EnerSys (ENS) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2005 EnerSys earnings conference call. My name is Sean, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session following today's presentation. (Operator Instructions). At this time, I would like to turn the presentation over to your host, Mr. John Craig, Chairman, President and Chief Executive Officer. Please go ahead, sir.

Thank you, Sean, and good morning to everyone and thank you for joining us for our second-conference call. As you know, EnerSys completed its IPO on July 30 of this year. And during this call, we're going to be reporting on our results for the second quarter of fiscal year 2005. And this is the period from July 5th through October 3rd.

We're very pleased to report pro forma diluted net earnings per share of 23 cents as compared to 19 cents per share during the same period last year. This pro forma earnings per share results is consistent with the previous guidance that we gave at between 20 to 24 cents. Before I go any further this morning, I'm going to ask Mike Philion, our Chief Financial Officer, to cover information regarding forward-looking statements. Mike?

Good morning, and thank you, John. As a reminder, we will be presenting certain forward-looking statements on this call that are based on management's current expectations and are subject to uncertainties and changes in circumstances. Our actual results may differ materially from the forward-looking statements for a number of reasons. For a list of the factors which could affect over future results, including our earnings estimates, see item two, management's discussion and analysis of financial condition and results of operations, including forward-looking statements set forth in our quarterly report on Form 10-Q for the quarter ending October 3rd, 2004, which was filed with the SEC. In addition, we will also be presenting certain pro forma or non-GAAP financial information. For an explanation of the differences between the comparable GAAP financial information and the non-GAAP information, please see our second-quarter earnings release or our second-quarter 10-Q, which are located on our website at www.EnerSys.com. Now let me turn it back to you, John.

Thanks, Mike. I'm pleased to report that EnerSys sales for the second quarter of fiscal year '05 were $261.3 million, which is a 17 percent increase over the same period last year. Our second-quarter and year-to-date sales results show a positive growth in both our Reserve Power and our Motive Power business units, and positive growth in the three geographical areas where we sell our products and services, which are Asia, Europe and the Americas. Our strong sales growth reflects our efforts to drive market share and is consistent with the current global economic recovery. We are particularly pleased by the continuing growth in our Asia business, with net sales increasing 42 percent and 54 percent, respectively, compared to the second quarter and first half of the prior year. Also, our Motive Power business continues to be very solid, with net sales increased 17 percent and 21 percent, respectively, compared to second quarter and first half of last year.

As you know, commodity costs have increased significantly over the last year and our commodity costs are up approximately $20 million during the first half of fiscal year '05 compared to the same period last year. We had instituted a series of price increases during fiscal '05 in an effort to recover these cost increases. We have realized a modest benefit during our second fiscal quarter from the price increases, but we expect further impact to take place for the remainder of this year.

Turning to the Company's earnings, our second-quarter pro forma diluted net earnings per share were 23 cents compared to 19 cents for the same period in the prior year, or an increase of 21 percent. Additionally, our first half of fiscal year '05 pro forma diluted net earnings per share were 46 cents compared to 31 cents for the same period last year. That is a 48 percent increase year-on-year. We're particularly pleased with our earnings results when you consider the unfavorable impact the commodity costs have had on our business. This earnings growth is primarily attributable to strong growth in topline volume and continued success of our cost-reduction initiatives. But it's partly offset, obviously, by the higher commodity costs.

For the third quarter of our fiscal year '05, we expect diluted earnings per share of between 14 to 18 cents. And we're going to provide full-year guidance on a pro forma basis at this time of 85 cents to 90 cents. We are anticipating the third-quarter decrease in earnings to be primarily due to the following factors. First, we expect commodity costs will be marginally higher than those experienced during our second fiscal quarter of 2005. And second, we have reduced production levels temporarily in several of our plants in response to rescheduling delivery of certain orders from the third to fourth quarter. We experienced delays in mainly, it was military orders, both from the U.S. military and some of the European militaries. We had a large submarine battery order that was scheduled, that we have delayed from third quarter. We now have the order, however, and that will be shipping in the fourth quarter. This plus coupled with the facts that the normal seasonal impact of summer plants -- vacations and shutdown periods, and non-recurring additional costs from partially closing of high-cost manufacturing locations, is anticipated to result in higher manufacturing costs for the quarter.

