ATS Corp (ATS) 2009 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the ATS automation second quarter conference call. (OPERATOR INSTRUCTIONS)

The following statement respecting forward-looking information is made on behalf of ATS and all of its representatives on the 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 where applied a conclusion or making a forecast as reflected in the forward-looking information. Additional information about the material factors that could cause actual results to differ materially from the conclusion, forecast, or projection in the forward-looking information and the material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as contained in the forward-looking information are contained in ATF's filings with the regulators. I would like to remind everyone this conference call is being recorded on Wednesday, November 12th, at 10:00 a.m. eastern time.

Now it is my pleasure to turn the call over to management. Your hosts are Anthony Caputo, Chief Executive Officer of ATS; Maria Perrella, Chief Financial Officer; Stewart McCuaig, General Counsel; Carl Galloway, Vice President, Treasurer; (inaudible) Vice President, Corporate Controller. Also in attendance is the managing director of Photowatt, and Eric Keasal, Senior Vice President ASG Canada.

Now over to Anthony Caputo.

I'm assuming you have seen our press release. Maria will review some financial highlights in a few minutes. On our last call I continued to emphasize that our short-term plan is to fix our problems, deliver results and earn credibility. As a reminder, fix means strong leadership, control over our business, and eliminating red programs and divisions. During the quarter, we experienced the economic head winds brought on by the global financial crisis. We continue to make progress and are now about halfway through accomplishing our fixed objectives. I would like to update you on our progress and make some comments about the way forward.

First on management. During the quarter, we continued to strengthen our management and business processes. As of today, management's degree of control over the entire business is good and improving. Last quarter I characterized our control as "fair". We are still weak in a few areas and need to improve management of our global supply chain. Although improving, our control over our business is still not acceptable.

On PCG, in September we announced that we finalized the definitive agreement to sell the key operating assets and liabilities of PCG to a group led by current PCG management. We expect to complete the sale in the third quarter of this fiscal year upon finalization of certain regulation and legal matters.

On ASG, during the second quarter, we had strong bookings, revenue, and we reached the 9% operating margin. Bookings were driven by our healthcare and energy segments. We saw weakness in the automotive segment and softness in our consumer product segment. Some of the weakness was offset by our revised approach to market. During the quarter, we continued to approach 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 40% of our divisions were either acceptable or approaching acceptable levels of profitability. This was up from approximately 20% in the prior quarter and 0% the quarter before. Today approximately 50% of our divisions are either acceptable or almost acceptable.

On program management, last quarter I discussed our categorization of programs as red is unacceptable, yellow is almost acceptable, and green is acceptable. As of today, approximately 30% of our programs are red, compared to 40% last quarter, and 15 are yellow, compared to 10% last quarter. On supply chain, we have made modest progress. We are still not effectively planning our programs, approaching our suppliers in a strategic way or using our own capabilities such as preexisting designs and footprint to our advantage.

Now that we have a good level of control over other parts of our business, we can dedicate more time to the situation. We have started to improve our performance metrics in this area and I will update you on an ongoing basis. Last quarter, I indicated that ASG would require further restructuring to complete fixing the operations. During the quarter we accelerated and completed a strategic review of the number, scope, and character of our divisions globally. As a result a number of our smaller operations in Asia, the US, and Europe, will be consolidated and or see their rolls within the corporation changed. We intend to maintain a sales, service, and support presence in all the geographical markets served by these divisions. This restructuring will substantially complete fixing the operations and is planned to be implemented by the end of the fiscal year. I previously indicated that we expect to spend C$30 million across the Company with a one-year payback. We have spent almost C$20 million to date. The additional -- these additional consolidations will cost approximately C$5 million, bringing our total spend to about C$25 million. The balance will be spent on revising our approach to market, supply chain, and completing the sale of PCG.

On Photowatt, during the second quarter we continued to make progress. Photowatt EBIT remained consistent at 8% despite the summer shutdown. During the quarter approximately 80% of our sales were fabricated from 100% metallurgical silicon, this up from 75% last quarter. Metallurgical silicon saw efficiency increase from 13.8% in the first quarter to 13.9% in the second quarter, and poly silicon cell efficiency remained fable. We expect continued improvement thorns with plans. We move forward with the previously announced 20 million Euro investment to expand and balance capacity in existing facility and reduce manufacturing coughs. During the second quarter, we started to install some equipment and the remaining equipment is expected to be in place by the end of the third quarter.

