ATS Corp (ATS) 2009 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the ATS Automation first-quarter conference call. (Operator Instructions).

The following statement respecting forward-looking information is made on behalf of ATS and all of its representatives on this call. The oral statements made on this call will contain forward-looking information. The actual results could differ materially from a conclusion forecast or a projection in the forward-looking information. Certain material factors or assumptions are 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 conclusions, forecasts, or projection in the forward-looking information; and the material factors or assumptions that were applied in drawing conclusion or making a forecast or projection as reflected in the forward-looking information are contained in ATS's filings with Canadian Provincial Securities regulators.

I would like to remind you that this conference call is being recorded on Wednesday, August 13, at 10 AM Eastern Time.

Now it's my pleasure to turn the call over to Management. Your hosts on the call are Anthony Caputo, Chief Executive Officer of ATS; Maria Perrella, Chief Financial Officer; Stewart McCuaig, Vice President and General Counsel; Carl Galloway, Vice President, Treasurer; and Hans Rudell, Vice President, Corporate Controller. Also in attendance are Eric Laborde, Chief Executive Officer of Photowatt; Jean-Louis Dubien, Managing Director of Photowatt; and Eric Kiisel, Senior Vice President, ASG Canada.

Now over to Mr. Anthony Caputo. Please go ahead, sir.

Good morning, ladies and gentlemen. I'm assuming you've seen our press release, and Maria will review some of the financial highlights in a few minutes.

On our last call I indicated that our short-term plan was to fix or problems, deliver results, and earn credibility. I spoke in terms of five immediate actions -- improve management, sell PCG, fix ASG, position Photowatt for stand-alone status, and strengthen the balance sheet.

During the quarter we've made good progress. We're now approximately halfway through accomplishing our short-term plan objectives. Over the next several quarters we intend to complete our short-term work and begin to focus on the future. I would like to bring you up to date and then begin to speak on the way forward.

First, on management. Last quarter I reported that a number of business processes related to bids, program management, profitability, cash, capacity, and performance management were modified or implemented. We have seen improved results due to these efforts. As of today, management's degree of control over the entire business is fair and improving. We're still weak in a few areas and also need to improve management of our global supply chain. We're now able to forecast operating performance one quarter out with a good degree of accuracy.

Although significantly improved, our control over our business is still not acceptable. We have a strong senior management team in place committed to drive predictable performance and minimize surprises. Going forward, we will work to strengthen management throughout our divisions with a view to driving down and entrenching our corporate initiatives.

On PCG, nothing new to report. We continue the process of negotiating an agreement to sell the key operating assets and liabilities.

On ASG, during the first quarter we had strong bookings -- revenue and 7% operating margin. Bookings were driven by two large orders from the solar industry. Although resulting from our revised approach to market, this type of booking success is sporadic and should not be assumed to repeat every quarter.

During the quarter, we advanced our value-based approach to market and continued the process of organizing around market segments and key accounts. We approached a number of customers with a more comprehensive offering which includes pre-automation services, design development, equipment build, and support. While early indications suggest a receptive market, I believe this revised approach will take some time to gain traction both outside and inside the company.

On operations, last quarter I indicated that approximately 20% of our divisions were approaching acceptable levels of profitability. Today, approximately 40% of our divisions are either acceptable or almost acceptable. We now have a more granular categorization for program performance -- red is unacceptable, yellow is almost acceptable, and green is acceptable. As of today, approximately 40% of our programs are red and 10% are yellow.

We made progress towards coordinating and levering our global footprint, but much more work needs to be done. On a monthly basis we now review global capacity and forecast, and make decisions regarding work and resource allocations. As of today, standardizing designs and driving down material costs still remain unrealized opportunities.

On Photowatt, during the first quarter we continued to make progress. Photowatt EBIT improved to 8%, and approximately 75% of our cells were fabricated from 100% metallurgical silicon. Metallurgical silicon cell deficiency increased from 13.5% in the fourth quarter to 13.8% in the fourth (sic) quarter. And polysilicon cell deficiency remains stable. We expect continued improvement in accordance with our plans.

We moved forward with a previously announced EUR20 million investment to expand and balance capacity in the existing facility, and reduce manufacturing costs. Approximately EUR17 million of equipment has now been ordered and is expected to be installed during the second and third quarters of fiscal 2009.

A team of experts from ASG and Photowatt completed a review of Photowatt's manufacturing processes, and have identified ways to reduce scrap and increase throughput. We plan to invest a further EUR4.0 million in automation systems at Photowatt, which is expected to have a 12-to-18 month payback period.

