EnerSys (ENS) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2006 EnerSys earnings conference call. My name is Jackie, and I will be your operator for today's conference. (OPERATOR INSTRUCTIONS). I would now like to turn the presentation over to your host for today's conference, Mr. John Craig, Chairman, President, CEO. You may proceed, sir.

Thank you, Jackie. Good morning and thank you for joining us for our fourth-quarter conference call. During this call we will be reporting on the results of our fourth quarter and the full year of fiscal year 2006. As we reported last night, our fourth-quarter diluted net earnings per share were $0.25, which were at the upper end of our previous guidance of $0.21 to $0.25 for the quarter and were up 14% from the $0.22 in the fourth quarter of the prior year. This resulted in a full year diluted net earnings per share as adjusted of $0.78 compared to $0.82 in fiscal year 2005.

I would now like to ask Mike Philion, our Chief Financial Officer, to 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 Seven, "Management's Discussion and Analysis of Financial Conditions and Results of Operation" set forth in our annual report on Form 10-K for the year ended March 31, 2006, which was 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 differences between the comparable GAAP financial information and the non-GAAP information, please see our Company's Form 10-K for fiscal 2006 and our press release dated June 14, 2006, which is located on our website at www.EnerSys.com.

Now let me turn it back to you, John.

Thanks, Mike. Although that we are not totally satisfied with our fiscal 2006 earnings, in many ways we experienced a very good year, and I am proud of the many accomplishments of the EnerSys employees worldwide.

Revenue increased 18% over the prior year, and when adjusted for the impact of acquisitions and weakening currency, our base business grew an impressive 15% for the year. A very strong performance as a result of robust market growth, selling price increases, and we believe a continuation of our gain in global market share.

We remain highly focused on working with our customers to provide them with the right products and services that will give them an ongoing incentive to increase their future business with EnerSys. We successfully completed the acquisitions of FIAMM and GAZ during the year, along with acquiring controlling interest in modular energy, and in May we acquired the battery operations of ATK, which provides lithium primary batteries for the Aerospace and Defense applications.

When we acquired FIAMM, we advised you that we believe this acquisition would result in about $0.02 of dilution to our earnings per share in fiscal year 2006. FIAMM was actually breakeven to our EPS this year since the integration and restructuring benefits exceeded our original plan. Also, FIAMM was accretive to our fourth quarter of fiscal year 2006 results by approximately $0.01 per share. In addition, this acquisition enhanced our position as the global leader in the Motive Power batteries. It added approximately $60 million to fiscal year 2006 sales in the 10 months since the acquisition. And finally, we expect it will be accretive for fiscal year 2007 by about $0.04 a share.

The acquisition of GAZ added over $4 million to fiscal year 2006 sales and enhanced our nickel-based battery offerings. We previously sold these products primarily in Europe but are now focusing on the global market to increase revenue and earnings in this sector. This acquisition also gave us the opportunity to restructure our existing nickel-based battery business and will allow us to further reduce costs in fiscal year 2007.

The recent transactions of modular energy in ATK battery operations have provided an important opportunity for us in the lithium-based technology platform. The ATK operation is expected to generate approximately $10 million in revenue in the next 12 months. We have renamed the ATK operations to EnerSys Advanced Systems and believe in the significant growth potential of the business with new products and new customers. We believe that lithium-based technologies will become an increasingly important part of our business particularly in the Aerospace and Defense segment.

With our strong revenue growth, we had a selective manufacturing capacity during the year, primarily in our low-cost manufacturing plants in China, Mexico and Eastern Europe. We also began the manufacturing of Motive Power batteries in China as we continue to grow our market share in Asia.

Throughout the period we continue to emphasize our cost savings programs that have been an integrated part of our operations for many years. The successful results of these programs that continuing to reduce our costs have been highly evident during the last two years as they have played a meaningful role in helping to offset the substantial increases that we have seen in commodity costs.

For lead alone the incremental cost due to increased lead prices in the world market was approximately $44 million in fiscal year 2005 and another 23 million in fiscal year 2006. The rise of all commodity prices including lead adversely affected our operating earnings by $58 million in fiscal year 2005 and an additional $39 million in fiscal year 2006. Our operating earnings, excluding the 8.6 million of highlighted restructuring and other charges in fiscal year 2006, increased a modest 1% as we offset the effects of higher commodity costs with the positive effects of increased volume, selling price increases and cost savings.

