EnerSys (ENS) 2006 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the second quarter 2006 EnerSys conference call. My name is Andrea and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question and answer session towards the end of today's conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to the host, Mr. John Craig, Chairman, President and CEO of EnerSys. Please proceed, sir.

Thank you, Andrea, and good morning to everyone and thank you for joining us with our second quarter conference call. This conference call will cover the period from July 4 through October 2 of 2005.

As we reported last night, our second quarter pro forma net earnings per share were $0.14. These earnings exclude a $6 million restructuring charge which will generate substantial cost savings in the future. The results were in line with our previous guidance of $0.11 to $0.15 for the quarter. As I will discuss later, we believe that the $0.14 per share on a pro forma basis will be our lowest quarterly earnings this fiscal year.

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

Thank you, John, and good morning to everyone. 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 2 -- 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 ending October 2, 2005, which was filed with the 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 the fiscal year 2005 and our 10-Q for the quarter ending October 2, 2005, which is located on our web site at www.EnerSys.com. Now, let me turn it back to you, John.

Thanks, Mike. As reported, our sales for the second quarter were $304 million. That's up 16.5% while our first-half sales were 608 million, up 16%, both compared to the prior-year periods. Excluding the FIAMM Motive Power acquisition completed in the first quarter of this year, sales in the first-half increased by more than 11% over the same period last year. We continued to be optimistic about the second half of our fiscal year as we expect that the historic pattern of our lowest net sales in the second quarter and our strongest in the fourth quarter will be repeated this year.

Our first-half of fiscal year 2006 net sales growth reflects our continued strength in all of our markets, but particularly in our Motive Power segment. This sales growth also reflects our success in providing our customers worldwide with products and services they expect. Although we're clearly not satisfied with the current level of earnings due primarily to higher commodity cost, I am pleased about the actions we're undertaking to improve future revenue and earnings which we expect will increase the value of EnerSys for shareholders. I would like to talk about some of the key actions we're currently taking.

To satisfy strong demand from many of our customers, we are selectively increasing manufacturing capacity and adding new products while continue to spend capital to implement cost savings programs. Some of this capacity is for new products developed in conjunction with our customers and designed for their specific needs. Some is for increasing productions of our unique thin plate pure lead product, which is well known as being a premium product in the marketplace.

At the same time, we continue our strong focus on providing the best possible delivery and service to our customers so that they will continue to increase their business with EnerSys. We will continue to stay focused on acquisitions in our traditional lead acid business and in alternate technology, such as nickel-based batteries. The FIAMM and GAZ acquisitions are recent examples of this and as we seek other opportunities around the world, we will have a particular emphasis on complementary core lead acid business and alternate battery technologies.

Regarding our recent acquisitions, the integration and profit improvement with the FIAMM Motive Power business continues to progress well and I'm very pleased to tell you that the dilutive effect of FIAMM that we've projected earlier at $0.02 a share; it will only be dilutive $0.01 a share in this quarter. We now anticipate that this business will not be dilutive for this fiscal year. This is because of the excellent work that was done because of our management team in Europe and integrating the business and implementing the process of the improvements.

As you know, in October, we acquired GAZ, a German producer of nickel-based specialty products. We expect this business to be accretive to our earnings this fiscal year in the range of $0.05 per share and to be accretive by approximately $0.02 per share in fiscal year '06 (ph).

While we are increasing our revenue, we know we must continue to reduce our cost. The combined impact of our second quarter restructuring charge and the FIAMM restructuring plan are primarily to cover the cost of closing two manufacturing plants, combining a number of distribution of sales locations and reducing our employment level in Europe by over 210 people. We anticipate these actions will result in fiscal year 2007 savings in excess of $10 million. About 4 million of that is already included in the projections of FIAMM for fiscal year '07.

As you know from earlier calls, we expect commodity costs to eventually ease. As we have shown over time, we will not stand still waiting for commodity costs to decrease. We will continue our strong focus on cost savings programs. In addition, the persistent high levels of commodity costs continued to make us more determined to recover a higher portion of these costs through price increases to our customers. While we can offset a portion of the higher commodity costs with our cost savings programs, we will continue to ask our customers to share in this burden. As I've said in previous meetings, we will remain focused on our basic strategies; namely, we will continue to expand our market and leadership position by satisfying customer demands for quality products and excellent service. We will continue to reduce costs through productivity improvements, plant and distribution consolidation, enhanced product designs, procurement-oriented cost reductions and efficiencies in sales and administration expenses. We will continue to expand our presence in high-growth markets, such as Asia and Eastern Europe, and continue to pursue acquisitions in a variety of geographic and technological areas. In summary, we will continue to focus on the key actions that we believe will lead to significant increase in long-term value of our company.

