EnerSys (ENS) 2006 Q1 法說會逐字稿

Welcome to the EnerSys Q1 2006 earnings conference call. My name is Carlo and I will be your coordinator for today's presentation. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's prepared remarks. (OPERATOR INSTRUCTIONS) I would now like to turn the presentation over to your host for today's conference, John Craig, Chairman, President, and Chief Executive Officer. Please proceed, sir.

Good morning and thank you for joining us for our first-quarter conference call. During this call we will be reporting on the results for our first quarter of fiscal year 2006, which is the period from April 1 through July 3, 2005. On a pro forma diluted net earnings per share basis, our first quarter was $0.19, as compared to $0.23 per share during the same period last year and is within the range of our guidance of between $0.18 to $0.22 per share. These results are reflective of the increasing commodity costs, the added cost of being a publicly traded company, plus the dilutive impact of the recent FIAMM Motive Power acquisition that we made.

I will now ask that Mike Philion, our Chief Financial Officer, cover the information regarding forward-looking statements. Mike?

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 forward-looking statements included in Item II, Management's Discussion and Analysis of Financial Condition and Results of Operations set forth in our quarterly report on Form 10-Q for the quarter ended July 3, 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 Company's 10-K for fiscal year 2005 and our 10-Q for the quarter ended July 3, 2005, which is 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's net sales for the first quarter of fiscal year 2006 were 304 million, which is a 15% increase over the same period of last year. Excluding the recent FIAMM Motive Power acquisition, the sales increase was 13%. We continue to see strong demand for our products globally, and we believe that we are continuing to increase our market share worldwide.

As we noted in our fourth-quarter investor call, the recent completion of the acquisition of FIAMM Motive Power business will be dilutive by approximately $0.02 for this fiscal year; but should be accretive by a minimum of $0.04 per share for fiscal year 2007. During the second quarter, the FIAMM acquisition will be dilutive and should be accretive by the fourth quarter of this year. This improvement is due in part to our plans to restructure our European motive power business to take advantage of the synergy opportunities this acquisition presents.

We expect to experience our highest lead cost for fiscal-year 2006 in our second quarter, after which time we expect that our lead cost will decrease in the second half of the year. With the LME lead prices declining from their previous high levels, this has provided us with the opportunity to expand our lead hedging position for the second half of the fiscal year. The increase in our lead hedge position at prices lower than the current spot market price should have a positive impact on our second half-year earnings.

With the dilutive effect of FIAMM Motive Power and high lead cost, in combination with the second quarter historically being our lowest sales volume quarter, we expect our net earnings per share to be between $0.11 to $0.15 for the quarter. I will now ask that Mike Philion provide more detailed review of our financial performance. Mike?

Thanks, John. The results of our first quarter of fiscal 2006 were consistent with our previous earnings guidance and continue to demonstrate our industry leadership position in a very challenging business environment. As John said, our first quarter of fiscal 2006 net sales were 303.8 million, an increase of 15.4% over the comparable period in the prior year. When excluding the favorable impact of foreign currency translation, net sales increased approximately 14%.

On a business segment basis, our first quarter of fiscal 2006 net sales in the reserve power segment increased 9.2% to 136.3 million, while our motive power segment increased 21% to 167.5 million over the comparable period in the prior year. When excluding the approximately $7 million impact from the June 2005 FIAMM acquisition from our motive power segment's first-quarter net sales, that segment's sales increased approximately 16% compared to the same period in the prior year.

Our top-line performance in the first quarter of fiscal 2006 was indeed strong, as we continued to experience strong demand in all motive power markets and improving demand in selected reserve power markets. As many of you know, historically our upcoming second fiscal quarter represents our lowest net sales and earnings quarter within a respective fiscal year. We certainly anticipate this historical trend will be experienced in our next fiscal quarter.

