ATS Corp (ATS) 2012 Q1 法說會逐字稿

Good morning, ladies and gentlemen, welcome to the ATS Automation first-quarter conference call. I would like to remind you that this conference call is being recorded on August 17, 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 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'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 to turn the call over to Anthony.

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

During the quarter, we continued to advance our value creation plan. Before I get into the details you will have noticed with the presentation of our financials has changed this quarter with the adoption of IFRS and the classification Photowatt as discontinued operations. Maria will speak to these changes in her remarks. Our continuing operations now consist of ASG and corporate. Overall, at ASG, our operating performance remained strong as we advanced the integration of ATW, generated strong bookings, and ended the period with record backlog and continued to advance our approach to market.

Turning to Photowatt. Ontario continued with the ramp up of their 100-megawatt line. Operating results were approximately break even for the quarter as the macro environment for the FIT program improved. France was hurt by deteriorating market conditions caused by oversupply of module inventories in Europe and further declines in European ASPs. This negatively impacted operations and Photowatt took a CAD6 million inventory impairment charge in the quarter.

Today, I will update you on ASG, including the integration of ATW, conditions in the market and our outlook. On Photowatt, I will update you on activities in Ontario and France, conditions in the market and the separation of Photowatt. I will then make summary statements.

On ASG, we booked CAD157 million of new orders, an 85% increase over Q1 last year. The increase in Q1 bookings was driven by larger programs, primarily in Transportation and Life Sciences. Our revised approach to market and the additions of Sortimat and ATW were key in achieving this level of orders. For the quarter, we finished with a record backlog of CAD328 million, representing a 53% increase over Q1 last year. It should be noted that even without ATW and Sortimat, the ASG base orders grew by over 50% from Q1 last year and that a number of orders resulted from synergies between businesses.

ASG revenues in the first quarter were 25% higher than last year. Sequentially, revenues decreased 14% from the fourth quarter, despite record ending backlog. This is largely a timing issue that reflects the early stage of completion of a number of our new large programs.

As we move into the build phase of these programs, we expect revenues will increase to levels more in line with Q4. Approximately two-thirds of our backlog is now program type bookings. As we indicated last quarter, in Q1 we used cash in ASG primarily to fund working capital for our expanding program base, including a number of strategic opportunities in Transportation.

Consolidated operating margin was 8%, or 12% if we normalize for corporate expenses as we previously reported. This is in line with Q4 and Q1 last year, notwithstanding the addition of ATW and Sortimat and the impact of acquisition accounting. Recall that ASG margins are negatively impacted by the inclusion of Sortimat and ATW, who operated at significantly lower margins than ASG, until both are fully integrated. Our base business has continued to perform very well, driven by improvements in leadership, program management and supply chain.

On integration, we have eliminated a significant number of Sortimat's RED programs. Notwithstanding this improvement, operating performance of Sortimat has not yet reached acceptable levels and we're taking actions to accelerate the improvements.

The integration of ATW is well underway. The consolidation of ATW's Saginaw division is substantially complete. Efforts to integrate ATW into ATS's structure, sales and marketing, program management, supply chain and command and control processes are progressing well. We have made good progress in eliminating RED programs at ATW, having gone from approximately two-thirds RED to less than 15% today.

Turning to ASG's market, overall activity remains healthy. Our funnel-in proposal activity continued to grow. As I noted last quarter, we are engaged with a number of our customers on enterprise solutions.

By way of example, we are executing a large multi-phase expansion program in Life Sciences where ATS is providing multiple systems for several sites, with tailored designs for each location. The program includes equipment, training, support and embedded ATS personnel. Additional follow-on phases are contemplated.

To deliver the program, we have engaged a number of ATS divisions globally. This approach is the key differentiator for ASG, but large programs cause variability in quarterly booking numbers. Over time, I believe our revised approach to market will continue to gain traction and serve us well. Our orders for the first 6 weeks of the second quarter were CAD90 million.

In terms of outlook, ASG remains focused on growth. Our record order backlog speaks to success of our approach to market. We continue to strengthen our sales organization, improve front end of the business processes, attract and reward the best talent, engage on a key account basis and increase program type orders. In addition, organizing by segments has allowed us to tailor our capability and efforts and offer differentiating solutions to our customers.