Now I would like to comment on our earnings guidance for the next quarter. As we reported yesterday, we anticipate our pro forma earnings for the third quarter of fiscal year 2006 will be in the range of $0.17 to $0.21. Excluded from this pre-share guidance is an anticipated restructuring charge of approximately $0.02 per share associated with the October acquisition of GAZ. This restructuring program will reduce costs by integrating this business within our existing operations.

I would now like to ask Mike Philion to pick up and cover more on our financial performance for the second quarter. Mike?

Thank you again, John. The results of our second fiscal quarter and first-half of fiscal year 2006 continued to reflect strong topline growth, challenging commodity cost pressures and incredible earnings performance. Our second quarter of fiscal 2006 net sales increased 16.5% to 304.4 million over the comparable period in the prior year. When excluding the negligible favorable impact of foreign currency translations, primarily the euro, net sales increased 16.2% in the second quarter.

Further, the increase in our second quarter of fiscal 2006 net sales included approximately 17 million attributable to our FIAMM acquisition, which is roughly 6 percentage points of our 16.5% growth rate compared to the prior year. On a business segment basis, our second quarter of fiscal 2006 net sales in the Reserve Power segment increased 8.3% to 140 million while our Motive Power segment increased 24.5% to 164.1 million over the prior year. The increase in our second fiscal quarter Motive Power net sales included the favorable impact of our FIAMM acquisition, which is roughly 13 percentage points of this segment's 25% growth rate.

Our first half of fiscal 2006 net sales increased 16% over the prior year to 608.3 million. When excluding the modest favorable impact of foreign currency translation -- again, primarily the euro -- from our fiscal 2006 results, consolidated net sales increased 15.1%. Additionally, the increase in our first six months net sales included approximately 24 million attributable to our FIAMM acquisition, which is roughly 5 percentage points of our 16% growth rate.

On a business segment basis, our first-half of fiscal 2006 net sales in the Reserve Power segment increased 8.7% to 276.3 million, while our Motive Power segment increased 22.7% to 332 million over the prior year. Again, the FIAMM acquisition increased our first half of fiscal 2006 net sales, roughly 9 percentage points of this segment's 23% growth rate.

Now a few comments about our pro forma consolidated operating earnings performance. As you know, we utilize certain non-GAAP measures in analyzing our Company's operating performance, specifically excluding our second quarter of fiscal 2006 $6 million restructuring charge and giving certain pro forma affects to our fiscal 2005 IPO. Accordingly, my following comments concerning operating earnings exclude these relevant items. Please refer to our fiscal 2006 second quarter report on Form 10-Q for more details concerning these pro forma adjustments.

Our second quarter of fiscal 2006 pro forma consolidated operating (ph) earnings of 15.9 million decreased 19.7% in comparison to the prior year with a decrease of 240 basis points in operating margin to 5.2%. The decline in operating earnings and margin is primarily attributable to higher commodity cost of approximately $13 million. For the first half of fiscal 2006, pro forma consolidated operating earnings decreased 20% over the prior year to 33.5 million with a decrease of 250 basis points and operating margin to 5.5%. Again, the decline in operating earnings and margin is primarily attributable to higher commodity costs of roughly $17 million.

A key element of our ongoing strategy is to continuously reduce our cost. Our second quarter of fiscal 2006's $6 million restructuring charge is our most recent example of our steadfast commitment in this regard. This European action alone will result in annualized savings of roughly $6 million per year once fully implemented and reduce our employment level by over 100 people.

As I previously commented, our fiscal 2006 results were significantly affected by the higher cost of commodities. Lead alone, which is roughly 20% of our cost of goods sold, represents approximately 90% of our first-half of fiscal 2006 increase in total commodity cost. We continue to implement sales price increases to our customer to recover these cost increases with disappointing results achieved this fiscal year for both our company and we believe for the industry. We estimate a 40% pricing recovery rate was realized in both our second quarter and first half of fiscal 2006.

