EnerSys (ENS) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2007 EnerSys earnings conference call. (OPERATOR INSTRUCTIONS). I would now like to turn the presentation over to your host for today's conference, Mr. John D. Craig, Chairman, President and Chief Executive Officer. Please proceed, sir.

Thank you, Cindy. Good morning, and thank you for joining us for our first-quarter conference call. During this call we will be reporting on our results for our first quarter of fiscal year 2007, which was for the period of April 1, 2006 through July 2nd of 2006.

Before we review the results, I will ask Mike Philion, our Chief Financial Officer, to cover 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 Operation, set forth in our quarterly report on Form 10-Q for the quarter ended July 2nd, 2006, which was filed with the U.S. Securities and Exchange Commission.

Now let me turn it back to you, John.

Thanks, Mike. We certainly are pleased with the results for our first quarter, and in a few minutes Mike will be reviewing in details with you the results. I'd like to spend a few minutes and talk a little bit about some key points of our business, and more importantly, what are our future plans.

Our strong increase in sales in our first quarter was due in part to solid global economic growth and the resulting demand for industrial batteries. More importantly, we believe, is the value we bring to our customers. We believe that we continue to gain market share because our customers clearly recognize the long-term value they receive from EnerSys, with the high quality and performance of our products, coupled with our world-class distribution and the aftermarket service we provide.

In addition to being the leading supplier in our industry, we're also a leader in profitability, and we intend to remain so, as we succeed in our goal of being a low-cost producer and providing the best value to our customers.

Our earnings growth in the quarter benefited from higher volume and increased selling price, but we also continued to be successful in our cost-savings programs. The ongoing cost-savings initiatives that have provided us with significant savings for many years will continue into this year as part of what I refer to as being our normal cost-saving operating environment -- that is, we will continue to find ways to become more efficient every year.

I am particularly pleased with the success we have experienced and our additional cost savings associated with our acquisitions that we announced last year. We continued to be ahead of schedule on the savings that we had planned as we move aggressively to do everything we can to offset higher commodity costs and improved profitability.

I would now like to spend a few minutes to talk a little bit about the future. Our continued success will come from our ability to execute and stay focused on the basic strategies that have resulted in our global leadership position. I have discussed these in previous meetings, but I'd like to emphasize them once again.

First, [we're going to] expand market share by continuing to take care of our customers. We believe our customers view EnerSys as the best provider of overall value when they consider our products, service and distribution capabilities.

Most of our reserve power batteries are for critical backup power applications, where high quality, power and duration are absolutely essential, such as telecommunications and computer networks.

In the motive power area the same qualities are important, for the efficient operation of manufacturing, distribution, and other organizations that depend on the use of fork trucks.

In addition, our battery maintenance contracts continue to grow because our customers recognize the value of our service organization to assure the reliability of their batteries, and because of our known expertise in this area.

Second, achieve reasonable pricing to offset higher commodity cost. With commodity cost up substantially, we needed to increase selling prices. Our price recovery is improving as our customers recognize the total value that EnerSys provides to them.

Third, build or acquire new manufacturing capacity in low-cost areas, such as the recently announced agreement to purchase CFT in China. We have the best distribution system in our industry, which allows us to provide our customers with common products globally.

We currently manufacture about 20% of our products in plants that we consider to be in low-cost regions, and we're actively planning to increase that to 50% or more. This will take time, but we intend to make progress in that direction each year.

Fourth, continue our highly-successful cost-savings programs. As I noted earlier, the overall savings we will achieve this fiscal year will be in excess of the very significant savings achieved each of the last several years, including the additional savings related to the acquisitions we completed last year.

And finally, pursue appropriate priced acquisitions to expand geographically and into alternate battery technologies, as well as those in our existing lead acid battery business. The major focus will be on those that are in high-growth geographical or product areas, and those that will provide the best opportunities to reduce cost.

In summary, we are looking at opportunities in stored energy solutions that have the opportunity (indiscernible) appropriate levels of profitability for EnerSys. As we continue to successfully execute these strategies, we will remain the global leader in the industrial battery business.

