ATS Corp (ATS) 2010 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the ATS Automation third quarter conference call. I would like to remind you that this conference call is being recorded on Tuesday, February 9, 2010, at 10:00 AM Eastern time. (Operator instructions)

I'd would now like to turn the call over to Stewart McCuaig, Vice President, General Counsel of ATS. Please go ahead.

Thanks, Operator, and good morning, everyone. Your main hosts today are Anthony Caputo, Chief Executive Officer of ATS, and Maria Perrella, Chief Financial Officer.

Before we begin, I am required to provide the following statement respecting forward-looking information, which 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 projection in the forward-looking information.

Certain material factors or assumptions were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information. Additional information about the material factors that could cause actual results to differ materially from 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 reflected in the forward-looking information, are contained in ATS's filings with Canadian provincial securities regulators.

Now it's my pleasure to turn the call over to Anthony.

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

In the third quarter, we continued to experience challenging market conditions, which negatively impacted orders and revenues in both ASG and Photowatt. Despite these circumstances, we continued to operate profitably during the quarter. Today, I will update you on our progress in ASG, Photowatt, and on our balance sheet, what we are seeing in our markets, and our plans as we move forward.

On ASG, recall that our plan was to fix things, improve our approach to market, and focus on more attractive market segments. In response to the economic crisis, we expanded the fix phase of our plan.

In the third quarter, we experienced a 45% decline in revenue, compared to the same period a year ago. This reflected lower backlog entering the third quarter, lower bookings in the quarter itself, and a longer period of performance on certain projects and backlog.

Order bookings were down 41% compared to a year ago. Based on the activity we're seeing now, I believe the booking deterioration we have experienced has moderated, and growth should slowly follow.

As part of our efforts to improve the front end of our business, we strengthened our sales and marketing organization. During the quarter, we hired seven new people, all of whom have significant experience in our customer segments, automation and manufacturing. We have appointed Patrice [Pelchet] to the role of VP Global Sales and Marketing to lead our revised approach to market efforts. I have previously worked with Patrice, who is a seasoned executive with over 25 years of experience in international sales and marketing, engineering, project development, and general management. Patrice has been at Photowatt for the past eight months.

Despite the decline in revenue, we were able to maintain a normalized operating margin of 13%. Improvements in leadership, program management, supply chain, number of divisions, and other cost reductions all contributed to positive operating margins in the third quarter.

As a reminder, our original plan was to spend CAD30 million across the Company, with a one-year payback. We increased that by CAD6 million to CAD8 million, in response to the economic crisis, of which we have spent almost CAD6 million this year. We are continuing to monitor market conditions in ASG, and we'll respond accordingly.

On Photowatt, recall that our plan was to position for separation by fixing the operations, securing appropriate silicon supply, and moving downstream. During the third quarter, we continued to see sequential improvement in Photowatt, compared to previous quarters this fiscal year. However, compared to the third quarter a year ago, revenue was down 25%, as megawatts sold were off 22%, and module ASPs were down 35%.

The impact of lower volumes and module prices was partially mitigated by an increase in system sales, which accounted for 64% of revenue this quarter. As I indicated last quarter, we are now running at 100% polysilicon production. Average cell efficiency remained consistent with last quarter.

For the quarter, Photowatt's operating margin was 3%. Lower volumes and ASPs significantly impacted Photowatt's profitability. However, we mitigated the full impact through increased system sales and our cost per watt reduction plan.

During the quarter, we established Photowatt Ontario, which offers turnkey solar project development, installation, and solar products. Located in our Fountain Street campus in Cambridge, we are applying our solar expertise, automation capability, and significant presence to serve the Ontario solar energy market. In Ontario, we are incurring incremental costs which are reflected in the third quarter. We will continue to incur incremental costs until production ramps up and begins generating revenue, which is expected by the second quarter of fiscal 2011.