Last quarter, I reported that a team of experts from ASG and photo watt reviewed photo watt's manufacturing processes and identified ways to reduce scrap and increase throughput at a capital cost of 4 million euro and an 18-month payback period. During the quarter we began designing automation systems which are expected to be on-line in the fourth quarter of the fiscal year 2009. We also took steps to implement a longer term collaborative arrangement in this regard. On upstream relationships, during the quarter we outsourced some of our production of poly silicon wafers, cells and modules, and also purchased -- wafers. Through managing our supply chain we were able to partially mitigate the negative impact on operating results of the three-week summer shutdown. We plan to use supply chain to balance product and the total output of Photowatt. We continue to advance the alliance. Facilities are now ready for equipment to be installed for a 25-megawatt cell line designed to achieve cell efficiency and improvements. Initial activities are expected to begin during the latter part of 2009 and are expected to be largely funded by the French government. The cell line is expected to be complete mid-fiscal 2010.

During the quarter we also exercised our option under our P VA agreement to investigate on a six-month exclusive basis further cell efficiency improvements using heterojunction technology. Going forward we plan to continue operations and advance possible upstream and downstream relationships. Expectations should be tempered by declines in average selling prices and expected reductions in some government subsidies. On our financial flexibility, we continue to improve our position, generating operating cash of C$27 million in the quarter. Our balance sheet has strengthened significantly from a year ago and now affords us considerable flexibility to support strategic initiatives.

Looking forward, we are cognizant of the current global economic environment, and we are, therefore, reviewing and where appropriate adjusting our plans by considering both defensive and offensive strategies. In general, we expect the state of the global capital marks will negatively impact our marketplace. Automation will require completion of the restructuring plans, continued development of our revised approach to market, and more focus on standard product and supply chain. Our automation business will be comprised of system, product, and services. It will service customers and compete on a global basis and expand organically and through acquisition.

In automation, we believe that in the short term some customers will reduce their capital spending is and perhaps delay or defer certain programs. We are seeing varying degrees of this depending on the market segment from. From a defensive point of view, we are diversified, accelerating our consolidation, focused by market segment, and in a position to leverage our balance sheet. Offensively, we have a revised offering and approach to market and we are now in a position to consider strategic or opportunistic acquisitions. Photowatt has market leading expertise relating to processing metallurgical silicon. Photowatt will work to combine process, automation and product knowledge to achieve results that can be replicated and or sold in France or other countries.

In solar, we believe in that the short term the availability of capital and declining government thanks will continue to drive down average selling prices and dampen overall growth. From a defensive point of view, we have almost 50% of our output sold at favorable prices for the next year. We are continuing to improve efficiency and reduce fully loaded cost per watt. From an offensive point of view, we are seeking appropriate strategic relationships, exploring downstream possibilities in France, advancing our relationship with our PV alliance partners, and broadening the relationship between ASG and Photowatt.

Overall our plans are working but our business environment has become more challenging and difficult to forecast. I don't know the extent to which we will be impacted or the degree to which our mitigation plans will offset. I am pleased with with our progress. We are reviewing our plans and I'm cautiously optimistic about the future. At this point I'd like to turn the call over to Maria.

Thank you, Anthony, and good morning, ladies and gentlemen. Second quarter -- as second quarter financial results demonstrate we continue to make substantial gains and improvements across ATS. The action of the last three-quarters have taken hold and are positively impacting performance.

However, additional improvements, combined with the restructuring to be undertaken in the next two quarters, are required in order to meet our objectives and to deal with the uncertain economic conditions. As Anthony has already discussed the actions we are taking as part of our fixing stage, let me move to a brief review of performance starting with ASG.

ASG revenues from continuing operations of C$147.4 million were C$38 million or 35% higher than the second quarter of last year. This increase comes from higher order bookings generated in the last six months compared to the prior year. Second quarter order bookings of C$131 million were flat with last year's second quarter. In the first six weeks of the third quarter, order bookings were approximately C$35 million, which is a reflection of weaker economic conditions and more cautious customer purchasing practices. As a comparison, last year post quarter bookings to date were C$52 million. Even so, period end ASG order backlog of C$247 million was 12% higher than at September 30th, 2007. ASG's second quarter earnings from operations were C$13.9 million. This compares favorably to earnings of C$2.4 million in the second quarter last year and 10.3 million in the first quarter of this year. Restructuring, program management, our bid review process, and command and control over the business all had positive impacts on ASG's operating results. This compares favorably to earnings of C$2.4 million in the second quarter last year and C$10.3 million in the first quarter of this year. It is estimated that it will take a few more quarters for these programs to ship.

