EnerSys (ENS) 2005 Q4 法說會逐字稿

Good morning ladies and gentleman and welcome to the fourth quarter 2005 EnerSys earnings call. My name is Shawn. I'll be your coordinator for today.

At this time all participants are on a listen-only mode with a question-and-answer session to follow. If at any time during the presentation you require assistance, please dial star followed by zero and a coordinator will assist you. As a reminder today's conference is being recorded for replay purposes.

I would now like to turn the presentation over to Mr. John Craig, Chairman, President, and Chief Executive Officer. Please go ahead, sir.

Thank you, Shawn. Good morning and thank you to everyone for joining us for our fourth quarter conference call.

During this call we'll be reporting on our results for our fourth quarter and full-year of fiscal year 2005. Our fourth quarter was the period from January 3rd through March 31st of 2005.

On a pro forma net earnings per share basis our fourth quarter was $0.22 as compared to $0.26 per share during the same period last year. The $0.22 earnings are at the upper end of our initial guidance of between 18 to $0.22 per share.

For the full-year our pro forma diluted net earnings per share were $0.82 as compared to $0.78 per share for the prior fiscal year.

Given the increase in commodity costs and the other costs of being a publicly traded company, I'm very pleased with the earnings increase from our prior year.

I will now ask that Mike Philion, our Chief Financial Officer to cover forward-looking statements.

Okay. Thank you, John, and also good morning.

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 our future results, including our earnings estimates, see special note about forward-looking statements, risk factors, in Item 7, management's discussion and analysis of financial condition and results of operation as set forth in our annual report on Form 10-K for the year ending March 31, 2005, which was recently filed with the U.S. Securities and Exchange Commission.

In addition, we will also be presenting certain non-GAAP financial measures. For an explanation of the differences between the comparable GAAP financial information and the non-GAAP information please see our 10-K for the fiscal year 2005 which is located on our Web site at www.enersysinc.com.

Now let me turn it back to you, John.

Thank you, Mike.

I'm pleased to report that EnerSys' net sales for the fourth quarter of fiscal 2005 were $286 million, which is a 3.7% increase over the same period last year. For the full-year, our net sales were approximately 1.1 billion, which is a 11.8% increase compared to the prior fiscal year.

As we noted in our previous calls, one of the largest challenges we face as an industry are high commodity costs, especially lead. In response to these costs we continue to emphasize selling price recovery.

We have recently announced additional price increases to help offset the rise in commodity costs. Third party forecasts indicate that lead pricing will decrease during this year but at a rate slower than was previously anticipated.

In addition, we remain focused on operating efficiency improvements, and other cost reduction initiatives to counter increased cost.

Let me take a moment to update you on the recent acquisition of FIAMM Motive Power business. As you are aware, EnerSys completed this transaction on June 1st of this year.

I'm pleased to report that the integration of this business is going smoothly. We are projecting that this acquisition will be dilutive by approximately $0.02 per share for fiscal year '06, however, it should be accretive by a minimum of $0.04 per share in the following year.

This opportunity, with its complimentary fit with our business, further solidifies our market leadership positions.

We believe this challenging environment will result in further acquisition opportunities. We remain active in pursuing additional acquisitions that are compatible with our strategies which should result in continued growth and success for EnerSys.

Looking ahead to our earnings forecast for the first fiscal quarter of 2006, we expect our diluted net earnings per share to be between 18 to $0.22.

I'll now ask Mike Philion to provide further detail on our financial performance. Mike?

Okay. Thank you again, John.

The results of our fourth fiscal quarter and fiscal year 2005 were solid. Our fourth quarter of fiscal 2005 net sales increased 3.7% to 285.6 million over the comparable period in the prior year.

When excluding the favorable impact of foreign currency translation, primarily from the euro, and adjusting fiscal 2005 fourth quarter net sales upward by 19 million, because the fiscal 2005 fourth quarter operating calendar contained four fewer business days than in fiscal 2004, net sales increased approximately 8%.