Following the third quarter, we entered into a supply contract to purchase 900 tons of polysilicon over the next three calendar years. This contract, combined with a smaller contract we signed in the third quarter, provides us with predictable silicon supply at competitive market prices.

We may proceed with a plan to reduce Photowatt's cost structure, which would cost approximately CAD10 million to implement. We're also looking at not renewing the contracts of a number of temporary workers in France. These decisions will be made as circumstances dictate.

Looking at our balance sheet, our cash position, net of debt, increased by approximately CAD19 million during the third quarter, to CAD122 million as of the end of December, 2009, most of which was generated from operations and reductions in working capital. However, as I've said in past quarters, our inventory levels at Photowatt remain too high. I expect it will take several quarters before we can reduce Photowatt's metallurgical inventory, and this will depend on the speed with which we can execute our downstream initiatives, particularly in France.

At this point, I'd like to make a few comments on what we're seeing in the market. In ASG, customers are continuing to delay their capital spending programs. However, we're seeing signs of improvement. We are beginning to see more opportunities develop, and proposal activity is increasing. We expect that this activity will translate into orders, but at a modest rate.

As customer prospects and end markets begin to improve, I expect capital investment will return to more normal levels. In the meantime, I believe that macro forces will continue to impact our revenues over the next several quarters, notwithstanding our relatively healthy six-week booking number.

At Photowatt, we are continuing to make progress on our downstream initiatives. Photowatt is actively targeting strategic customers and solar projects with a view to creating downstream pull. We have submitted several proposals in this regard.

Reductions in feed in tariffs in Germany and France, and increased industry inventory levels and capacity, particularly in Asia, will cause further downward pressure on market demand and average selling prices. Overall, the new FIT in Paris and France remain attractive, and I believe will continue to support a sustainable solar market.

For Photowatt, our BIPV offering meets the new technical specifications for full building integrated TV products, which is an advantage over some of our competition. For simplified BIPV and ground mount applications, we are working to decrease our costs and address the foreign low cost competition. I believe our brand name, low carbon footprint as a French integrated producer of BV modules, and 30 year history in France, will continue to provide competitive advantage.

In Ontario, the new feed in tariffs are expected to increase demand for solar energy over time. This should benefit Photowatt, as we are well positioned with an Ontario based manufacturing presence and extensive capabilities and experience.

Going forward, our strategy remains to fix, upgrade and grow. While difficult market conditions have required us to do incremental fixing and restructuring, we have achieved a lot, and are moving forward with our plans for separation and growth.

For ASG, this means consolidating the space, expanding our offering, and improving our market position. On the M&A front, we have reviewed a number of opportunities, and are actively in discussion and conducting due diligence with respect to certain of these opportunities.

While I believe these activities will be successful, the completion of any transaction is dependent on a number of factors, including the completion of satisfactory due diligence, negotiation of purchase and sale, and requisite board and other approvals. We are targeting companies based on their ability to bring market or technology leadership, scale, or opportunity brought on by the economic environment. Financially, targets will be reviewed for their potential to add accretive earnings to our current operations.

Going forward for Photowatt, as I indicated, our path to separate Photowatt was to fix the operation, secure appropriate silicon supply, and establish a reliable pipeline. We have made enough progress that we are now in a position to consider an appropriate strategy to make Photowatt a standalone company. This process has been launched, and is now in a preliminary phase. Conditions in the solar market will be a consideration in the timing and form of transaction.

To summarize, in the short term, market conditions for ASG will remain difficult. This will continue to impact our revenues, operations and margins. We are strengthening the front end of our business, and moving forward on acquisitions.

At Photowatt, module demand and ASPs will remain low, and could decline further. We are building our sales funnel through strategic initiatives in France, which should become visible over the next few quarters. We are continuing to target supply and operational improvements to reduce our manufacturing cost per watt, and are moving towards separation. We have created a solid foundation, and we are working to build upon it.

I am confident of our future prospects despite the short-term challenges we're facing. We remain committed and focused on our value creation plan.