I would now like to ask Mike Philion to discuss the details of our first-quarter results and to give our second-quarter guidance. Mike?

Thanks again, John. The results of our first quarter of fiscal 2007 were indeed very strong and continued to reflect robust topline growth, improving pricing recovery, and ongoing cost improvements in our operations. We believe the underlying strength of our global business and our industry-leading position was very evident during our first quarter.

Our first quarter of fiscal 2007 net sales increased 18% over the prior year to 359 million. This increase includes approximately 10 million attributable to the acquisitions of FIAMM and GAZ, which accounts for 3 percentage points of our 18% growth rate.

Additionally, foreign currency translation, primarily from the euro, had a favorable impact on our first quarter 2007, which resulted in a 2 percentage point increase in our net sales growth rate.

In summary, our base business experienced solid revenue growth of approximately 13%.

On a business segment basis, our first-quarter net sales in the reserve power segment increased 16% to 158 million, while our motive power segment increased 20% to 201 million. When excluding the impact of our acquisitions and foreign currency translations on the first quarter, revenue from both the reserve power and motive power segments increased 13%.

Our first quarter of fiscal 2007 consolidated operating earnings were 26 million, or an increase of 45% in comparison to the prior year, with the operating margin increasing 130 basis points to 7.1%. This strong earnings growth was achieved in spite of higher commodity costs of approximately 18 million in the quarter compared to the prior year. Clearly, our commodity cost headwind was more than offset by the favorable impact of higher revenue, selling price increases, cost-savings programs, the FIAMM acquisition's successful integration, and lastly, litigation settlement income of 2.8 million.

Certainly, a major contributor to our improved profitability in our first quarter was the continued progress made in our ongoing pricing recovery actions. We estimate price increases of approximately 3% of net sales, or $11 million, were achieved in our first quarter. Further, we anticipate similar pricing recovery results will be achieved for the balance of our fiscal 2007 year, and will approximate between 3 and 4% of net sales for the full year.

Our cost-savings programs also remained an important element of our improved profitability in the quarter. In general, our fiscal 2007 programs are on schedule as to both timing and their full-year cost-savings objectives. We remain vigilant in our unending quest for new cost-savings opportunity, as recently illustrated by our agreement to acquire additional low-cost manufacturing capacity in China with the CFT transaction. We expect this acquisition will close later this month and will provide us with an additional cost-savings opportunity in our second half of fiscal 2007.

As we have already discussed, our first quarter of fiscal 2007 results have been significantly affected by the higher cost of commodity. Lead alone, which is roughly 25% of our cost of goods sold, represents approximately 80% of the $18 million increase in total commodity costs absorbed in the first quarter of this year.

For the first quarter of fiscal 2007, the average LME cost for lead incurred by EnerSys as it affected our income statement was approximately $0.51 per pound, compared to approximately $0.40 per pound in the prior year.

Further, we expect our second quarter of fiscal 2007 LME lead cost to decrease to approximately $0.50 per pound, as LME lead prices have eased from an average of roughly $0.56 per pound in the first calendar quarter of 2006 to $0.50 per pound in the second calendar quarter. As you may recall, it takes roughly three months for lead purchased today to impact our income statement, due to our FIFO accounting methodology.

Lastly, our lead hedge position at the end of our first quarter of fiscal 2007 was approximately 44 million pounds under contract at an average cost of $0.52 per pound, which represents roughly 10% of our trailing 12 month lead usage requirements.

Now a few comments concerning our diluted net earnings per share. Diluted net earnings per share were $0.26 in the first quarter of fiscal 2007, compared to $0.19 in the prior year, or an increase of 37%. We are particularly pleased with this strong improvement in fiscal 2007 first-quarter earnings, given the dynamic business environment in which we operate.

Clearly, our business performed well above our previous earnings guidance of $0.17 to $0.21 for the first quarter. This was primarily caused by stronger topline volume, as demand for our products remains robust, and better pricing recovery and sales mix than was anticipated.