On a business segment basis our fourth quarter of fiscal 2005 net sales in the Reserve Power segment decreased 5.9% to 128.2 million, while our Motive Power segment increased 13.1% to 157.4 million over the comparable period in the prior year.

The decrease in the fourth fiscal quarter of 2005 Reserve Power net sales was in part attributable to unusually high aerospace and defense sales in the fourth quarter of the prior year.

Our full-year of fiscal 2005 net sales increased 11.8% over the prior year to 1 billion 83.9 million. When excluding the favorable impact of foreign currency translation, again primarily from the euro, from our fiscal 2005 results, consolidated net sales increased approximately 8%.

On a business segment basis, our full-year of fiscal 2005 net sales in the Reserve Power segment increased 6.4% to 510.5 million, while our Motive Power segment increased 17.2% to 573.4 million over the comparable period in the prior year.

Now a few comments about our pro forma consolidated operating earnings and two business segments operating earnings performance.

As you know, we utilize certain non-GAAP measures in analyzing our operating performance, specifically excluding special charges and giving certain pro forma effects to our IPO. Accordingly, my following comments concerning operating earnings exclude a fiscal 2005 second quarter $6 million non-operating special charge associated with our IPO, and exclude several operating fiscal 2004 special charges totaling 21.1 million, primarily associated with our March 2002 acquisition of the ESG business.

Please refer to our fiscal 2005 annual report on Form 10-K for more details concerning these pro forma adjustments and special charges.

Our fourth quarter of fiscal 2005 consolidated operating earnings of 17.9 million decreased 26.3% in comparison to the prior year with a decrease of 250 basis points in operating margin to 6.3%. The decline in operating margin is primarily attributable to higher raw material costs.

For the full-year of fiscal 2005 consolidated operating earnings increased 2% over the prior year to 76.4 million, with a decrease of 70 basis points in operating margin to 7%. Our fiscal 2005 results are particularly solid when considering the historically high commodity costs.

On a business segment basis, when comparing the fourth quarter of fiscal 2005 to the prior year, Reserve Power operating earnings decreased 42.5% to 7 million, and the operating margin decreased 340 basis points to 5.5%.

Motive Power operating earnings decreased 11.8% to 10.9 million, and the operating margin decreased 200 basis points to 6.9%. The decrease in operating earnings and margin in both segments was primarily attributable to higher raw material costs.

Additionally on a business segment basis when comparing full-year of fiscal 2005 results to the prior year, Reserve Power operating earnings decreased 4.4% to 36.8 million, and the operating margin decreased 80 basis points to 7.2%. Motive Power operating earnings increased 8.2% to 39.8 million, while the operating margin decreased 60 basis points to 6.9%.

As has been emphasized by John and my comments today, our fiscal year 2005 results were significantly impacted by the higher cost of raw materials. We estimate that the impact of higher lead costs alone, our primary raw material, which is approximately 20% of our cost of goods sold, unfavorably impacted our full-year operating earnings by approximately $44 million, with all commodity costs unfavorably impacting operating earnings by approximately 58 million.

We have partially mitigated this impact by implementing sales price increases throughout the year to our customers which we estimate achieved a 40% recovery for the fiscal year 2005.

An additional few comments concerning lead costs.

For the fiscal year 2005 the average LME price for lead as it would have affected our income statement was approximately $0.40 per pound. The cost that EnerSys incurred for the fiscal year 2005 was approximately $0.38 per pound, with this $0.02 per pound benefit the result of our favorable lead hedging program.

Additionally, the EnerSys fiscal year 2005 lead costs were further reduced by another approximately $0.02 per pound as a result of our lead tolling programs that remain an ongoing element of our operating business.

Lastly, as of March 31, 2005, we had outstanding lead hedge contracts for approximately 9.9 million pounds of lead at an average cost of $0.37 per pound. And as of May 31, 2005, had outstanding lead hedge contracts for approximately 17.2 million pounds of lead at an average cost of $0.40 per pound.