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

Thank you, Anthony, and good morning, ladies and gentlemen. In the third quarter, consolidated results remained relatively stable and similar to Q2. Despite the challenging economic environment, which has been impacting us for the past several quarters, we have continued to operate profitably, and advanced our strategies.

My comments today will focus on the performance of our two segments, our consolidated results, and the balance sheet.

First, on ASG. Our third quarter ASG order bookings of CAD92 million represented a 30% improvement from our Q2 low of CAD71 million. Although nowhere near fiscal 2009 quarterly bookings, which ranged from CAD126 million to CAD169 million, based on the sequential improvement this quarter, I believe the downward trend is dissipating.

The impact on revenues, however, continues to be felt as third quarter ASG revenues dropped by 19%, to CAD79 million, from CAD97 million in Q2. Third quarter revenues were CAD65 million lower than the CAD144 million generated in the same quarter last year.

ASG's third quarter earnings from operations were CAD8.4 million, or CAD5.2 million lower than earnings from operations in the second quarter of this fiscal year. You will recall that Q2 included CAD2.5 million of incremental investment tax credits.

On a year-over-year basis, third quarter earnings were CAD6.3 million lower on reduced revenues. However, our operating margins, as a percentage of revenue, are holding. Our third quarter operating margins, normalized for restructuring costs, were 13%, same as Q2, and improved over last year third quarter margins of 12%.

Q3 earnings from operations included severance and restructuring charges of CAD2 million, compared to CAD1.6 million in Q2, and CAD3.1 million in the third quarter last year.

Interim fourth quarter 2010 bookings for the first six weeks of this current quarter are CAD46 million. This is similar to interim bookings last quarter.

Last quarter, I had said that although we have seen increased activity in the ASG opportunity funnel and signs of stability, I did not expect that this would immediately translate into orders, and that the automation business would lag a general economic recovery. Companies are still taking a cautious approach to capital spending. With this view, and a lower ending backlog of CAD203 million versus CAD282 million last year, I expect ASG will continue to see lower revenues in the near term.

Next, let's look at Photowatt. This segment includes both Photowatt France and Photowatt Ontario. In the third quarter, our revenues came from Photowatt France, with Photowatt Ontario incurring startup and operating costs, which impacted the solar segment's profitability. We expect Photowatt Ontario will start to generate revenues by the second quarter of fiscal 2011.

Megawatts sold have gone from a high of 16.4 in Q3 last year, down to 12.8 megawatts in Q3 of this fiscal year. Although 22% lower than a year ago, it represents a significant improvement from the Q1 low of 8.3 megawatts, and the 10.6 megawatts sold last quarter. Photowatt's focus in France has helped to mitigate the challenges brought on by lower module demand in Europe.

Average selling prices for modules declined by 35% year-over-year. Based on the recently announced reductions in feed in tariffs in several jurisdictions in Europe, some further decline is expected.

In the third quarter, Photowatt revenues increased to CAD60 million, up from CAD52 million in Q2. Last year, Q3 revenues were a record CAD80 million. Photowatt's strategy, to move from a module producer to a provider of systems, has partially offset the decline in megawatt sales. System sales accounted for 64% of total Q3 revenues, compared to 28% a year ago.

Looking at operating earnings, in Q3 fiscal 2010, Photowatt generated operating earnings of CAD1.6 million, or 3%, compared to an operating margin of CAD600,000, or 1% in Q2, and 10% in the same quarter last year, when Photowatt earned CAD7.7 million. Our Q3 operating performance demonstrates ongoing improvements, as we have continued to reduce our manufacturing cost per watt through higher cell efficiency, improved throughput, and reduced scrap in fiscal 2010, partially offset the decline in ASPs.

Now, a few consolidated ATS highlights.

In the third quarter, we generated cash, net of debt, of CAD19 million. Of this, CAD16 million was as a result of decreased investment in non-cash operating working capital. At the end of the quarter, our net cash position was CAD123 million, compared to CAD104 million last quarter.