On upstream relationships, we formalized an existing supply arrangement by committing to purchase 1900 tons of metallurgical silicon over the next three years. We're beginning to use our supply chain more effectively to balance production and increase operating results.

We continue to advance the PV Alliance. Facilities are now being prepared, and equipment has been ordered in preparation for a 25 megawatt cell line designed to achieve cell efficiency improvements. Initial activities are expected to begin during the latter half of fiscal 2009 and are anticipated to be largely funded by the French government. The cell line is expected to be complete mid-fiscal 2010. Photowatt France's direct investment in the PVA is expected to be less than EUR10 million and have a payback period of approximately two years.

Going forward, we plan to continue to improve operations and advance possible upstream and downstream relationships. Eric Laborde will spend more time on PVA and strategy, and Jean-Louis Dubien will focus on operations. Expectations should be tempered by Photowatt's Q2 shutdown and expected reductions in some government subsidies. Although not there yet, given our progress toward reaching acceptable levels of performance, we're now in a position to start looking at Photowatt's stand-alone future.

On our financial flexibility, we continue to improve our position. Our cash position net of debt improved approximately $4.0 million since year-end. This was driven by the sale of the SSP Building, and net income. While progress has been made on working capital management, much more remains to be done.

Looking ahead from 30,000 feet, our value creation plan has three basic steps -- fix things, separate Photowatt and Automation, and then grow. We're about halfway through fixing things and therefore achieving our short-term plan. We have improved management, aligned our people, cleared away the fog of recurring onetime items, divested of noncore assets, and gained a minimally acceptable level of control and performance. As we continue with our work in this regard, we can also begin to think about the future.

Going forward, we have two businesses that need to pursue independent futures -- Automation and Photowatt. Automation will require some further restructuring, continued development of our revised approach to market, and more focus on standard products and supply chain. Our Automation business will be comprised of systems, products, and services. It will serve customers and compete on a global basis, and expand organically and through acquisition.

Photowatt has market-leading expertise relating to processing metallurgical silicon. Photowatt will combine process automation and production knowledge to achieve desirable results that can be replicated and/or sold in France and other countries. We will analyze the best strategic vehicle to achieve this objective.

Overall, I'm pleased with our progress. I remain optimistic about the future prospects but also cognizant of global economic conditions and changing market dynamics.

At this point, I would like to turn the call over to Maria.

Thank you, Anthony, and good morning ladies and gentlemen. I would like to begin with some general comments about the business and our progress to date. As you can see from our financial results, we have made substantial gains and improvements over prior quarters. Some of the actions taken over the last two quarters are starting to take hold. Although I'm pleased with this performance, more work remains to be done, and additional improvements are required to maintain the positive trend. I would also like to point out that it is too early to take our quarter-over-quarter improvements and extrapolate going forward.

I will begin my financial remarks by discussing two unusual items, both of which were discussed as subsequent events last quarter. First, the SSP Building was sold for net proceeds of $16 million. A gain on the sale of $3.2 million was recorded. Second, a gain of $2.0 million was realized on silicon that was not usable by Photowatt France. This completed the sale initiated in the fourth quarter.

Now, let's briefly review segmented results starting with ASG. ASG revenues from continuing operations of $142.7 million, or $35 million, are 32% higher than the first quarter of last year. This increase comes from higher order bookings generated in fiscal 2008 over fiscal 2007, which drove higher backlog entering the first quarter compared to last year.

First quarter order bookings of $169 million exceeded not only last year's first quarter bookings of $146 million but were also the highest quarterly bookings in the last three years. Our bookings were healthy, but you should not expect that kind of sustained run rate going forward. In the first six weeks of the second quarter, order bookings were approximately $62 million. Period-at-end ASG order backlog of $258 million was 19% higher than as at June 30, 2007.

ASG's first-quarter earnings from operations were $10.3 million compared to earnings of $600,000 in the first quarter of fiscal 2008. Earnings improved in all geographic regions with ASG Canada and APG having the highest absolute dollar contribution.

Along with a corresponding increase in revenues, the cost reductions implemented during the fourth quarter of fiscal 2008, which you may recall we said had a one-year payback, and improved program management all had positive impacts on ASG's operating results.

Q1 ASG operating earnings of $10.3 million also reflected an improvement over the four quarter of fiscal 2008 normalized earnings of $4.8 million, $2.1 million, $2.4 million, and $2.7 million for last year's Q4 through to Q1 earnings, respectively.