Our effective booked income tax rate for the first quarter of fiscal 2007 was 31.8%, compared to 34.2% in the prior year. This 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. We estimate our booked tax rate will approximate 32% 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 358 million at the end of our first quarter of fiscal 2007, and as a percentage of annualized trailing three-month net sales was 24.9%.

Primary working capital levels have increased since the beginning of the fiscal (technical difficulty) with our (technical difficulty) 1.5 percentage points to 24.9%. This change was expected and is in part caused by our planned increases in selected inventory levels to improve customer service, the impact of higher commodity costs on inventory, and the customary increase in our inventory levels prior to entering the Western Europe and United States summer holidays.

First quarter of fiscal 2007 capital expenditures were 9 million, compared to 8.5 million in the prior year. 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 continue to expect capital spending for our fiscal 2007 year will approximate 45 million.

Net debt -- which we define as total bank debt minus U.S. short-term investments -- at July 2, 2006 was 407 million, and has increased approximately 7 million since the beginning of fiscal 2007, primarily due to the impact of increased primary working capital. Our relationship with our bank group is good, and we remain in full compliance with all financial covenants.

As previously reported, effective June 29, 2006, our third amendment to the current senior secured credit agreement was successfully completed. Among the changes approved by our bank group was the elimination of our senior secured debt leverage ratio, while maintaining our total debt leverage ratio, and several minor technical cleanup changes. This amendment will provide our company with greater operating flexibility and will increase our borrowing capacity for future acquisition opportunities.

We expect to generate diluted net earnings per share of between $0.20 and $0.24 in our second quarter of fiscal 2007. The primary factor that will impact our second-quarter earnings is the anticipated sequential quarterly reduction in our topline volume. This pattern is consistent with historical trends and is caused primarily by temporary reductions in the demand for our products during the traditional summer holidays in Western Europe and the United States. The above second-quarter EPS guidance excludes all costs associated with the shelf registration filed with the SEC.

In closing, I certainly 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. I'm pleased with the results, but I want to assure you that we're not resting on this performance. We have many opportunities going forward to continue to enhance the performance of EnerSys. We currently are working on a number of different things that we feel that will help the company grow. The global EnerSys management team has demonstrated their ability to successfully implement, and I'm confident that we will continue to see growth in our business and in our company.

And with that, I'd like to open it for questions.

(OPERATOR INSTRUCTIONS). Bill Benton, William Blair.

Congratulations on the strong results again. Just a couple of questions. If I look at the margins here -- I know you guys talked about the lead headwinds you face here -- but if I exclude even lead from the analysis, it looks like your costs did drop in the first quarter. The margins excluding the lead impact were quite a bit better. Is there something else? I know you talked about cost-saving initiatives; is there something else that's maybe benefiting you there?

Yes. I think that what we've talked about on it was really pricing came through. Pricing was good in the quarter, our mix was good in the quarter, and our cost reduction initiatives continue to be strong. As I mentioned during our opening comments, our cost-savings initiatives this year will be greater than they've been in prior years, and part of that is because of the cost savings associated with the acquisitions.

Any particular raw materials that might be going in your favor recently? It doesn't seem like anything is from a cost standpoint, so I'm just curious if there's anything (technical difficulty)

No, there really isn't. I think that everything you see about oil going up, and the impact it has on plastics and other materials and freight costs -- we are experiencing those same things. But we've been fortunate that we've been able to offset those high commodity costs through the areas that I mentioned earlier -- pricing, cost savings and some good mix.

You guys talked about 3% price recovery. Can you offer any granularity on what that might have been by the segments, in terms of motive reserve?

Sure. The motive power, as we reported before, tends to be -- we get a better price increase in motive power when we have reserve power. Reserve power -- there's been a lot of consolidation in the industry and fewer purchasers of batteries, higher volume they have, and unfortunately it's been tougher to get the pricing in that area. We do push very hard on it.

We have (indiscernible) some business, and we'll continue to, because what we're looking for in our strategy is to be the best overall provider. We know our products outperform our competitors, and what we look for is how we can service the customer better. You have to keep in mind, our applications are very critical applications. These are situations where in some cases they could be life-threatening if a battery doesn't work. So it's a very critical application, so many of our customers are looking for top-quality and the best service they can get.