Within the third quarter of fiscal '05, we expect these higher commodity and manufacturing costs to be partially offset by the realization of commodity-related selling price increases, and the continued benefit from our cost savings program. As you know, we remain highly focused on aggressively pursuing a variety of cost reductions, including consolidation or further consolidations of our manufacturing by moving products from higher-cost manufacturing locations to our lower-cost operations in China, Mexico and Eastern Europe. We remain optimistic concerning our fourth quarter of fiscal '05 outlook. Historically, this fiscal quarter has been our strongest of the year, both from a sales and an earnings perspective. And we anticipate that this year will be no exception. And I'm going to ask Mike to cover this in more detail in a few minutes.

Now I'd like to spend a moment commenting on our customers and our products and services. We continue to be pleased with it highly focused on providing superior products and services to our customers. We've recently been awarded several large contracts from major new customers. And our product development contract with the U.S. Navy for batteries for the nuclear submarine fleets is progressing extremely well.

And finally, we remain very active in growing our business through acquisitions. In our second quarter of fiscal year '05, we successfully completed two acquisitions. The first was the acquisition of Mandik, a motive (ph) power train manufacturer located in the Czech Republic. This transaction will further reduce our European Motive Power cost.

The second was our purchase of FNB Australia. This acquisition increased our market share position to number three in the Australian market and we expect to grow even further. Although I cannot announce any additional acquisitions today, we continue to aggressively pursue appropriate opportunities and remain confident in our continuing future success in this area. We firmly believe that we have the right products, the right people and a sound strategy to successfully grow our global business. And with that, I'd like to ask Mike Philion to provide more details on our financial performance for second quarter. Mike.

Okay. I thank you again, John. The results of our second fiscal quarter and first half of fiscal 2005 were certainly solid. For the second quarter of fiscal 2005, our net sales of 261.3 million increased 17.6 percent over the comparable period last year. This brings our first half of fiscal 2005 net sales to 524.6 million, which is a 19.1 percent increase over the prior year. Both our business segments and all three of our regions experienced strong increases in net sales in both the second quarter and first half of fiscal 2005 over the prior year. On a business segment basis, when comparing the second quarter of fiscal 2005 to the prior year, Reserve Power sales, which were 49 percent of our sales, increased 18.2 percent to 129.3 million while Motive Power sales, which were 51 percent of our sales, increased 17.1 percent to 132 million.

Additionally, on a business segment basis, when comparing the first half of fiscal '05 to the prior year, Reserve Power sales, which were 48 percent of sales, increased 17.2 percent to 254.1 million while Motive Power sales, which were 52 percent of sales, increased 21 percent to 270.5 million.

On a regional basis, when comparing the second quarter of fiscal 2005 to the prior year, America's net sales, which were 42 percent of sales, increased 9.6 percent to 109.7 million. Europe net sales, which were 52 percent of sales, increased 22.4 percent to 135 million, while Asian net sales, which were 6 percent of sales, increased 41.9 percent to 16.6 million. Additionally on a regional basis, when comparing the first half of fiscal '05 to the prior year, America's sales, which were 42 percent, increased 13 percent to 222.4 million; Europe net sales, which were 51 percent, increased 21 percent to 267.9 million; while Asia net sales, which were 7 percent of sales, increased 54.5 percent to 34.3 million.

On a consolidated basis, excluding the favorable impact of foreign currency translation adjustments, which is primarily driven by the euro, fiscal 2005 net sales increased 12.8 percent in the second quarter and 14.6 for the first half of fiscal 2005, respectively, compared to the prior years.