However, as Anthony discussed, we did not make any progress to reduce Photowatt's inventory. As I said last quarter, I expect initiatives in both France and Ontario where metallurgical inventory will be used for specific module supply contracts to impact inventory in fiscal 2011.

During the third quarter, we invested CAD4.3 million in property, plant and equipment, of which CAD3.8 million was invested in Photowatt.

Turning to earnings, earnings per share were CAD0.04 in the third quarter, compared to CAD0.07 in Q2, and CAD0.16 in the third quarter of last year. Higher positive operating margins, lower revenues, have generated lower earnings dollars, therefore decreasing our EPS.

In the quarter, the effective tax rate was 12%, as compared to the previous quarter's rate of 31%. On a year to date basis, the effective tax rate of 22% was higher than the 10% effective tax rate in the prior year, due to the additional investment tax credits taken in Q2 this year to reduce taxes payable, which increased the effective tax rate.

In summary, the solar market continues to be difficult. Demand improved primarily in France, however, increased module capacity and supply in the industry continues to driver lower selling prices, which in turn are putting pressure on profitability. In Ontario, our pipeline is building, and applications were submitted for a number of projects under the FIT program.

For ASG, market conditions continue to negatively impact order bookings and revenues. We are more confident today that the increased proposal activity will lead to an increase in bookings, however, we cannot predict the magnitude or timing of that improvement. Based on market activity to date, we don't expect to see a return to calendar 2009 levels in the short term. We have a strong cash position and a sound balance sheet, which gives us the ability to pursue our growth strategies.

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

Ladies and gentlemen, we will now conduct a question and answer session. (Operator instructions)

Your first question comes from Michael Willemse from CIBC. Please go ahead.

Hi, great. Thank you for taking my question. First question, what's the -- your topic of creating solar as an independent entity. Is there any preference right now related to a sale of the solar business, or a public offering of the shares, or is it too early in the process right now?

It's early days, and we're just beginning, but I think that a solution that we would go forward with would try to preserve the competitive advantages that we have, so it would involve France, hopefully it would involve Ontario. But it's really early days.

Okay. And then, next question, related to your inventory of metallurgical silicon. When would you expect your inventories of metallurgical silicon to start to drop off significantly? Is this one or two quarters away, or maybe second half of fiscal 2011?

So what I've said in prior quarters, that it would take a number of quarters, and I think I said it would take over two fiscal years. We expect to see some reduction in that inventory starting in -- or, towards the end of Q1 fiscal 2011.

And do you expect to have a significant margin impact on your gross margin, once those sales all start to become incorporated?

At this time, we don't expect a significant impact. So -- and as we've said, we're still working to reduce our cost per watt to also mitigate declining ASPs.

Okay, thank you. I'll get back in queue.

The next question comes from Daniel Kim with Paradigm Capital. Please go ahead.

Morning. Thank you. Given the weak overall outlook for polysilicon prices, what, if any, impact you believe you might see in the Ontario market specifically?

I'm sorry, the Ontario market with respect to -- ?

To polysilicon, and -- or just general module pricing.

So our assumption on poly is that it's not going to go up in the short term, and it might go down a bit. In terms of Ontario, the poly component is a relatively small component in terms of the cost of developing the whole system, in terms of modules and balance the system, and project development, and so on and so forth.

In terms of market prices in Ontario, our assumption is that they will be comparable relative to similar markets, like, let's say, Europe or parts of the US. But there might be an initial premium in order to meet the Made in Ontario requirements.

Okay. And has there been any shift in landscape? We've seen a couple of competitors announce their intention to set up shop in Ontario. Have there been any other recent moves?