Now, let's move to Photowatt, where first-quarter revenue increased by 45%, or approximately $22 million year-over-year. A significant increase is due to increased megawatts sold, from 10.7 megawatts to 13.8 megawatts versus 13.1 megawatts in the last quarter, Q4 of fiscal 2008; and there was a $4.2 million positive impact as a result of foreign exchange rates.

Photowatt France had operating earnings of $5.6 million at an 8% margin in the first quarter of fiscal 2009 as compared to a loss from operations of $400,000, or a negative operating margin of 1%, in the first quarter of fiscal 2008. A better comparison is Q4 fiscal 2008, or the prior quarter, which had operating earnings of $3.3 million, or 6%.

Overall, Photowatt had positive year-over-year as well as sequential improvement on revenues, efficiencies, megawatts produced, and profitability. As a reminder, although we're taking actions to try to mitigate, the second quarter is expected to be negatively impacted by the usual four-week plant shutdown in France.

Now, a few consolidated ATS highlights. Cash balances net of debt increased by $4 million. ATS's working capital increased in the quarter due to the build in APG inventory as well as down payments on long-lead ASG material items. Both combine to increase current assets and therefore reduce cash from operations by approximately $13 million. As program management continues to improve, management has identified opportunities to reduce the investment in working capital. Various processes have been and will be put in place to ensure that certain internal targets are met.

First quarter EPS from continuing operations was $0.19 compared to Q1 last year's loss per share of $0.12. If onetime gains are removed from first-quarter fiscal 2009 results, then earnings per share would've been $0.13. Q4 normalized earnings per share was $0.06.

A reminder of the stock-based compensation costs and the fact that certain stock price performance thresholds will trigger expense recognition requirements -- in the first quarter no triggers took place, therefore stock compensation expense was $700,000 as compared to a potential incremental $1.7 million should the stock price increase by approximately $3.00 over today's price. This will impact operating earnings going forward.

To recap, although the first quarter of fiscal 2009 showed considerable improvement over both the first quarter and the last quarter Q4 fiscal 2008 financial results, there remains work to be done. We expect to see improvements. However, in the next quarter we'll be tempered by the Photowatt shutdown, the potential impact of general global economic conditions, and our continued review of operations and sites, which is expected to lead to additional restructuring costs.

Just before we conclude, would like to remind everyone of our annual general meeting which will be held on September 11 at the Kitchener Holiday Inn and Conference Center at 10 AM.

Now, we would like to open the call to your questions. Operator, could you please provide instructions for our listeners? Thank you.

(Operator Instructions). Neil Linsdell, Versant Partners.

Great results, by the way. Just to cue in on something that Maria just said, you're talking about caution over the next little while. Can you talk about the different sectors that you've got running, as far as automotive, health-care -- where you see the best growth? Obviously I guess automotive would be the weakest? And where you are seeing the growth or the positive stuff on the health-care and the energy and such?

This is Eric Kiisel speaking. Our bookings are holding up quite well. We've seen a few instances of some opportunities delayed, but overall we're holding up quite well. We are seeing differences in some sectors. Of course you mentioned automotive; that is a sector we're seeing some differences. But we're also seeing other sectors such as health-care and energy holding up quite well.

Okay. But specifically, if you talk about say automotive, I think last quarter you had specific strength in Europe. Can you talk about really what's going on as far as in the health-care sector say in the US that's helping you grow those areas, or where we are expecting the best growth say over the next 12 months?

I can speak to in general terms and then ask Eric to make a couple more comments. So in general terms, almost across the board in health-care US, we are seeing fairly strong demand for what we do, and what we do defined as automation equipment, but also the provision of services that could lead to automation equipment, and also support.

We have seen a small number of cases where in that segment, programs have moved slightly to the right, but they haven't gone away. So in general terms, it was robust, it is robust, and with our revised approach to market -- not just for that segment but for others -- it's a very attractive segment, even right now. Eric?

Another segment that's really significant for us now and increasing is the energy segment, and in that energy segment we are seeing activity increasing not only in solar but also in nuclear. Automotive has been decreasing as the total of our business over the past couple years, and emphasis is still on automotive. It's very important to us. But that being said, the concentration here very much is on health-care, energy, and some of the other sectors that are more robust at this time.

Just as a second question, on the restructuring efforts, you've talked about the $30 million you're going to be spending. You've spent about $16 million to date. And you said you're halfway through basically the restructuring, it sounds like.