Second quarter fiscal 2005 operating earnings increased 14.4 percent over the prior year to 19.9 million, with a small decline of 20 basis points in operating margin to 7.6 percent, primarily due to the effects of higher raw material costs. First half of fiscal 2005 operating earnings increased 41.8 percent over the prior year to 42.4 million, with operating margins increasing 130 basis plus to 8.1 percent. The fiscal 2005 operating earnings increase is primarily attributable to increased net sales and cost savings initiatives, partially offset by higher raw material costs.

On a business segment basis, when comparing the second quarter of fiscal 2005 to the prior year, Reserve Power operating earnings increased 3.1 percent to 9.9 million, while their operating margin decreased 110 basis points to 7.7 percent. The reduction in operating earnings margin was primarily attributable to raw material costs and sales mix. Motive Power operating earnings increased 26.6 percent to 10 million, while the operating margin increased 60 basis points to 7.6 percent. The increase in operating earnings margin was primarily attributable to selling price increases and cost savings initiatives, partially offset by higher raw material costs.

Additionally on a business segment basis, when campaign the first half of fiscal 2005 to the prior year, Reserve Power operating earnings increased 54.7 percent to 21.2 million, while the operating margin increased 200 basis points to 8.3 percent. Motive Power operating earnings increased 30.7 percent to 21.3 million, while the operating margin increased 60 basis points to 7.9 percent.

A non-operating special charge of 6 million was recorded in the second quarter of fiscal 2005. This included the write-off of a portion of the unamortized deferred financing costs and a prepayment penalty associated with the repayment of our senior second lean term loan repaid from IPO proceeds. This special charge, net of tax, reduced our second-quarter basic and diluted earnings per share by 9 cents.

A favorable year-to-date the effective income tax rate adjustment was recorded in the second quarter of fiscal 2005 to bring the year-to-date effective tax rate in line with the current estimate for the entire 2005 fiscal year of 35 percent.

Consolidated net earnings for the second quarter of fiscal 2005 were 6.4 million compared to 8.7 million in the prior year. This decrease is primarily attributable to the $6 million special charge mentioned above, which is equal to 9 cents per share. Diluted net earnings per share were 15 cents in the second quarter of fiscal 2005 compared to 26 cents in the comparable period of fiscal '04. After giving pro forma effect to the IPO as if it occurred at the beginning of fiscal 2004, and excluding the $6 million special charge in the second quarter of fiscal '05, pro forma diluted net earnings per share were 23 cents in the second quarter compared to 19 cents in the prior year, or a 21 percent increase.

Consolidated net earnings for the first half of fiscal 2005 were 15.4 million compared to 14.5 million in the prior year. Diluted earnings per common share were 27 cents compared to 28 cents in the prior year. Again, after giving pro forma effect to the IPO and excluding the 6 million special charge as previously discussed, pro forma diluted net earnings per share were 46 cents for the first half of fiscal 2005 compared to 31 cents in the prior year or a 48 percent increase.

As John mentioned in his earlier comments, this strength growth in 2005 earnings is primarily attributable to strong growth in topline volume and continued savings from our successful cost reduction initiatives, partially offset by higher material costs. Please refer to both our press release and second quarter 10-Q for more details concerning this pro forma earnings information.

The increase in costs of raw materials remains a significant challenge for both our industry and us. We continue to closely monitor lead and other commodity costs, but do not expect any meaningful reduction from their current high levels for the balance of this fiscal year.

Now a few comments about our first half of '05 financial position and cash-flow results. Primary working capital, which we define as Accounts Receivable plus inventory minus Accounts Payable, was 272.8 million at the end of our second quarter of 2005 on October 3rd. And as a percentage of annualized trailing three-month net sales, was 26.1 percent. This is comparable to the levels reported at the end of our first quarter of '05 on July 4th, of 274.8 million and 26.1 percent, respectively. Since the beginning of our fiscal 2005 year, however, this represents a $26.4 million increase in primary working capital or a 3.7 percent increase in the primary working capital ratio. The majority of this increase is attributable to slower collection of receivables in Europe, higher levels of inventory to support shifts in the production of certain products, and the further strengthening of the euro. We continue to focus significant attention on reducing both our global DSO and inventory levels to achieve meaningful improvement in our primary working capital performance by the end of fiscal 2005.