I think there's a number of companies that have indicated their intentions to set up at Ontario. The recent move was, the government entered into a relationship with Samsung, which is primarily on wind, 2,500 megawatts, I think, and 500 on solar. The net impact of that is, the government, to some extent, financing a new entrant, which is not good. On the other hand, it's primarily wind. Samsung has obligations to create manufacturing capability over a period of five years or so on wind towers, and inverters, and blades and modules. So that potentially creates opportunity for the other part of our business.

So the good news is, it's not primarily on the solar side, as far as we're concerned.

Okay. Thank you, and last question. With regard to the [met-sil] inventory, a little while ago, you announced the contract with the EDF. I presume that was for 100% met-sil, so when Maria was discussing the declining inventory, is that related more or less to that? Or how much of your inventory would be consumed by that one particular contract?

Well, I think that the contract you're referring to is one that was disclosed two years ago or more?

This was back in October?

In October? No. We didn't disclose any such contract. No.

Okay, sorry. Let me just double check my notes. I'll get back to you. Thank you.

You're welcome.

Your next question comes from James Morrison with Cormark Securities. Please go ahead.

Hi, guys. In terms of the ASG, I guess we're finally seeing an increase in new orders. How long-tailed are these orders, and do you think we're seeing the bottom in terms of revenue, or how long will that take to kind of impact the downward trend in revenue?

So, most of these new orders are more typical of what we experienced in the past, or historically, our orders have been revenued over six to eight months. So when I look at our backlog right now, about 10% of that backlog is further out than that, more than a year. But the rest of it would be -- or fall within the six to eight months, that new timeframe.

Okay, so (inaudible), I guess, could you character -- do you think that the revenue is bottoming here, or it will take a couple more quarters?

Based on our backlog and the order intake that we have today, I would say it's bottoming.

Okay. And then on the Photowatt side, the CAD10 million that you're looking to spend, what would this include? And does that include the CAD2 million to CAD4 million that you previously said you'd spend on Ontario?

That does not include the CAD2 million to CAD4 million that we talked about in terms of Ontario. And the Photowatt CAD10 million is essentially to reduce costs, to reduce our cost structure, and it's not capital. And we can't really go into a lot of details, because we have obligations in French law that we need to discharge before we could get into the details of what the program would look like.

Okay. Okay. And I guess on the Photowatt -- on the sale of Photowatt, these are (inaudible) somewhat of a timeline, like a goal in mind that you wish to share with us? Or like you said that it's kind of standalone at this point, so I interpret that as that you could sell it today if you wanted, if the market was good. Is that correct?

I mean, one course of action would be to sell it. That would be correct. And we -- our intention is to move forward as quickly as we can, but mitigated by factors or assisted by factors that we can't control, including the solar market itself. But we intend to move forward the best we can, and quick as we can.

Okay, thanks, guys.

Your next question comes from David Tyerman with Genuity Capital Markets. Please go ahead.

Yes, on the Photowatt Ontario new plant, what is the capacity of this plant? And what does it do? Is it just a module manufacturing plant?

At this point, it's a module manufacturing plant. In terms of capacity, so we have a million square feet in Ontario anyway, and this plant takes up part of that million square feet. We are cautiously ramping up to meet demand, and the demand comes from projects that we intend to develop, as well as from other developers. And so our position is, we can meet whatever demand develops, and we would either do it ourselves, or we have a relationship with a manufacturing partner as well.

So, we're in the ramp up, and we're going to ramp up to market demand.

Can you give us any idea of what that could possibly look like? Like were you talking 10 megawatts, or 50, or do you have any sense of that?

The only color I have -- would give you at this point, is that we intend to make it meaningful.

Okay. Okay, that's fair enough. Just a couple of housecleaning things. The tax rate -- can you give us some idea of the tax rate in Q4 fiscal '11, and what you would consider a normal tax rate?

So that's a difficult answer -- or, a difficult question to answer, that in the past -- and I'll just give you some of the tax rates that we have and the tax credits, loss carry forwards that we also have.