Before, I think you had said -- you expected to be able to wrap up the restructuring somewhere around Q3. So could we imply that you're going to be spending another, say, $5 million to $8 million a quarter, and then be wrapping up by the end of this fiscal year?

I don't think we said Q3. I think the words I used were next several quarters. And I think that's -- I think that's still true.

Okay, so you're still on track, and you're probably going to be spending, say, another $5 million a quarter, then --?

In aggregate, I would say that we're on track. If you take the $30 million and subtract what we've spent, we believe the remainder is appropriate. But I wouldn't want to say x this quarter and y next quarter, or whatever.

David Tyerman, Scotia Capital.

On ASG, on the margin front, is there any reason to believe that the margins that we saw in the quarter wouldn't be sustainable at that kind of revenue run rate going forward? Anything unusual in there?

No.

And then on the Canadian dollar side, obviously, it's backed off some here. Can you give us some idea of the North American revenues for ASG?

It's Hans Rudell. Just give me a half a minute to look that up. But I think that North American revenues are likely around two-thirds of our ASG revenue.

Okay. And what percentage of that would be priced in US dollars? Would it pretty much all be priced in US dollars?

No, it wouldn't all be priced in US dollars.

I think approximately 40%.

David, it's Carl Galloway. Historically, our US dollar revenues have been the majority of the Canadian dollar activity. It's been an excellent market for us. We do have an offset in that -- a significant portion of our purchases are in US dollars. So I think we've talked in the past that there is somewhat of a natural hedge. But at the end of the day, there's an exposure.

I said historically, the majority has been US dollars. That remains the case. It's come down a little bit because of some of our energy-related activities tended to be priced in Canadian dollars.

That's kind of where I'm heading here. I'm just wondering what percentage of the costs -- what's your net exposure here? I'm assuming you have net CAD exposure, because every quarter, you report a hit.

We've always given an idea of the currency impact on a global basis, which is a combination of transaction and translation. The transaction impact is largely due to the Canadian business unit activity, exposure to US dollars. And typically, the split between transaction exposure and translation exposure is about 50/50.

So if I look -- just to try and nail this down, if I look at the impact that you identify in the quarter, you indicate that currency -- with all the currency changes, you had 7.2% EBIT margin in ASG. If you take the two currency impacts and add them back, you end up at 8.5. Does that give a bit of an idea of the impact there then?

I'm not quite following your number.

Well, all I do is I take the -- you identify the currency impact on revenue, the currency impact on EBIT. I just add those back to the revenue and EBIT, and I end up with a margin of 8.5% instead of 7.2% for ASG.

Yes, the comparison is -- just so you understand the comparison, it takes all ASG activity around the world, which we just spoke about. Most of it is in US dollars, but there's also other impacts, and not necessarily in the same direction.

And we compare it to the rates that existed in the quarter a year earlier, and [say that] this quarter's activity was at -- we'd pick up the change in the rates to come up with an estimate of the impact.

Okay, that's what I expected.

Marko Pencak, JMP Securities.

Will you share with us who the supplier for the metallurgical silicon that you talked about in your MD&A is?

No, I can't.

What gives you comfort that the volumes that you've contracted are in fact going to be manufactured by your supplier? I mean, some guys have had challenges in their ramp-ups. Can you just give us some perspective on that, please?

I will start, and then asked Eric Laborde to comment as well. And I will direct traffic, because he's not in the room with us.

So number one, it's an existing relationship that we're formalizing. And number two, it's not the only relationship that we have from a feedstock point of view. Eric, did you want to comment on that as well?

The comment I have is that the supplier that we have contracted with [has] addition manufacturing style or method of strategy as some other ones. Instead of having a large unit to start with, they have several small units. So when one (inaudible), they are adding several units, and the risk -- it's much less risky than starting up a large factory.

That would be my answer. So I'm pretty much confident that we get what we have ordered.

And just to follow up on feedstock, you mentioned in your press release that -- you commented about external versus internally sourced wafers. What was that mix?

It's not exactly a mix in terms of entirely external versus internal. It's more that we purchased certain components -- for example, wafers -- to come into the production process where we couldn't produce enough wafers ourselves to keep the cell and module lines fully occupied.

Right. And I'm just trying to understand what proportion of your requirements you had to source in that fashion, roughly.

In this quarter, maybe around 20%.

Okay. And then my second question is, Tony, at the beginning, you outlined a proportion of programs in ASG that were red, yellow, and green. For the 40% of your programs that you characterize as being red, can you give us a sense of what the average duration for you to complete delivery of those programs is? Because -- one quarter, two quarters, three quarters? How should we think about that?

