ATS Corp (ATS) 2011 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the ATS Automation fourth quarter conference call. I would like to remind you that this conference call is being recorded on Thursday, June 2, 2011 at 10.00 AM Eastern time. Following the presentation, we will conduct a question-and-answer session.

Instructions will be provided at that time for you to queue up for questions. (Operator Instructions) I'd now like to turn the call over to Stewart McCuaig, Vice President and General Counsel of ATS.

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'm 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 turn the call over to Anthony.

Good morning, ladies and gentlemen. I'm assuming you've seen our press release. Maria will review financial highlights in a few minutes. During the quarter, we made significant advances towards our value creation plan.

At ASG, we had our best looking performance in history. Our funnel increased for both single orders and programs. Our base business continued to perform. We continued the integration of Sortimat and drove much improved EBIT margin and we completed the acquisition of ATW and initiated its integration.

Financial results for ASG in the fourth quarter were strong and the future appears brighter as economic environment improves. At Photowatt in Ontario, we continued to ramp up our 100-megawatt module line which is now substantially complete. We signed additional customer and developer agreements. The previously announced restructuring at Photowatt France has been advanced.

Photowatt secured worker counsel advice and we are now moving ahead with the spin-off of solar by the end of the calendar year and less than the acceptable sale arrangement of Photowatt France is identified first. Photowatt incurred a significant loss for the quarter. Half that loss was due to write-offs of fixed assets and inventory and half the balance was due to increased provisions. For reporting purposes, Photowatt will move to discontinued operations at the end of Q1.

Today I will update you on ASG, including the integration of Sortimat and ATW, conditions in the market, and our outlook. On Photowatt, I will update you on activities in France and Ontario, conditions in the market, and the separation of Photowatt. I will then make some summary comments. On ASG, we booked CAD206 million of new orders, almost double Q4 last year.

The increase in Q4 bookings was driven by larger programs primarily in transportation and life sciences. Bookings in excess of CAD1 million doubled compared to the same period last year. Our revised approach to market was key in achieving this level orders. Revenues in the fourth quarter were almost 70% higher than last year, just over half of that was due to Sortimat and ATW and the rest from the ASG-based business. For the full year, ASG revenue increased 32%.

Transportation was the growth leader in the quarter and made up the largest portion of the Puritan backlog reflecting organic growth in the automotive sector and the addition of ATW. We also saw strong results in energy, life sciences and consumer markets, while computer electronics held study. Operating margin was 13%, 1% higher than last quarter, as Sortimat margins improved due to the reduction of Red Programs and our base business ASG continued to perform well. Improvements in leadership, program management and supply chain all contributed to strong operating margin performance.

Recall that at ASG we expected to be negatively impacted by the inclusion of Sortimat and ATW until both were fully integrated. Sortimat was historically operated in the high-single-digit EBITDA range. During the quarter, EBITDA, adjusted for acquisition accounting, was approximately 11%. The integration of Sortimat is almost complete.

We are working on integrating ATW which will take several quarters to eliminate Red Programs and apply best practices and leadership command and control supply chain, program and performance management. During the quarter, we initiated the consolidation of ATW Saginaw into other operations. Our goal is to increase ATW's EBITDA margins which were historically in the mid-single-digit range.

Turning to the market. Indicators and activity continue to improve as we have moved beyond the bottom of the U and into a more normal market. We are growing our funnel and our proposal activity has increased. We are seeing the return of larger opportunities and receptivity to program offerings as our customers move beyond planning and are launching new products and/or increasing their capacity.

Our orders in the first eight weeks for the quarter were CAD100 million. The fourth quarter orders include a number of larger program type bookings which won't necessarily repeat each quarter. Our bookings are somewhat lumpy but certainly heading in the right direction. In terms of outlook, our core business, ASG, remains focused on growth. To drive this, we are continuing to strengthen our sales organization, improve front end of the business processes, apply our approach to market, engage on key accounts, an increase program-type orders.

As I indicated on our last call, organizing by segments allows us to tailor our capability and efforts and develop differentiating solutions for our customers. On the acquisition side, we continue to review companies against our M&A framework, the ability to bring marketer technology leadership, scale, or opportunity brought on by the environment. As we move beyond separation of Photowatt and focus on our core business, acquisitions may become more significant in terms of size and strategic contribution. I would note that acquisitions are not a substitute for growing our business base, which is experiencing strong organic growth.

Turning to Photowatt. Fourth-quarter revenue was 17% lower than a year ago after removing the sale of CAD9 million of excess inventory. Lower revenues reflected a 21% decrease in megawatts sold, as work stoppages and other actions taken by Photowatt France's workforce in reaction to restructuring negatively impacted production volumes and limited Photowatt's ability to meet demand.

The decrease in France module sales were not offset by an increase in system sales, or revenues generated by Photowatt Ontario. There were several items that impacted Photowatt results related to restructuring and changes in the French solar market. Specifically, we incurred [CAD16] million of non-cash impairment charges, and the rest of the operating loss was essentially divided between higher provisions, restructuring, and higher operating costs as a result of work stoppages and slowdowns in France.