Now a few comments about our consolidated operating earnings and two business segments' operating earnings performance. Our first quarter of fiscal 2006 consolidated operating earnings of 17.6 million decreased 20.4% in comparison to the prior year, with a decrease of 260 basis points in operating margin to 5.8%. The decline in operating margin is primarily attributable to higher raw material costs, partially offset by selling price recovery actions that continue to approximate 40% of the aggregate increase in all commodity costs since the beginning of fiscal 2005.

On a business segment basis, when comparing the first quarter of fiscal 2006 to the prior year, reserve power operating earnings decreased 24.3% to 8.4 million, and the operating margin decreased 270 basis points to 6.2%. Motive power operating earnings decreased 16.4% to 9.2 million, and the operating margin decreased 240 basis points to 5.5%. Again, the decrease in operating earnings and margin in both segments was primarily attributable to higher raw material costs.

As has been emphasized by John and my comments, our first quarter of fiscal 2006 results were significantly impacted by the higher cost of our raw materials. We estimate that the impact of higher lead cost alone, our primary raw material, unfavorably impacted our first-quarter operating earnings by approximately $4 million, with all commodity costs unfavorably impacting operating earnings by approximately 7 million over the comparable period in the prior year. We have partially offset this unfavorable impact by continuing to implement sales price increases to our customers and further reducing our costs as part of an ongoing cost-savings initiative.

Let me spend a moment on the recent FIAMM acquisition. The integration of this strategic acquisition is progressing on schedule and, as expected, we anticipate it will be $0.02 dilutive for the full fiscal 2006 year, with it also being dilutive in the $0.02 per share range in our upcoming second quarter of fiscal 2006. Significant cost-savings opportunities do exist and will be realized in the second half of fiscal year 2006 and fiscal 2007.

An additional few comments concerning lead cost. For the first quarter of fiscal 2006, the average LME cost for lead incurred by EnerSys as it impacted our income statement was approximately $0.39 per pound, compared to approximately $0.35 per pound in the prior year. Further, we expect our second quarter of fiscal 2006 lead cost to increase by approximately an additional $0.03 per pound for a second-quarter average of roughly $0.42 per pound. This will increase our second quarter of fiscal 2006 lead cost by approximately $3 million. Based upon recent lead spot market prices, current lead forward contract prices, and our current lead hedged position, we anticipate our second quarter of fiscal 2006 lead cost will be the highest experienced in our current fiscal year.

Lastly, as of July 3, 2005, through a combination of lead hedges and our ongoing tolling programs, we have approximately 40% of our remaining lead purchase requirements that will impact our income statement for the balance of fiscal 2006 covered at approximately $0.38 per pound. We continue to closely monitor lead and other commodity costs and are encouraged by an improved lead cost outlook for the second half of fiscal 2006.

During the first quarter of fiscal 2006, a foreign currency transaction gain of $1.5 million was realized, compared to a transaction loss of 0.3 million in the comparable period of the prior year. We do not anticipate any significant FX transaction gain or loss over the balance of fiscal 2006. Our effective income tax rate for the first quarter of fiscal 2006 was 34.2%, compared to 37.1% in the comparable period in the prior year. We estimate that our book effective tax rate will approximate 34% for the fiscal 2006 year.

Now a few comments concerning pro forma net earnings per share. After giving pro forma effect to our fiscal 2005 IPO as if it occurred at the beginning of that fiscal year, and excluding the IPO-related special charges, pro forma diluted net earnings per share were $0.19 in the first quarter of fiscal 2006, compared to $0.23 in the prior year. This decrease was again primarily attributable to higher commodity costs, partially offset by strong growth in sales and continued savings from our cost-reduction initiatives.

Additionally, we incurred approximately $2 million of added costs associated with being a public company in the first quarter of fiscal 2006. Please refer to our fiscal 2005 10-K and our first quarter of fiscal 2006 10-Q for more details concerning this pro forma earnings information.