On acquisitions, we continue to review companies against our M&A framework, the ability to bring market or technology leadership, scale or opportunity brought on by the environment. As we move beyond the separation of Photowatt and focus on our core business, acquisitions may become more significant in terms of size and strategic contribution. We intend to apply significant corporate resources to this activity, post separation of solar. Our balance sheet remains strong and we have significant room under our credit facility. I would reiterate that acquisitions are not a substitute for organic growth.

Turning to Photowatt, first quarter revenues were 29% higher than a year ago. Higher revenues reflected higher megawatts sold on growth in Photowatt Ontario volumes and higher system sales in France. These increases were offset by lower ASPs in France, which declined approximately 20% for modules. ASPs for systems experienced a modest decline.

Turning to operating results, normalized for the CAD6 million inventory impairment, Photowatt operating margin for the quarter was negative 8%. This primarily reflects losses in France where declines in ASPs outpaced cost reductions. Photowatt Ontario was approximately breakeven on CAD4 million of revenue. Photowatt used cash in the quarter of approximately CAD14 million, including investments of approximately CAD11 million in working capital in Ontario.

As a reminder, in France, a restructuring plan was initiated in the fourth quarter through which Photowatt has plans to, number 1, focus on growing system sales in France and other emerging markets. Number 2, significantly reduce factory costs. And number 3, improve supply chain. During the quarter, Photowatt advanced this plan.

To date, the work force reductions have now been fully implemented, resulting in a one-third reduction in full-time equivalent positions. Beginning in Q2, module production has been outsourced. The factory is being down sized to 50-megawatts, which will be supplemented by the 25-megawatt PBA cell line and improvements were made in reducing scrap and increasing cell efficiency.

In Ontario, output from the 100-megawatt module line is increasing to meet contracted demand. We expect to be at full capacity prior to calendar year end. As we announced during the first quarter and discussed on our last call, Photowatt Ontario has secured contracts for the majority of its production capacity for the next 2 years. This includes a manufacturing contract to supply a customer with 24-megawatts of modules over fiscal 2012 and 2013, the agreement allows for an additional 24-megawatts to be ordered.

A contract with Hanwha SolarOne under which Photowatt Ontario will supply 160-megawatts of Hanwha branded modules over the next 4 years with shipments expected to start in October. Additionally, through its 50/50 JV with Q-Cells, Photowatt Ontario continues to progress through development steps related to conditional fit approvals totalling 64-megawatts. We are in final discussions regarding takeout on construction finance and we expect to meet the OPA waiver window.

Looking at Photowatt's market, in Ontario, we continue to be encouraged by the level of opportunities and Photowatt's demonstrated capability. While we remain cognizant of potential risks that could impact market development, including possible changes in the political landscape and/or transmission capacity issues, we believe the Ontario government's recent announcement that allows developers with advanced project plans to obtain a waiver of the LPA's termination rights will provide market stability.

The addressable market in Ontario is estimated to be between 2 to 3 gigawatts over the next 5 years. As of June 2011, there were 6.5 gigawatts of solar project applications submitted to the OPA and a total of 1.2 gigawatts of solar contracts have been granted under FIT. Photowatt's plan is to continue to grow by developing projects, building modules and providing contract manufacturing for others. Photowatt Ontario has a competitive cost structure and operating results are expected to be more in line with those experienced by ASG.

In France, changes in FIT regimes in France and other major European markets continue to have a negative impact on customer demand. Potential investors are holding off on new projects due to market volatility. This is causing a buildup of industry inventory levels and driving ASPs lower. Overall, despite the positive changes being made to restore competitiveness, if ASPs continue to decline, further actions may be required.

On separation, we are continuing to pursue our dual track separation process, involving either the sale of Photowatt France or a spinoff of the entire Photowatt group. On the sale, we are engaged in discussions with a number of interested parties for Photowatt France, and if an acceptable offer is made, we will give it full consideration.

On the spinoff, we are advancing our plan as follows. We are preparing documentation and expect to deliver materials to shareholders in the fall and complete a transaction prior to calendar year end. We are preparing for a spinoff of solar assets, Photowatt France and Ontario, as a publicly listed company via return of capital. We have identified a short list of candidates to fulfill the CEO and Board roles for [SpinCo]. I expect we will be in a position to finalize these appointments shortly.

We are considering the initial capitalization requirements of Photowatt and alternatives to achieve this. Note that ATS has the resources to capitalize SpinCo without materially impacting its ability to pursue its growth line. As I indicated before, we would terminate the spinoff if an acceptable offer for Photowatt France were received.