On the restructuring in France, Photowatt has plans to focus on growing system sales in France and other emerging European markets, significantly reduce factory costs, and improve supply chain. The total megawatt capacity available for sale by Photowatt France is expected to remain generally the same. With respect to reducing costs, we have initiated workforce reductions which will result in a total reduction of over 35%, including the elimination of almost 170 full-time positions and 130 temporary positions. To date, we have implemented approximately one-third of the reductions.

Photowatt initiated efforts to add or redeploy 44 people into other areas, including sales, marketing, engineering, and manufacturing. 50 people will be deployed to the PVA cell line. Photowatt has contracted with two manufacturers for module production, which will ramp up over the next several months. In-house production is scheduled to terminate by the end of July. Until the result of these actions are taken, we are fully realized operating performance will continue to be negatively impacted.

In Ontario, module line output is increasing and Photowatt Ontario generated revenues in the fourth quarter for module sales and EPC from a project for the City of Kitchener. In building our pipeline, we have also made progress. During the fourth quarter, Photowatt Ontario signed a manufacturing agreement to supply a customer for 24 megawatts of modules over fiscal 2012 and 2013. The agreement allows for an additional 24 megawatts to be ordered over its term.

Yesterday, we announced a contract with Hanwha SolarOne, under which Photowatt Ontario will supply 160 megawatts of Hanwha SolarOne branded modules over the next four years with shipments expected to start in October. And Photowatt Ontario, through its 50/50 JV with Q-Cells, continue to progress through development steps related to conditional FIT approvals totaling 64 megawatts. We are in the final stages of discussions regarding take out and construction finance.

Photowatt Ontario now has in place firm contracts for the majority of its production capacity for the next two fiscal years. We are continuing to quote on a number of module sales systems and tolling manufacturing opportunities. Maria will speak to the timing and the financial implications of these programs shortly, including expectations for revenue and working capital.

Looking at Photowatt's market. In Ontario, our pipeline continues to be strong. We are obviously cognizant of potential risks which could impact market development, including possible changes in the political landscape and/or transmission capacity issues. Overall, the level of activity is encouraging and I expect their position in the market will serve us well. In France, the government's three-month moratorium on the majority of new solar installations is behind us. The new solar regime announced in France, as expected, will lead to further FIT reductions along with a new 500-MW annual limit for new projects. This will have a negative impact on the industry, however, the restructuring program will help Photowatt be more competitive and expand its higher-margin systems business.

I've spoken about separation of solar and automation in past quarters. The rationale is compelling. It will provide benefits to both businesses. Separation could enhance capital markets' understanding and valuations for the two resulting public companies, provide the Board and management of each with the means to better focus resources with a view to enhancing value.

As you'll recall, we initiated a dual track separation process involving either a sale of Photowatt France, or a spin-off of the entire Photowatt Group. On the sale, we are engaged with a number of interested parties in Photowatt France, and if an acceptable offer is made we will give it full consideration. Photowatt management is conducting management presentations and we expect to receive additional feedback in coming weeks. We have developed a plan to effect a spin-off with accommodation for a potential sale of Photowatt France.

We are advancing this spin-off plan as follows. We are pursuing a spin-off of solar assets, Photowatt France and Photowatt Ontario, as a publicly listed company via return capital. Our intention is to effect this on a tax efficient basis for shareholders on the Company. Photowatt France has secured workers council advice necessary under French law. We have initiated a process to select a CEO and a Board of SpinCo. We are currently considering the initial capitalization requirements for Photowatt and various alternatives to achieve this.

ATS has the resources available to capitalize SpinCo without materially impacting its ability to pursue its growth strategy. In addition, we are pursuing options with respect to other sources of capital for Photowatt. In terms of timing, we are preparing documentation and expect to seek shareholder approval in the fall, and separation prior to the end of the calendar year. We would terminate the spin-off in the event of a timely favorable offer for Photowatt France.

The spin-off entity will be a solar project developer and systems and module manufacturer with approximately 170 megawatt of module capacity serving the European and North American markets, with a competitive cost base at current ASPs. The plan is subject to various approvals, including those of shareholders and courts. I will continue to update you on our progress as we move forward.

In summary, we see signs of strength in our core markets, but we remain sensitive to quarter-over-quarter variability. Our growth plans for ASG are advancing, both organically and through acquisition. We are pleased with the additions of Sortimat and ATW which have driven revenue and backlog growth. Both will make strong contributions to our results over time.

At Photowatt France, restructuring is well underway and Photowatt's cost base has been significantly improved. This will negatively impact results in the short term, but will restore competitiveness in difficult market conditions. At Photowatt Ontario, our pipeline is growing. We have the ability to meet demand and our cost base is competitive. However, due to timing Photowatt Ontario performance will not offset near-term difficulties in France.