Now let me take a few moments to comment about our financial position and cash flow results. Primary working capital, which we define as Accounts Receivable plus inventory minus Accounts Payable, was 303.5 million at the end of our first quarter of fiscal 2006 and as a percentage of annualized trailing three-month net sales was 25%. Primary working capital levels have increased since the beginning of fiscal 2006 by 21.4 million, with our primary working capital ratio also increasing by a modest 0.3%.

The increase in invested working capital was caused by the FIAMM acquisition, which accounted for over $20 million of this increase. Further, when excluding the FIAMM acquisition, our primary working capital ratio was 23.6% at the end of our fiscal 2006 first quarter, compared to 24.5% at the end of the comparable period in the prior year. We're very pleased with this year-over-year improvement in our base businesses' primary working capital ratio.

Capital expenditures were 8.5 million for the first quarter of fiscal 2006, compared to 7.8 million in the prior year. Our capital spending continues to focus heavily on the reduction of costs, increases in efficiencies, and selected increases in manufacturing capacity in our low-cost manufacturing locations. We expect capital spending for our fiscal 2006 year to approximate 35 million.

Net debt, which we define as total bank debt minus U.S. short-term investments, at July 3, 2005, was 400.5 million; and we had available under all existing credit facilities approximately 125 million of additional borrowing capacity. We incurred additional debt of approximately 33 million in our first quarter of fiscal-year 2006, to purchase the FIAMM Motive Power business.

As John mentioned earlier, we expect to generate diluted net earnings per share of between $0.11 and $0.15 per share in our second quarter of fiscal 2006. The major factors which will impact our second-quarter earnings are, first, commodity costs; second, the dilutive impact of the FIAMM transaction; and third, the expected historical second-quarter sales pattern. In my closing remark, I remain confident in our business and its future prospects. John, now let me turn it back to you.

Thanks, Mike. In summary, considering the challenges we faced in the first quarter, I am pleased with the results that we have seen. Obviously the second quarter is going to be a challenge for us, and it is really three things coming together. It is lead cost, which will be at the high mark for the year for us; historically our second quarter is our lowest sales volume quarter; and third, we're just beginning to implement the strategic synergies of the FIAMM acquisition. Obviously when we bought FIAMM it was losing money. We're seeing the impact of that carrying into just taking the company over, but we know that will turn around.

Looking ahead, we're anticipating the lower lead cost. We will see improvements with the acquisition of FIAMM. I am very optimistic about our second half of the year because of the forward lead position that we have, as Mike mentioned earlier. About 43% of our forward lead is bought at $0.38. So with that summary, I would like to open the line for questions.

(OPERATOR INSTRUCTIONS) Bill Benton with William Blair.

A few questions. On the lead pricing, obviously it had come in a little bit; and I know you talked about second quarter kind of being a high water mark. How confident do you feel that the underlying forces that are driving the lead price have kind of led it to at a point which maybe we can kind of remain at these kind of current levels, at least? And maybe ease a little bit more in the back half?

Bill, to start off with, I would have thought lead would have come down even further. I guess maybe that is wishful thinking. But when you look at the supply and demand curves, and the mines that are going online currently, and what is going on in later this year and next year, we anticipated that lead would drop. As you will recall, ending our fiscal year our forward position was about 5%. We anticipated that lead would drop. We moved at that time, as we mentioned earlier, we were at about 38% -- or $0.38 right now, 43% covered.

There's a couple things that's happened. There's a couple of smelters that have had some problems. There is a strike with Teck Cominco in Canada. I think these are events that are taking place that will shortly be resolved. So we don't know; no one, I think, really knows exactly what's going to happen with lead. But I think that there is good reasons why it didn't stay down at the $0.38 level and it has popped back up to the 40. But I think once -- I hope once those things are resolved that we will see lead prices come back down again.

Okay. But you have not heard anything about any sort of delays in bringing on some incremental production that was expected in the back half of this year?

Not at all. It mainly has been the strike in the Canadian operation is what I am reading has had the major impact.

What is your average cost of lead that is capitalized in inventory right now?