Following the spinoff, Photowatt will be a solar project developer and systems and module manufacturer with approximately 175-megawatts of module capacity serving the North American and European markets. The plan is subject to various approvals, including those of our shareholders and courts. I will continue to update you on the progress as we move forward.

In summary, we're pleased with the level of activity in our core markets, but we remain sensitive to quarter-over-quarter variability. Our growth plans for ASG are advancing. The additions of Sortimat and ATW have driven revenues and backlog growth, and I expect both will make strong contributions to our results over time.

At Photowatt Ontario, our prospects are good. We have the ability to meet demand, and our cost base is competitive. In France, Photowatt's cost base has been significantly improved. This will help partially offset difficult market conditions, but with continued deterioration of the European solar market, additional actions may be required.

Finally, we have a clear and definitive path for the separation of our solar business. We believe that this will result in enhanced value for all our stake holders.

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

Thank you, Anthony, and good morning, ladies and gentlemen. This is the first quarter ATS has reported under IFRS rather than Canadian GAAP. As a result, there are a number of presentation changes, but 2 are notable that I will address.

First, our solar businesses were removed from ongoing results from operations, and separately disclosed on the balance sheet as assets held for distribution to owners and on the income statement as discontinued operations. This treatment is required under IFRS, given the spinoff decision has been taken. Under Canadian GAAP, this would not have been the case as the spinoff must have already been implemented.

Second, the comparative balance sheet as of March 31, 2011 includes an impairment charge related to Photowatt France as required under IFRS. The impairment testing methodologies differ. Notably, IFRS requires cash flows to be discounted and compared to the enterprise carrying value of each cash generating unit independently, Photowatt France and Photowatt Ontario, whereas Canadian GAAP uses undiscounted cash flows compared to the carrying value of each division's fixed assets.

Under IFRS, we were required to take a CAD62 million impairment charge against Photowatt France's fixed assets in Q4 of fiscal 2011. For reference, the financials of our solar business, as presented in our consolidated results, will be the same financials that the spun off entity takes on. Other changes resulting from the adoption of IFRS are not material to the financial results and are summarized in note 25 to the financial statements.

My comments today will focus primarily on our continuing operations and our balance sheet, but I will also touch on the solar business. First on ASG. As you will recall, we ended fiscal year 2011 on a strong note. Fourth-quarter revenues and bookings were the highest for any quarter. We had relatively strong operating performance.

In Q1, our results continued to be good. Revenues of CAD127 million were higher than last year's Q1 revenues of CAD102 million. This is due to contributions from both Sortimat and ATW. Sortimat contributed for just 1 month in last year's first quarter, while ATW was not acquired until January 2011.

Sequentially, ASG revenues were CAD21 million lower than in Q4 despite our record opening backlog. The decline is not unusual, as the increase in backlog came from large dollar longer-term programs. As programs got under way in the first quarter, it was primarily design and engineering-type activity, with the higher revenue assembly and build activity to follow in the next 1 to 2 quarters.

Based on our backlog, we expect to see Q2 and Q3 revenues, which are more in line with Q4 revenues. In Q1, the presentation of ASG results from operations changed, as we consolidated corporate costs together with ASG. This change in how we report results in lower overall EBIT margins at the ASG level compared to our previous presentation.

Gross margins for Q1 fiscal year 2012 were 27.2% compared to last year Q1 of 24.5%. Another year of improvements in operational efficiencies, as well as the relatively smooth integration of our 2 acquisitions provided for the higher gross margin.

SG&A of CAD22.9 million, which includes operations SG&A and corporate costs, increased by approximately CAD7 million, with the addition of ATW for a full 3 months, and Sortimat for 2 months as compared to last year's first quarter. Our corporate costs are and will continue to be in the range of CAD4 million to CAD5 million per quarter, excluding M&A costs. We believe our current corporate structure is appropriate to support future acquisitions. SG&A was 18% of revenue compared to 15.6% in last year's first quarter. At approximately Q4 revenue levels, SG&A as a percentage of revenues is approximately 15%.

We continue to target cost reductions in all areas to improve this figure. However, under IFRS, all M&A activity must be expensed as incurred rather than being capitalized on the balance sheet, as was done under Canadian GAAP. With a focus on acquisitions, we expect an overall increase in SG&A, as well as variances from quarter to quarter.