We have a clear and definitive path for separation of our solar business. We believe that this will result in enhanced value for all our stakeholders. A t this point, I'd like turn the call over to Maria.

Thank you, Anthony, and good morning, ladies and gentlemen. Overall, four items shaped the year; ASG margins, ASG growth, solar results and separation. On margins, ASG's EBIT margin performance was strong, at 15% before acquisitions and 13% including acquisitions. On growth, ASG achieved both organic and acquisition growth.

For the year, Sortimat and ATW increased Automation revenues s by approximately 22%, with the remaining 10% growth achieved organically. On solar, restructuring activities at Photowatt France and a number of write-offs and other charges reduced consolidated results and cash. And our Photowatt Ontario start-up is well underway and is positioned for positive fiscal year 2012 contributions. However, initial investments for capital and to fund start-up losses also negatively impacted ATS financial results.

On separation, a plan has been finalized, which will see Photowatt and ASG separated by the end of this calendar year. Now to our segment results, starting with ASG. ASG had good sequential revenue growth with the addition of ATW accounting for half of the increase, adding approximately CAD17 million in revenue to the quarter, and growth in our base business representing the other half.

Q4 revenues of CAD154 million increased 23% or CAD29 million over Q3 and CAD62 million over Q4 of last year. In Q4, ASG's normalized operating margin was 13% versus 15% in the fourth quarter of fiscal 2010 and consistent with Q3 of this year. Sortimat and ATW impacted base business margins. Excluding acquisitions, ASG margins continued to be in the 15% range. The integration of Sortimat is significantly advanced and Q4 EBIT margins have increased to approximately 9% excluding acquisition accounting items. Q4 was the first quarter we consolidated ATW.

EBIT margins were at approximately 3%. Restructuring is underway, with Saginaw consolidating into Dayton and Livonia. In the short term, ATW margins maybe slightly more than ATS due to the high concentration of programs and the very competitive transportation market. For the year, our ASG order bookings were CAD529 million, 45% higher than fiscal 2010. Approximately half of the bookings increase came from the base business, and the other half from our acquisitions. With an ending backlog of CAD296 million versus CAD209 million last year, ASG has a solid foundation to continue its strong revenues in fiscal 2012.

Next, let's look at Photowatt. Under Canadian GAAP, Photowatt cannot be classified as a discontinued operation until the spin-off takes place or a sale is imminent. However, as we are moving to IFRS in Q1, we expect solar to be classified as held for distribution to its owners and treated as a discontinued operation at that time. Moving to Photowatt operating results, the fiscal 2011 revenues included a significant contribution from excess inventory sales sold for approximately their book value, plus the addition of revenues from Photowatt Ontario.

On an annual basis, Photowatt revenues increased to CAD216 million from CAD200 million in the prior year, due primarily to inventory sales of CAD45 million, offset by lower average selling prices and lower foreign exchange rates. Average selling prices for modules declined by 20% year-over-year. This was expected based on previously announced feed-in tariff reductions in several European jurisdictions.

In the fourth quarter, Photowatt revenues decreased to CAD49 million from CAD73 million in Q3 as the approximate 15% decrease in systems megawatt sales and the impact of the weak euro relative to the Canadian dollar negatively impacted the translation of revenue. Last year, Q4 revenues were CAD48.6 million. In Q4, megawatts sold decreased 21% from Q4 last year to 10 megawatts and were also down from 16.4 megawatts in Q3. This primarily resulted from lower production volumes due to the work stoppages and slowdowns instigated by the workers council in France.

Looking at Photowatt operating results, the Q4 loss of CAD31 million included several unusual items. A CAD6 million operating loss at Photowatt France due to the work stoppage, which caused the low volumes and higher cost, impacting our ability to mitigate lower average selling prices. A CAD9 million fixed asset write-off for the module line as a result of our decision to outsource module production. An inventory write-down of CAD7 million due to the declining ASPs which has impacted work in progress and finished goods. A CAD2.3 million operating loss at Photowatt Ontario as the business ramped up to 100 megawatts of production and incurred inefficiencies in the process, and another CAD2.5 million in restructuring and separation charges.

For fiscal year 2011, Photowatt had operating losses of CAD50 million, which included the Q4 items just mentioned, the Q3 restructuring provision of CAD9 million, and Photowatt Ontario start-up losses of approximately CAD5 million. Now, a few consolidated ATS highlights. In the fourth quarter, we generated cash from operations of CAD6 million. At the end of the fourth quarter, our total cash position was CAD124 million compared to CAD153 million last quarter.

During the fourth quarter, we invested CAD17 million in the acquisition of ATW, and CAD10 million in property, plant and equipment. Going forward, we will see the impact on our balance sheet of our decision to fund certain strategic sales opportunities particularly in the ASG transportation segment. I expect our investment in working capital will grow as we work through our significant transportation backlog over the next several quarters. For the year, our total cash position decreased to CAD124 million from CAD212 million. This change reflects cash funding for business acquisitions of CAD67 million, CapEx of CAD32 million, CAD23 million of which was spent in solar for CapEx in France, the completion of PV Alliance's 25 megawatt cell line and for the 100-megawatt Photowatt Ontario line, and net debt repayments of CAD26 million.