Capital expenditures were 14.8 million for the first half of fiscal 2005 compared to 10.6 million in the prior year. Our capital spending continues to focus heavily on the reduction of costs and increases in efficiency in our global manufacturing locations. As mentioned in our first-quarter conference call in August, we successfully completed the refinancing of approximately 360 million of our senior secured Term Loan B, which will lower our interest rate spread 50 basis points. Currently, our pricing for this credit facility is LIBOR plus 200.

As John covered in his opening remarks, we expect to generate diluted net earnings per share of between 14 and 18 cents in the third quarter of fiscal 2005. This decrease from our pro forma earnings per share result in the second quarter of this year is expected to be primarily attributable to higher raw material costs and nonrecurring manufacturing costs of approximately 3 cents and 8 cents per share, respectively, partially offset by additional selling price increases and continued savings from costs reduction programs.

Due to the unusual items expected to adversely impact our third quarter of fiscal 2005, and our expectations that our fourth quarter will improve significantly on a sequential reporting basis, which is historically our strongest fiscal quarter of the year, we are providing earning guidance for the entire 2005 year. We anticipate pro forma diluted net earnings per share of between 85 and 90 cents for our 2005 fiscal year compared to the prior year's 78 cents per share. This represents approximately a 10 to 15 percent increase in pro forma diluted earnings per share over the prior year.

Candidly, when considering commodity costs, net of related selling price increases, are respected to reduce fiscal 2005 earnings per share by approximately 40 cents per share. We are pleased with this solid year-over-year earnings growth amidst this extraordinarily challenging business environment. This is largely attributable to our continued success in further reducing our costs and improving upon our leading global market position.

In closing my remarks, I share both John's resolve and confidence in our business strategy and its future prospects. Now let me turn the call back to you, John.

Thank you, Mike. In closing, I am pleased with the performance of EnerSys, given the environment of high commodity costs that we're currently in. When you take into account that two of our major commodities that are used in building our products, they being lead and steel, have approximately doubled in the last 12 months, I'm pleased that we've been able to offset these increases. In fact, as Mike stated earlier, we're projecting our full-year earnings per share will be up in the 10 to 15 percent range as compared to last year. This has really come about because of our employees and our focus on our customers and in reducing our costs. It is allowed us to pick up market share, and in doing that, it's also allowed us to reduce costs. I want to thank you for your interest in EnerSys, and now I'd like to open it up for any questions that you may have.

(Operator Instructions). Bill Benton, William Blair.

The execution was great (ph), given all the issues on the lead pricing, obviously. With that, I just want to ask I guess a few questions on the lab side. Could you just talk about what the average price of lead was during the quarter? And compare that maybe with just the June quarter? And tie it in with kind of what you expect for the balance of the year in your guidance?

Sure. Taking a look at our first quarter -- and I'm going to give you two factors on this thing, first is going to be LME (ph) pricing, and second is going to be our pricing for the quarter. The LME pricing for the first quarter was 38.3. Our average was 34.9. Second quarter, it was 36.8 LME, and we came in at 33.4.

Okay. And then assumed within the balance, I think we're at, at the spot, what is it, 44 cents, roughly, now.

Approximately 44.

What is the kind of thinking I guess in your forecast, that's embedded in your guidance at this point?

When you take a look at our hedge programs and everything, we are approximately 90 percent of the lead that we're going to consume for fiscal year '05 is already accounted for. So to answer your question, what we're looking at is it's going to be in the '40s. Even if it jumps way up, it would not have a major impact on our '05 numbers, because of how far ahead we are right now.

Okay. So you're assuming something in the '40s?

Not for our fiscal year '05, no.

No, not for the fiscal '05, but I mean for the last two quarters?

For the last two quarters, we think the LME will be up in the '40s.

Okay. How much are your -- requirements are hedged for the back half?

Approximately 90 percent of the requirements that we have for the remainder of fiscal year '05 are already accounted for.

Okay. And can you tell us what those are hedged at?