The increasing cost of our raw materials remains a significant challenge for our industry and us. We continue to closely monitor lead and other commodity costs but do not expect any meaningful reduction from their recent high levels in the first quarter of fiscal year 2006.

Now a few comments concerning pro forma net earnings per share.

After giving pro forma effect to the IPO, as if it occurred at the beginning of fiscal 2004, and excluding the special charges in fiscal 2004, pro forma diluted net earnings per share were $0.22 in the fourth quarter of fiscal 2005, compared to $0.26 in the prior year, or a 15% decrease. This decrease was primarily attributable to higher commodity costs.

Again, after giving pro forma effect to the IPO and excluding all special charges in fiscal 2005 and 2004, pro forma diluted net earnings per share were $0.82 for the full-year of fiscal 2005, compared to $0.78 in the prior year, or a 5.1% increase.

Our growth in 2005 pro forma diluted earnings per share is primarily attributable to strong growth in sales and continued savings from our cost reduction initiatives, partially offset by higher raw material costs and new public company expenses of approximately 3 million.

Our effective income tax rate for fiscal 2005 was 34.9%, compared to 37.9 in fiscal 2004. This rate reduction is a result of a higher proportion of our pretax earnings in tax jurisdictions with lower tax rates in fiscal 2005 in comparison with fiscal 2004.

Our cash tax rate for fiscal year 2005 was approximately 15% as we continued to take advantage of previous tax loss carry forwards and other tax planning opportunities. We estimate our booked and cash tax rates will approximate 35% and 25% respectively for fiscal year 2006.

Please refer to our fiscal 2005 10-K for more details concerning this pro forma earnings information.

Now here are a few comments about our financial position and cash flow results.

Primary working capital, which we define as accounts receivable plus inventory minus accounts payable, was 282.4 million at the end of our fiscal year 2005, and as a percentage of the annualized trailing three-month net sales was 24.7%. Primary working capital levels have increased since the beginning of fiscal 2005 by 32.1 million with our primary working capital ratio also increasing by 2%.

This increase in invested working capital was primarily caused by stronger European FX rates, approximately a $10 million impact, and the impact of a higher percentage of our global business mix being from outside the United States.

Capital expenditures were 31.8 million for fiscal year 2005, compared to 28.6 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.

We expect capital spending for our fiscal year 2006 to approximate 35 million.

Net debt, which is total bank debt minus U.S. short-term investments, at March 31, 2005, was 359.8 million, and we had available under all existing credit facilities, approximately 125 million of additional borrowing capacity. We believe our relationship with our bank group is good as we are in full compliance with all loan and financial performance covenants.

We incurred additional debt of approximately 31 million to purchase FIAMM in June of 2005. Please refer to our current report on Form 8-K for the details of this new financing agreement.

Let me briefly cover the impact of Sarbanes-Oxley on our business.

As many of you know, we are in the process of the implementation of the documentation remediation and testing of our internal controls over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002. Our required completion date for this important project is March 31, 2006. We expect approximately an incremental $4 million cost in fiscal year 2006 to meet the Sarbanes-Oxley requirements.

As John mentioned earlier, we expect to generate diluted net earnings per share of between 18 and $0.22 in our first quarter of fiscal year 2006. The major factors that will continue to impact our near-term earnings are, first, commodity costs, second, our ability to recover selling price increases, and third, the dilutive impact of the FIAMM transaction.

In my closing remark, I certainly share John's confidence in both our business strategy and its future prospects. Now let me turn it back to you, John.

Thanks, Mike.

In closing, I want to reaffirm my belief that EnerSys will continue to be successful even in this challenging environment. We have the right people, products, and global distribution network to allow to us continue to grow our market share and achieve financial performance.

With that, I want to thank you for your interest in EnerSys and like to open the lines for questions.

Thank you, sir. [Operator instructions] Your first question comes from the line of Dan Whang with Lehman Brothers. Please go ahead.