These amounts were partially offset by cash generated from operations of CAD41 million. On a segmented basis, ASG generated cash from operations while Photowatt used cash in Ontario and France. Turning to earnings. In Q4, we incurred a loss per share of CAD0.18. On an annual basis, our loss per share was CAD0.21, down from earnings of CAD0.14 in fiscal 2010.

For the year, ASG contributed approximately CAD0.64 per share, offset by a loss per share of CAD0.60 in Photowatt and corporate costs and eliminations of CAD0.25 per share. The Q4 tax provision of CAD1 million is the result of earnings in Canada and the US, where we recorded a tax provision. However, our actual cash taxes payable in these jurisdictions is minimal as we are able to utilize future tax assets to offset these losses.

In our solar operations, we are not able to recognize the future benefits of our tax losses for accounting purposes and as a result our consolidated effective tax rate is high. Going forward, our consolidated effective tax rate will remain high until we are able to generate taxable income at Photowatt France. However, the tax losses will go with the new solar entity, either when sold or spun off. In summary, fiscal year 2011 was a year when the improved economic backdrop allowed ATS to resume focus on its growth and separation strategy. We completed two acquisitions, initiating our growth phase and saw a return to healthier order intake, setting the stage for stronger backlogs going into fiscal year 2012.

In solar, with uncertainty in European demand and the decrease in Photowatt's average selling prices, it is difficult to forecast our near-term Photowatt France financial performance. However, with the significant actions taken in the latter part of fiscal 2011 we expect Photowatt France to have a more competitive cost structure by mid-fiscal 2012 and, therefore, be in a better position to mitigate decreasing ASPs. In Photowatt Ontario, we have sold the majority of our capacity for the next two years. The accounting impact of these projects are the 64-megawatt JV projects will see us recognize revenues on approximately 50% of the modules over the next two years.

Photowatt Ontario will recognize the remaining revenues through the sale of the projects to third-party owners at the time the sale is completed. For the 24 megawatt contract, Photowatt Ontario will recognize revenues for the sale of modules to the customer, utilizing Photowatt Ontario's own materials. For the 160 megawatt contract, Photowatt Ontario will recognize revenues based on a tolling fee for manufacturing services utilizing the customer's cells. Revenue from this conversion activity is approximately 25% of revenue from full manufacturing.

We have a strong cash position and a sound balance sheet with the ability to pursue our growth strategy and the ability to raise debt and capital should the need arise. Now we would 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 today comes from the line of Michael Willemse of CIBC. Please go ahead, sir.

Thank you. Good morning. Just first question on the corporate eliminations, it looked really low in the first quarter at CAD2.6 million on the operating earnings line. What caused it to drop so much versus the last couple quarters?

We had -- so the quarter was a little unusual, and --

I'm looking at the first exhibit in the press release. EBITDA corporate and intersegment elimination at CAD2.6 million.

Is that the elimination number?

Yes. CAD2. 6 million?

We had lower corporate costs, and we were able to record the recovery of an item that we had not previously recorded, and that helped to offset our corporate costs.

Okay. So is that like over CAD1 million of the recovery?

The recovery is about CAD2.5 million.

Okay. So I'm just trying to work out what a good run rate is for that segment. It seems to bounce around a lot. Should it be around CAD3 million or CAD4 million a quarter?

Typically, I've said -- or normally we would be in the range of CAD4 million to CAD5 million a quarter, and that amount -- or the CAD4 million to CAD5 million would be impacted by such things as M&A activity, professional fees, and various bonus accruals.

Okay, so CAD4 million to CAD5 million a quarter. Once Photowatt is spun off, could we see that decline by a decent amount, or would it kind of stay the same?

I would expect that that would stay approximately the same, and one of the things that I've said moving forward is that in those costs, we have -- or we will have M&A activity. And in the past, we've been able to capitalize those costs going forward and under IFRS, we have to expense those costs as we incur them. Therefore, any benefit or cost reductions that we would have seen because of Photowatt is no longer consolidated with our results would be offset by, I expect, higher increases in M&A activity.

Okay. And then the next question on Photowatt, the Photowatt spin-off, I guess we're looking at by the end of this year, it has been a long process to get here. Is it just the volatility in the solar market that's made it so difficult to spin this off? And then, secondly, given that the Photowatt operations is not profitable now, I guess, how would that be, kind of, translated into a sale? Is this going to be kind of valued versus peers on a price to sales basis or what's the thinking there?

On the timing, there are a number of things that we had to get done in order to get to a point where we could have a definitive plan for a spin-off or for a sale of Photowatt France for that matter. And those items included restructuring and processes that we have to follow under French law related to the process of consultation with our workers. And the final step in that regard was forthcoming when we received advice from the works council, which is a necessary ingredient to move forward. And that's where we are now.