It is of the approximate $0.42, Bill, that we commented that we expect to hit our second quarter. So essentially, as you know, with our FIFO approaches, we have very good visibility on that metric.

Right. Okay. On Asia, it was I guess a little more flat sequentially. Is there anything going on in that market? I know that historically maybe there has been some, maybe, some more pricing competition on the reserve side. Can you comment on what might be happening in the Asian market?

The pricing continues to be tough in Asia. Part of what happened in this particular quarter, there were some quotes about there or some tenders that were out that were pretty low on pricing. We did not go in low on those. What we did was we diverted that production from the Asian market to our European market and the U.S. market. Or in other words, we are running close to maximum capacity in China right now and just selling that product at low margins in that region. We ship to Europe primarily at some very nice margins.

Okay. Then just a quick final question. Motive operating margin, obviously I suspect that you're getting better pricing in that market. You're able to get pricing more there. So I'm kind of curious on a year-over-year basis as you look at the operative margins there, obviously impacted by the FIAMM acquisition. How do we kind of separate the impact from unrecovered lead cost versus FIAMM pressure on the operating margin, from a mix basis?

Bill, certainly you're right. FIAMM does have some negative impact in the quarter. But it is fundamentally the commodity cost pressure, pricing recovery issue, that is compressing margin.

Okay. As it a correct assumption, though, still to think that you're getting pricing a little better on the motive side than necessarily the reserve side?

That's correct.

Okay. Great guys, thanks a lot.

Dan Whang with Lehman Brothers.

First question was again regarding the pricing impact on top line. Can you quantify what that was in the quarter?

Our best judgment, Dan, it's in the 2% range.

Have you put through any additional price increases going into this year?

Selective, Dan, at this point. We have some out that dates back a few months ago that are just starting to kick in place. Normally what happens -- and it's one of the things that our customers have been complimentary on -- that when we go for a price increase, we do give enough time ahead so the customer can react. So we have some that are kicking in right now that were announced earlier.

Okay. I think you talked about that you are gaining share on a worldwide basis. From that standpoint, what are you observing in terms of how your competitors are approaching the marketplace, with respect to pricing and some of their tactics out there?

We're finding, actually in some cases right now, that competitors are starting to go along with higher prices. Which is good. It leads into, we think, we will actually get some higher pricing in the future because of what our competitors are doing. We are picking up share in part because of service. More service. We believe that we are the leaders in going after pricing in the industry, and we are asking for higher pricing because we are doing a better job servicing the customer.

Okay. Shifting over, I think you talked about some of these plans for restructuring in the motive business. Could you provides more details around that? Is it primarily focused on the European motive operations? And maybe some more details around the specific steps that you plan on taking.

Yes, we just started consultation with labor representatives earlier this week. I really can't comment very far on this at this point, Dan, because of certain rules and regulations within the European Community. But I will say that we had a plan on the front end when we acquired FIAMM, that we felt we could reduce costs, and we are moving forward on those actions to implement the strategic synergies to reduce overall cost.

Okay. Finally, to wrap up a question on lead, I think as of July 3, you had about 92 million of pounds of lead hedged. Let's say in a worst case, spot prices swing back up to the mid $0.40 level in the second half. Even in that worst-case type of situation, would you expect the lead cost to be lower in the second half?

Well, it is our belief that lead cost will come down in the second half on the LME. But let's say that we are wrong; and just for round numbers, it is actually 43% that we have forward bought. Just for the sake of conversation you can run the math on it at $0.38, 43% forward bought. If it went to 45 you could calculate what our average would be. Or if it went to 30 you could calculate what our average would be.

Okay, great. Thank you.

John Saks (ph) with Nomura.

Can you give us just sort of an idea of what your free cash flow would look like for the year? Just in general. Even for the second quarter. I am just trying to get a sense as to what we're looking at in terms of free cash flow. I know the second quarter it sounds like it is going to be kind of tough, but is there any improvement on the working capital side that might (technical difficulty) better cash flow generation?