A significant part of the cost savings we achieved has been in the area of operating expense, which had been reduced during the last two years as a percentage of net sales from 17.7% in fiscal year 2004 to 15.6% in fiscal year 2006. This was accomplished even with the public company cost or being a public company cost us an increased $10 million this last year. We are currently not satisfied with the small increases in adjusted fiscal 2006 operating earnings. We were able to pass along only about half of our additional commodity costs in the form of price increases to our customers during the year. We are steadfast in our commitment and resolve to improve upon our pricing recovery in fiscal year 2007.

Although I was disappointed in our pricing recovery results, I'm pleased with the many accomplishments of our employees who have worked together to extend our position as the leading industrial battery manufacturing company in the world. I believe our competitive position has improved as a result of their commitment and satisfying our customers and continuously driving cost down to our global business.

The successful integration of our FIAMM acquisition and becoming fully compliant with the new requirements of Sarbanes-Oxley Act were also noteworthy accomplishments during this year.

Next, I would like to comment briefly about our plans for fiscal year 2007. We will build upon our industrial leading position by continuing to satisfy our customers with the highest quality products and outstanding services. However, our future revenue growth must come with appropriate levels of profitability. Although the price of lead has come down from recent highs earlier this year, we have not fully realized significant price increases to cover the higher cost of all commodities used in our products. Pricing recovery and associated margin expansion remain our number one priority for fiscal year 2007. We will continue to focus heavily upon reducing our manufacturing and operating costs. Many programs have already either been completed, identified or significantly far -- or sufficiently far enough along to ensure you that we will see further reductions take place in fiscal year '07, and they will be significant.

Our expansion and acquisition strategy will continue. We intend to grow faster than our existing markets by expanding in high-growth areas such as Asia and Eastern Europe while continuing to pursue attractive acquisitions in all technologies related to stored energy solutions.

In summary, our focus will continue to remain on formulating and executing plans designed to increase the long-term value of our company through profitable revenue growth, cost reductions and attractive acquisitions.

As we reported yesterday, we expect diluted net earnings per share for the first quarter of fiscal year 2007 will be in between $0.17 to $0.21 per share. Mike Philion will give a lot more details on this in a few minutes.

I would now like to ask Mike Philion to go into the details about our fourth quarter and to cover our fiscal year performance.

Thank you again, John. The results of our fourth quarter and full year of fiscal 2006 were very solid and continue to reflect robust topline growth and challenging commodity cost pressures. We believe the underlying strength of our global business and its industry-leading position were very evident over the past year. Our fourth quarter of fiscal 2006 net sales increased 24% over the prior year to 353 million. This increase includes approximately 20 million attributable to the acquisitions of FIAMM and GAZ which accounts for 7 percentage points of our 24% growth rate.

Additionally foreign currency translation, primarily the Euro, had an unfavorable impact on our net sales growth rate of approximately 5 percentage points for the quarter. In summary, our base business experienced an impressive revenue growth rate of approximately 22%.

On a business segment basis, our fourth quarter of fiscal 2006 net sales in the Reserve Power segment increased 20% to 154 million, while our Motive Power segment increased 27% to 199 million over the prior year. When excluding our acquisitions impact on the fourth quarter, revenue from the Reserve Power segment increased 19% while the Motive Power business increased 15%.

For the fiscal 2006 year, net sales increased 18% over the prior year to approximately 1.3 billion. This increase includes 65 million attributable to our acquisitions, which accounts for 6 percentage points of our 18% growth rate. Additionally foreign currency translation had an unfavorable impact on the fiscal 2006 year, which resulted in a 3 percentage point decrease in our net sales growth rate. Again, in summary, our base business experienced a solid revenue growth rate of approximately 15%.

On a business segment basis, the fiscal 2006 net sales in the Reserve Power segment increased 12% to 571 million, while our Motive Power business increased 24% to 712 million over the prior year. When excluding our acquisitions, revenue from Reserve Power increased 11%, while the Motive Power segment grew 13%.