I'll answer the question and then asked Eric to correct me. It's like typically one to two quarters.

Right. Our programs typically run 26 weeks to 36 weeks. So any program that is identified now that is ongoing that may be identified as red or -- in other words, underperforming our initial expectations, might take what Tony said -- a quarter, or a little bit more than a quarter to flesh out.

Okay. And when you talk about 40%, are you talking in terms of number of contracts? Or is that sort of the backlog or delivered revenue value?

It's the number of programs.

And how would that relate to your sort of pro forma revenues associated with those? Do you know?

Yes, so the distribution of those programs is there's big ones and then there's a bunch of little ones. And in terms of attacking the solution, there's both the quantity and the quality.

So the quantity is -- we're trying to get to a place where everything is green. The quantity is -- obviously, we're going after the most problematic programs in terms of financial and schedule in a very aggressive way.

Michael Willemse, CIBC World Markets.

On the automation systems group, can you give us a sense of how many customers you're working with in the solar backlog?

We're dealing -- this is Eric again. We're dealing with quite a few different customers, of which I would say five or six are considered major customers. We have some that are smaller that we're in initial stages with.

Okay. And out of the energy backlog, how much is solar and how much is nuclear, [if] you could?

Hans Rudell here. I think maybe a quarter is nuclear, and the rest is solar -- something like that.

And I guess have you thought about how big the revenue run rate could be for -- I guess the solar side of the automation systems business? Or is it too early to estimate how big that could be from an annual revenue perspective?

Yes, we have thought of it, but I think it's too early to kind of talk about.

Okay. And then on the solar -- the Photowatt business, I might have missed it earlier on. With the EUR20 million expansion, what does that bring -- what will that bring capacity to?

So capacity of the existing plant, and stated in metallurgical terms -- typically, we state this in polysilicon terms, but I'm going to state it in metallurgical terms. It's about 50 megawatts at the end of the year.

So with the EUR20 million expansion, you'll be at 50 at the end of year?

Using metallurgical silicon, which is a different stack than we normally would give. We normally quote poly.

Right. And then the 25 megawatt facility with the PV alliance, how would the economics work with that? Is it -- you have a 40% interest, and would you be buying all the wafers from it?

Photowatt is supplying wafers to the PV Alliance. And the PV Alliance owns the 25 megawatt line. And therefore Photowatt owns 25% of it. (multiple speakers) Sorry (multiple speakers)

We're going to buy 50% of this (multiple speakers)

Sorry. Yes, 25 megawatts, 50%.

So you will buy 50% of the modules coming out of the PV Alliance?

(technical difficulty) yes. The Alliance makes (technical difficulty) module.

And then what's the plan -- after the 25 megawatt line is built, what would be the next plans after that for the PV Alliance?

Two parts, and then I'll ask Eric to talk about -- the first one is there are ongoing plan in the PV Alliance to improve efficiency. And the PV Alliance also contemplates the possibility of building plants in France in 100 megawatt increments. So -- Eric?

The PV Alliance is really a (technical difficulty) large search program. The first half of the (technical difficulty) and the second half of the program is to develop a new generation of [cells]. And as soon as we have [these products developed], we need to (technical difficulty) factories in France. It's what Anthony was talking about.

So Eric was breaking up a bit but, if you caught the words, there are a number of phases to the cell efficiency improvement program. We're on the first part. We're thinking about the second part. And that's kind of 1a and 1b. And the second issue is the possibility of expanding in France.

(Operator Instructions). Peter Sklar, BMO Capital Markets.

Maria, my first question is, you said that earnings after taking out the two gains during the quarter -- the two gains were the sale of the building and the sale of silicon -- were $0.13 a share. Is that $0.13 a share from continuing operations, or after discontinued operations?

That's from continuing operations.

Okay. And then my next question is on Photowatt. If you are -- is there any possibility that you would expand the production output of the current Photowatt France facility from the 50 megawatts? Or do you contemplate that any future capacity expansions would be undertaken through the PV Alliance?

No, both possibilities exist. So with respect to Photowatt, the key driver was to create characteristics in Photowatt that can be replicated. And as I indicated, notwithstanding we're not yet where we want to be, we have made sufficient progress in that regard so that we can look at either replicating or expanding.

Our vehicle to do that is not exclusively through the PV Alliance. Our relationship through the other principles of the PV Alliance is such that in France, we would use the PV Alliance as a vehicle to do that.