So is it fair to say you've got maybe some price on reserve, but pretty minimal?

That's their.

Outlook on the lead supply, is there any update you can offer us in terms of supply demand characteristics (indiscernible)?

I think on the supply demand side, it's still -- I'm not worried about not having lead; lead is there. I am concerned still about pricing of lead. You know the price has gone up north of $0.50 a pound. In May timeframe, roughly, it was down in the low 40s. Part of that, I believe -- and again, I'm not a lead expert; I want to say that right on the front-end -- but some of the readings I've done indicates that some of the production that was coming online, or forecasted to come online, in '06 has been delayed. They're not seeing the output of primary lead that was anticipated six months ago to run at the level. That being said, the same analysts are also reporting that price will come down on lead, but it's not within the timeframe they projected six months ago.

John Franzreb, Sidoti & Co.

I want you to talk a little bit more about the market share gains you alluded to. Were they domestic versus international, or is it some products versus the other? Could you provide some more color on where you're gaining market share?

You're breaking up a little bit. I think what you're asking was about market share gains, where we're getting them from.

I'm sorry; I'm on vacation right now at the beach.

Okay. Let's talk a little bit about market share, why we think we're picking it up. The first reason is -- I think it goes back to what I was talking about earlier about taking care of customers. And I really want to emphasize that. It's just not about selling batteries, it's about providing an overall turnkey solution and providing the backup power.

Someone asked me a couple of weeks ago about a battery, and what's so important about it, why would you have all this testing on it? And he had a cellphone in his hand, and I asked him how often he tests his cellphone battery. He said I never do. I said what if that same battery was hooked to your pacemaker? Would you test it? It got the point across. These are critical applications, our batteries are. And our customers are willing to pay a premium for the service and what we provide for them. So it's just not the initial sales of the battery.

That being said, where we think we're picking up market share at, and the reason we think that, is based on two things -- one, looking at Battery Council International, the data we see there; and how we think we stack up to our competitors. And more importantly, there are a number of battery companies that are publicly reported. We look at their growth that they are -- or lack thereof that they're reporting, and we look at ours, and we see this less quarter we reported 18% growth. We're not seeing that from our competitors.

(multiple speakers)

Hold on. Let me add (multiple speakers)

Just to complement what John said, John said it well. We are not resting easy because we have a lot of hard work and success ahead of us. But our market share gains are particularly pleasing when you look. It's in both segments; it's in all regions. So, it's very broad-based. And, obviously, Asia continues to be very explosive growth. But when you step back and you look at one of the things that we've consistently felt was a big strength of our company is diversity in geographics, in segments, etcetera. And John, the market share gains are really coming in all those areas. So right now, we're continuing to just execute, execute, as John said, keep taking care of the customers, and these things, in our view, will continue to go in our direction.

One follow-up question. The acquisition in China -- you mentioned extremely strong demand for 2-volt batteries. What does that go into and what's driving that demand?

Mainly it is telcom industry. That's the big part of it. There's really two facets to it. This particular factory and this technology can be used for both motive power and reserve power. The real driver right now (technical difficulty)

Ladies and gentlemen, please stand by while we reestablish the speaker connection.

This is EnerSys. I'm not sure what happened. We got cut off here.

(OPERATOR INSTRUCTIONS). John will resume his question. Please go ahead, John.

I guess we were talking about the (indiscernible) 2 volt, last I heard.

We apologize for what happened here on the telephone. We're not sure exactly ourselves, but somehow we got dropped off. The demand in China for the 2-volt cells is mainly driven by the telcom industry; in particular it's the cellphones or mobile industry. The expansion that's taking place is very explosive in that area.

The other thing is that we have started a product line, our motive power product line in China, which we manufacture in one of our plants there. And it uses similar equipment, or some of the same equipment, I should say. So this really gives us an expansion in both areas.

I'll let somebody else in. Maybe they'll have better luck.

Dan Whang, Lehman Brothers.