Our ASG performance and operating margin of 8.3% remains strong and the same as last year's Q4 margins. Prior quarters Q4 and Q3 normalized operating margins were 9% and 6% respectively. Order bookings continue to be strong at CAD157 million. Although a drop from last quarter's high of CAD206 million, it is higher than Q3 and Q2 bookings of CAD133 million and CAD105 million respectively. Order backlog at the end of Q1 is CAD328 million, setting up ASG for strong revenues in fiscal year 2012. We expect to continue to see fluctuations in bookings and are not concerned with the variances given our healthy funnel.

As mentioned, we have now classified Photowatt as discontinued operations and held for distribution to its owners. Ontario had revenues of approximately CAD4 million compared to zero in the first quarter last year, and CAD2 million last quarter. Megawatt sales in Q1 were approximately 2-megawatts, with results from operations at approximately breakeven.

At Photowatt France, revenues were CAD59 million, up CAD10 million from a year ago, while megawatts sold were 12.9 versus 11.4. Despite higher revenues, France incurred losses of CAD11 million, comprised of normalized losses of approximately CAD4 million, the CAD6 million inventory charge and CAD1 million for warranty. Steep ASP declines have negatively impacted operating results.

Photowatt France's current cost reduction initiatives will help to mitigate market conditions. However, it is unknown if these reductions will keep pace with or fall behind ASP declines. Difficult European conditions will provide for lower volumes over the next 2 quarters, further compounding the declining ASP problem.

The Ontario market is positive, as described by Anthony. As explained last quarter, we have sold the majority of our capacity for the next several years. Photowatt Ontario will recognize revenue from 3 activities over 2 years. In general terms, here's how to think about it.

The 64-megawatts is split in 2, with 50% of modules and revenue recognized as modules are produced. The other 50% will be recognized as project sales once the project is completed. For the 24-megawatt contract, revenues will be recognized on normal module sales.

For the 160-megawatt contract, Photowatt Ontario will recognize conversion revenues from a total fee from manufacturing services over 4 years. Conversion revenues are approximately 20% to 25% of normal module sales. EBIT margins for the fully ramped Photowatt Ontario business are expected to be more similar to the ASG business or in the 10% range. Working capital requirements, as a percentage of revenue, are expected to be similar to ASG when fully ramped.

Moving to the balance sheet, I'll review cash generated from operations and working capital as a percentage of revenue. At the end of the first quarter, our total cash position was CAD84 million, and cash net of debts was CAD74 million. Over the last 5 quarters, we have used CAD124 million made up of solar funding of CAD50 million, ASG investment in acquisitions of CAD82 million and ASG CapEx of CAD6 million. ASG generated cash of CAD15 million, which was partially offset by restricted cash.

Working capital as a percentage of revenue has increased by approximately 5% from below 10% in the prior quarters to above 10% in Q1 fiscal year 2012. The increase is due to the ramp in business, as well as decisions taken to use the balance sheet. We have said that going forward, we will see the impact of our decision to fund certain strategic sales opportunities and this is evident this quarter.

We will continue to invest in working capital in the coming quarters, but we are working to mitigate some of this through supply chain and other measures. We expect to operate within the 10% to 15% range for the time being. CapEx spending as ASG continues to be in the CAD1 million to CAD2 million range per quarter.

Turning to net earnings, in Q1, we generated earnings per share of CAD0.07 from continuing operations. Loss per share from discontinued operations was CAD0.13, bringing consolidated EPS to a loss of CAD0.06. Last year in Q1, earnings per share from continuing operations were CAD0.06.

The effective tax rate for the quarter was 38% as compared to last year Q1 of 33%. This is higher than the Canadian effective tax rate of 28%, as losses were incurred in Europe. Our cash taxes payable are minimal, due to the use of loss carry-forwards.

In summary, we have progressed on our value creation plan. Our ASG business remains strong and is performing to expectations. We will continue to use our balance sheet over the next few quarters to fund our organic growth. Photowatt Ontario is expected to continue with positive ramp up, whereas Photowatt France will negatively impact total solar results, but is expected to show improving profit levels from Q1 as a result of its restructuring efforts.

We continue to pursue both separation options for our solar businesses, with the separation to be completed by the end of the calendar year subject to regulatory and shareholder approvals. We expect to only see impact of discontinued operations for another 2 quarters. We will continue our focus on growth in the automation business and are well positioned to execute.