So the implication is outside of France, that would be accomplished through Photowatt?

[Or] Photowatt. So hypothetically, Photowatt could be expanded.

Okay. And is there any room to expand or possibility of expanding at your current location?

Sure, yes.

[Asimov Fiore], Versant Partners.

My question concerns macroeconomic conditions on the solar space. It looks to me like you have approximately 60 megawatts of total capacity on Photowatt. Is that correct?

That we have 60 megawatts of capacity today?

Yes.

We still have to implement some of the improvement initiatives that we discussed, including the capital plan. We have that many megawatts of capacity at certain stages of our production, but not throughout the entire production. (multiple speakers) And also that 60 megawatts would be using poly as opposed to metallurgical.

Sure, but you have produced 13.8 last quarter. So that's a run rate of about 53, 54 yearly, right?

So essentially, the question pertains to -- I'm getting the impression that as much as you can make, you have customers that are willing to buy it. And prices are staying fairly firm.

So can you comment on essentially mid-term expectations from the market for your output? Do you still see very strong demand? And what do you see in terms of pricing for your output?

Eric, do you want to speak to that?

So the demand is still -- is very strong for the remaining of the year 2008, the calendar year. We see a slowdown in Spain in October and November and December. We don't know how 2009 will look in Spain.

In Germany, the program has now been [voted], so we know what we can expect. We will expect a price decrease in Germany. But if the price decrease takes place, and it will take place, the market will be [solid] again, because the program in Germany allows for two gigawatts installation per year, which is much larger than what we had last year.

So what we can expect is the market to be a little bit slower during the beginning of 2009, and then to pick up again with lower price on this year.

Can you comment on how low you think prices are going to get?

I can't comment on that, because it depends a lot on the category of customers that you have. For large customers, very large customers, which we can't access because our capacity is not as big. But the price will go down quite a lot. [There] will be a battle.

But for very small customers as, for example, the homeowners that we are servicing in France, I expect the price to be to remain almost the same. But it depends on the companies. For us, it should be okay. We will have to decrease our price to our distributor. There's no doubt. But I can't comment too much on how much I think, because it's (technical difficulty) forward statements. But it should be okay.

Marko Pencak, JMP Securities.

A question relating to automation equipment sales and services to solar customers. A number of market participants have articulated multiyear capacity expansions. And so my question is, for the five or six large customers that you have today, do you have options on follow on businesses they bring on, additional phases of capacity? I'm just trying to get some color on how the nature of your discussions with those customers and their multiyear requirements sort of works.

I would characterize it like this. In the past -- at least in the past that I know about -- we sold automation equipment. We are now selling more than automation equipment, and I would say that the services that we have sold to our solar customers are some automation equipment, but also some -- let me use the term program or programmatic.

And programmatic -- both in terms of our offering, meaning we get in their early with our pre-automation services -- these are process experts, consultants that understand not only the equipment, but also how the equipment and other aspects of the operations interrelate to each other. They go in, come up with requirements, specifications, which give rise to the equipment, which then gives rise to equipment being made. Not necessarily just the first piece of equipment, but equipment number 2, 3, 4. And also, the support, maintenance, upgrade, training, value engineering of that subsequent equipment installation in the factory.

So we have, let me say, a number of cases where our offering is more towards the right of that continuum than the left. But it's the beginning for us in terms of going down that road.

Okay. And the next question I wanted to ask is with respect to your average selling prices, you seem to have a mix shift towards more systems business. Do you think -- should we expect a continuation of that trend, or was there something unusual here that happened? Or is that the strategic -- are you moving looking to move to more systems sales rather than component sales?

So you're talking Photowatt now, right?

Yes, sorry.

Yes, so I think on the last call, Eric indicated a percentage which is systems. And it is an area that we are focusing on and trying to develop. Eric?

(multiple speakers) Yes, the strategy is to sell as much system as we can because we capture more margin for each megawatt that we can make. So we will continue increasing the system sales. But we have to do it slowly because we don't want to add the other overhead without having the business. So, we have to increase the system sales but slowly in order to monitor the overhead increase with the business increase.

David Tyerman, Scotia Capital.

Following on the solar, I was wondering if you could outline how you see the separation process working -- any idea on timelines, that sort of thing?

We're not ready to go there yet. As I indicated, we're just at the beginning. And sort of given the history and the situation, we just need to take the time that we need and make sure that we take the right vehicle.