Now a few comments about our as adjusted consolidated operating earnings performance. As you know, we utilize certain non-GAAP measures in analyzing our Company's operating performance, specifically excluding our highlighted fiscal 2006 restructuring and other charges and giving certain pro forma effects to our fiscal 2005 IPO. Accordingly, my following comments concerning operating earnings and my later comments concerning net earnings exclude those relevant highlighted items.

Please refer to our fiscal 2006 annual report on Form 10-K for more details concerning these highlighted items. Our fourth quarter of fiscal 2006 consolidated operating earnings of 24 million increased 32% in comparison to the prior year with the operating margin increasing 40 basis points to 6.7%. Higher commodity costs of approximately 12 million in the quarter compared to the prior year were more than offset by the favorable impacts of higher revenue, selling price increases and cost savings programs. For the fiscal 2006 year as adjusted, consolidated operating earnings increased 1% from the prior year to 77 million with a decrease of 100 basis points in operating margin to 6%. The decline in operating earnings margin was primarily attributable to higher commodity cost of approximately 39 million for the full fiscal year.

We continue to be highly focused on a wide range of cost savings programs throughout the Company to help offset high commodity costs and to improve earnings. Examples include the highlighted restructuring and other charges of 8.6 million in fiscal 2006 that will reduce our employment levels in Europe by over 200 people that we also expect will result in fiscal 2007 cost savings in excess of 10 million.

In addition, we continued to improve our efficiency and better leverage our fiscal 2006 operating expenses with a reduction of 90 basis points to 15.6% of net sales for the full fiscal year, in spite of approximately $7 million or 55 basis points of additional public company costs over the prior year. As we have already discussed, our fiscal 2006 results have been significantly affected by the higher cost of commodities. Lead alone, which is roughly 21% of our total cost of goods sold, represents approximately 60% of our $39 million total commodity cost increase in fiscal 2006. We continue to remain highly focused upon maximizing sales price increases to our customers to recover these dramatic cost increases. We estimate our pricing recovery for both the fourth quarter and fiscal 2006 year approximated 2% of net sales.

The maximum impact of our most recently announced price increases in late fiscal 2006 are expected to be realized during the first half of fiscal 2007. The timelag in realizing price increases in our operating results is caused primarily by the impact of our order backlog. We expect to realize significantly greater pricing recovery in fiscal 2007 than was experienced in fiscal 2006.

An additional few comments concerning lead costs. For the fourth quarter of fiscal 2006, the average LME cost for lead incurred by EnerSys as it affected our income statement was approximately $0.43 per pound compared to approximately $0.37 per pound in the prior year. And for the fiscal 2006 year, the average LME cost for lead incurred by EnerSys was approximately $0.41 per pound compared to approximately $0.36 per pound in the prior year.

Further, we expect our first quarter of fiscal 2007 LME lead costs to increase to approximately $0.51 per pound. This will increase our first quarter of fiscal 2007 lead cost by over $11 million on a sequential quarterly basis.

Now a few comments concerning net earnings per share. Diluted net earnings per share were $0.25 in the fourth quarter of fiscal 2006 compared to $0.22 in the prior year or an increase of 14%. We are particularly pleased with the strong improvement in fiscal 2006 fourth-quarter earnings given the many challenges and dynamic factors our business has faced. After excluding the highlighted restructuring and other charges in fiscal 2006 and giving pro forma effects to our fiscal 2005 IPO, as adjusted diluted net earnings per share were $0.78 for fiscal 2006 compared to $0.82 in the prior year or a 5% decrease. This decrease 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. Our effective booked income tax rate for fiscal 2006 was 31.4% compared to 34.9% in the prior year. This tax rate reduction is 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, plus a non-recurring $1.5 million tax benefit recorded in the third quarter of fiscal 2006.

Our cash tax rate was 19.1% for the fiscal 2006 year as we continue to maximize available tax benefits throughout the world. We estimate that our booked tax rate will approximate 33% for the full 2007 fiscal 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 330 million at the end of our fourth quarter of fiscal 2006 and as a percentage of annualized trailing three-month sales was 23.4%. Although primary working capital levels have increased since the beginning of fiscal 2006 by 48 million, our primary working capital ratio has decreased by 1.3 percentage points. The increase in invested working capital primarily results from our strong increase in revenue and the FIAMM acquisition. We are very pleased with the 1.3 percentage point reduction in our primary working capital ratio with this improvement largely attributable to improved inventory turns and a modest increase in Accounts Payable relative to our sales volume levels.