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) Cherilyn Radbourne from TD Securities.

Thank you very much and good morning. I guess the obvious question that's probably on a lot of people's minds this morning is just whether the recent stock market turmoil has impacted customer behavior thus far, or whether you think it's still too early for you to have observed something like that?

Hi, it's Anthony. It is too early for us to have observed something like that. And the nature of the programs that we participate in tend to be strategic. They tend to be larger, they tend to be multi-phase, so we would lag anyway in a sort of general declining market environment. But we have a healthy funnel and we haven't seen any negative impact of the turmoil at this point.

Okay. And second question, can you maybe just elaborate on market activity by your various end markets? Clearly transportation has picked up. The strength in life sciences I guess could be a function of both organic market activity and your acquisition. Can you just kind of go market by market?

We have seen significant activity both in terms of funnel, customer interaction, proposals submitted, et cetera, in transportation. We've seen similar trends in life sciences and we have seen a, I would say, robust consumer market. And we've seen modest or some declines in energy and specifically in the solar area.

Okay, that's my 2. Thank you.

Marko Pencak from GMP Securities.

Thank you. Accounting question first for Maria. Note 25, I noticed that 1 of the big differences between IFRS and GAAP is the expensing of various costs relating to business combinations and last year in Q1 that negatively affected your profitability by CAD1.2 million. Can you give us an approximation of what the impact would have been in Q1 this year? Because you also got the ATW acquisition, which you wouldn't have had back then.

Right. So in Q1 this year, there was relatively very little activity in the CAD100,000 to CAD200,000 range, therefore not impacting our SG&A costs for the quarter.

So those are only -- it's not like there's the cost that you sort of amortized over some period?

No, these would be more like professional fees, due diligence costs, legal fees.

Okay. My second question is, the -- your order intake for the last couple quarters, I mean, you talked about how you expect your revenues to sort of come back to the Q4 levels. But I note that your order intake in the last 2 quarters and your sort of run rate for the current quarter would suggest those levels are much higher than the revenues that you reported in Q4, so are you just being conservative, or is there some timing issues relating to the sort of duration of when deliverables are on some of these larger contracts? I'm just curious why the revenues wouldn't be higher than what you reported in Q4.

A lot of it just has to do with timing and the type of programs that are in backlog. The orders came in in Q4 towards the end. They're large dollar programs, and on average, I would say they would take 9 to 12 months to revenue, whereas in the past we've had programs or backlog that would take 6 to 8 months to revenue. And in the first quarter, we started to revenue some of these programs, but it was more labor for the engineering and design type work and then we expect to see revenues pick up in the next few quarters.

Okay, but I mean, I guess I understand that profile, but I guess I'm just trying to get a sense of -- I mean your order intake in Q4 would have been a third higher than the revenues that you reported and sort of directionally the same thing so far. So I would have thought that perhaps your revenues would be trending higher than they were in Q4 as we look forward to the balance of the year.

So I think, Marko, it just-- it really just has to do with the profile of what's in our backlog and it'll take a little longer to revenue it.

Okay, thank you.

Michael Willemse from CIBC World Markets.

Thank you, good morning. Just wanted to follow up on Marko's question. If you look at the last couple of quarters, your order intakes averaged about CAD180 million. It looks like order intake might come in at that level again this quarter. And I know you mentioned in the fourth quarter that revenues going forward will probably be more like fourth quarter of last year, CAD154 million.

But if order intake continues at CAD180 million a quarter, I would assume that revenues would eventually come up to that level. Is it just like you said, that these are just long, very extended programs and that's why you're just not going to see revenues come up to that level?

Eventually if we keep to the CAD180 million and CAD200 million per quarter order intake range, we would see our revenues getting to that level. I think for now, it'll just take a bit of time to get there for the reasons that we've said.

Okay, so it's more of a stay tuned. I guess the orders you're getting now are different than the orders you might have been getting a year or 2 ago, is that another way to put it?

Yes. And just another example, a few years ago, we would have had more product orders, so they're a quicker turnaround, ship and bill. And that mix has changed a bit, where we've had longer term programs in our backlog.

Yes, you mentioned in the intro that two-thirds of your backlog is program-type bookings. Does that mean that this is like reoccurring annually, or does that mean it's just a longer project?