Let me give you some specific numbers on this. What we're projecting are the LME for the second half will be at 41.7, and our number will be at 36.9.

Okay. So you're looking at going up a couple pennies versus the first half? Okay. And then, can you just talk about how much have you passed on in terms of pricing increases? I guess what's in the numbers, what's not in the numbers? I'm just trying to get an idea of future prices.

In our assumptions when we look at it, commodity costs in the first half, we feel that we are seeing about a $23 million impact year on year. And we're realizing pricing of about 10 million. So our price recovery on higher commodity costs has been running at 43 percent. And as I said earlier, we've been able to offset that by cost reductions in other things.

In the second half of the year, we're anticipating that commodity costs will be higher, as we just discussed. In fact, it will run to the 30 million range as opposed to 23 in the first half. And we will realize pricing of about 15 million on that 30. So our price recovery on lead will go from 43 percent in the first half to 50 percent in the second half, an average for the full year of 47 percent. And we've been able to offset that because of our cost reduction initiatives.

Okay. Final question I guess, with regard to, including the lead and kind of pricing going forward, do you have any additional maybe pricing actions that need to take place to get there? And can you talk about just the general pricing environment, what your competitors are doing? I see that you guys obviously outperform on the topline pretty significantly relative to your peers. And so I'm trying to just get a sense at what is happening in the pricing environment. Are you guys being more aggressive? Is anybody being more aggressive?

We feel that we are number one, that we're leading it in pricing. We are very aggressive to try to go out and get it. And it is a tough market. You have to keep in mind that the industry itself, especially in the Reserve Power side, that there was a lot of capacity added at the time of the telecom boom. And there's a lot of that capacity still in existence. Yes, there was some capacity taken out in the industry, but there's still quite a bit of capacity there. We're pushing very hard to get the pricing. I would like to report that we're getting higher than the 50 percent, but the numbers speak for themselves. We're hoping with time that we can get that up. But obviously what dictates the pricing is the market. And we feel that we're pushing as hard as we possibly can on that particular aspect, and hopefully, our industry in total will continue with that.

But you're not seeing any, per se, aggressive pricing that's directed at you. You're pretty much the aggressor if anything.

I see the aggressor. I mean we're going after higher pricing. We're not going lower pricing.

Okay. So you're not seeing any aggressive lowering in pricing?

We see in certain regions on the globe that there are some people that are going after it that are trying to take market share through pricing. We see that on a spot basis.

Greg guys. Thanks a lot.

Don MacDougall, Banc of America Securities.

Hi, guys. It's Paul Jacobi (ph) here for Don. Most of my questions have been answered, but we were wondering if you could provide a little bit of color around some of the order activity in the various end markets, like the telecom, military? (multiple speakers)

Sure. Again, our order activity remains solid throughout the globe. And I'm going to give you some metrics, just so on a basic constant currency so you can understand the impact of the euro. As I mentioned earlier, the euro has helped us. But we're still seeing very strong, low double-digit growth excluding that. Orders are continuing to perform at about that clip. Again, low double-digit. As you would expect, America is a little stronger because of just the general economic macroenvironment. But it's good everywhere in the world. Our military business, our Reserve business, our Motive business. So we're continuing to see broad increases in orders.

Okay. And are you seeing anything specific on the UPS side too?

Yes. I mean let's take the Reserve Power in total. The telecom industry, obviously, a couple of years ago was booming. The telecom industry is still not coming back very strong at all. UPS side, we are up slightly, ever so slightly. And I think that in Europe, we seem to be doing a little better there than we are in the Americas in the UPS side right now. UPS products tend to be lower margin than telecom. And as I said earlier, we're pushing very hard on the pricing side. We could pick up share by lowering price, but we don't think that's the right thing to do.

Greg, guys. Thanks very much.

Dan Whang, Lehman Brothers.

Good morning, everyone. My question was regarding the particular order that you talked about, the military orders, shifting over from 3Q to 4Q. Was that at the customer's request? And how much revenue are we talking about?