An additional few comments concerning lead costs. For the second quarter of fiscal 2006, the average LME (ph) cost for lead incurred by EnerSys as it affected our income statement was approximately $0.42 per pound compared to approximately $0.33 per pound in the prior year. Further, we expect our third quarter of fiscal 2006 lead cost to decrease by approximately $0.02 per pound for a third quarter average of roughly $0.40 per pound. This decrease in third quarter lead cost by approximately $2 million.

Lastly, as of October 2, 2005 through a combination of lead hedges, our ongoing tolling programs, coupled with effect of our FICO accounting method, we have approximately 70% of our remaining lead purchase requirement that will impact our income statement for the second half of fiscal 2006 covered at approximately $0.40 per pound. We continue to closely monitor lead and other commodity costs but do not expect any meaningful near-term reduction from their current levels.

Now a few comments concerning pro forma net earnings per share. After giving pro forma affect to the IPO as if it occurred at the beginning of fiscal 2005 and excluding restructuring and special charges, pro forma diluted net earnings per share were $0.14 in the second quarter of fiscal 2006 compared to $0.23 in the prior year, or a decrease of 33%. Again, after giving pro forma affect, pro forma diluted net earnings per share were $0.33 for the first half of fiscal 2006 compared to $0.46 in the prior year, or a 28% decrease. The decrease for both our second quarter and first half of fiscal 2006 results was primarily attributable to higher commodity costs, partially offset by continued savings from our cost reduction initiatives, strong growth in sales and our pricing recovery actions. Please refer to our fiscal 2006 second quarter 10-Q for more details concerning our pro forma earnings information.

Our effective income tax rate for the second quarter of fiscal 2006 was 31.7% compared to 32.2% in the prior year. Our effective tax rate for the first half was 33.7% compared to 35.2 in the prior year. These fiscal 2006 rate reductions are primarily the result of a higher proportion of our consolidated earnings being in tax jurisdictions with tax rates lower than our previous period global averages. We estimate that our booked tax rate will approximate 33% for the entire fiscal 2006 year.

Now let me make 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 309.4 million at the end of our second quarter and as a percentage of annualized trailing three month net sales with 25.4%. Primary working capital levels have increased since the beginning of fiscal 2006 by 27.3 million with our primary working capital ratio also increasing by a modest 0.7%. The increase in invested working capital was cost primarily by the FIAMM acquisition, which accounts for over 20 million of this increase.

Capital expenditures were 10.1 million for the second quarter of fiscal 2006 and 18.6 for the first half of the current fiscal year, compared to 6.3 million 14.8 million, respectively, in the prior year. Our capital spending continues to focus heavily on the reduction of costs, improvement and efficiencies and production of new products and selected increases in manufacturing to capacity. We expect capital spending for fiscal 2006 year to approximate 40 million.

Net debt, which we define as total bank debt minus U.S. short-term investments at October 2, 2005 was 401.6 million and has increased approximately 42 million since the beginning of fiscal 2006 primarily due to the FIAMM acquisition and the impact of increased sales volume on primary working capital. We expect net debt levels will be substantially similar for the balance of fiscal 2006. We believe our relationship with our bank group is good and we remain in full compliance with all our financial covenants.

As John mentioned earlier, we expect to generate pro forma diluted net earnings per share of between $0.17 and $0.21 in our third quarter of fiscal 2006. The major factors that will impact our third quarter earnings are, first, a reduction in our sequential third-quarter lead cost; second, the expected continued progress in the integration of FIAMM and the favorable impact from our recent GAZ transaction; and third, the expected historical improvement in third-quarter sales compared to our second quarter.

In closing, I share John's confidence and resolve in successively growing our company's future earnings and shareholder value. Now, John, let me turn the call back to you.

Thanks, Mike. I remain optimistic about our business. We are confident about the prospects for growth in both our revenue and our profits. We believe our financial results in the second half of this fiscal year will show significant improve the over the first half and we are highly committed to increasing the long-term value of EnerSys. I want to thank you for attending the meeting this morning and I would like to open the lines for any questions that you may have.

(Operator Instructions) Dan Whang, Lehman Brothers.

I just wanted to refer back I guess from the last conference call, you kind of did a walk-through on the EPS expectations going into the third quarter from second quarter, and you talked about a potential improvement of $0.07 to $0.10 and I think you went through a number of different positive factors that would make that happen. Obviously, the new guidance is a little bit below that. Now is that really due to the lead cost in the market that's changing this outlook?