Fiscal 2006 capital expenditures were 40 million compared to 32 million in fiscal 2005. Our capital spending continues to focus heavily on the reduction of costs, introduction of new products and selected increases in manufacturing capacity, particularly in our lowest cost regions of the world. We expect capital spending for our fiscal 2007 year to approximate 45 million. Net debt, which we defined as total bank debt minus U.S. short-term investments at March 31, 2006, was 400 million and has increased approximately 40 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 believe our relationship with our bank group is good, and we remain in full compliance with all our financial covenants.

We announced yesterday a planned third amendment to our current senior secured credit agreement as led by Bank of America. Among other items, we will request our bank group to approve a reduction in the credit spread, the elimination of our senior secured debt leverage ratio while still maintaining our total debt leverage ratio and several minor technical cleanup changes. We are doing this to reduce our future interest costs, provide greater operating flexibility and to increase our borrowing capacity for potential acquisition opportunities. We expect this amendment will be approved by our banks near the end of June.

As John mentioned earlier, we expect to generate diluted net earnings per share of between $0.17 and $0.21 in our first quarter of fiscal 2007. The primary factor that will impact our first-quarter earnings is the substantial increase in sequential quarterly lead cost net of our expected selling price recovery.

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

Thanks, Mike. As you can see, commodity cost had a major adverse effect on our Company this last year, but we were able to offset most of this through our cost reductions and price increases. Although I'm not satisfied with the $0.78 per share as the end results for the year, I must say that I am very pleased with the performance of our Company and the people. I think they have done an outstanding job of taking this adverse condition and turning it around to something that is very positive, and I think it presents us an opportunity for a very good future going forward.

So with that, I would like to open it for questions.

(OPERATOR INSTRUCTIONS). John Franzreb, Sidoti.

The $0.51 price of lead that you are going to incur in the current quarter, that kind of suggests that you have did some locking and hedging at some of the higher prices given that today's or yesterday's close was $0.43. Is that the case?

Yes, but that is not the only reason for the price that we will see in the first quarter. As you may recall that we FIFO our variances, so the lead cost that we experienced in our fourth quarter will actually hit our P&L in the first quarter. So as an example lead hit a high point of about $0.63 at the end of January. We were running at -- we are seeing those, the effects of that hit our P&L in the first quarter.

The other part of your question though we have increased our position slightly or increased our position on lead hedging. We currently have approximately 75 million pounds at a cost of about $0.52 a pound, and that is over an annual usage of 480 million pounds. So if you look at it from the standpoint of where we stand today, 75 million pounds of 480 is roughly 16% of our lead is forward bought. 16% of our lead requirements are forward bought at an annualized basis at a cost of about $0.52.

Okay. So you should be benefiting significantly going forward at the current levels. I have got a question, though. In the past you referenced that one of the drivers of higher lead prices was the factors included in metals baskets. Now has lead been rebalanced out of these baskets? Why did disconnect stay in lead prices and copper prices over the past month or so?

Well, I think if you look at copper prices, you will see the same thing. Copper has come down. In fact, there are people today shorting the copper market. So copper has come down. It has followed not as directly as it was, John, to your point, but the fundamentals of lead based on what I am reading still indicates that lead is overpriced.

So you think an equilibrium price will be below $0.40?

You know I'm guessing at that. I don't know what it is going to be. I can just tell you the statistics on it. We started the year at 43,000 metric tons -- or 43 million metric tons -- I'm sorry, 43,000 metric tons -- and currently were at about 113,000 metric tons, so inventory is way up. Everything that I'm seeing this year indicates that there will be more supply than there will be demand. So the fundamentals are indicating that we are going to see a surplus or continue to grow within the inventories of lead. Where it is going to go, I'm not the lead expert on it. I'm not going to try to speculate on that.