Good morning, everyone.

Good morning, Dan.

First question was regarding the incremental lead costs that you saw of 44 million and you talked about 40% from recovery from pricing. I was just wondering how much of a benefit did you realize from the cost reduction programs during the year?

Dan, as you know, we don't give specific guidance as to that amount but it remains a significant factor in certainly helping mitigate our costs. So it continues to be a significant item.

In terms of fiscal '06 I guess you have ample opportunities in '06 as you did in '05 in seeking additional cost reduction?

Yes, Dan, as we've talked in the past our cost reduction activities are one of our top priorities in continuing to improve productivity not only in our factories but in our professional ranks also. We feel that there are additional opportunities that we can avail in this next fiscal year.

Okay. And in terms of the overall competitive environment out there, I mean, what are you seeing in terms of how your competitors are behaving in terms of pricing and other practices, if you can make a general comment around that?

Generally speaking I would say that we are seeing modest price increases go through. It's my belief our industry has not done a very good job at recovering pricing. As we said, we've recovered approximately 40%. We feel that we are the leaders in the industry as far as leading the industry in trying to increase prices, but I think it's been slow.

And finally, just moving on to the FIAMM acquisition, could you talk about what needs to be done in terms of the integration going forward? What are the areas of synergies that you expect from the cost or working cap side?

Dan, whenever we do an acquisition, what we do is we put together a team of a number of different disciplines and one of them is the operations end of the business. What we build within our model is specific detailed plans on what we would do as far as with the acquisition.

In this particular example, we put together a 100-day plan which is really the details of how we would integrate the FIAMM Motive Power business into EnerSys. I can't go into too many specifics on this because of some of the requirements in Europe, but I will say that we've identified substantial cost reduction opportunities in integrating this business, and we are confident that we will be successful at integrating the FIAMM Motive Power business into EnerSys.

I may add that the team that is actually, did the due diligence are on the ground in the FIAMM manufacturing plants and also on the sales side working with the people to bring them into EnerSys.

Okay. Great. Those are my questions for now.

Thank you, Dan.

And your next question from the line of Bill Benton with William Blair. Please go ahead.

Morning, guys.

Good morning, Bill.

Just had a few questions here. On the FIAMM side again, I just want to, wondering if you could just walk through some of your assumptions there in terms of dilution this year, maybe in particular as we progress through the year, maybe the dilution's a little bit higher early on, and obviously more contributory maybe toward the end of the year. And then I've got some other questions.

Sure, Bill. I'd be happy to. And certainly, John covered it well from the overview. They are a significant synergy. And you are absolutely right, it just takes some time to work through the variety of operational complexities.

So we would broadly expect that, let me put it into sort of the first two quarters as we own the business. You're right, it would have generally higher dilution characteristics than in the second two quarters after ownership. So Bill, you're exactly right, that's the normal pattern.

And when John commented on the $0.02 for the full-year we would expect that it's a little heavier early and then improving, and clearly we anticipate within the 12-month time horizon that this transaction will be certainly accretive. So sort of a normal shape.

Any transaction of a $90 million business, has some uncertainties, but we have an extraordinarily experienced team, and in terms of the scale of similar things we've done in Europe, this is in the sweet spot of competence, ability, it is core business. So we are very confident that this will be a very successful transaction.

Yeah, to pick up a little bit on what Mike is saying there, we're very confident in our management team in Europe to implement this. This actually is smaller than most of the things, or many of the things that we've done in Europe in the last two years.

Since we've acquired the ESG Group we have closed and consolidated many operations, and the team that was involved with that is the same people that's involved in this one. So we've spent a lot of time studying this, we know the business, and it fits very well with us, so we're pretty confident that this will be very successful for us.

Okay. Can you give us any order of magnitude on maybe the impact, I know it's partial quarter here, but in your estimates for this quarter, or the June quarter that you're showing in terms of dilution?