So we have different tax rates in each of our jurisdictions. In Canada, we're at about 33%, US 39%, France 36%. And we also have a SR&ED pool and ITCs, some of which expire and some don't, and that's about CAD95 million, depending on where we're profitable, or if we have losses, that impacts our tax rate. Historically, we've seen a tax rate in and around the 12% to 15% range. Because of these factors going forward, if everything stays the same, I guess it would be in and around that rate also. If we're more profitable, I would expect the tax rate to increase.

Okay, that's very helpful. And then on the raw materials, the excess inventories that you have, I think -- did you say in the past that they're CAD30 million, so does that -- I assume that's still the rate?

Yes. In the past quarters, I've said that we have CAD30 million to CAD40 million of excess inventory, most of which is metallurgical.

Right. Okay, that's great, that's helpful. I'll get back in queue. Thank you.

You're welcome.

The next question comes from Marko Pencak with GMP Securities. Please go ahead.

Thank you, good morning. Anthony, in your comments about ASG orders, you said something along the lines that you expected to be at a modest rate. Modest relative to what?

Modest relative to the activity that we're seeing, and the number of proposals that we're submitting. So customers have reengaged, automotive is come to life, energy is come to life again in certain parts. We're bidding a lot of stuff. We have a lot of proposals out. And so my comment is related to the conversion of that into bookings, and then subsequently, revenue.

So does that mean -- so only if it's modest rather than good, it's simply that there's still lots of activity, but you're not able to assess when they may formally manifest themselves in the orders, because your customers aren't giving you any concrete feedback in terms of timing?

Yes. The way I think about it is, we're -- I believe we're at, in a U, and we're coming out of the bottom of the U. We're not in a V. So that's how I think about it.

Okay. My next question, I guess, is for Maria. In your MD&A, in the Liquidity, Cash Flow and Financial Resource section, in the second paragraph, halfway down, you comment -- you make a comment about your inventory turnover, and you say that in the short term, these efforts will be impacted by the Company's ability to increase sales volumes, particularly in Photowatt France.

So, is the takeaway there that you're basically telling us that you're going to see sequential increases in Photowatt volumes and just [to give] what you have to do from working capital to support that, we shouldn't expect a near term improvement in the working capital?

Yes, but I'll just say it in a different way. We don't expect our inventory levels -- or, our inventory levels have declined. The decline that has taken place is primarily on the ASG side, so we've made a bit of improvement there. But as we said before, most of our inventory is in Photowatt. And given that a fair amount of that is in metallurgical silicon, and we've said that it will take a number of quarters to work that down, we don't seen an improvement in the near term.

Well, I'm still not sure that I'm understanding what you're -- I understand what you just said about that part of it, but I'm not understanding the reference to sales volumes. I mean, my inference here is, your sales volumes are going up sequentially. That's how I read that sentence. And I just want you to either tell me that I'm right or I'm wrong on that interpretation.

Let -- okay. Can I get back to you?

Yes. Secondly, in note 15, you talk about investment in a joint venture, where you enter into an agreement to establish Ontario Solar PV Fields, Inc., a JV which I believe you proportionately consolidate 50% of that. Who is your other partner in that JV?

We haven't disclosed who the other partner is.

Is it a single partner?

It's a single partner.

Okay. Let's just see what else I wanted to ask here. Oh, yes. Can you just tell me, what were the actual startup expenses for Photowatt Ontario during the third quarter, and how should we think about that in the next couple of quarters?

We said that Photowatt Ontario will spend approximately CAD500,000, or less than CAD500,000 a quarter. And that's what we've been spending, and we expect to see that until actually start to generate our revenues, at which time we expect to generate income.

Okay. Well, if you could give me an answer to that first question, about that Liquidity Cash Flow section, either now or as a follow-up, that would be great. Thank you.

You're welcome.

(Operator instructions) The next question comes from Michael Willemse with CIBC. Please go ahead.