Okay. One last question and I will get back into queue. Demand in the reserve business has been fantastic. Could you just talk about what customers or end markets are driving that demand?

Well, I think we're seeing it in a number of different places. Telecommunications has, in fact, made its turnaround. We see an increase take place there. We have seen an increase take place in UPS business. We have also seen an increase take place in our military business, which is part of our Reserve Power business.

So this is all organic existing customers, not geographic kind of expansion? It is more driven by what you -- what the current customer list looks like?

Primarily yes.

Bill Benton, William Blair.

Congratulations on the continued strong results here. First, I just wanted -- in your K you mentioned in your remarks you expect a significantly better pricing in the first half of '07 to start to kick in. Could you give us some sort of quantification there with regard to maybe historically you have realized maybe 50% of the increases that you have announced? What kind of maybe ratio should we expect in the first half that you expect to realize?

Well, I think the issue -- let me not address how much we think it will be or anything else. Let me tell you about the dynamics that are taking place and why we are making a statement. Our business will carry roughly, let's say, 200 million in backlog. We implemented a price increase in January. With that backlog and working with customers to actually get the price increase implemented, it takes time. It can take anywhere from three to six months. So even if we assume that we are getting the same rate, 50% roughly what we're asking for, or whatever percentage you want to pick, we naturally should go up in pricing because of the price increase we announced in January. Just timing to get to it. Work the backlog off. Timing of working with customers. We should see that price increase just because of the nature of the timing.

Okay. And then could you comment maybe on what the competitive response has been? I know we saw that Exide and C&D have raised prices as well, but what has really been happening in the market beyond the press release that they have put out?

Well, Bill, you have seen the same information I have on it. I will say that we have made the statement before that if we don't feel we're getting a decent price for our product, we're willing to walk from business, and we have done that in some situations where we did not think the pricing was right. All-in-all on a general basis, I would say that the market appears to be more receptive to the higher pricing than before. But every now and then we see someone that wants to cut a deal on a large one, and if the margins are not there, that is okay, their competitor can have it. We're here to make money.

Right. That is good. With regard to your kind of current hedging strategy, obviously you said you locked in some in the low 50s. Here it is a lot lower than that. Should we suspect that you would get more aggressive with your hedging strategy down at current levels?

As of right now, we have no open orders, nothing open to go after. Later today or tomorrow we are going to discuss that particular issue on where we think it is going to go down. I will back up, and when you look at our $0.52 when we had those particular orders hit, lead was in the high 50s, low 60s, and at $0.52 it looked pretty good at the time. The luxury of hindsight obviously we wish we did not have 15% of our forward lead bought at 15%.

That being said, two weeks from now if it pops back up again, it may be a good solution. Who knows? Right now we are looking at it from the standpoint and thinking where do we think it is going to go and try to come up with an estimate. And what we will try to do is hit the low points. Typically what happens it is like buying anything else. It varies hour by hour minute by minute on the market, and we're looking to hit a few low points here to try to average down that $0.52.

Okay.

Just to complement John for a minute, as you know, hedging is to reduce some volatility, and it is a constant process. We use discipline. We use consistency, and as John said, you can look in the rearview mirror, and $0.52 does not necessarily look attractive. But I think it is very consistent with our strategy. The fundamentals are all pointed in the same direction. So again I think we're going to have a steady hand at the helm and continue to use that kind of discipline and logic and facts as we continue to navigate forward.

Great and just one final question. You guys mentioned in your K about some of the Chinese competition you mentioned before. I'm just curious, is the Chinese competitive environment, has there been a significant change (indiscernible) in there?

For the better. China is an opportunity for us. We don't view China as being bad for us. It is good for us. We have approximately 800 employees in China. We're running 100% of the capacity we have there. We are adding additional capacity there. We made double-digit operating earnings in the fourth quarter in our Asia operations. We are excited about the growth in opportunities there, and one thing that we have that the Chinese manufacturers do not have and that is a distribution network worldwide. In other words, you can buy a battery from a Chinese source, and if they are not there to service it in the middle of the night, that presents a lot of problems and a lot of concerns to customers. From our end, we can manufacture it at low cost, ship it over here. If it does go down in the middle of the night, we are there to service it.

Great, guys. Well, congratulations again, and I will see you in a couple of weeks.