Now let's move to Photowatt where second quarter revenue at Photowatt France increased 91% or approximately C$35 million year-over-year. There were three reasons for this significant increase. One, megawatts sold increased from 8.2 to 14.9, versus 13.8 in the last quarter, Q1 fiscal '09. These megawatts include system sales. Two, we outsourced some production to offset the summer plant shutdown, and three, there was a 5.9 million dollar positive foreign exchange impact.

Looking deeper at revenue, we found a solution that effectively offset the negative impact on sales of the annual three-week plant shut down at Photowatt France. The solution involved utilizing external wafer supply and outsourcing some cell and module production in order to increase the megawatts available for sale in the quarter.

Going forward, improving our supply chain will continue as a part of our strategy. Photowatt France had normalized operating earnings of C$4.6 million or a 6% operating margin in the second quarter of fiscal 2009. By normalized, I mean we have excluded the C$1.4 million previously written off receivable that Photowatt management was able to recover. The outsourcing that positively impacted revenues also produced incremental operating earnings. This compares to a loss from operations of C$6.1 million or a negative operating margin of 16% in the second quarter of fiscal 2008. Keep in mind, last year's operating loss reflected a C$1.4 million write-off of deposits paid to a silicon supplier in China, and costs associated with the ramp-up of metallurgical silicon products. Compare to the first quarter fiscal 2009, normalized operating earnings were down by a million dollars, reflecting the three-week shutdown and lower margins earned on externally produced cells and modules used in Q2.

Now a few consolidated ATS highlights. Our cash position, net of debt, improved by approximately C$23 million since year end, and C$19 million since the first quarter. Last quarter, I indicated that working capital and cash management required work. This quarter operations generated C$27 million of cash, C$13 million of which came from working capital improvements. We are working to reduce our investment in working capital as a percentage of revenue through better alignment of our customer terms with our supply chain terms. This alignment also assists with efforts to reduce and manage potential credit risks in our customer base. Other credit risk management initiatives include a proactive review of credit risk profiles during our bid review process and improved accounts receivable procedures during the program.

During the second quarter, we invested C$5.8 million in property, plant, and equipment, of which C$4.6 million was invested in Photowatt France bringing our year to date investment in Photowatt France to C$9.9 million. Second quarter earnings per share from continuing operation was C$0.16 compared to a loss per share of C$0.23 last year. Year to date earnings per share from continuing operations normalized for one-time gains realized in the first quarter fiscal 2009 was C$0.29 per share compared to a loss per share of C$0.35 in the same period a year ago. Stock-based compensation expense and potential future expense impact was provided in the last two quarters.

To recap, the second quarter of fiscal 2009 showed continued improvement over both the second quarter last year and the first quarter of fiscal 2009. However, the rest of fiscal 2009 will be impacted by further restructuring as has been outlined and general global economic conditions which may reduce or delay the capital spending of some ATS customers.

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

Ladies and gentlemen, we will now conduct a question-and-answer session. To allow as many voices to be heard as possible please limit yourself to two questions per turn. (OPERATOR INSTRUCTIONS). Your first question is from Marko Pencak with GMP Securities.

Thank you. Good morning. First question has to do with Photowatt. Notwithstanding the outsourcing that you undertook in the quarter, I was quite surprised by the strength of your revenue performance. Is there anything else, any other insight that you can give to us? Because certainly -- was there any, perhaps, material that you produced in the prior quarter that got sold this quarter that would have boosted the results?

Its Hans, Marko. No, there was nothing else unusual going through the revenue. We increased our system sales which I think was disclosed in the MD&A, which helped the revenue, but that's an initiative as we discussed last quarter that we are trying to increase sales in that area.

But even aside from that mix issue, just your overall megawatts sold this quarter was quite high given the typical season Al tee. Is it just that you were more efficient in trying to account for that down time earlier than later in the quarter?

What we did was, and I think this is outlined in the MD&A, for our own production, we were able to increase the output compared to prior quarters by purchasing additional ingets and wafers, which were two bottlenecks in our production process, which then translated into more revenue. Then we were able able to take some of our supply chain wafers that we were receiving, have them produced into cells and modules by supply chain partners, and those are really the two things that allowed us to increase our production output which then also allowed us to increase the revenue.

Okay. My second question has to do with the automation systems order intake. During the September quarter you identified two particular contracts. One C$25 million from a solar customer, the other C$23 million from a healthcare customer. Your order intake thus far is soft. My question is how many of those C$25 million and C$13 million dollar (inaudible), how many of those opportunities do you see currently in the marketplace?