What I can say is that we're now in a position where we can start to look at it.

Okay, so it sounds like you identified three preconditions in the press release. It sounds like you have really achieved those, and it's a matter of going through the analysis of vehicles, etc. Or is that not true?

Yes, I wouldn't use the word "achieved." I would say achieved enough that we can go forward. But we're not yet happy with the absolute metric in EBIT, for instance.

Sure, okay. So it also sounds like building PV Alliance 100 megawatt lines and -- or outside of PV Alliance all about stuff -- sounds like it's after the separations kind of timeframe, really. Is that fair?

No, I didn't mean to say that if I implied that.

Okay, because wouldn't that the several years off, really, if you have to go through first improving efficiency, then generating a new generation of cells before you build those plants? And you're not [even] going to finish the 25 megawatt line until 2010.

Yes, so the performance of Photowatt that we're reporting here is the performance of Photowatt. If we're successful through the PV Alliance, then the performance of Photowatt would be better, because we gain greater efficiency.

Also, through the PV Alliance we have a vehicle to expand in France. But or plans for Photowatt are in part dependent or connected to the PV Alliance. But we can expand Photowatt with or without the PV Alliance. We can continue with Photowatt in parallel with PV Alliance.

Fair enough. And then just a question on PCG. Can you give us an update on what's going on there?

I really can't -- only to say the state that we're in, which is a state of negotiation we realize can't go on forever, both for the employees and the stakeholders. So, we're either going to get it done or we'll do something else.

Okay. And do you have any timeframe on that?

Very near future.

Okay. And I noticed in the restructuring that there was really no expenditures on ASG and Q1. And yet, you have some more to come in terms of restructuring. Is the remainder of it mostly targeted ASG, or is ASG restructuring pretty much done?

No, I wouldn't say that. I would say more than 50% ASG.

Michael Willemse, CIBC World Markets Corporation.

Just following up on the question on PCG. What's the book value of PCG? Is it zero? Has it been written down completely?

It's Hans Rudell here. The book value isn't zero. It's -- the carrying value is our net working capital with adequate provisions for write-downs, etc.

How much would the net working capital be? Still a few million?

Yes, a few million.

Okay. And then just to follow up from David's question on expanding Photowatt, is it fair to say that you've committed EUR20 million today for the expansion, but you will look at committing more cash to that business going forward, regardless of what kind of financing vehicle you ultimately decide to pursue?

I would sort of categorize the $20 million not as expansion but as sort of balancing and improving. And so it was about balancing and improving and having the upfront relationships necessary in order to assure that we have the feedstock that we need to have an adequate and improving efficiency, and a marginally acceptable and improving EBIT.

So if none of those conditions are met, we can look at the future of Photowatt. And part of the future of Photowatt is related to the PVA. Part of the future of Photowatt is related to creating a stand-alone company. Part of the future of Photowatt is to growing Photowatt.

So all of those are now on the radar scope. And they weren't three or six months ago for this management team.

I guess what I meant by my question is, you got $61.5 million of net cash right now. Even if you spend the EUR20 million, you will still have cash in your debt facility. Are you willing to spend more cash of your existing liquidity regardless of when you look at other financing?

I would just answer that generally and say it was a very deliberate initiative to strengthen the balance sheet in parallel with trying to fix our operations, so that the two would meet down the road some time. And now it's down the road. So we would look at all avenues.

Okay. And then just a follow-up question on the solar module system sales. What are these module systems? Are they panels kind of in an array, or -- I'm just trying to -- it's a pretty big chunk of your sales, and I'm still not exactly sure what they are.

Eric, do you want to speak to that, please?

Yes. These are -- the majority of the sales of Photowatt up to now was [to] cell modules -- modules that are just a product -- is a commodity.

When we say we sell systems, it's a turnkey system. So we sell the module plus all -- what we call the balance of systems. And sometimes, we install them. Not the majority of the time, but sometimes we install them.

So it's basically -- we've bundle our module with the design of a system, and the balance of system, which is the inverter and all the mounted feature. And these are the system sales that you see in our report.

In some categories, in France only, we sell also kits which are [BIPV], which is building integrated kit because in France, the market calls for this type of kit. And we sell that to individual installers. Small installers are everywhere in France. We have 200 or 300 customers like that in France.

And are the majority of your module system sales in France?

Excuse me?

Are the majority of these system sales in France?

Yes -- [somewhere] this year in Spain, but the majority is in France now.