Now, of course, in order to get a spin-off done, there's a number of critical path items, including a Board, including management, and including some of the items that I spoke about before. In terms of the profitability of Photowatt France, the restructuring that we have done in France makes Photowatt France competitive at current ASPs, but ASPs continue to go down so more work needs to get done in that regard. And in terms of the sale process in France, we've done -- Photowatt France has done management presentations. There has been interest and there are preliminary discussions with potentially interested parties on the sale process.

And just to be clear, the labor problems that resulted in the productivity issues in the last quarter, are those in the past now?

Yes. So we had a -- Photowatt France had a significant disruption, work stoppage, as a result of Photowatt's plans to restructure the Company and to outsource modules and terminate, discontinue a number of the positions in France.

Okay. Thank you.

Your next question comes from the line of David Tyerman of Canaccord Genuity. Please go ahead.

Yes. Good morning. First, just a housekeeping item. What would the Q4 EPS be excluding the unusual items?

I don't have that readily available. I'll get back to you in the call.

Okay. Maybe a simple question would be should we take the charges and put any taxes on it? It sounds like you're not tax adjusting anything out of France and it's all related to France, presumably?

That's correct, yes.

Okay. So we could just drop that out directly it sounds like and that would get it pretty close?

Yes.

Okay. Second question, on Photowatt France, so with the restructuring actions it sounds like you're a lot more competitive. Would you be at break-even with the actions completed? I guess it would include the things up to the shutdown of the module lines at current ASPs?

Based on some calculations that we performed, we would be very close to break-even today with the current ASPs that we have and the restructuring and outsourcing that we plan to do.

Okay. Okay. So is there additional things -- because it sounds like ASPs continued to fall, and that makes sense, given all the inventory, et cetera, that you can do beyond that or that you have planned or you are just going to be behind the curve again by the time you finally get everything done that you've got so far?

No. Photowatt's restructuring plan includes the elements that I talked about, which are pursuing the French and other markets, working to change the mix between modules and systems, the restructuring -- actually, in my comments, I termed it cost reduction and cost reduction has two components. The first component is restructuring.

The second component is a continuous improvement component. So both elements are part of Photowatt's plan. It was just necessary to do the restructuring in order to catch up or almost catch up with current ASPs.

Okay. So is the idea that the continuous improvement and the marketing efforts and so on in terms of trying to do more sales and new markets and so on, it's anticipated that that's how you are going to try to keep up with continuing falling ASPs?

That is Photowatt's plan, yes.

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

And your next question comes from the line of Marko Pencak of GMP Securities. Please go ahead.

Thank you. Good morning. The contemplated spin-off, you talk about a quote -- the form would be a return of capital. What does that actually mean? Does that mean that the parent company has to make an injection into the Photowatt balance sheet? Sort of prior to spin off? Or is there some other meaning to that?

So the spin-off -- so we're looking at the capitalization requirements of the spin-off entity separately than the spin-off methodology. So in terms of spin-off methodology, return of capital as opposed to butterfly. And then we are looking at SpinCo's capital requirements going forward, initial capitalization requirements, and considering various alternatives to deal with that issue concurrently with the spin-off.

Okay. But you guys tripped your covenants on the Photowatt debt, so is a pre-condition of this that your lender for that Photowatt facility has to agree to a pro forma balance sheet and certain credit metrics have to be met in order for this all to happen? Is that one of the things in the critical path?

And a related question, will that, on a pro forma basis, mean that it's consolidated Photowatt Ontario and Photowatt France, or is that facility only going to be on sort of the Photowatt France side?

So the first question, we're in the process of negotiating with the French banks and I don't believe it's on the critical path. On the second question, the spin-off would be Photowatt France and Photowatt Ontario.

Right. But I guess what I'm really just trying to understand is from your current -- your balance sheet as it sits today, what I'm just trying to understand, on a post-separation world under the spin-off scenario, I'm just trying to understand how much cash might need to be injected?

And I appreciate your in discussions with your banks, but I sort of look at this like Photowatt France basically breaks even, sort of big picture, and then Ontario is the profit contributor. So if I'm trying to do my own internal calculation I'm just trying to understand structurally what it is that I have to play with to try to come to my conclusion? Can you provide any help in terms of how we should be thinking about this mechanically?

I think I'll start. Mechanically, we have facilities at Photowatt France, which we disclose, the bank facilities, and going forward Photowatt France will require those facilities. We haven't said how much money, if anything, we would have to put into the spun-off entity. And then for Photowatt Ontario, Photowatt Ontario would also need facilities for working capital construction, financing, and then, of course, we're working to get take-out owners. Therefore, we would need more support for that, Photowatt Ontario would require it's own facilities to be able to manage that business.