You're talking about the third quarter guidance to -- the guidance that we gave for our second quarter, which is the only guidance we gave last time, was $0.11 to $0.15 and we're within that range. We did not give third quarter guidance.

Right. I think you just kind of did a hypothetical walk-through of the potential increase that we could see going into the third quarter if lead prices had stayed low and so forth. So --.

Dan, candidly, I don't recall if we did do that. But certainly, as John commented and I, our commodity costs have continued to persist at higher levels than experts'. And certainly, we follow lead closely. I wouldn't say we're exports, but there is no question that the headwind we are experiencing in our industry is commodity cost. And I think we're doing a lot of really great things as John referenced to offset them, but we don't control that. An in fact, lead was just, call it $0.46, over the last several days. So that is the headwind that persists.

And just to add a little bit to that, I don't recall anything that we said about the third quarter, but let's go back to where we were at that point in time. If you look at the forward curves of what the lead experts were projecting where lead would be at this period of time to where it actually is today at the $0.46, it is significantly higher. It's held up higher than most of the experts; in fact, I will go as far as to say, all of the experts that I have read have stated. And there are some that believe or their view right now is that lead is tracking with other commodities, it's part of a basket, and that it is overpriced right now. But I think you have to read the lead reports and the lead experts, which we are not, and form your own opinion on where lead is going.

Do you think that's really driven by the post-hurricane and domestic demand? Is it a combination of domestic as well as global demand being better? What is your take on that?

My take on it, and again, is only from the readings I have done from the experts, and it is I think what I have read on it and the consensus is that lead is being tied to the other commodities, particularly copper and zinc, and that most of that is being driven by China and the growth that we're seeing over there. There are several reports out that I've read recently that says it's overpriced, including this morning. There was one I read that still says lead is overpriced. But again, we're not lead experts. I'm just repeating back the same information that is available in the public market to you.

I want to ask one more question and let someone else have a chance. You talked about you planned a capacity add to certain products. Could you talk about where you are in terms of capacity utilization on the Motive and Reserve side? I'm assuming the capacity add would be on the Motive side.

Right now, we're running in the high 80s. And you're correct that a lot of it is on the Motive Power side, but we are also seeing growth take place in telecommunications. We have very high demand for our thin-plate pure lead, which is driven by telecommunications and is also driven by military applications. So the investments that we're making in capacity are really threefold. One is to support North America -- well really -- yes, support North American Motive Power; two is thin-plate pure lead products and three is an expansion that we're doing in China to move our Motive Power products that are manufactured currently in Europe, and we're starting to manufacture those products now in one of our Chinese plants to support that market.

I see. Now the thin-plate pure lead, I had known that there was a lot of application on the military side. Now you talk about the telecom. Is this a new or -- application, or is this telecom on the Reserve side had been using the thin-plate pure lead in the past?

They have been using it in the past, but we're seeing globally a pickup in telecom spending right now.

And that geographically, I guess it's coming primarily from Europe and North America lagging a little bit?

Actually, it's both.

All right, great. Thank you.

Bill Benton, William Blair.

Good morning, guys. Just a follow on with the last (indiscernible) question. I guess you guys had talked about kind of a $0.07 to $0.10 lift hypothetically in the third quarter. And so it does sound like GAZ, the contribution should be positive and we should have -- we're integrating FIAMM it sounds like quite a bit better than expected. And so I guess what I'm trying to figure out, is there something that has changed with regard to maybe your pricing recapture assumptions, or maybe with regard to the European side of the business, if there's anything happening on that side of the -- or in that geography that's looking maybe a little bit more challenging?

I would back up. If I think back to three months ago where we are and what are the pluses and minuses or the surprises and so on, we're performing better on our integration of FIAMM. Our topline is performing better than I thought it would have three months ago. The one that is hurting us are commodities. Fuel costs are up. We never anticipated that we would see the increase in energy that we have seen. Lead prices are holding higher with fuel costs being up, which affects plastics obviously, it affects transportation. The cost basis has increased from one quarter to the next if I go back and reflect back where we were three months ago and try to think where we are today.

So I guess in summary, I'm not happy with what we are seeing on what I will call the uncontrollables, and that's the commodity prices -- fuel and lead, plastics and so on -- but I'm very pleased with the operations of the Company from the standpoint that we've been able to offset a lot at the increase. In other words, if our operations would have performed at the same level that I thought they would have performed three months ago, our numbers would have been worse. But we've offset some of those commodity prices by better performing on the operating end of the business.