On the particular submarine order we're referring to was well north of 3 million. It was closer to 5 if I think about it. The U.S. military tank batteries, I believe the number on that was in the 16,000 range and --

I'll do the calculus for you. About $4 million.

4 million there. There's also another one, which was a European country on a tank battery, that we will be entering into in the fourth quarter. Our military business, as you know, most supply are to the military. It's up and down, and it's really availability of funds. And we thought we would get this order a little sooner than we did. In fact, all of three of them tended to slip. But those orders are now in hand and we are producing the products. I think, to answer your question, it's north of $10 million in total, all three of them.

Right. And in talking about the seasonality that you typically see in the quarter as you talked about the March quarter being seasonally the strongest, you expect that this year. Now, because it is some of the shift in the military orders, do you expect a sequential improvement in sales in the third quarter versus second quarter?

Dan, we think in terms of that sequential, pretty much the same volume levels. But certainly, we would expect to see a normal fourth-quarter pickup from Q3. As I think most of you will see when you further evaluate, topline has been pretty constant when you really look over the last five quarters. Very solid, very steady. So we see that pattern continuing with, again, the fourth-quarter normal pickup.

A couple of other quick items. In terms of prices, did you put in any incremental price increases during the quarter? I think you had put in some going into this fiscal year, some additional in the first quarter. But any incremental moves in this particular quarter?

Yes, actually we announced them in the last quarter. And usually there's a delay of anywhere from 30 to 60 days on those. So they're starting to take effect. But the other thing of it is that even when you go out for a price increase -- and I'm just going to make up a number to illustrate the point here -- if you go our for a 5 percent increase, in some cases, you're going to get 1 or 2 percent to start with, and eventually you can bring it up. So it's not something that is a flip of a switch, you go for a price increase, you get it immediately. So as I mentioned earlier, we do expect the price increases we announced earlier in the year, which are starting to take effect, we saw $10 million of it come through in the first half. We're anticipating that we will see 15 million of it come through in the second half. So order of magnitude, you can get an idea of how that will ramp up.

Finally, with respect to China, I mean you're still seeing some strong growth. Any sign that there might be some slowdown with some of the government action there?

Well, you know, we keep reading about that it's going to slow down and everyone was saying that what the Chinese government was going to do was slow the economy down. The GDP, it recently was reported that would reflect that it has not slowed down. And we sure haven't seen it in our business.

Thank you very much.

Greg Irwin, First Albany.

Hi, guys. Great execution in a difficult environment. First question is really operating expenses. Could you give us a little more color on the sequential decline there, from your first to second quarter?

Craig, a lot of that is what I would characterize as two factors going on. Some of the characteristics between what goes through reps and what goes through our in-house. So there was a little, a bigger shift to in-house, which will drive it down just a little bit. We do have cost savings programs that are continuing to take cost out of our operating expenses. So again, nothing that I would characterize as inconsistent with our strategies or basic business pattern.

Let me add a little bit to what Mike is saying there. Especially in Europe, we have been doing a very good job of looking at how we can consolidate. And as you know, to let people go in Europe is extremely expensive. The other thing we want to be sure of is that we do not disrupt the market. We basically have gone from a model in the last two years of being a model where it's by country. And what we're trying to do and what we have been doing is switching to a model that we're treating Europe more as one entity. And there's a lot of reasons for that, and part of it is the way our customers are reacting. So in other words what I'm trying to say, where we used to have a person in one country selling a product and a person in another country, we're looking at -- we've been consolidating operations -- and we have taken some of the SG&A down. And we will continue to do that in our European market as we evolve.

And just to complement John. One of the things that we've done a pretty effective job in is continuing to further leverage our operating expenses. I'm going here by memory, but if I remember first half of the year, we're down about 180 basis points relative to the first six months. And volume is clearly helping. But it's the execution of those tactical cost reductions that are certainly continuing to pay dividends for us.

Okay, fantastic. But is it fair to expect this to continue to modestly go down sort of as a percentage of sales? Or should this really bounce around based on channel mix over the next few quarters?