Yes, so those are -- kind of a strategic recap from a couple years ago, so we used to build one-off machines, which were cost based, let's say. And then what we said was that from a strategic organic growth point of view, we want to not sell one-off machines, we want to sell programs. And programs consist of multiple machines, multiple services, et cetera, et cetera, which has the effect of -- A, increasing the backlog, B, giving us visibility into the future, and C, engaging with customers on a more global enterprise, key account basis.

So we started with zero basically of that type of activity in backlog and today, two-thirds of our backlog is that. And I think it's strategically very significant and important for us and our goal is to try and continue to build that up.

Okay. And then moving on to the margin, if your corporate overhead costs are still going to be about CAD4 million to CAD5 million a quarter, and if I add that to the CAD10.5 million in operating profit you reported at ASG this quarter, I would get it there at 11.5% operating margin, kind of in an apples-to-apples basis. Is that about right?

Can you explain what your starting point again was?

So for ASG, the operating profit reported was CAD10.5 million, correct?

Correct.

So if corporate costs were about, call it CAD4.5 million, and that would get you CAD15 million adjusted for the corporate overhead costs and that would give you an operating margin of 11.5%.

You're doing that math for ASG only?

Just for ASG, correct.

For ASG only, yes, I think we're more in the 12% range.

Okay. Is the goal still to get that in the mid-teens?

The goal would be to get that in the mid-teens, yes. And as we've talked about before, the acquisitions are impacting that. But also going forward, we expect that there might, or there could be some impact from the transportation segment. But our goal remains to get that to the mid teens.

Okay, but the transportation segment might drag, might be a drag for a little bit?

Yes, we expect it to be a bit of a drag.

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

David Tyerman from Canaccord Genuity.

Yes, good morning. Couple of questions on margins, and I'm thinking at the consolidated level, since that's pretty much what we're going to have going forward. Should we be thinking about with -- I guess the first question is on the gross margin level, what kind of sensitivity do you have to volume there? Is there much fixed cost structure there, or -- because you're going to see from what you're saying, a fairly large increase in revenue next quarter. I'm wondering, does this generate a significant improvement in gross margins, or is it pretty much linear to where you were in the last quarter, i.e., all variable?

Based on what we have in backlog, going forward, we expect our gross margins to be in and around the same level as we've seen in Q1.

Okay.

Plus, the transportation segment may cause a little bit of variability to that.

Okay, and by that, what do you mean? What would cause the variability?

It could cause some downward pressure to the margins that we had in Q1.

And why would that be?

Some of the big transportation jobs have a large third-party component.

Okay, that's helpful. So from what you're saying then, aside from this transport element, then just to kind of circle back to what I was saying, it sounds like you're pretty much a totally, not totally, but a largely variable cost operation, and so I shouldn't see a lot of variability from quarter to quarter within a reasonable range of sales, is that a fair way of thinking about it?

Yes, it is.

Okay, and then on the SG&A line, is there -- should I be thinking of SG&A from the standpoint of 1% of sales over a year, or is the CAD21 million you did in the quarter kind of a good run rate in the ball park of where we are at sales levels for the next year?

I think it would be better to look at it in terms of the absolute dollars, and Q1 would be in and around the range that we expect to be for the rest of the year, plus any M&A activity that takes place, which would increase those costs.

Right. Okay. So that's helpful. And then just very quick accounting question. The amortization and depreciation, does the depreciation go through the cost of sales line and the amortization of intangibles through the SG&A?

Amortization of intangibles goes through SG&A, that's correct. And we have depreciation in both cost of sales and SG&A.

Is there anything in here I haven't run across that would help me split them out on the depreciation?

Yes. So just to make it simple, most of our depreciation is in cost of sales.

Okay. Okay, great. Thank you.

(Operator Instructions) Marko Pencak from GMP Securities.

Another question for Maria about the accounting. If I look at your historical margins where I add back, or I net the inter segment loss against your ASG income, and if I compare those results to your-- to the IFRS restated schedule that you provided, basically what we find is that your margins under IFRS are about a point and a half lower than they are under GAAP. And if I look at, again, note 25 from last year, I'm hard pressed to figure out what is really driving that differential aside from my previous question about business combination.

So -- and you would not have incurred business combination costs through each of the 4 quarters last year, I wouldn't think to any -- wouldn't be significant every single quarter. So can you just give us a little bit of color in terms of what are the other significant differences that account for that margin differential?

Okay. First of all, on the M&A costs, in the year we incurred about, I think it was CAD4.8 million.

Right.