Just in terms of -- I guess one of your competitors has got some pricing in Europe as being a little more challenging. Is there anything going on there? Is the kind of (ph) maybe some of the restructuring and FIAMM having any impact on that sales outlook there?

No. I think, on the -- total pricing in Europe is tougher than what it is in the U.S., and there are a number of reasons for that. We are the leaders in going after price increases. We've implemented price increases or gone to the market with price increases in Europe where our competitors did not follow. It has been tougher in Europe to get pricing.

And then as far as the lead costs may potentially breaking, could you just talk about what you're hearing, seeing, knowing, in terms of the supply that was anticipated to come online in the back half of this year or anything that may be holding that up?

They supply that is supposed to come online, the only thing that I've read that says it could impact it, and I have not studied this over to see what impact would be, is earlier this week, Magellan announced that they're going to delay a year an investment that they were making in their Australian operation. Everything that I have read prior to that indicated that there would be a surplus, a slight surplus of lead next year. I have not read anything in the marketplace that said that lead is going to hold at the numbers they are right now. Maybe you have. If you have, I'd like to see it, but I have not seen anything that has indicated that it's going to hold at the $0.46 level.

No, I certainly haven't read that. But I am curious, what did they cite? I haven't seen that, Magellan's situation. Was there a reasoning for the delay of a year that you're aware of?

Yes. Bill, we are pretty close to what is going on. And as John said, fundamentally, supply is coming on as expected. This is Mike Philion's opinion, but I don't believe the delay in the potential smelter will have any impact on supply. It's more of, as I understand their strategy, most of their lead is going into Asia. In fact, that mine is ahead of schedule in terms of productivity and they were looking at a theoretical optimization to put a smelter right at the mine. The mine is in sort of Central Australia and they thought they would potentially have obviously an economic advantage. So there's plenty of smelting capacity in China. It's really just an optimization of return to the Magellan organization that's really the issue at hand.

A last comment on the lead. One of the themes that we have also have heard in the last quarter, I don't have to tell the audience the obvious. There has been an increased concern about inflationary pressures, some of it certainly rekindled by Katrina and the other hurricanes. So we do continue to believe, as John said, that there are increased speculation in metals as one hedge against inflation that has likely continued to have a negative impact on the fundamentals of lead.

If I could just have one final quick question. On the OpEx side, I think you guys said that -- I couldn't remember if you said you expected 10 million in annual savings or 6 million and 4 million in 2007, or did I miss that?

When you add all the programs up, everything up -- if you take GAZ, the accretion we're anticipating next year, when you take the FIAMM, the integration in place and we take the restructuring that we're doing in our distribution and sales locations in Europe, it is approximately an annualized $0.16 per share gain.

Okay. And then so the OpEx level that we saw this quarter you think is at kind of a sustainable level?

Again, Bill, I will come back to that question. An important point of clarification -- certainly as you can appreciate, these cost initiatives that John referenced, they take some time to fully develop and mature. So the $0.16 that John quoted is a run rate that we will expect to ramp up to. Now we do expect that in the Op earnings, we will get in excess of $10 million of that benefit in the next fiscal year. But we're in this ramp-up period. It's progressing extremely well, so I don't want to mislead you that like starting in Q3 you're going to see that kind of improvement fully develop.

Mike's right on the mark with it. It's an annualized number. It's going to take time to have the integrations take place. Those are the type of numbers that we're looking at.

Now this is a simple rule, and don't get ahead of yourself, Bill, but when typically we see a cost savings, we generally get in the range of a year payback and it typically takes about -- you know, you get about 50% of that in the first year, and then you get the balance in the second. So, again, you have to sort time phase (ph) quarters, but that will generally give you some barometer of how these start to be realized.

Great guys. Thanks a lot.

(Operator Instructions). Jeff Bencik, Jeffries & Co.

Okay, thank you. I just wanted to get a little more clarification on lead as usual. But essentially, as I understand you correctly, you have 70% of your lead needs hedged throughout the end of the year at $0.40 per pound. Is that correct?

It's actually a little less than that, but if you round it, it's at 40.

Jeff, a point of clarification. You're certainly right, but that includes hedge, lead toll and the FICO effect. So, again, a point of clarity. It's not just the hedging. It's those three in combination.

It's P&L impact.

