EnerSys (ENS) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2007 EnerSys earnings conference call. At this time, all participants are in a listen-only mode. We'll conduct a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS).

As a reminder, this call is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call -- Mr. John Craig, Chairman, President and CEO. Please proceed.

Thank you. Good morning and thank you for joining us for our second quarter conference call.

During this call we will be discussing our second quarter and first half fiscal 2007 results, along with a review of the general state of our business. Before we get into details, though, I would like to 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 in 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 October 1st, 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 the differences between comparable GAAP financial information and the non GAAP information, please see our Company's Form 8-K which includes our press release dated November 8, 2006, which is located on our web site at www.Enersys.com.

Now let me turn it back to you, John.

Thanks Mike.

As part of our last conference call, I commented on the strengths of our business based on three major points. First the overall favorable economic environment resulting in strong growth in our worldwide markets. Second, the value we bring to our customers resulting in continued gains in market share. And, third, our cost savings programs and pricing initiatives.

The second quarter accomplishments are impressive and continue to demonstrate our leadership position. Net sales were up 16% and net earnings were up 70% on a comparative basis to the second quarter in the prior year. Our sales and growth in marketing areas continue to remain strong in all regions of the world. Our reported earnings of $0.24 per diluted share were at the high end of our $0.20 to $0.24 guidance that we gave three months ago.

In summary we had a good quarter and I'm very pleased with the overall performance of our Company.

Last night we also provided our guidance for the next quarter to be in the range of $0.16 to $0.20 per diluted share. There are two reasons for the reduction of our second quarter results which are, first, the seasonal impact of vacations on our manufacturing operations; second, the ongoing increase in commodity cost coupled with a normal delay in pricing recovery.

We have seen this pattern before and we have demonstrated our ability to eventually offset higher commodity cost with a combination of higher pricing and successful cost reduction programs. I have little doubt that we will repeat this pattern again. However, it is going to take several months to realize the revenue from our new price increases.

EnerSys, as well as our competitors, have announced additional price increases during the last several weeks and we remain highly focused on implementing these actions. At the same time, our employees continue to be very creative with new ideas to reduce cost and as you well know, we have had a long history of success with our cost reduction initiatives; and we are confident we will continue this in the future.

So lead has clearly in a challenge to us. Almost all of the lead experts continued to forecast an increase in worldwide lead production and forecast a supply of lead in the future, which will result in lead coming down from the high prices it is currently at.

Earlier research reports, however, have incorrectly projected predicted a reduction in the price of lead based on, largely, the new production capacity that was projected to come online earlier this calendar year. Completion of several of these projects have been delayed, which has reduced the supply side of lead. When these projects are completed we believe that the total production of lead will exceed demand, and prices will come down to the current historical high levels.

Next, I want to take a moment to comment on recent action with the Chinese government on the elimination of a long-standing 13% rebate on their value-added tax for batteries and lead exports. The net effect of the government's action will be an increase to the cost of batteries exported from China by approximately 10%. We believe this will have a positive impact on our business in Europe and in the Americas as Chinese-made batteries should become higher priced in these regions.

Our Chinese factories are currently running at maximum capacity, primarily to support the China market. Therefore our exports from China are relatively modest and we anticipate the change in VAT tax will have little effect on our overall business.

As I stated earlier demand for our product remains high due to favorable market conditions and our excellent products and customer service. A recent example of this is the signing of a three-year agreement we have with a major new customer that has a projected revenue in the $10 million range for each of the three years. We are very excited about working with this new customer and we are planning additional public announcements in the coming weeks.

Overall, I am very pleased with our performance for the first half of this year; and although disappointed in the current levels of lead prices I remain confident in our ability to recover these costs in the future and in our ability to continue to bring value to our customers and investors.

With that, I would like to ask Mike Philion to go into further detail on our second quarter results, and also give a little bit more color to our third quarter forecast. Mike.

Thanks again, John.

The results of our second quarter and the first half of our fiscal 2007 year were solid and continue to reflect strong topline growth and challenging commodity cost pressures. We believe the underlying strength of our global business and our industry leading position remained very evident throughout the first half of 2007.

Our second quarter net sales increased 16% over the prior year to $354 million. This 16% growth rate includes approximately four percentage points attributable to our ongoing pricing recovery actions. Foreign currency translation primarily from the euro also had a favorable impact of three percentage points on our second quarter net sales growth rate. Additionally, our most recent acquisitions had a favorable impact of roughly 1%.

In summary, our base business experienced solid revenue growth of approximately 8%.

On the business segment basis our second quarter net sales in the reserve power business increased 13% to $159 million, while our motive power business increased 19% to $195 million.

Our first half of fiscal 2007 net sales increased 17% over the prior year to $713 million. This increase includes 3% attributable to our pricing recovery, 3% to foreign currency translation and 2% due to our acquisitions. Again in summary our base business experienced solid revenue growth of approximately 9%.

On a business segment basis, the first half of 2007 net sales for our reserve power business increased 15% to $317 million while our motive power business increased 19% to $396 million.