Marko, hi, it's Anthony. So I will start, then ask Mike to make a couple comments. We have a revised approach to market which I have described before and we have a number of pursues in that regard. We don't count on them we get them they're doubles or triples, or hopefully one day a home run.

So in terms of quantity, we have lots. In terms of our ability to actually go out and get them, because of our previous approach and the capabilities that we have, we're limited. So in terms of making further improvements, the further improvements are going to come in the front end of our business and in the back end of our business specifically the supply chain, which is the context that surrounds your Photowatt question. Mike?

Yeah, I think, Marco, it's Mike Fisher. Starting with the pipeline of opportunities, if we look at that over the last 12 months, the pipeline of opportunities in terms of dollar amounts, what the average dollar amount is increasing, so back to Tony's comment about the comprehensive offering, we're looking at larger opportunities in that pipeline, and in terms of the bookings, as you've duly noticed, we have witnessed some experience or delays in those order dates or commitments, due to a reduction in capital spending and competition for the same capital dollar, if you will. But having said that, we're -- we remain to discussed on the strategy of aligning ourselves with the stronger industries and, of course, the stronger customers in those industries or mark with a more comprehensive solution.

Yeah, I just finally noticed your backlog automotive is actually up both year over year and sequentially. Are you surprised by that?

I wouldn't overly read into that. I would just say that our approach to market, and what we're trying to do at the front end of our business, is not just limit it to home runs, it's about improving our whole approach to market. But I wouldn't -- Mike, I don't know, I wouldn't read anything into that.

No, I think, again, two points, if we look at pipeline, the opportunities in the pipeline are really more focused on the stronger markets being healthcare, energy. However, when you look at the bookings, Anthony had talked about realignment of our sales force and the market segments, and a lot of the automotive bookings we see right now are still predominantly coming through more of the Europe -- more through Europe than Asia, as opposed to North American bookings.

Okay. Thanks. I'll get back in queue.

Your next question comes from Peter Sklar of BMO Capital Markets.

Good morning. Wanted to have a better understanding of the restructuring costs that you took during the quarter. If I do the arithmetic correctly, I believe the restructuring charges were just under C$4 million during the quarter, and I just wanted to have a better understanding of where you are taking them. Are those charges in the automation group, or are they in the precision components group? What are the nature of the charges? It wasn't clear to me what the precision component group restructuring charges are? If you could answer those questions.

Can I start and then turn it over to Hans to give you the finer answer? So I'm being not too specific in terms of what we're doing on this call just to make sure that we take care of all our internal communication before we take care of our external communication due to sensitivities in that regard. So that's kind of the general context. The specific answers to your question --

For the quarter, the costs were primarily the losses incurred in the Precision Components Group, and then there were also some costs associated with our continual efforts to clean up the last of the non Photowatt France solar business, so that would be our SSP initiative that was halted and matrix, which is closed down.

So my restructuring comments were in the context of ASG.

Right. So I understand the sensitivity with respect to ASG, but can you just disclose the dollar amount of the charge that was charged against ASG's segmented results in the disclosure?

In this quarter there were no charges to ASG or to Photowatt France with respect to restructuring.

Okay. And my second question is, again, where the restructuring is going, Anthony, you had talked about, in the past, where you threw out the number where ASG has 23 operating facilities of which eight account for 80% of the revenue and the other 15 account for 20% of the revenue. With the restructuring actions you have taken, those you have announced to date where, do we stand on that, those numbers, the 23 and the eight and the 15, and where do you see sue ultimately end up when the restructuring is completed?

Let me give you the answer and then Hans will correct me. I think in the end, we will, excluding PCG -- you want me to include or exclude PCG?

Exclude PCG. The 23, does that include PCG or exclude PCG?

Includes.

So can you kind of -- whichever -- if you could talk about -- So including PCG, I will say 8 to 10 operations less. Hans, you correct me.

I think that's right. So the 23 also included, I think, Thailand and Michigan, which are now essentially closed, so we're down to 21, and that includes three PCG operations, and then from that, there will be a number of ASG operations that are consolidated into other ASG operations.

Okay. Thanks very much.

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

Yes, good morning. Just following up on the margin question for ASG, could you take us through, in a conceptual way, how you see the margins unfolding over the next few quarters and years? It seems to me that perhaps you might be due for a bit of a pause, and then see it improve again as the next round of restructuring and other efforts begin to unfold. I just wanted to get an idea if that's the general idea or if there's some other process we should think about.