Okay. And for your expected lead cost in the third quarter of $0.40 per pound, down from $0.42 this quarter, is that predicated on spot prices of lead coming down from $0.46, or are you fine with it at $0.46?

We're actually in the third quarter forward bought and we have everything covered with the items we mentioned earlier at 89% in the third quarter. So the third quarter, we only have 11% at risk.

Okay. And if I remember my -- or work through the math, based on a $0.40 versus a $0.42, that would imply something around $0.03 benefit to your EPS in 3Q versus 2Q, which gets you to the 17 pretty much guaranteed on the flattish type of sales. And so is the rest of that benefit coming from a sales increase seasonality between the third quarter and the second quarter?

Jeff, again, you're math is roughly correct. And as I commented, we do expect the traditional uplift in third quarter top line.

Okay. And then in terms of in this quarter, can you give me a breakdown in terms of the price and volume impact that generated the roughly 11% sales in the quarter?

Sure. When again just the second quarter, we would say that a little under 2% was priced. Obviously the FX as I commented is negligible. The PM effect I covered. So you're looking at roughly 8% or so that you would characterize as volume.

Okay. And you're in the high 80s in terms of capacity utilization. Can you break that down in between Reserve and Motive Power?

Go ahead, Mike, you've got the chart there.

As John said, we're in the 80s, mid to high 80s, and Motive is between 85 and 90, particularly in the Americas where demand is extraordinarily strong. So we're not particularly surprised by that where we are in the recovery cycle.

I would like to add, we have anticipated this type of growth to take place and we started an expansion of our Monterey, Mexico plant some months back, and that will be online to reduce that capacity utilization number starting in about February of this next year.

And are you actively converting some facilities from Reserve to Motive? Or when you talk about adding capacity in Motive, is that the method you're using, or are you just simply adding new capacity?

We're adding new capacity, because even in our Reserve side, when you go back and look historically at our business, and one of the reasons that we are profitable is because we went through consolidations a number of years ago and actually took the capacity down when we had excess capacity. So right now, we are in a good operating position on capacity in our Reserve Power.

Let me a break it down further by segments. If you look at our flooded (ph) product line, we have some excess capacity. If you look at our thin-plate pure lead product line in Reserve, we actually are short on capacity and are making further investments in that to keep up with the growth we're seeing in Reserve Power business. We want to have our capacity utilization running at a higher number, as opposed to a lower number.

And how difficult is it to switch over your lines from flooded to thin-plate?

Major difference. It's like the difference of building a lawn mower and a refrigerator. It is a completely different process. And I say it that way because the good news on it is, if a competitor wants to get into that business, they are not going to use their existing equipment. They're going to make a major capital infusion.

Okay. And when did you -- you mentioned that telecom spending has started to pick. When did that start, and has that continued through end of this quarter so far?

I've met with several of our major OEMs in recent weeks, and I'm hearing across the board that they are seeing increase in their business. And we are starting to see that pull through. And I would say that it's just -- I don't know the exact time on it, when it really kicked in. But just in recent weeks, I would say probably in the last month or two, is where we've really started to see some pickup.

Okay, that's all have. Thank you.

John Sykes (ph), Nomura Securities.

I had a question. Just on the customer side, have you seen high-single digit growth basically across the board on the top 10 customers? I'm just trying to get a sense -- has your organic growth net of some of these other items come from that top 10 customer base, or adding new customers? What has kind of happened there?

That's a tough question because over the number of 10,000 customers that we have globally, it's a tough one. I will take a stab at it. We have seen a pickup with one major customer in China that I'm aware of. Our OEMs I would say in the Motive Power side in Europe has been I would say just about flat of what it's been in the past. Some minor pickups, but nothing major. Department of Defense in the United States has been a big pickup for us. There are several OEMs in the U.S. market in Reserve Power that have -- fundamentally, we were not doing business with them, and now we are doing business, so it was picking up new customers. The Motive Power business is just growth in the U.S. market because even listening to our competitors, they are seeing growth in that same segment. When you look BCI -- Battery Council International -- data for Motive Power and Reserve Power, they're both up. So I think it's a lot markets in general. And I would say that there are examples of where that we have seen some pickups in customers. There are examples of where we have actually had less sales with some of our larger customers. And particularly, the reason for that is because back to pricing. If it's not of a quality sale, and if it's one we don't think we can make a reasonable return on it, there's certain business that we will walk away from.