Okay. And it's been lumpy, but it's been growing pretty well. Do you think this business can continue to grow at a very good growth rate -- let's say in line with the solar sector? It's just -- the system sales business alone?

Alone -- it will continue to grow. As I mentioned before, we have to be careful not to grow too fast, because it's cyclical. And we don't want to report very good results one quarter, and less results the quarter after.

We have to grow that slowly, and to manage that growth. But if we continue to grow -- we don't want to sell all our capacity like that. It would be too dangerous, but it will continue to grow, yes.

Okay, and is it seasonal?

Excuse me?

Are the sales seasonal?

You have two types of systems -- individual systems that we sell to owners or to the installers. This is not seasonal. This is a stable system, and this is -- we have to keep growing this system, these sales because this is not [seasonal] for distribution channel.

But the large systems -- one megawatt, or it's the other 300 kilowatt installed system -- it's not seasonal. It depends on the project. It's project related. You can have three projects one quarter and nothing the quarter after, because the timing of the orders are like that.

Mac Whale, Cormark Securities.

In terms of implementing the automation at Photowatt, can you explain to us -- what's the goal? Is it to reduce your cost per watt, or is it to increase total sort of megawatts of output?

I'll start to answer, and then ask Eric Kiisel to help me. So this is a case where the automation part of the Company went in and worked with Photowatt with very deliberate outcomes in mind. And none of the outcomes were expressed in terms of machine terminology.

So it's -- yield and cost is what we're trying to achieve. And there was analysis, joint analysis by the ASG and Photowatt teams, and determination of objectives. Those objectives were broken down and translated into solutions. Some of those solutions had to do with machines. Some of those solutions had nothing to do with machines. And then the machine portion of those solutions I'll turn over to Eric.

Really, the opportunity within Photowatt, as Anthony mentioned, really is in two big areas. One is yield improvement. And so a lot of the efforts that the team has tackled -- and there's been 40 or 50 opportunities for yield improvement identified, and they were analyzed and brought down to six or seven. And those are being implemented.

There's also a factory balancing effort where we try to identify and eliminate bottlenecks within the production flow. And there's equipment modifications [in], and in some cases, some equipment additions that are not major that can make a big difference in eliminating those bottlenecks.

Jean-Louis, did you want to add anything?

I just want to add that we want to focus on scrap. And so it's efficiency. And as you know, the cost per watt is linked with the overall efficiency in your plant. So you can -- when you improve by automation, either yield or performance, you reduce your cost per watt.

Can you share with us a cost per watt target that you hope to achieve?

No, we can't. But we're trying to improve it.

And then just the second question then is on the upgraded silicon. Do you have -- if you can't get that supplier to deliver, do you have a clause on liquidated damages? Or can you break -- or can you sever the contract if there's a whole bunch of polysilicon that comes on in that timeframe of the contract?

Let me answer it this way. The relationship that we formalized I think is on good commercial terms. It's not a very long-term relationship. And the contract is as flexible, if not more flexible than what is generally available in the marketplace.

Peter Sklar, BMO Capital Markets.

On the solar automation orders, can you disclose what aspect of the solar manufacturing process these orders relate to? And is it only applicable to polysilicon based sales that your automation equipment -- can it also be utilized in thin film?

Let me try and answer. The orders that we have -- some relate to equipment, and some relate to equipment and more comprehensive services. Some are for individual pieces of equipment, and some are programmatic, as I described before.

And in terms of technologies, I would say that we are involved with a number of technologies used by PV companies, from classical, if that's the right word, to thin film, and even things that haven't been invented yet.

(Operator Instructions). David Tyerman, Scotia Capital.

I just wanted to clarify on solar. I'm hearing a lot about potential investment, I guess, or thinking about the next steps for solar, expanding Photowatt, the PV Alliance and so on. And I'm wondering whether you're moving away from the separation idea, or is this just a part of -- well, as long as you control it, you need to keep moving the business forward?

No, we're not moving away from the separation idea. And the actions that we're taking, I believe, are the correct actions off expanding whether Photowatt is part of ATS or in some other construct. So that's that, I think.

I'm just wondering -- are we potentially in a situation where you could be owning this thing for a very long time, investing money in it, etc.? That's what I'm trying to drive at.

Hypothetically, yes. Our plan is to separate BSG and Photowatt for a number of reasons, and for those companies to pursue independent futures.

At the same time, the separation is not in series with taking prudent measures to improve Photowatt or ASG or any other part of our company. So that's what we're trying to do.

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

If there's no further questions, thank you very much. Have a nice day.

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