Bill, yeah, we'd be happy to. And obviously these are estimates. We would expect slightly under $ 0.01 dilution in our first quarter which will end in ten days or so.

Okay.

Obviously it's included in the guidance that we've given.

Right. Okay. And then, just in terms of on the lead side, just want to get your kind of current thinking on hedging going forward, your plans, I guess your philosophy at this point in time, given your own outlook from where you're sitting.

Well we do, as Mike had mentioned earlier, we do have some hedge contracts that are out there right now. We have a number of bids in that have prices lower than what current market is.

It's our belief, and this is really, comes about from a lot of different analytical reports that we read, that there will be late capacity coming on line this year and next year, and it's our belief that last year we were in a shortage of lead, demand exceeded supply, this year it will be approximately a breakeven, and next year there will be a slight increase in supply over demand.

So we're very cautious on our forward position right now. We think that lead is at or near its peek at the 45, $0.46 per pound it's been running but that being said, we do have some hedged at this stage.

Okay. Great, guys. Thanks a lot.

Thank you.

And your next question is from the line of Craig Irwin with First Albany. Please go ahead.

Good morning, everyone.

Good morning, Craig.

My first question is, I was hoping you could comment about the relative pricing achieved between Reserve Power and Motive Power, where you're getting the most traction and really if you think the outlook could be improving for further price increases in certain markets.

Well, as we mentioned, Craig, we're getting a 40% recovery in total, is our estimate, and most of that, by far and away, is coming from the Motive Power end of the business, and that's coming both Europe and the Americas where we are, that's where we're the strongest in those regions.

Reserve Power has been less, and the primary reason for that is, really goes back to the telecom boom. There was a lot of capacity put in place to support the telecommunications industry back in 1999 and 2000. Some of that capacity with competitors still exists. We have taken a lot of that capacity out, they have not. So pricing has been much tougher to get in the Reserve Power market than it's been in the Motive Power market.

Also, with our Asian business, pricing continues to be a challenge there. There are many competitors. So by far and away it's rougher to get price increases in Reserve Power than Motive.

Great. Just to dig down a little bit into the comment that Mike made that during the fourth quarter of 2004, you saw a large military order that sort of has made the year-over-year comparisons a little bit distorted. Could you give us an idea of how much military business you did in the year-ago period?

Go ahead, Mike.

Yeah, just bear with me one second.

Sure.

I do have that data. Fourth quarter of fiscal year 2005, globally we did a little over $20 million of revenue. Now, as I think you know and many, the military business is a very good business, but it has some spikiness to it.

Specifically, I'm going to reference some submarine battery orders, which we had a number that shipped in that quarter. So it was really attributable to what I would characterize just an abnormally large number of submarine battery shipments in that particular quarter.

When you look at the numbers on that and normalize the military business for the fourth quarter and when you look at the extra days that we had in the prior year, and you normalize that, our Reserve Power business in fourth quarter this year as compared to last year was about flat.

Okay. Excellent. And then just, I guess this is talking about history, but looking at the 17% growth in Motive Power and the industry estimates out there of about 15% growth last year, it's pretty obvious that you've taken share. Can you talk about some of the things that you're doing that are really helping you take share in this market?

Well, I think the key thing, Craig, is listening to our customers, servicing our customers. We have added people in our sales organization. We have added people in our service organization, and it really comes down to listening to the customer, taking care of the customer, and our organization I feel has done an outstanding job in that area.

I recently was at the North American Motive Power sales meeting. Morale of our sales force is at an all-time high right now, and a lot of it is that as a company, we are taking care of the customer.

Excellent, excellent. And then if I can just squeeze a couple more in here. On the market outlook, could you comment a little bit about some of the things you're seeing in the short-term in the Reserve Power market in North America versus Europe?

In the Reserve Power market in total, I'll break it down by two segments it's telecommunications and UPS, those are the two large segments. The UPS area tends to be a little stronger right now than the telecom industry.