Hi, David. The way I think about it is that the basic automation business is a 10% business, if we were able to fix the red, yellow, green thing, assuming no real benefit from a revised approach to market, or significant improvements from a supply chain point of view, offset by whatever is going on in the world these days. So that's kind of the formula that I think is helpful to figure that out.

Okay. But just in a sequential sense, like you've done a bunch of stuff, you had benefits come through the quarter, is there more to come? You've got another improvement program like just basic fixing that you talked about today. It sounds like something would come of that. So I'm just wondering, is all of the first round already in, and then you need the next round before you get more, and then the final piece of the puzzle would be to generally fix -- or not fix, but improve the business?

So the fix it program, the C$30 million, was all of the fix-its. So to date, we have almost fixed the programs and the divisions and left to fix is the front end of the business and the supply chain, and that's sort of my definition of the fix program, and that surrounded by the separation of the companies which included the strengthening of the balance sheet, the divesting of some noncore assets, et cetera, and the fix in Photowatt was about -- and is about the relationship -- well, is cost per watt, and specifically in that regard, yields and the relationship between our automation part of the company and our Photowatt part of the company. So what we're doing is we're seeing benefits in that regard, and therefore we are strengthening it going forward.

Okay. And then just on sort of outlook for ASG, given what you said about the global economy, et cetera, are we to expect -- you have a pretty good backlog there right now, but would there be the potential for the turnover of that backlog into revenue, the potential to flow?

No, we don't think there's any potential to flow that down.

Okay. So if comments are really reflecting orders, not backlog?

Correct.

Thank you.

Next question, Michael Willemse of CIBC World Markets.

Thank you. Can you give us a sense of the sales geography mix at Photowatt? Were most of the sales to France, or are the sales still pretty diverse?

So the main markets are France, Spain, and Germany.

Is France the highest percentage?

Yes.

And your sales of systems increased again pretty significantly. I know I've asked this question before, but can we continue to see growth even above -- I guess you had 21.6 million in the quarter, but can we continue to see growth even above that going forward?

Again, the French market is starting in the major part of systems are for French market.

Okay. And -- it's good to see kind of the changes you made to keep capacity strong and keep shipments and seams pretty good, strong in the quarter. Just wondering why these weren't done in prior years or what changed this year that, you know, caused you to go that route.

I'm sorry, I can't really speak to the prior years. Just because I don't know. I've asked a lot of questions and read a lot of stuff, but I just can't speak to it.

Okay, that's fine. I saw in the MD&A the PV alliance is looking at hetero junction sales. What caused the alliance to go in this direction given that Photowatt hadn't really had a lot of experience in that in the past?

So the relationship which is contemplated in the PV alliance includes a number of technology initiatives, mono junction, hetero junction specifically, as well as the possibility of expanding in France by building as the possibility of expanding in France by building in France and applying some of the technology. The 25-megawatt line, which is being installed in France is to take what is work in the lab and try and produce it with a view to achieving improved cell efficiencies. So the CEA, our technical partner, is the technology partner. EDF, I think you are familiar with, and we supply, so to speak, the production process, know how, and the 25-megawatt line in order to convert the technology if it's successful into something which is producible.

Just one last question. On the cash balances, you're building up a decent amount there. You talked about initiatives in France, and still more restructuring in the Automation Systems Group. Any other thoughts on uses of cash? Is there any acquisitions maybe of some -- if you have some distressed competitors in the systems business, or even would you consider a share buyback considering where your share price is now?

On the acquisition question, certainly we're in a position, for a couple of reasons. One, because we have learned how to manage programs. Two, because we have a geographical footprint which, in a short period of time, will become more efficient than what it was, and we are learning how to manage our own supply chain in terms of standard designs and relying upon each other within a new approach to mark. And given the economic times, that certainly accelerates our thinking on the possibility of being more opportunistic or strategic on acquisitions. So it's something that we're going to look at. On the share buyback, we don't have a current plan to buy back our own shares, but, you know, we -- we'll look at everything going forward.

Okay, thank you.

Your next question comes from MacMurray Whale with Cormark Securities.

On the systems business inside Photowatt, can you share with us what exactly you're selling there? Is it 30% or 50% of the cost? Is that a panel? What's the sort of balance?

Jean Louie, can you talk to what we're selling?

You use module, you had a converter, cable, all of that in order to be able to convert the energy into electricity. So that's the system. Compared to only the module alone, so that's what we call the systems. So this could be applied in France for great connection this could be applied in Africa for pumping, and that's the way of --

So would the dollar per watt average selling price per system would that be like C$7 a watt or C$3 a watt? Can you just give us an idea what that price would be?

No. We don't provide that information.