Again, John, help me, as you define it. Everyone has a slightly different quest (ph).

It is really -- let's just call it cash flow available to pay debt, okay? So operating cash flow less cash flow from investing activities.

I will give you the general answer, and certainly we can spin (ph) specifics off-line. But as I am sure you can appreciate, we are in a growth mode of our business right now, as the top line has continued to expand nicely. Roughly $0.25 of every dollar of additional sales growth is deployed in primary working capital.

Again, as a side note, I think we have done a fine job in terms of managing our bases businesses' investment there. As I commented we had a little bit of a down-tick versus the prior year, which we are certainly pleased with.

But a simple answer is, we don't expect to see appreciably different cash flow from operations sequentially or for the year. We're very balanced. We have good liquidity. But we are continuing to invest in both the growth of our business, and we certainly anticipate having some cash obligations as we advance our restructuring plan that John commented. So in simple terms, we don't see any appreciable plus or minus. We're very steady there. We've got very good liquidity.

How about on the new product side? Do you -- is there anything in the works that you are coming out with in the next couple of quarters that has sort of higher margins? Then maybe we could see some improvement in the margin over time.

We have a number of projects in our engineering group, which obviously I would prefer not to comment on those, for competitive reasons. I am sure our competitors listen in on our phone calls. But, yes, we have a number of things in engineering going on that we feel that will help us.

Just the last question is the financial covenants. How do you feel with respect to meeting those?

John, we have outstanding relations, I believe, with our bank group. We are not even close to any of our covenants. We have very comfortable room, and certainly it is not an issue that we are concerned about.

Okay, thanks.

(OPERATOR INSTRUCTIONS) Craig Irwin with First Albany.

Most of my questions have actually been pretty clearly answered. Just one, John. I noticed a distinctly different tone in your outlook for accretion from FIAMM. You said a minimum of $0.04 accretion in FY '07. Am I noticing anything here that could potentially have a little upside?

No, Craig, in fact I went back and read what I said in the last meeting; and those were the exact words.

Okay. Is there a potential for FIAMM to have synergies in the other areas of business that could potentially help profitability on the other side and not have direct accretion?

There is a potential there. As I said in the past, that when we look forward at where we think that FIAMM will take us in fiscal year '07, and what I said in the past and stated today, that we see a minimum of $0.04 accretion. Which would imply that we do believe that there is some upside.

Okay. My understanding is that FIAMM now makes you the largest manufacturer of batteries for the motive market in Europe. I guess previously it was very close; now I guess you're a little bit ahead of the major competitor out there. Can you talk a little bit about the channel that this brings to you, or how this adjusts your relationships with your important customers in the motive channel market in Europe?

Before we completed the acquisition, during our due diligence and even after closing, we spent a lot of time with the FIAMM customers. They are feeling good about the acquisition that took place. They are staying with us. We have not lost any business at all because of this. The FIAMM product line is -- about 60% of that business is in Italy; the rest of it is spread across Europe. We're looking at how we could expand the FIAMM brand-name even further.

Okay. Excellent. Just one question for Mike. There's been a lot of discussion about pricing over the last several quarters. Obviously motive is much easier than the standby power side or the reserve power market. Can you just help me understand this? When you put in price increases, they use roll on over a period of time. Would you expect the price increases that you put in over the last few months to continue to roll in over the next quarter or maybe couple quarters?

Absolutely. You are right, Craig, there is the lag effect. Certainly we expect some continued improvement into our second and third quarter. Then it will probably taper off as we get to the balance of the year. But you're absolutely correct. There is more in the pipeline that will come.

Okay, excellent. Thanks a lot guys. Great quarter.

Jeff Bencik with Jefferies & Co.

Can you guys remind me, what is the typical lag between when you purchase the lead and it being recognized in your cost of goods sold?

Well, we FIFO our manufacturing variances. Typically in the States, there is a three-months lag. If you add on another month, you buy the lead; there is a month, let's say, to get it in; it's about a four-month lag in total for the U.S. market. In the European market, it would be about a three-month.