Dan Wong, Lehman Brothers.

The first question was regarding the pricing gains. I think you said maybe a couple of percentage points in the fourth quarter, as well as for the full year. Could you break that down by what you saw by Motive, Reserve and maybe by the regions as well?

Sure. As we have been saying, again these are general. Broadly recovery has been better in Motive than it is in Reserve, and we continue to expect that trend will continue. As we look regionally, pricing recovery has been the strongest in the Americas. It has been somewhat weaker in Europe and somewhat weaker in Asia. And again, a lot of dynamics. But that pattern has been reasonably consistent, and again we believe we will see a continuity in that pattern as we go into '07.

Well, I think right now there is a lot of discussion around the interest rates going up domestically as well as globally. And from that standpoint, are you detecting any sort of change in the demand trends in the marketplace? If you could just comment on the different regions -- North America, Europe, Asia -- in terms of what you're seeing or hearing from your customers?

Sure. Asia continues to be very strong. There's no concerns out all. Everything we build, we sell, and I'm not at all concerned on that particular area.

Europe is fairly stable. I'm concerned about the U.S. market. I'm concerned because only what I read. I do not see the slow up in the orders taking place right now. It still appears to be very strong. I'm one of these people that believes, though, there will be a downturn someday, and I know there will be a downturn someday. It is just when does it hit. And we're keeping our eye on that. We do not see indicators in our business that says it is going to slow up.

But I think it's a fair question. It is a good question. It's one that we keep our eye on. It's one of our number one priorities or one of my number one priorities. As soon as we start to sense it, we will have to slowly pull back. But as of right now to answer your question, we are not seeing a slow-up.

Good. In terms of your plans for capacity expansion this year, has that changed from what you had initially set out to accomplish, or has that kind of remained the same? I think you said it is mostly in the low-cost countries, but any update on that would be great.

Our manufacturing strategy, and if you take a look, we spent 40 million this last year in CapEx. Most of that went for cost improvements and expansion into low-cost manufacturing areas.

Our basic philosophy is this, that we want to take our high-cost plants and do one of two things with them -- automate them or shut them down. We have shut a number of plants down.

Secondly, when we invest in capacity, we're going to invest in low-cost areas. We have made major investments in our Eastern European operations, major investments in China and Mexico this last year, and we are continuing to do the same this next year. If we do see a downturn take place, we are evolving from the high-cost, a higher cost base to a lower cost. In other words what I'm saying is, if we need to cut capacity back or cut production back, we will cut it back in a high-cost area.

So we will continue to expand in the low-cost areas. As a sidenote, in these low-cost areas, the rate of growth is significantly larger also as an example in China. Our opportunities in Eastern Europe, we are a player there, but we are not a big player, and that is a market that we need to get stronger into. So to look for additional manufacturing capacity there is the right thing for us to do.

So we have to balance it to your first question. If we see a downturn, how do we handle it. How do you justify adding capacity and then all of sudden you have a cutback? The reason we're viewing it the way we're viewing it is we will add that capacity, we have reduced our total cost, and then if we have to take manufacturing down, we will take it out of the high-cost areas.

[Josh Landis], [Wildlough Shares].

I'm primarily interested in your leadfree battery efforts. I guess basically nickel and lithium, and nickel I'm trying to understand you don't seem to talk about nickel metal hydride, only NiCad with the GAZ acquisition. And then with lithium, I'm trying to understand a little bit better how your revenues might shift next year. I think you said maybe 10 million for ATK, but that did not include the [Intermod] estimation?

Right. Okay. Let me touch on each of those. First off, with the nickel cadmium business, we have a nickel cadmium -- or had a nickel cadmium business, which is in Germany. It is roughly a EUR7 million business. We found a company in Zwickau, Germany that is approximately -- it is a little bit larger than our business, about 8 to EUR9 million.

What we were able to do is combine those two together, cut a lot of cost out and take the two companies, put them together. We're looking roughly 15, EUR16 million in revenue with a lower-cost base, and it becomes profitable, very profitable. Nickel cadmium in Europe is used a lot in the railroad business. It is also used in the U.S. to a lesser degree in the railroad business. We have taken these companies, put them together. They have been focused just on the European market in the past. We now are expanding that to the Asian market and the American markets. We expect we will see revenue growth take place. We know that we will have a cost reduction activity with the opportunity with the consolidation of the two operations. That is the nickel cadmium side.