(multiple speakers) John, and I agree with what you've said. Certainly, I think one of the values and benefits to the company -- John covered it -- we have over 10,000 customers; in fact, it's closer to 20. And when you sort of look at concentrations by region or by segment to John's point, I think this is very broad and very deep. If there were a few big customers were there was some shifts, I would also agree with John, it's very minor. This is a very broad increase in demand throughout the globe.

On the pricing side, those are considered surcharges? There's a portion of that that's a surcharge, right, for the higher lead cost?

Very little of it, actually.

Because here's what I was going to ask. To the degree that the lead costs go down, right, do you then have to readjust back down your prices based on where -- in other words, lead I think you said will come out at $0.40 a pound in the fourth quarter, roughly. Do you then have to give back some of the pricing that you got because the lead prices are coming down?

Some customers and some contracts, but I wouldn't describe that as being material. There are examples of where would see that. But on an overall basis, contractually speaking, it's immaterial.

And then just the last question. Can you breakout the debt balance? You might have mentioned it, but I think I missed it -- between the term loan revolver and I think the FIAMM-related related debt -- what does that look like?

Sure, John. And I didn't, but of the 401 million, virtually all of it's term debt. We have very little out on revolvers. It's really minor uncommitted lines in the 10 million range, so it's all term debt.

All right. Thanks a lot, I appreciate it.

Jamie Lester (ph), (indiscernible) Partners.

I'm just doing a little back of the envelope and thinking, okay, if you get back to a lead price in the low 30s, which is where I think a lot of people think it will get to eventually, and you -- I guess you keep 60% of that gain because you pass on 40% of it going up, so just kind of symmetrically there. And then you run through your synergies (indiscernible). That seems to get me to about an 8% operating margin on a run rate basis, which given all of the stuff you've done, all the costs you've taken out, it doesn't seem like that should be the ultimate target for the Company. So I guess if you could just elaborate, assuming normalization of the lead prices, assuming the synergies and the cost reductions come through as planned, where do you see the operating income margin going? Is 8% the right target, or are you targeting something in excess of that?

I will say from a generic or general standpoint if there's any employees on the phone, they've probably heard this too many times from me. I've always said that if we can't put a plan together to be in 10% operating earnings in the segment of the business, then we shouldn't be in that segment of the business; we ought to look at getting out of it. And we've done that in a number of locations. That's not to say that we're going to be at 10% today or tomorrow or next week. I'm just telling you philosophically what I believe in very strongly and that's what we keep pushing towards.

So you agree with the general idea that 8% is kind of the run rate, assuming normal a normalized lead price, and that extra 2% hurdle I guess that you're discussing, that's on the comments you will (ph) with process improvements?

Jamie, I think again your math is probably a little low. What you're probably failing to give consideration to is what I call the lead cost pressure for the last year and a half, almost two years. Last year alone, we had lead cost pressure $44 million. This year, we're certainly tracking at roughly half that kind of pressure. So when you take $60 million plus, do the math, then I think you will come up with -- it has a bigger negative impact than you just went through.

Yes. And to Mike's point, if you compared this fiscal year to two years ago where the lead was running in the 20s, we're looking at about a $65 million difference. $65 million in added cost. Obviously, we have offset a portion of that, about 40% of it, with pricing and we have offset a lot of it with cost reductions also.

I guess my point is, if you take 60% of that 65 million, I guess you'd call it 39, 40 million (multiple speakers). What's that, sir?

You're missing the other commodities. Clearly --

Lead is a portion, but you have to (multiple speakers) portion (multiple speakers) energy.

Your hypothesis has very sound validity, it's just you need to pick up the other commodities and you need to look at it for a broader period.

Okay. So I will leave that alone, I guess. I guess the second question is, just strategically, do you see your competitors acting more rationally in terms of trying to recover the costs as guys are? Are there continued opportunities within the lower (indiscernible) competitors in terms of, I don't know, upside or C&D (ph)? Are you seeing anything from there? I think C&D said that they are pretty committed to the motive business at this point. But are you seeing any other kind of major industry rationalizations out there that you think could unfold?

Again, Jamie, as certainly I've covered and John, it's hard to answer that in an absolute. I would say it in this way. As the leader in the industry, we're going to continue to be aggressive, being fair with customers, but trying to recover these high costs. We are a bit surprised as an industry that there isn't more discipline in terms of dealing with this acute pressure. So we're not going to change our approach, we're going to continue to go for pricing, and we hope that the competitive environment becomes a little bit more unified. And I will leave it at that.