And that was spread out throughout the year. On the margin differential, it might just have to do with our acquisitions and the timing of acquisitions and that's driving down the margins. Plus, in Q1 of this year, and if we compare it to Q4, just the fact that we did have lower revenues impacted our margins also.

Okay. So the biggest driver then I guess is going to be, well I mean aside from volume, is going to be whatever acquisition expenses you're incurring, that's basically the difference. There isn't any other sort of material differences in terms of differences in revenue recognition or treatment of other items?

No, no. And then just on the business combination costs in fiscal year 2011, they account for about 1% of the margin drop overall.

Okay. Can you -- do you guys have orders by industry for the quarter? You used to provide that and I didn't see it in your documentation.

We don't -- we do not provide that. We just provide the backlog and revenue information by industry, but not the bookings.

Okay. Now finally on Photowatt, you said that you expect to deliver the documentation to shareholders in the fall. So from that, should I interpret that to mean that there will not be a vote on the separation on September 15 at your AGM?

Correct.

Okay, thank you.

Michael Willemse from CIBC World Markets.

Thank you. In the energy segment of your backlog, is most of that still solar?

Yes, it is.

And I just-- there's been some bankruptcies in the solar industry. Is there a chance you might have to take some provisions on your solar, I guess either your receivables? And is there a chance that that backlog might be reassessed just given the customer base? Or is your customer base pretty solid there?

On receivable side, we have no issue. There's no exposure.

And on the backlog, is that with pretty secure customers?

Yes.

And just the outlook for the energy segment from Automation Systems, do you see that weakening or strengthening? I guess in the initial comments, it did sound like it might be struggling a bit there.

Well, first, there's variability all over the place, as I indicated for the reasons that I mentioned, because we go after programs, we go after larger things. Yes, the energy and specifically solar is down, but I think, I think it's still okay for us. There's a number of specific customers and program areas that we're working on that are less vulnerable, so to speak, to the overall market downtrend.

Okay. Just moving to inventory, at CAD12.6 million, it just seems like a low level relative to the sales of ASG. Is that a good number going forward, or should we see that ramp up as the business ramps up there? I guess that goes for working capital in general.

On the inventory, I would say that's a good number moving forward, we have a relatively low inventory requirement. And then on working capital, we've said that we expect a bit of an increase going forward, just based on the types of programs that we've taken on, strategic decisions that we've made, which include the types of terms that we've given to various customers.

Okay. And then lastly just on Photowatt, if the ultimate structure is to do a share spinoff to shareholders, is it safe to say the idea would be a listing on the TSX, or the TSX venture?

It would be a listing on the public listing, yes.

Have you decided on which continent, or is it safe to say it'd probably be Toronto?

I would say North American exchange.

Okay, thank you.

David Tyerman from Canaccord Genuity.

Yes, hi. I just wanted to go over the Photowatt Ontario stuff that Maria was giving us, it was coming pretty fast and furious, I'm not sure I got all of it. But first the -- it sounds like you did 2-megawatts in the quarter and CAD4 million in revenue, is that correct?

That's correct.

Okay. So CAD2 a watt, is that a reasonable number to think about going forward for normal contracts, not the like the tolling type stuff?

That's a round number for a module, sure. I mean, it's less than that, but it's okay for modeling.

Okay, and then so for the 160-megawatt contract you have, it sounds like we should just use 20% to 25% of that as a modeling idea.

Right, over 4 years.

Yes. And sorry, the other contract you have, is it a regular type contract? Like it would be the CAD2-per-watt type of thing?

It's a module-type contract. Yes.

Okay. And then on the 64-megawatts, it sounds like you are -- are you getting, did you say, half of the modules?

Half of the 64-megawatts are modules, yes, and the other half are projects.

Right, but I guess any of the production you do for that 64-megawatts would just be capitalized into the project, is that correct?

For 32-megawatts, that's correct.

Okay. So for those ones, would Photowatt Ontario actually show any revenue until the projects are actually sold?

For the projects, revenue would only be recorded when the projects are sold, yes.

Okay, okay. And I think that's all I had on that. Then on the spinoff, assuming that's what-- the route you end up going down, you said that the financing requirements from your side were not material. For modeling purposes, if we use like CAD10 million or CAD20 million of cash dumped in, would that make sense, or is that much larger than not material?

Yes, we haven't finalized the numbers, so I wouldn't want to give guidance in that regard yet. We're still, we're still just looking at it.