So on the project take-out side, I said in my comments on the 60 or so megawatts through the JV that we're in final discussions with a take-out guys with respect to ownership and project finance. And on the initial capitalization requirements of the entity, the whole entity, in my comments, I said that one option would be for ATS to fund the initial capital requirements, and that would not be material, the amount would not be material to ATS. But we are looking at other alternatives in order to do the initial financing of SpinCo.

Okay. The projects that you have in your JV with Q-Cells, I mean, you keep talking about conditional feed-in tariff, so can you just tell me what are the actual remaining steps that you need to solidify that? When those might be awarded, and when would you expect first construction to start on those JV projects?

Yes. So under the Ontario FIT program, as you know, everything is conditional until it's not conditional. And so NTPs we expect notice to proceed on half the projects this fall, the other half in the spring, and construction next year.

Okay. And the Hanwha agreement you signed this morning, do you know what portion of that volume has received FIT approvals or conditional FIT approvals?

No. That would be a matter between Hanwha and its customers.

Okay. Can you -- Maria, can you tell me what the revenues for Photowatt Ontario were in the fourth quarter?

Around CAD2 million.

CAD2 million?

Yes.

Okay. And finally, I'm just having some trouble reconciling a few numbers. Can you tell me what were your -- what was your selling and admin expense for Q4 only? In your income statement?

For Q4 only?

Yes.

Not corporate costs, just all of SG&A?

No, I'm just looking at the presentation of your income statement. You've got revenues, cost of goods, gross margin, D&A, selling and admin, stock-based comp. Because it looks like there's some prior period adjustments probably have happened here.

I'll get back to you with that one, Marko.

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

(Operator Instructions) Your next question is a follow-up from David Tyerman of Canaccord Genuity. Please go ahead.

Yes. I was wondering if you could give us an idea of the capital expenditure budget for fiscal 2012, and maybe by segments since that's going to be relevant going forward?

Yes. For ASG, we're looking at in the range of CAD6 million to CAD8 million for the year.

Okay.

And then on the solar side, for Photowatt France, right now, we're just looking at about CAD10 million to CAD15 million. And then Photowatt Ontario, would just depend on what they do in terms of expansion. If there's no further expansion, then I would say CapEx spending would be relatively low. And then if there is expansion, I don't know what that amount would be.

Okay. That's helpful. And then you mentioned, Maria, that the non-cash working capital is going to go up in the near term because you're going to be working through the transportation backlog. Is that ATW, it sounds like you?

That's a combination of ASG and ATW.

Okay. And is this just a normal kind of build that you would get as you're going through a project, or is there something unusual going on here?

I would say the normal build going through projects. In some cases, it has to do with the types of payment terms we've offered to the customers. However, we are offsetting those payment terms through our supply chain management.

And so should we -- will we notice a significant increase in non-cash working capital?

No, I would say not a significant increase. We've talked in the past about targeting approximately 10% working capital as a percentage of revenue. And right now, we are actually below that. And we would expect to be in the 10% range for ASG.

Okay. That's perfect. Thank you.

Your next question is a follow-up from the line of Michael Willemse of CIBC. Please go ahead.

Thank you. Maria, that CapEx outlook for ASG, CAD6 million to CAD8 million, is that unusually low or is that normal for that whole business, including the acquisitions?

I would say is normal for the whole business. And if we were to look at past years, it's been running in and around that range, if even slightly lower. The ASG business requires little CapEx relatively speaking.

Okay. And then on the increase in the backlog in transportation, sounds like most of that was because of ATW. Was this -- what kind of automotive business is ATW in? Is it like in the seating area, say, steering? Is it electric vehicle? Jus t trying to get a sense of what kind of gross there could be in that type of business?

On your first comment, where you say most of it is coming from ATW, that actually is not the case. The backlog and the bookings in the quarter for transportation came from both ASG and ATW.

Okay.

Okay.

And to your second question, ATW does assembly systems, test systems, for engines, transmissions, other parts of drivetrain. A fairly full capability. And compared to ATS, more relationships with Tier 1 type automotive customers.

Have you guys has started to get any business for, say, setting up systems in the electric vehicle market, or is that the potential market for ASG?

Yes. And, yes. The first yes goes for the old ASG, and the ASG/ATW. And the second yes, every time there is a new product or a new product launch, that's where ATS typically participates and we intend to continue to do so.

And so this could be a meaningful amount of order activity at some point?

I hope so.

Okay. Thank you.

Your next question is a follow-up from the line of Marko Pencak of GMP Securities. Please go ahead.

Thank you. Maria, when you went through the reconciliation of the various items in Photowatt, I'm still having a bit of a hole. There's the three items that you mentioned in your press release, which were the charges, which I think total CAD18.5 million. There's the loss in Photowatt Ontario that you identify, which was what, CAD2.3 million. But I still have a hole to get to the CAD31.3 million. So can you just go through those one more time, please?

I don't know what hole you've calculated, but I would just say the hole is probably the loss from operations. So I just tried to remove the, what I would call the unusual items. And what's left over would be Photowatt's run rate or loss from operations for the quarter.