It's my belief the telecom industry in Europe right now tends to be a little stronger than in the United States. I think the primary reason that's the case is the U.S. is going through quite a bit of integration, and so I think what we're seeing is a little bit of a slow-up in U.S. telecommunications.

But that being said, once these organizations that are merging together that, if you will, get their act together, what we should see is a pick up in capital spending again.

Okay. Excellent. And my last question's for Mike. I noticed that the consolidated interest expense, or, I guess, the other line, had a positive impact this quarter. Could you comment about that, what that was that sort of helped us out this quarter?

Craig, I assume you're referring to the below the line other income and other expense?

Yes, yes.

Sure. As I've commented in the past, in the fourth quarter specifically, we had approximately 1.8 million of what I would characterize as FX gain, and for the year in total, that number was 1.9. As I'm sure you know and many, we've seen some remarkable volatility in dollar-euro over broadly the last six months. And certainly when you look at the big picture of our FX exposures, fortunately we're generally naturally business hedged.

But when you see near-term spikes in volatility, Craig, we could see some quarter-to-quarter gains could turn to losses, but broadly we think that tends to average out. So, yeah, we did benefit in quarter four by approximately that 1.8 million I referred to, but again, when we look into the future, we certainly recognize that we could have some of these aberrations but broadly we are not concerned that we have any, what I would call, substantial FX exposure or headwind.

That makes a lot of sense. Thank you very much, gentlemen.

As a reminder, ladies and gentlemen, please do dial star one to ask your questions. Your next question comes from the line of Rand Gezzing, David J. Green & Company.

I was just looking to get a little more detail on the basis for your third party lead forecast. I do understand that there is some capacity coming into the market but I guess I also heard some news that maybe there's some capacity exiting. Is it the thought that the net-net is that we'll have more capacity in the next 18 months than we do today?

Yes, and the one report that I'm referring to is by CHR. The gentleman's name is --

Hugh Roberts.

Right.

And that's the one report that I'm making reference to. There are a number of others that we've read that I can't quote right off the top of my head but that's the one that we recently have studied.

Right. Okay. And you had mentioned that the industry has not been so great at getting price. Do you feel like there's momentum that this is a dynamic that's changing, or do you feel like over the next 12, 18 months that we're going to still struggle with getting price through?

Well let me answer that question this way, Rand. About a year ago when we first went out for price increases we felt at the time we were the leader, we had very few people that followed suit. As the year went on, we went out for a number of other increases. There were some that jumped on with it.

The last increase that we did in North America, I think that most all of our major competitors immediately followed suit with it. [Nerff] has been a little tougher with it.

I think all in all, just to summarize it, I'm more optimistic on pricing recovery right now, much more so than I was even three months ago.

Right.

That being said, we went out for a price increase recently. As I said, it seemed that the field has accepted it. I think it's one of the these things we're going to have to wait and see in the next couple of months and how it really comes through, but this is a general feeling in what we're seeing come in on some orders just after going with this price increase, it appears that the customers are more receptive.

Now I think there's a better understanding of what's going on in commodities. I think our sales force is much better prepared to go in and explain it.

That's right. Do you feel if lead hangs in here that you're going to have to do a couple of increases, or do you feel the one you're putting in will be enough?

Well, that's a tough question. It's one of these things that if the market will allow it, we will continue to add. I'll never say it's enough.

Okay. Thanks.

You're welcome.

At this time, I'm showing no further questions. I'd like to turn the call back to Mr. Craig for closing remarks.

Well, in summary again, I'm very pleased with the operations of the Company given the environment that we're dealing in with commodities. Again, it's my belief that we will see commodities come down in price. It's tough to predict exactly when that's going to be. It's our belief it's probably not going to be this calendar year, but in the next year we hopefully will see some reduction take place.

I would also add that while we're in this situation, we continue to be very active in looking for other opportunities like FIAMM, where we felt that we bought the company at the right price.

So with that, I want to thank you for joining us on the call today, and everyone have a good day.

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