Can you break out how much of it is a panel? I'm just trying to gets an idea, it's a big change your business. We can get an idea what your average selling price is on panels historically. You're introducing a new business line and it's very difficult to understand how to benchmark you against the industry if you are now selling more and more systems, because it could be a big jump on a per-watt basis, and I'm just trying to understand that.

So I think what we'll do is just take your comment, then we will consider the next time we have a call how we speak to that point, taking into consideration your comments. I understand what you said.

Okay, thanks, Tony. And moving on to the outsourcing opportunity, when you are outsourcing some of the production of cells, panels, are you outsourcing that in France? And what is the outlook for more of that, and what could the impact on your margin be?

So let me start and then Jean Louie, if you can make a comment as well, I'd appreciate it. So I think of it as a global initiative within our company, and that includes interacting with one another. Acquiring services from automation, or Photowatt utilizing other third parties to add value in terms of part of their process, either because of a VY indication period or some other reason. Automation using a alternative supplier to perform a certain function, or us using or working to use a different robot company or conveyor company or whatever. So within that context, we have not established too many hard and fast rules in terms of what we subcontract to what or who we use for outsourcing supply chain generally speaking. So, Jean Louie, did you want to add anything?

I just would add that we are subcontracting, as you said, in France but also in third parties, and that's to benefit from this. That's the only thing I would add.

Okay, so we shouldn't expect like an increase in your capacity through an outsourcing in some big way. It doesn't sound like it's as yet a big initiative to sort of grow your capacity in that manner.

I would agree that it's not a big initiative to grow our capacity in that manner. But we are working to build flexibility and capacity up and down in all of our businesses.

That makes sense. And then just lastly, on the solar, or the energy portion of your backlog at ASG, is that -- is the solar part of that still effectively one customer?

No.

So you are broadening -- I think originally one of the big order was one particularly big customer but are you seeing uptake now from multiple customers on your offering in that space?

I would say four to five customers.

Okay. Great. That's all I have. Thanks.

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

Thank you. You generate a lot of cash from working capital this quarter. The question is how much incremental opportunity do you still see in that regard, excluding any new supply chain initiatives. Just meaning in terms of the Company it is a sits today.

Our internal goals, objectives are to continue to generate cash as we have in the second quarter. Our first quarter was low, and in the third quarter, we would expect to continue, as we have in the second quarter, just offset by any restructuring dollars we need to spend.

Okay. But when you say cash, aim just specifically referring to the change in noncash working capital. Is that what you are referring to as well as opposed to operating cash flow and excluding your earnings?

I'm referring to the operating cash flow.

I'm just trying to understand how much more cash you can squeeze out of your balance sheet items. Have you guys taken most of that out, then any material incremental gains would likely come from supply chain initiatives? Or is there still some more room to take some cash out of that?

Marco, it's Carl. We're making progress, but we're still not happy. There's more to be had had.

Okay. Second question is can you just give us further insight into the nature of the equipment that you are supplying into the solar industry? Is there particular parts of the value chain or the overall stem to stern production process where you have -- you've had particular success?

You want to start, Eric?

Sure. In the solar industry, this is Eric Hugel speaking, the equipment that we supply ranges right from the front end of the process to the back end of the pro. So I would say that we do concentrate on material handling aspects more than the process. However, we do offer both.

And Marco, going forward, we're not trying to sell equipment, right, like if we're successful, the equipment is part of what we're trying to sell. Whether that be Photowatt or whether it be a customer like I talked about at our annual meeting being at the top right-hand corner of our approach to market chart. We're trying to be more comprehensive in terms of what we're offering, and obviously that includes automation.

Yeah. No, I understand that. I was just trying to get a handle on where you've had the success thus far. So that's helpful. That's it for me. Thank you.

Your next question is a follow-up question from David Tyreman of Scotia Capital.

I just wanted to clarify, on the PVA line, is the first line about improving cell efficiency is and the second line about actually producibility?

Jean Louie, you want to speak to --

The first line is to improve the cell efficiency, okay. On the current -- on the process we have now, which is called (inaudible) and then we are -- we have started to work on the second phase to improve solar efficiency on the cell. So that's --

I'm sorry, the second line is about --

The second line is to go further in terms of efficiency, but with the new process, which is called hetero junction.

Okay.

Just to summarize, hetero junction, could you say it's two cells in one cell.

Right.

And just to be clear, we are in a six-month period where we're looking at whether we should do that.