It's a tough one to answer because (multiple speakers) let me be specific on it. I expect that we will see further reduction from a headcount standpoint. But what, really the answer to the question is volume. If the volume were to jump up, and we think volume with time will continue to grow, we think we're properly positioned with it right now. When we run an upside, downside analysis on this thing, we look at our SG&A, we think it's positioned well, given what we have in the plans for further cost reductions in those areas. And I will say that they're not huge cost reductions. But they're significantly enough that we want to keep pushing for them.

Okay, okay, that's fair. My next question was about the military market. Obviously everybody knows this is a cyclical market and I guess most people out there are aware of trends now where the military sort of trying to bring down inventories modestly. I was just wanting to get your comments about where you see the military business for the full year versus last year. I mean obviously you added the extra line at your -- the ArmorSafe (ph) line at your Lawrenceburg facility. The submarine battery market is a pretty stable long-term market. I mean, what are your thoughts on the military revenue contribution in fiscal '05 versus '04?

Unfortunately, it's going to be flat to up ever so slightly. And let me explain why on that. Our European business will be off this year. Our Americas business will be up. Net-net, when you look at it worldwide, it's flat to up a little bit. Now that being said, as you said, it's a very cyclical business, and it is from year-to-year. Europe will rebound back again next year with no problem. We've really established ourselves very well this year with the U.S. military, and we've had explosive growth in that area. So I think when you look at '06, I am anticipating, although I don't know for sure, it's just a guess on my part, that we should see some pretty nice projections in the future.

Okay, fantastic. And then any progress on Florida submarine batteries, potentially working those in with the U.S. submarine battery buying?

Absolutely. The United States Navy ordered us a $1 million development project for a retrofit of their nuclear submarines. And when you run quick numbers on it, there's approximately 70 nuclear submarines in the fleet, at about a million and a half a battery. We're looking at a potential $100 million market. Actually I don't expect that we're going to get all that. But we do have a special and very unique technology that no one else has. And that's why the Navy gave us a contract for developing a battery for them. And I may add that in recent meetings, they've been extremely pleased with the progress we've made. In fact, they've exceeded their expectations.

Great, great. And then my next question was really about the contribution in the quarter from the aftermarket. I guess this is more relevant to the Motive side. But did you see much of a shift, either in North America or Europe in the aftermarket contribution to the overall revenue mix?

Not really. Again, it's a tough one for us to assess on that because the markets are so different between Europe and the Americas. I'll just take the America as an example. We typically sell to a fork truck dealer. And where that fork truck dealer is putting it in as a replacement battery, or on a new installation or new truck, it's tough for us to tell. That being said, it's our belief that truck sales are off. So it's probably more going into new trucks, I would guess. I'm going to emphasize that word. I'm guessing on that part because it's hard for us to obtain the data on that. It's very similar in Europe. Europe, about 40 percent of the business goes through three major OEMs. And they sell and they also lease or rent more trucks, and how they are controlling that, since we are selling direct, whether they go in new trucks or replacement batteries, it's difficult for us to tell.

Okay, excellent. And then my last question is about your strategy for acquisitions, obviously, you are going after both horizontal and vertical acquisitions, you know, integrating the train manufacturing and also growing geographically. Could you comment about what you're really looking for? And if you're looking at any other technologies out there? Or potential opportunities that you think could have synergies with existing operations?

Absolutely. There's four strategies that we have on acquisitions. We have people around the world, acquisition teams are constantly looking at different things, and we are extremely aggressive in that arena. From a top-level, the direction we give to them is we're looking for other companies that are core lead acid battery businesses. Competitors in different regions, if we can find something that's either in the Motive Power region or our Reserve Power business, in lead acid, we're very interested in looking at it if it's accretive to our P&L.

Second is geographic expansions. I mentioned about Australia as an example, and going in and buying FNB. We were basically a nonplayer in Motive Power in Australia, and we're now number three in that market because of that acquisition.

Third, vertical integrations, Mandik, we talked about that one.