Great, thank you. Just going back to the Ontario solar market, you mentioned that the ramp up of the Ontario solar market looks different from German -- you know, some of the European markets. What are the major differences? And I guess, what's going to be Photowatt's approach to market in Ontario relative to the approach to market you had in France?

So on the capacity side, we have significant existing infrastructure, and we have an automation company in the next building, next door. So in terms of our ability to ramp up production capability at a relatively low incremental cost, we are very, very well positioned. We don't have to build a building, we don't have to do all of those other things. So that's on the supply side.

On the demand side, there are three levels of engagement, if you will, that we're following. The first one, I would call a strategic one, where we're an Ontario based company, and we have certain initiatives and proposals into the government with a view to capitalizing on the fact that we're a very, very significant Ontario company and player.

Number two, directly and indirectly -- indirectly, meaning through a JV, we have a number of applications into Ontario Power Authority pursuant to the FIT, and so we will get our responses from them in due course, and those are projects that we develop.

The third strategy, or element, or approach, is we are developing, and have some relationships with third parties that are in the development business, that could potentially buy modules from us.

That's the Ontario story. The France story is a much more strategic story, given our roots, capability, and competencies that we have in France.

So in that particular case, we are -- we have a number of proposals into bodies of the French government, and we're hopeful that we will be successful in one or more of those, and that will establish us and advance our position, really, as the only integrated manufacturer in France, in an environment which politically is supporting that type of green initiative.

Do you think ultimately the Ontario opportunity could be bigger than the opportunities in France? Or is it too early to tell?

I mean, I think it's early. It's a function of political will, it's a function of the cost of the program, other priorities. I guess on one hand, you could argue, well, the government has demonstrated a willingness by putting in an attractive fit and by engaging in relationships as they did with Samsung. Then you could take the other view that says, well, maybe the whole overall pie got somewhat smaller, and the market may or may not develop as quickly on that side.

But overall, I think it will be good, and so, we're talking about degrees of good.

Okay. Is there an opportunity to supply Samsung with solar modules, or are they going to be manufacturing themselves?

There's an opportunity for Ontario industry to participate on supply, products and services on the Samsung initiative. And to my knowledge, the only contractual obligation that they have in that regard is that they have to procure Ontario steel, as long as the steel meets certain quality requirements. But I think that there are other, softer undertakings, which could create opportunity.

Okay, and then just one more question on ASG. You had mentioned looking for acquisition opportunities. Now is this something that's pretty material, at tens of millions of dollars of an acquisition, or more of a tuck under?

When I talk about the acquisition framework, I talk about adding to our market leadership. I talk about advancing technology. I talk about opportunity brought on by the economic circumstance which we're all facing.

I think generally speaking, I would think of these acquisitions as being meaningful, not crazy. But a tuck in might be for technology (technical difficulty), and technology only.

Okay, thank you.

Your next question comes from David Tyerman with Genuity Capital Markets. Please go ahead.

Yes. Your Other Expenses line, I'm wondering what exactly is that, and what would be the impact of a solar separation on that line? Would it go down by proportionate to segment sales, or what should I be thinking about?

So you're looking in --

The notes near the end.

Note 10, where it ranges between CAD3 million and CAD5 million a quarter?

It's on note -- yes, note 10. It's four -- yes, exactly.

Okay. So in a year, we primarily have corporate costs.

Okay.

And most of this is salaries, and I think I've said before that we have in here also restructuring, and restructuring costs related to corporate, professional fees, M&A activity, going to profit sharing accruals.

We, as all costs, we monitor these costs, and we're working to reduce these costs. Should we not have Photowatt, then it would be our intention to reduce these costs proportionately to the revenues that we have.

Okay. And the kind of CAD3 million to CAD5 million that we're seeing, that we've been seeing for a number of quarters, is that kind of a normal run rate, then, that we should be thinking about, or was there a lot of unusuals running through there?