Okay. That's helpful. Then there was a comment, I think it was you, Anthony, who said you were talking about considering -- or you had been considering or have considered the 100-megawatt concept for France, I guess it was, and then I wasn't clear if you had come to some decision or whether it's still outstanding or what.

That was in the context of what our arrangement is with our PV alliance partners, so that arrangement contemplated both technology, which Jean Louie just spoke of, and the possibility of expanding in France in 100-megawatt increments.

Yes.

So that is a potential vehicle that we have at our disposal that we can pursue if and when that's appropriate to pursue. In France. Another one is the systems sales that we've been talking about. So generally speaking, one of our strategies is to take advantage of the French market, given that we're there and a bunch of other regions.

So has any decision been made on these 100-megawatt lines, or is this really dependent on what comes out of the 25-megawatt explorations if you go with the hetero, too?

No decision has been made on the 100-megawatt plants, and that decision would, in part, be dependent on what comes out of these technical initiatives that we just spoke about.

Okay. Are there any other key items that would be thresholds or milestones?

I mean, normal commercial market competitive, that kind of stuff.

Okay. Nothing special. And then just on solar and general right now where you are, is your capacity now 60 megawatts, or should we think of it as in that area? Because you are shipping at that rate, even in the summer quarter.

It's Hans here. Right now, in the terms of UMG-Si capacity, by the end of the third quarter we'll be close to 50 megawatts, and that's being supplemented by some of our outsourcing arrangements, which are leading to some of our poly manufacturing.

Right. Okay. So do I take that it basically -- it sounds like the back end can produce 60 megawatts, and you are bringing in enough from outside sources, if the's profitable to get to that. The general idea?

So the plant in France, the capacity by the end of the fourth quarter will be approximately 50 megawatts of UMG-Si, or metallurgical silicon, or approximately 70 megawatts if we use polysilicon, and that's being supplemented by supply-chain management.

Okay. So you could ship even more than 70 if you could get poly and you brought some more stuff in?

That's possible.

And is that -- would that imply that you would be at that point bringing in modules, or do you actually have module assembly capacity to get to 70 in-house or more?

Under that model, some module assembly would be done in our existing facility and other module assembly operations would be done by others.

Okay. Sounds like you are doing outsourcing it at various stages depending on balancing the facilities. That the idea?

That's correct.

Okay. And then on AP G, this seems to be a growing area. Quite a lot growing. Just wondering what the product are that you are selling there. Trying to get a picture of that. And the sustainability of what you've got, because it's had a huge growth.

I'm going to start, then Hans can give you a rough breakdown on segments. So it's strategic product area, and we are working to build a comprehensive offering, so that has the automation system part, product part, services part. We are just standing up, if I can put that it way, the automation products and soon the automation services, so the idea is that the automation systems guys go in, take on a major project, which includes automation, design, develop, build the first pieces of equipment, and then the subsequent pieces of equipment and the value engineering and the upgrades of those, let me call it the prime contractor, would be our products group and the subcontractor would be our automations group. So that's what we're trying to do strategically. In terms of characterizing the work that they're currently doing, I'll turn to the Hans.

So the primary sectors that AP G is in righted now is in healthcare and energy with approximately, say, 30% in healthcare and most of the balance in energy.

What was that number?

About 30% healthcare, 70% energy.

Okay. So if I understand this correctly then, it sounds like you come up with a product, for lack of a better word, and it sounds like those product can change over time, but then you -- once you've done the first one, if it's repeatable, a bunch of times for various different folks, then it's considered part of this APG thing?

There's two ways that APG gets work. The first one, it can build equipment directly for customers, which is the current case.

Right.

Strategically, for us, we're trying to make the connection between the products and the systems and the services in the manner that I've described before.

Okay. I think I get the general idea. Just on the solar system, bouncing back to that I think last quarter you talked about -- or someone did -- about the possibility this could be a lumpy business from quarter to quarter. Is it the case that in Q2 we saw particularly strong quarter, or is this quite sustainable at 20 million per quarter level?

Is this bookings?

I think you said sales were 21 million, or something like that.

Sorry, are you asking about systems within Photowatt?

Yes.

So, Jean Louie, do you mind fielding that?

I would say that it's -- it could be linked with the weather, okay. When you have some snow, it's difficult to install systems.

Okay. So in winter quarters, not so high, but in summer quarters, C$20 million per quarter is quite doable?

I think he's saying yes.

Okay. Just wanted to confirm. Last general question, in the whole cell area you guys are pretty small now compared to a lot of the major players. Just wondering where you see yourselves fitting in the ecosystem of solar, given what's going on in terms of size, and also in terms of how some of the industry dynamics could change quite sniffing can'tly, like polysilicon prices or ASPs and could you get whipsawed in amongst all these very large players now.