To address nickel metal hydride, we have not found an opportunity that we think really fits our business in nickel metal hydride. That is not to say that we won't in the future. But for industrial applications, we don't think nickel metal hydride is necessarily the right technology.

On the lithium side, our interest in that comes from really the Aerospace and Defense business. When you look at the military business globally, we estimate it is approximately $1 billion in size. About 25% of that market is lead-acid type batteries. United States military is about 66% of the global -- the world market in military. United States military needs lithium batteries, and they buy lithium batteries from foreign sources today. The foot soldier is an example in the electronics that they carry.

That is a big market opportunity. We have very good relationships with United States military. We're building on those relationships. We have assessed their needs, and they like the idea that we're investing in these areas.

ATK, as I mentioned before, is about a $10 million opportunity in revenue for us this next year and profitable, very profitable. Modular Energy is a startup company. We're not expecting revenue this next year, but we have a very unique design, and when the telecoms have looked at this, they are very excited about it. It is a niche type market. As an example where the telecoms who used this particular design would be in a multiple family dwelling where you would want to put a phone or a cell application, let's say, in the attic of an apartment complex or something, or you could put a lead-acid battery up there, but it is not necessarily the best solution. This particular lithium design would work very very well in that type of application.

It also likes cold temperatures where lead-acid batteries does not perform as well in cold temperatures.

Well, thank you. One follow-up. On the military demand for lithium, is there's any indication that some of that is for military hybrid vehicles or not?

I don't know the answer. I don't know what the military is looking at on hybrid vehicles. I know that we have looked at hybrid vehicles in the past. We think it is going to be a very competitive business where you are questioning whether the margins are going to be that good in the long run. We have so many other opportunities right now around our core business. There is one that we have looked at on the surface, but it has not been at the head of the list for us.

John Franzreb.

I was wondering what your currency impact expectations are for the first quarter? There have been some headwinds in the past couple of months. What are your thoughts there?

John, not a particularly important issue. As you know, we're fairly well naturally business hedged and being specific broadly in Europe, labor is in local currency. Most of the materials other than lead is local currency. Our sales are in local currency. So even though we certainly do have some FX exposures, it is more translation effects than it is what I would call transactional gains or loss exposures. So broadly speaking, we don't see an appreciable change when we look at the fourth quarter of '07's currency rates versus broadly where we are. Obviously the Euro has strengthened a little bit. It has been choppy. The simple answer is we are not particularly focused or concerned about that.

Okay. Great. Now you talked about the flexibility that you had should demand shift. I was curious what your capacity utilization rate is in your Motive business in particular, and what is it like maybe in some of the higher cost reduction regions?

We have approximately 20% of our production today is in low-cost; I would say about 80% in the high cost. Even though we have made substantial investments in the low-cost area, our topline has grown so much in the last couple of years that we have not -- we've increased a lot of production in the low-cost areas, but we keep selling higher so it takes a percentage and holds at about 20.

As far as capacity utilization goes, we're running about in the mid '80s right now, about 85% globally. It tends to run a little higher in Motive Power currently. That will be short-lived because we have an expansion going on in Monterrey, Mexico that will bring that back in line, and we also have an expansion going on in Bielsko-Biala, Poland for Motive Power. So we want to run our operations at the high end of the '80s%. I mean it is just good utilization to do that, and so I'm pleased with where we are right now with it.

Great. Now in non-lead battery technologies that you just discussed, could you just give us a sense of the competition in the nickel cad and lithium markets? Do you want to participate and how entrenched they are?

Well, I think if you look at the big players and that [SAFT] would be a very large player in that arena, a French-based company. They sell a lot to the U.S. You would see Eagle Pitcher would be a player in that. Those are the two big ones. I think what the United States is looking for is a company that is U.S.-based, U.S. owned, U.S. listed on the exchange to do business with from the standpoint of having a source that is domestic for the United States military.

How about in the nickel cad market?

The nickel, it is the same thing.