The CAD3 million to CAD5 million would be a normal run rate, and the items that I described just cause the CAD3 million to CAD5 million to vary from quarter to quarter, so (multiple speakers) --

Right.

That's M&A activity, professional fees, that might just drive a different number, slightly different number.

Sure. Okay, so just expect that kind of run rate.

Yes.

Okay. And then on Photowatt France, I'm trying to understand the demand in the ASP situation now. Is it quite conceivable, given what's going on with the FITs in Europe, that demand, in terms of -- or, your sales, could actually drop in megawatts, and ASPs drop quite dramatically?

So the feed in tariff, as you know, depending on whether it's [pool] FIT or simplified FIT, drops from -- you know, for residential and schools and health, from like [60 to 58], and then for other buildings, from [60 to 50].

Our target is primarily the full building integrated, so -- which is from [60 to 58]. We also participate in the other buildings, specifically agricultural buildings and farm buildings, etc. And in that particular case, the FIT will go from [60 to 50]. So we need to continue to improve, from a cost point of view and project development point of view, in order to protect that.

Overall, I believe there will be more competition, so we are trying to position on the basis of -- you know, not the highest cost, developing projects, our relationship from a technology point of view through the PV Alliance, and the fact that we're the only integrated manufacturer in France, and that trying to use all of our capability in order to enter into more strategic relationships with the government.

Okay, and then on the ASP side?

I mean, we assume that ASPs will go down. We don't assume they'll go up.

Right. Do you have an idea, or give us an idea what you're seeing?

What we've seen, to some degree, is moderation. But given what's happening in Germany, and similarly in other jurisdictions in France, we expect that they're going to go down.

Okay. And then, on the PV Alliance, what exactly are you doing at PV Alliance right now?

PV Alliance had -- has two parts. It has a technology part, and it has a potential collaboration part. On the technology part, there's two parts. There is a basket of initiatives related to improving efficiency for the monojunction, and there's a basket of initiatives related to improving technology around heterojunction, or layered stuff.

We have a 25 megawatt line, which is going to become operational April -- what, April? April --

This April.

This April. And that line is to take developments which have been created by the CEA on the first phase of the program, the monojunction, and work to operationalize it, commercialize it, productionize it -- i.e., make it work, with a view to improving cell efficiency.

The second program, which is the heterojunction program, we are actually at a point where, through the PV Alliance, we are making decisions with respect to how we move forward in that regard.

Okay. Okay, that's helpful. Thank you very much.

The next question comes from Marko Pencak with GMP Securities. Please go ahead.

Can you share with me what your geographic split was during Q3 at Photowatt?

Primarily France.

But are we -- is that like 90% France, or 75%? I'm just trying to gauge the relative exposure with the changes in the FITs by country.

Ninety percent.

Okay. And secondly, you -- again, in your MD&A, you talk about the fact that you're seeking to secure [optic] agreements for Photowatt France production, and so you're not -- you're going to -- your cost saving initiatives in that regard are kind of, again, go hand in hand with events there.

Are any of those -- are those hoped for optic agreements separate and distinct from anything you're doing in your PV Alliance, or are they somehow tied together?

They are separate.

Okay. And the only other comment -- question I had, you comment about some customer push outs. Just to be clear, are those with respect to new orders and contracts, or are you also seeing some push outs in terms of delivery requirements from existing contracts as well?

So it's not for existing contracts, or contracts that are in our backlog. It's just for bids that we are working on, opportunities.

Right.

So they're not becoming orders or bookings as quickly as we would like them to be.

Okay, perfect. Thanks very much.

And I would just -- I'd like to just answer your previous question. So this referred to -- or, refers to metallurgical inventory, and the fact that demand for metallurgical products is down, has been down. So the idea -- or, what we want to do is just increase the sales, or get sales contracts for metallurgical products, in order that we can use this inventory at Photowatt France.

Okay, thank you. That's helpful.

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

Thank you very much. Thank you very much, ladies and gentlemen. Have a good day.

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