Well, we could talk for an hour. I would say that we need to develop something which will differentiate us or give us competitive advantage, and so what are we going to do that? What could it people be? It could be an operation which has very attractive characteristics in terms of dollars per watt and certainly the automation guys as well as the -- our management and employees in Photowatt are committed to do that. It could be some technical breakthrough which could potentially come from our association with the PV alliance. It could be in-country strategy in France, which could start with systems business and then potentially grow to 100-megawatt plants. It could be some technological breakthrough that could result from the collaboration of our automation people and our Photowatt people to solve a problem which the industry currently has. So those are the things that we're looking for. We don't think in terms of growing Photowatt as much as we think in terms of having a very attractive Photowatt that could be replicated, and I think that's -- that's a different strategy. We believe that euphoric market sources which are created by stimulus from governments will erode, that the prices of poly and more natural order will return to the marketplace, and that companies are going to have to compete on the same basis that other industries compete on, which is more classical than what that industry has experienced. So that's what we're trying to do.

And by replicate, you mean replicate Photowatt, you mean --

Well, hypothetically, if we have a 100-megawatt Photowatt, which has extremely attractive operating characteristics, and then we take that, and we build another one, in France or somewhere else, that's what I'm talking about.

Okay, that's helpful. Thank you.

Your next question is another follow-up question from Marco Pencak of GNP Securities.

One quick modeling question. What should we be using for an effective tax rate prospectively for the back half of this year and into next year?

I'm looking at Hans, but he won't tell me the number, so he is going to tell you.

I don't think we can give you an effective tax rate to use. What I can say is it largely depends on what jurisdictions we're taxable in, in Canada and parts of Europe, particularly ASG parts of Europe we have substantial tax losses that can be carried forward against future income. So to the extent that we have income in those jurisdictions, it will be sheltered for awhile, and other jurisdictions, such as the US, Photowatt, and parts of Asia are not as sheltered, so if we make money in those jurisdictions, we'll pay higher taxes, the or we'll fay normal tax rate.

Well, let me ask a question this way. Based on your backlog, and where you intend to build some of these systems, I mean, would it be reasonable to assume, based on what you just said then, that your tax rate for at least the remainder of this fiscal year is going to be similar, 10% or less? Or can we not do that even?

I won't comment on the 10% or less, but I will sort of from an order of magnitude perspective, the bulk of our ASG business is in Canada, so that would be our Cambridge business and most of our APG business. So that's the lion's share of the systems business and income made by those companies would be largely sheltered, and the other note would be Photowatt, which is another substantial business of ours, they would be paying more normal tax rate and so the income from that company wouldn't be sheltered.

Okay.

I have another follow-up question from David Tyreman of Scotia Capital. Please go ahead.

Sorry, one last question. Foreign exchange, the Canadian dollar has collapsed, as we all know. Or not collapsed, but is down a lot. Would that change your thoughts, the Anthony, on your 10% target, given that we're like, I don't know, 20, 25% lower than the peak, at least? And just kind of related to that, you're already at 9.5% on ASG now, so you're pretty darn close, yet you've got some more restructuring ahead, which should improve. Sounds like you're already over 10%. Any thoughts you had on FX and the fact you might be already over your target?

No, I mean, my 10% is still a 10%. You guys want to comment?

I'd say on the FX in the short term, there is minimal impact because we have a hedge program, and we hedge going out each quarter. It's longer term than that, but in the short term, we're substantially hedged. So as Anthony said, we won't see much of a foreign exchange impact, and therefore no change to our profitability because of foreign exchange.

Right. But your bidding programs today with a much more attractive cost structure, I would think, out of Cambridge, anyway, than you were. Wouldn't that push your margins up?

Well, the programs that we are bidding today, they take a bit of time to come in and for the work to start so we won't see those margins for at least one quarter, two quarters out.

No, I understand that, but I'm just trying to understand why your goals wouldn't have changed from 10% when we're at 118, or whatever the number is, when we used to be at par or above.

So just to kind of reiterate what I think I said, which is ASG business with the programs and the divisions working is 10%. I think -- and that's the whole business, not -- not just Cambridge.

Right.

And that's without making assumptions about a successful approach to market.

Sure.

Or assumptions about supply chain -- that I talked about.

Right, okay. That's fine. Anthony, you seem very conservative. Thanks.

[Laughter] I'm actually quite flashy. [Laughter]

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

Thank you all. Thank you very much. Have a good day.

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