I think just add to that briefly, the lead market is something that obviously we cannot control. And the thing that we can do though is try to hedge our position to try to remove some of the volatility. Our main focus though is our core business, improving cost, improving quality, improving service. And because we're improving service and delivery and performance, we're hoping our customers will realize or recognize that and reward us with higher pricing.

Fair enough, thanks guys.

Rand Jessings (ph), David J. Green & Company.

I think you guys have largely answered this, but I'll just throw out as it relates to lead. It just doesn't -- maybe the industry structure is wrong, but it doesn't make sense to me on an intuitive level that much of the reason that there's so much demand on lead is that there's so much demand on lead acid batteries. And to have you guys sort of just getting 2% price increase in this second quarter after we've had a two-year headwind, it just doesn't seem to make sense to me that with heavy demand and all of the players running tight with utilization that there isn't more ability to get price here. So I guess it's sort of a comment more than a question, but I don't know, maybe you have -- you can talk to that.

I hate to agree with your comment. I wish there was something we could do to take an increase set (ph). But as you well know, the market is what is going to set pricing. And when we're out there are looking at an order coming in or there are many that we have walked away from because the pricing has been low. But it's one that, it's a competitive marketplace. But the one thing I would disagree with the comment on is that they're not running at high capacity right now. A number of our competitors are the capacity utilization is not in the same situation that we're in. Some in Europe have not gone through the massive consolidation that we went through number of years ago to bring our capacity down. And I think, and I'm only speculating on this, that they may be running their operations just to absorb the overhead. But as you well know, the market is going to set pricing and we need to compete in that environment.

Okay, thanks.

To complement, John, your point, you've said this repeatedly, John. Even though we would like to see less commodity cost and higher earnings near-term, it may not be a bad thing in the long-term in terms of sorting out some of this excess capacity, sorting out some of the competitors that may or may not be financially viable long-term. I can assure you, we're going to continue to be the leader. And so we will have to obviously see how the next several quarters play out. But in the summary, this may accelerate some of the consolidation.

Yes, and Mike's point is right on the mark. I would take the other side or the other end of having high commodity cost and what it is done to some of our competitors; it has presented some buy opportunities for us. And we do remain very active in looking over a number of different opportunities. And I don't think that these opportunities would avail themselves if it wasn't for what's going on with commodities.

Right, okay, thank you.

Bill Benton, William Blair.

On the -- I think John, you mentioned something about China a major pickup from an OE there. And I did notice that Asia seemed to pick up a little bit this quarter. Is that on the reserve side? And can you just kind of update us how the pricing environment is Asia is looking right now?

Yes. Let's go back to the whole thing with it. The customer that I am referring to -- actually what took place was, and you will recall on our last call, I said that we walked away from a major customer in the Asian market because of pricing. The margins were too low. We diverted that production capacity in our Chinese plants to support demand in Europe and the Americas, but we didn't give up on that customer. What we did was went back, redesigned a product that was a less expensive or a lower cost product; went back to the customer. We have re-picked that customer up. In fact, we're now their largest supplier. I was talking with the president of our Asian operations just yesterday. Our Asian operations is having a difficult time keeping up with the demand that has just recently been placed on us.

So when you look at our numbers in the first half, we're up -- I don't remember what it is -- a 5 or 7% compared to prior year, which is very low for that market. And the reason that we're not seeing the higher growth is because of the loss that I referred to. We anticipate the second half will pick up because we have regained that customer.

Great, okay, because sequentially, you were up quite a bit more than that. And I think it was 15 million up to over 18, if I recall -- 15 million to 18.2 million in Asia in general, general Asia?

Yes, you have it right, Bill.

, Okay, and then could you just talk about what you expect in terms of a sales contribution from GAZ?

As I mentioned earlier, we're going to continue to combine our operations together. We do have another operation that's similar in size. But right now, that business is about $10 million U.S.

Okay. It's kind of a pretty good 2.5 million a quarter run rate?

Roughly.

Okay, great guys. Thanks a lot.

At this time, we have no further questions in the queue.

Okay. Again, I'd like to thank you for joining us this morning for the call and we look forward to communicating with you and telling you about our company as we progress forward. Thanks again, everyone, have a good day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect. Good day.