In terms of, as of July 3, you were 23% hedged. So is it correct to assume that later in July or maybe in August you increase that another 20% to get to the 43%?

No, we are currently at 43%.

Okay, but in the 10-Q you filed as of July 3, you were at 23%.

Let me clarify, Jeff. The 23 is looking at an annualized 12-month period requirement. The 43 that John referenced is for the balance of our fiscal year. There are two very different metrics.

Okay. Are there any additional plans to increase the hedging from that 43%? Or are you're going to let the rest of it float because you believe lead is coming down?

We have bids in the market right now at lower prices. If the lead market were to drop down considerably -- let's say it's just spiked down on a temporary basis for a day or so, and those hit -- we would see our forward position increase from the 43% for this fiscal year. It would go higher.

Just to complement John there, Jeff, clearly as you know, we're very active. Today's spot is call it $0.40; and one year forward is $0.38. So you only have $0.02 down a year out. As of today's curve, we would be reluctant to move. But John is absolutely right, we're very disciplined. We have got always orders out there, and we are always prepared on a daily move basis to increase our position if we like the forward market.

Okay. Very good. And presumably that is at $0.38 or below then (ph)? You probably won't tell me; but that is okay.

You're right, I won't.

Let me answer that this way. The spot this morning is at 39 7 and nothing has hit, so if that gives you any indication.

Okay. On the pricing front, can you give me -- was it 2% increase in motive and flat in reserve in the quarter that you were able to get year-over-year?

No, it is higher in motive -- and it is higher than the average in motive and less than the average in reserve.

So your average price increases across the board were 2% higher in motive and less in reserve.

That's correct.

Let me clarify, Jeff. What we have recovered is the 2% average as John commented. Obviously the official price increases that you go to the market with are higher than that recovery percentage.

Okay, thank you. That's all I have.

(OPERATOR INSTRUCTIONS) Jamie Lester (ph) with Soundpost (ph) Partners.

Can you just give a sense for, knowing what you know about the lead price now, and knowing what you know about the seasonality and the FIAMM reversal, how we should be thinking about the second half of the year in terms of seasonality and those one-off factors?

Sure. As we mentioned earlier, our lead coming in at second quarter an average of about $0.42; and when you look at the second half, with 43% forward bought at $0.38, it's a pretty significant drop. In fact, if you were just to assume -- hypothetically, hypothetically -- that lead at the spot market was at $0.38 for the second half of the year, we would be looking at about a $0.05 pickup approximately in our third quarter versus our second.

The FIAMM acquisition will turn around. We will see higher volume, which would be in the 5% to 10% range in the third quarter. We anticipate a little bit of pricing to come through also. In total, with those three thrown together, it should be somewhere between $0.07 to $0.10 pickup in earnings.

Sorry, $0.05 in lead times about 100 and --was it 100 (multiple speakers) ?

No, $0.05 was on an EPS basis.

Okay. But you're going from, say, $0.42 to $0.38; so that is about $0.04, right?

Right.

$0.04 times 110 million pounds.

For a quarter.

Yes. Right, so 110 times 0.04 times --?

It's a lot of money. It is 4 million pretax.

You figure -- you have got the number approximately right. It's a little bit higher than that. About 120 million pounds in a quarter, and at -- it's a little over $0.04, if you do the rounds on that. I don' know. It is 4-2, 4-3. But, yes, you're getting close to 5.

It will come out about $0.06. So that is $0.05 or $0.06. Then (multiple speakers) cents from the FIAMM; and then seasonality; and pricing on top of that. It should be at least a $0.10 pickup sequentially, right?

Your doing the calculations on it. I can give the information on that, but I don't want to speculate into our -- beyond our second quarter.

Okay, all right. Thanks guys.

Gentlemen, we had no further questions at this time.

Again, thank you very much for joining us this morning. Everyone have a great day.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes your presentation, and you may now disconnect.