My first question was regarding your commentary about product mix having a favorable impact on margins during the quarter. Just wanted to find out, is that related to certain product categories? Or was that related to, as you have done in the recent past, turning away some of the less profitable business?

I think it's a little bit of both. In some of the areas for a certain type of batteries we have there were lower margins, and we walked away from that business or didn't receive the bid for it. We've taken that capacity and used it for higher-margin business. But also, with some of our thin plate products, demand has been up on it. It's been some of our higher-end products which are higher margins -- has allowed us to see a better mix in this particular quarter.

Actually it's funny you mentioned that thin plate, it kind of relates to my next question. Obviously, that thin plate pure lead technology is something that's unique to you, and something that commands higher margins. I was wondering if you can provide what percentage of revenue base is provided by that particular product line or technology. Are there additional sort of unique technologies that you're pursuing that could provide an advantage out there in the marketplace?

It's approximately 12% of our total overall business, and when I say overall business, that includes our service business and our battery charger business. There are some very unique opportunities that we are pursuing with it; some I would disclose, others I would prefer not to disclose for competitive reasons.

Ones that we've made public in the past have been the United States Navy and EnerSys are working on a joint project to develop thin plate pure lead batteries to retrofit nuclear submarines. We announced that publicly. The money did -- the Navy did give us money upfront for the development of that battery, and that's moving along quite well.

We have introduced a product line for heavy start applications. As I've mentioned before, thin plate pure lead technology is used for starting tactical vehicles in military applications. It's a higher-priced battery. The military is willing to pay for it because it's a superior battery. We've also extended that product line into diesel starting, or high-powered demand starting applications, for a limited product line there. There are other ones going on, but at this point I don't think it would be wise for us to really disclose that, for competitive reasons.

Fair enough. In terms of your commentary that currently if you look at your manufacturing footprint, about 20% are coming from the low-cost country regions, but longer-term you're targeting to get that to 50%. Where do you anticipate that additional shift to come from? Is it more in Asia, is it more -- and also from Eastern Europe, South America, and potentially sort of a timeframe that you wish to hit that goal by?

We've mentioned this or stated this before. What we are focused on as our low-cost areas are countries in Eastern Europe, and that's really to support the growth and to meet customer demands for our European business unit. The second area is China, which the CFT acquisition was part of it, and we're going to continue to expand in China.

As I mentioned during the CFT announcement, we're running 100% capacity utilization in our Chinese operations. This will give us approximately $30 million more in revenue with CFT and some other investments that we're making in conjunction with that. We will continue to expand in China.

And our third area, to support really the North American market, is in Mexico. We currently have two plants in Mexico, and we plan on continuing to support the growth of those two particular plants to support customer needs in North America -- North and South America.

Finally, I know you provided your current forward contract position on lead as of the quarter ending in June or July 2nd, but I know in the past you also provided an update as of the current time. Is that something you could share with us?

Mike?

At the end of July, essentially, we're at approximately 26 million pounds at roughly $0.51. So in short, it's obvious we did not add to the position, and we had a few things run off. So, down modestly.

(OPERATOR INSTRUCTIONS). John Franzreb.

I apologize if you asked this question already, but did you give out what the average cost you expect to assume in lead for the current quarter is in your earnings guidance? What's the cost you expect to incur?

In the quarter we just completed, our first quarter, our average price of a pound of lead was $0.51.

And I'm sorry; what's your estimate for the second quarter that's part of your forecast?

We're projecting it will be at the $0.50 range.

There are no other questions in the queue, so I will turn it back to you for any closing remarks.

Thank you very much, Cindy. Again, we're very pleased with our first-quarter results. We have a lot of work to go and do in going forward. I've described the process that we've been in for the last couple of years as an evolution. And we will continue to evolve doing the things that I've mentioned -- taking care of our customers and providing top service; secondly, is to continue our cost reduction initiatives that we've talked about; I think a big one going forward is to continue to move to lower-cost manufacturing. And we are aggressively pursuing those objectives. And with that I'd like to thank each of you for calling in today.

Thank you for your participation in today's conference. This does conclude the presentation and you may now disconnect.