Okay, okay, that's fine. And then you mentioned about the OPA providing -- if you can get waivers for termination, you can get rid of the termination right issue. Are your projects regarded as advance project phase?

Yes, we intend to meet the waiver window for our project.

Okay, so they should be safe. And then finally on the Photowatt France, it sounds like you're somewhere in the process. Can you characterize -- with actually trying to sell Photowatt France, I don't know if you can handicap the odds of that happening relative to the spinoff at this point, but that's I guess what I'm ultimately after.

I would just say that we're at the very final stages of a potential sale of Photowatt France. So we'll know very shortly, and it's going to be binary.

Okay. And so if that goes through, then Photowatt Ontario remains yours for, I don't know, ad infinitum at this point, is that the way to think of it?

Our strategy is still to separate solar and Automation for all the reasons that we talked about, but we would have more degree of freedom in terms of the separation of Photowatt Ontario, and then we would have to regroup and consider our alternatives in that potential environment.

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

And just one more thing I'd like to add. So the-- I think my comments were that the capitalization requirements for SpinCo would not be material to ATS, not that they would not be, not that they would not be material. So ATS could still capitalize SpinCo and pursue its growth plans as opposed to the numbers not material.

Okay, okay, that is helpful. Actually, sorry, 1 last question. The margin that you provided for Ontario fully ramped, Maria, was that -- it was 10%, was that EBIT or EBITDA?

That's EBIT.

EBIT, right. Thank you.

Cherilyn Radbourne from TD Securities.

Thank you very much. Good morning. Not sure if you're going to want to answer this 1, but 1 of the things I do get asked by investors a lot is just whether this spinoff of solar is contingent on that business returning to breakeven or to profitability, or whether you could spin that off so long as it was sufficiently capitalized in terms of being able to fund losses.

So maybe I'll make a comment about the state of the businesses. So we have Ontario, which is breakeven and growing, and we'll be at full capacity by the end of the year, and Maria indicated the profile of what that might look like.

On the Photowatt France side, we've made a significant number of improvements to the cost base. So if ASPs were to remain where they are, then Photowatt France would return to profitability over the next couple of quarters. So, together, what we have is we have a viable plan and operation for profitability.

Those comments are helpful, thank you. Last 1 is a bit administrative. Just looking at your cash taxes in the quarter on continuing operations, they were I guess about 12% of the total tax expense. Is that indicative of what we should expect going forward?

Yes. As I said, we have loss carry-forwards which reduce our cash taxes payable going forward. Therefore, we expect minimal cash taxes payable in the next few quarters.

Okay, thank you. That's all for me.

You're welcome.

(Operator Instructions) Marko Pencak from GMP Securities.

The various costs that you're incurring with respect to the separation, are those being booked in discontinued ops, or is that part of your corporate expenses?

Costs related to the spinoff and separation are in discontinued operations.

And do you guys make any allocation for management time, or no?

No, we do not.

Okay. In commenting on your effective tax rate, you made a comment that you're incurring losses in Europe. So my question is, is that a function of Sortimat's contribution and their relative weighting in Europe, or is there -- is that also reflective of your pre-existing ASG operations as well and what might be driving the lack of profitability in those, if that's the case?

It's not that they are not profitable. We have operations in Europe. This has more to do with the acquisition accounting and also the tax structure that we've put in place to minimize taxes in Europe.

Okay. So it's really not reflective of your operating results, then.

No, it is not.

Okay, thank you.

David Tyerman from Canaccord Genuity.

Yes, hi. Just wanted to follow up on Cherilyn's question. So Anthony, you said if ASPs stay where they are now, Photowatt France would get back to profitability over the next few quarters. Do you have any expectation ASPs will stay there or don't they generally decline? And it sounds like from the picture you're painting, they could decline a fair bit.

Yes, I mean it's a fairly, as you know, a fairly volatile market and I wouldn't want to forecast ASPs. We've done a significant amount of restructuring. They are where they are now and we're modeling it on that basis.

Okay.

So with current ASP expectations, Photowatt would come back to profitability. Photowatt France.

And, sir, when you say current ASP expectations, is that just like the current ASP, or is it some projection based off that?

It's current and projected.

And I assume -- would that include some kind of general declining level then?

Yes.

Okay. Okay, thank you.

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

Thank you very much, and thank you very much, ladies and gentlemen.