The -- in your press release, or in the MD&A, you talk about the bad debt and the bankruptcies associated with some of your customers given the moratorium in France. You didn't give us a dollar amount on that sort of category. Can you provide that?

We haven't provided a dollar amount, but I would just say it's not material.

Okay. Okay. Then, that's fine. Let me see what else I had here.

Marko, on your question of SG&A for Q4?

Yes.

Our number is CAD29.4 million.

CAD29.4 million.

And in the past, we've talked about a CAD20 million run rate. And what's happening in Q4 is, versus if we go back a number of quarters, we've added the two companies, Sortimat and ATW, and they have SG&A, which is increasing the CAD20 million run rate by about CAD5.5 million.

Okay, so you would have had -- so if I go through those line items, below the gross margin you would have, what, about CAD6.4 million in depreciation and amortization in Q4?

I don't have that number.

Okay. Well, maybe we can circle back, because there's something that -- like, I can't seem to get the numbers to tie. So I'm just wondering if there is some accruals that went through the course of the year and you adjusted them in Q4 as a catch up or something like that, or a prior period restatement or something, so maybe we can do that offline.

Okay, we'll do offline, but we didn't do any restatements. But we'll take a look at our calculations.

Okay. And, Anthony, big picture question. The elections in Ontario in the fall, the publicly articulated stance of the conservatives. If we think about a scenario where they outright cancel the Green Energy Act but grandfather sort of approved things prior to that? How do you think about the, not your own projects, but how do you think about sort of sustainable volumes from the two customers that you've press released supply agreements with? In terms of what, sort of near term versus longer-term volume, is actually going to be realized?

I mean, speculating, of course, right?

No, no, exactly. I'm trying to come up with a worst case scenario because that's where my earlier question was. I'm just trying to understand how certain the volumes that you've communicated are likely to be as we go into next calendar year?

So that would depend, of course, on the political definition of canceling your termination, right? One view could be everything that has not been unconditionally approved, and there's very, very, very little of that, is canceled. That would be really bad. Another view could be anything which has been contracted, whether conditional or otherwise, will proceed, in which case, to answer your question, at least half of our stuff would be in that category.

Another view is we would not let any more contracts, or we would not initiate any more projects. That would be very good for us. Another view might be we're not going to expand the grid. We're going to stay to the 2.5 gigawatts and we're going to let this thing take its course.

That would be even better. So it really depends on the political definition of -- and then will it be solar, or will it be wind or will it be both? Or will it be -- there's a target rich environment in terms of living up to the political statements that were made, and they may or may not impact the stuff that we have.

Okay. But, I mean, the capital cost for your physical module manufacturing capacity is behind you. What I'm really just trying to understand is from a working capital requirements -- I mean you've got your own projects plus, certainly for the 24 megawatt deal, because you are providing the materials, you have to make an investment in working capital. And then I presume for the tolling, you don't. So is it really a situation where you can basically wait to the last minute and don't have to make any further working capital investments until you get clarity on that, or is there some sort of pre-spending you need to do where you might be taking on some risks if, let's say, the worst case scenario is you've sort of identified the various options unfold? I'm just trying to understand how much could be at risk until we get some clarity on what actually happens.

I don't think we would have a significant exposure, even under the most bleak scenario.

Okay. So that's really just lost opportunity, rather than anything more tangible than that?

I would agree with that statement.

Okay. Thank you.

Your next question comes from Daniel Kim of Paradigm Capital. Please go ahead.

Good morning, thank you, gents. Two quick questions. First, on the contract that was announced this morning, in reading through the press release, it looks like it's only for manufacturing services and materials. Could you share with us what type of revenue contribution and/or margin contribution you would expect from this type of contract?

On the revenue side, we've said that this type of conversion contract would be about 25% of the module-type revenues. And in the past, we've given a bit of a range, and we've said that module sales would be in the CAD2 range. As far as margins go, margins would be more similar to what margins we've been having on the ASG business side versus what we've been experiencing at Photowatt France.

Okay, great. Thank you. And then moving on back to the transposition side, given historically this has been such a big end market for the Automation Group, understanding that the backlog had a huge bump, owing in part to acquisitions and owing in part to organic increases, Anthony, could you comment at all in terms of what you're seeing in that end market?

We're seeing a bit of a rebound in auto sales. Do you think we're at the beginning of a turn in the cycle and perhaps a big rebound within this space?

Couple of comments. The first one is that we -- our business is not really connected to unit sales as much as it is connected to launch of new programs. Now, of course, if the whole industry is suffering a downturn and is in paralysis, as it was about a year or two years ago, then there's just total lack of activity. We are seeing a turnaround. We are seeing significant proposal activity.

We are seeing significant level of inquiries. We are submitting proposals. We are seeing the launch of new products like electric cars and motors and that kind of stuff, and we are participating. And we are being successful at winning with the capability that we have, the customer relationships that we have, and the approach to market that we are bringing to those customers.

Thank you very much.