The same, too?

Yes.

Okay.

They are big in the different technologies. They are not in lead-acid to any great extent. They are small in that area.

Jeff Bencik, Jefferies & Co.

Can you guys just break down the revenue growth in terms of the price and volume and the FX in simplest terms in terms of percentage of the 24% growth?

You're focusing just on the quarter?

Yes.

Give me a second. Bear with me once second, Jeff. Why don't you go to your next question, and I will dig that out and come back to it.

Okay. In terms of a long-term competitive threat, many of the fuel cell companies are talking about replacing lead-acid batteries with one fuel cell that could be rapidly charged to potentially replace two or three lead-acid batteries. How do you view that threat, and is it credible, real, or what do you think about that?

Well, we have spent quite a bit of time looking it over and really asking ourselves should we be investing in fuel cells. Fuel cells do work. They could do what they say they could do, but the only problem with it is the cost. It is extremely expensive compared to lead-acid batteries.

So I'm not concerned about it today. Because when you look at a couple of hundred thousand industrial fork trucks a year, there is just not the critical mass to do it. If we see fuel cells go into the automobiles to any extent and the critical mass starts to develop and the prices come down, they could potentially be a threat to some of our business. But I think that the cost is so high on it today that I'm not worried about it. I would not invest in it today. We have looked at investing in it, and we have decided not to because it just does not have the return.

Okay. Any idea on how much more expensive it is? I mean it has to be more than three times as expensive otherwise it would be (multiple speakers)

Well, let me put it this way. When I looked at the cost of a battery and I looked at the cost of just the material estimates for fuel cell, the material cost alone was significantly higher than what the battery was.

Okay.

We stopped there and said, you start throwing labor and overhead to build it, you know you're going to be through the ceiling with it. And by the way, that includes the battery and a charger.

Okay. Very good. Then in terms of -- I got tied up on another call when you started talking about the tax rate and why it was lower. I think there was you mentioned a $500,000 charge or onetime item. Can you go into that and then just why again it is lower going forward?

Okay. Sure, Jeff. And again broadly, we have been inching down our effective book rate measurably as you know, and it has been driven by good tax planning. Also, a higher proportion of our end comp is coming from places like China, Poland, Mexico, and obviously we are optimizing. But those countries -- for example, Poland it is under 20% effective rate. China with tax incentives that are very prevalent there, you are even lower, you are at 15. So certainly we are optimizing that and taking full advantage of it as many multinationals are.

The third-quarter tax benefit, the .5 million onetime, that is pretty normal stuff these days. As you know under FAS 109, when you always provide for potential tax contingencies and when statutes expire and those contingencies have not developed, those things come back into income. So again, we had a very minor onetime benefit in that regard.

Okay. And then I don't know if Mike had time to get to the first question?

I did and if I got it right, Jeff, what you wanted to know is taking out currency pricing acquisitions, what was roughly the topline growth rate? Do I have the question correct?

Well, if you can sort of break down the 24% and just sort of do the price impact from that, the volume impact, the negative FX impact and the acquisitions.

Okay. We will start with the 24. The acquisitions positively affected at 7%. So we will take the 7% off, and help me with my math, that was for that 17. We know the currencies were negative 5. So I'm back up to 22, and we have got about 2% in pricing. So what we would call sort of our base business with that simple math was 20% growth, which is very robust as you well know.

And all of that is volume then?

Yes, again, it is fundamental. You would characterize it as volume.

Volume or mix. You could have a mix situation that would change it, but selling more of a higher priced product because we are talking dollars here.

Right, right.

But broadly the volume to your question was very very strong.

All right. Very good. Nice quarter, guys.

(OPERATOR INSTRUCTIONS). At this time, gentlemen, you have no further questions, so I will turn it back over to John for closing comments.

Thank you, Jackie. I guess in summary you can see the challenging year with commodities. Fortunately they are coming down. I'm very pleased we were able to weather through this year quite well given the adverse conditions that were in place. I really believe that we're positioned very well going forward and especially with commodities coming down.

So with that, I would like to thank you for calling in, and everyone have a great day.

Thank you, ladies and gentlemen, for participating in today's presentation. You may now disconnect and have a wonderful day.