Fourth, and it really gets to your base question, aerospace and defense, we think we can continue to grow in that arena. But when you look at the dynamics of aerospace and defense worldwide, you'll see that it's approximately a $700 million market and approximately a third of its lead asset. That means there's two-thirds out there with other technologies. We're very aggressively looking at alternate technologies. to see how we could support the U.S. government in this, primarily the U.S. government.

When you look at the U.S. government and you find that the different type of batteries that they use, the different technologies, many of the sources that they have are foreign countries, are owned by foreign companies, I should say. There's a real concern on the military's part. They have talked to us about that. We're aggressively pursuing opportunities in that arena.

Fantastic. Great execution, guys. And I will hop back in the queue and let someone else ask questions.

Thank you.

Chris Trencher, Trenton (ph) Capital.

Good morning. And I would reiterate my colleagues' comments about the execution, particularly relative to some of your competitors. Just a question on the guidance. You gave us the range and mentioned that there would be some headwind from commodity costs, obviously. And I think there was the mention of a couple of special charges. Would you just be able to repeat that for us briefly?

Certainly, Chris. The commodity cost pressure, we think, is about 3 cents a share. And what I'd characterize as the nonrecurring manufacturing costs, about 8 cents.

Thanks, very much.

Bill Benton, William Blair.

Could you maybe quantify for us what the contribution was from acquisitions this quarter?

Basically zero. We're just really getting started with it.

I meant topline, actually, by the way.

It's still zero. And again, when you look at the first acquisition, Mandik, it will not hit topline; that's a cost reduction. We currently buy the Motive Power (indiscernible) from another company. And we will ramp that up and be about 90 percent sourced in the next 12 to 18 months out of Mandik. So that's a major cost reduction activity for us. The second one on FNB, we've just really completed that deal in the last month and a half, two months, I guess it's been. So it's basically insignificant at this stage, very low.

And then can you just talk about the linearity in the quarter and how that has, getting into one of these questions, as you're halfway through the current quarter, how that's kind of continued?

Well, again, Bill, as you know, we have what we consider to be a pretty good ability to have near-term visibility. So I certainly would just reiterate that the guidance we've given obviously reflects our ability to see what's happening within the quarter and be reasonably confident that we got it right.

Okay. And final question is in going through one of your competitor Q's, I guess XI (ph) was noting -- and they may have just been throwing this in as some sort of catch-all, but they talked about cheap Chinese imports on the transportation side and the industrial side. Is that something that you have seen anything on?

Yes, we have, and it is something that is a threat to the Reserve Power business. I think the best way of viewing this, when you look at smaller batteries, I'm going to call them block batteries, and just to illustrate, if you take something that's the size of a car battery to a little bit larger, that's something that's shippable or can be shipped across the world, they are a threat, a very big threat because of the inexpensive labor. They are still faced with the same situation with commodity costs that we are. And it has, in many cases, reduced pricing. It is something we consider a threat to our business.

Now that being said, it does offer some opportunities for us also. We have approximately 600 employees in China; we're growing at a very rapid pace there. One of the issues that we have is that we are going to soon run out of capacity in our Chinese operations. And I would add that we're also transferring some products from our European/American operations to China; so we need capacity. This does present an opportunity for us to go into some of these Chinese manufactures that are low cost but are currently struggling because of commodity prices being so high as potential acquisition targets.

Okay, okay. And what percentage of your business actually is China right now? I know it's relatively -- 5 percent or so?

7 percent.

7 percent.

Well, that's all Asia. But to your point, John, it's in the 5 percent range.

China is 5. Thank you for correcting me. That's right. All of our Asia operations, 7 percent.

Okay, great, guys. Thanks, again.

(Operator Instructions). Gentlemen, at this time, I'm showing no further questions. I'll turn it back over to you for any closing remarks.

Well, again, thank you very much. As I said earlier, we're very pleased with our performance, given this environment of cost. And it's our belief that we will see reductions in commodity costs sometime in the future, hopefully sooner than later. But I do appreciate your interest in EnerSys and (indiscernible) for you to have a good day today. Thanks, again.

Ladies and gentlemen, this concludes today's presentation. You may now disconnect your lines and have a great day.