Your next question comes from Mac Whale of Cormark Securities. PLease go ahead.

Hi, Anthony. I was just wondering, with Photowatt on, I wanted to focus a little bit on the outlook in the order book at ASG. Obviously, a big -- a couple -- a few big orders can really move that around a lot. But just qualitatively, looking at the organization and how it stands today, what can you inherently generate from the team the way it is composed now and the assets you have in place? Are you happy with CAD200 million as an order intake in the quarter, or, I mean, are you maxed out or what's just the nature of the environment and how well are you seeing your offers get turned into contracts?

Okay. Just a couple data points. The first one is that we have management structure and managers, id est, leaders, and business processes that allow us to do more work than what we're currently doing. We have facilities, 27 of them, that essentially operate one shift, and some operate a shift and a half. We are doing or trying to do to the front end of our business what we were successful in doing on the delivery side of our business.

So we got here, and we talked about fixing, we talked about fixing Red Programs, getting our divisions working, getting our divisions to subcontract to each other. So I would say from a delivery point of view, we're never done fixing, but we are, done fixing. Now, as we acquire new companies, we need to help and work with those companies in order to achieve the operational successes that we've been able to demonstrate. So then about a year ago or so, and unfortunately, the timing was wrong because it was the middle of the Great Depression, maybe a year and a half ago, we began to focus on fixing the front end of our business, transforming how we approach customers, trying to develop key accounts.

Bundling. Bringing value-added services, like services and pre-automation, engineering, strengthening the workforce, strengthening the front end processes, hiring more people. All of that. So I would say that we are, I don't know, 60% into doing that, and that's the organic growth answer. And then there's the acquisition answer.

So we believe that there are many companies in the marketplace that are like ATS was. We believe that we can acquire them and subject them to our framework and what we do. And working together with them, we can bring them into the fold and get bigger through acquisition as well. So that's kind of the 30,000-foot view of what we're trying to do.

Okay. And just as a quick follow-up then, when you look at those targets, they're probably coming off of bad time as well. Are you finding that the valuations and the prices you think you need to pay, are they still attractive, or are they improving as we're at the beginning of this sort of new cycle?

No, I would say that we don't have one acquisition that we are in love with, and that we are trying to populate a quilt of capability, and each one of those elements that we require has more than one choice. And, as you know, acquisitions in part are situational, so we look for opportunities, we look for good fits. We don't have one acquisition in mind that we must have that we would pay crazy prices for. There are several different ways to achieve and build each element of capability that we're trying to build.

And given where your cash balance is today, can you move ahead on a sizable acquisition prior to closing everything on Photowatt, or do you basically wait until the end of this year?

We're not waiting. Obviously, resources are limited to 100% of the resources, so what we're doing at Photowatt has caused some distraction, I would say. But at the same time, I would also say that we are still engaged with and intend to pursue acquisitions and, obviously, post-separation, that activity will go up an order of magnitude.

Okay. That's all I have. Thank you.

Your next question is a follow-up from David Tyerman of Canaccord Genuity. Please go ahead.

Yes. Just on when you start reporting the solar assets as non-continuing next quarter, if you proceed with the SpinCo, would you expect to have to add additional resources to whatever amount we see under non-continuing, or is that pretty much what is going to be separated off?

When you say add resources, can you explain?

Yes. I'm just wondering whether you're going to have to add material amounts of cash, I think, would be the main thing. Or anything else from the separated items, like presumably you're going to have one line item that'll show the non-continuing operations on the balance sheet. I was just wondering is something else going to have to come out of some of the other line items to facilitate the SpinCo that's material?

We are looking at what we have to do, and we haven't yet made a determination as to what SpinCo may need in terms of capitalization.

Right. But in your next quarter, you will actually have a line item in your balance sheet, right, called non-continuing operations or something like that?

That's right. On our balance sheet, we'll have two line items. One, in the assets held for sale, and then on the liabilities, liabilities held for sale.

Right. So I guess what I'm asking, is that pretty much the -- what will disappear off the balance sheet at SpinCo, or are you saying that you still have to make more decisions and it's possible some of the resources from other line items will end up, presumably cash being the main one, ending up in also being removed when you do the spin?

It's possible, but that's not our plan.

It's not the plan, okay.

Right, it's not the plan. And then as you've said, the idea is that whatever you would see on those separated line items on the balance sheet is what would just come off after the spin-off is completed.

Right. Okay. That's great. Thank you.

You're welcome.

Your next question is a follow-up from Marko Pencak of GMP Securities. Please go ahead.

Yes, thank you. Anthony, would you share with us what your hit rate or success rate on bids or contracts you're awarded and what you lost in the quarter was, in Automation?

We don't give an exact number, and I wouldn't want to, but it's better than it was before. And we're trying to make it more better.

(laughter) Okay. Thank you. That's it for me.

(Operator Instructions) Mr. Caputo, there are no further questions at this time.

Thank you very much, everybody. Have a nice day.

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