Now a few comments about our as adjusted consolidated earnings performance. As you know we utilize certain non GAAP measures in analyzing our Company's operating performance, specifically excluding highlighted items which are primarily litigation settlement income in fiscal 2007, and restructuring charges in fiscal 2006.

Accordingly, my following comments concerning operating earnings and my later comments concerning net earnings exclude those relevant highlighted items. Please refer to our Company's Form 8-K which includes our press release from yesterday for more details concerning these highlighted items.

Our second quarter of fiscal 2007 as adjusted consolidated operating earnings were $24 million or an increase of 50% in comparison to the prior year with the operating margin increasing 150 basis points to 6.7%. This strong earnings growth was achieved in spite of higher commodity costs of approximately $14 million in the quarter. Clearly our commodity cost headwind was more than offset by the favorable impact of fire revenue, selling price increases, cost savings programs and the successful integration of our acquisitions.

A major contributor to the improved profitability in the second quarter was the continued progress made in our ongoing pricing recovery actions. We estimate that price increases of approximately $12 million or roughly 4% of net sales were achieved in our second quarter. Further, we anticipate improving pricing recovery results will be achieved for the balance of fiscal 2007. This expected pattern of improvement further demonstrates the point that John made earlier, concerning our confidence in realizing additional price increases to offset ever higher commodity costs.

For the first half of fiscal 2007, as adjusted operating earnings were $47 million or an increase of 40% in comparison to the comparable period of the prior year -- with the operating margin increasing 100 basis points to 6.5%. Our first half operatings earnings growth was largely driven by the same factors as we experienced in our second quarter.

Our ongoing cost savings program remained an important element of the improved profitability in both the second quarter and first half of the current year. In general our 2007 programs are on schedule as to both timing and their full year cost savings objectives. We remain highly focused on identifying new cost savings opportunities throughout our global business.

As we have already discussed, our second quarter 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 70% of the $14 million increase in total commodity cost absorbed in the quarter. The average [LME] cost for lead incurred by EnerSys as it affected our second quarter income statement was approximately $0.50 per pound compared to approximately $0.42 per pound in the prior year.

Further, we expect our third quarter LME lead costs to increase to roughly $0.54 per pound as LME prices have continued to increase to record highs. As you may recall, it takes approximately three months for lead purchased today to impact our income statement due to our FIFO accounting methodology.

The unprecedented volatility in lead costs continues to be a major business challenge for both us and our industry. Most lead experts anticipate lead costs are likely to fall significantly in calendar 2007 as supply and demand fundamentals are expected to ease. Our current lead hedging position and strategy reflects this lead market outlook and assessment.

Now a few comments concerning our as adjusted net earnings. As adjusted diluted net earnings per share were $0.24 in the second quarter compared to $0.14 in the prior year or an increase of 71%. We are particularly pleased with this strong improvement earnings, given the dynamic business environment in which we operate. Our earnings performance is attributable to strong topline volume, as demand for our products remains robust and modestly better pricing recovery than was anticipated.

For the first half of 2007, as adjusted diluted net earnings per share were $0.45 compared to $0.33 in the prior year for an increase of 36%. Although we are pleased with our first half earnings results when considering the formidable business challenges we have faced, we are not satisfied at our current profitability levels. I can assure you, our valued shareholders, that the near-term commodity cost pressures do not alter our longer-term strategy and objectives for improving earnings and enhancing shareholder value.

Our effective book income tax rate for the second quarter remained unchanged at 31.7%. We anticipate recording a non-recurring tax benefit in our third quarter of approximately $2 million or $0.04 per share attributable to an expected favorable resolution of a prior year tax matter. Excluding this non-recurring tax benefit we estimate our book tax rate will approximate 32% for the full 2007 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 $372 million at the end of our second quarter and as a percentage of annualized trailing three-month net sales, was 26.3%. Primary working capital levels have increased since the beginning of 2007 by $42 million with our primary working capital ratio increasing 2.9 percentage points.

This change was expected and is in part caused by our planned increases in selective inventory levels to meet the ever increasing demand by our customers, the impact of the higher commodity cost on inventory and the customary increase in our mid-year inventory levels.

For the first half of fiscal 2007, capital expenditures were $19.4 million compared to $18.6 million in the prior year. Our capital spending continues to focus heavily on the reduction of cost, introduction of new products, expansion into new geographic markets and increases in manufacturing capacity in our lowest cost regions of the world. We expect capital spending for the full 2007 year will approximate $41 million. Net debts which we define as total bank debt minus U.S. short-term investments at October 1, 2006, was $399 million and has decreased roughly $1 million since the beginning of 2007.

Our relationship with our bank group is good and we remain in full compliance with all our financial covenants.

As John mentioned previously, we expect to generate diluted net earnings per share of between $0.16 and $0.20 in our third quarter. The three primary factors that will impact our third quarter earnings are first, the anticipated sequential quarterly increase in commodity costs coupled with a normal delay in associated pricing recovery; second, the seasonal impact of summer vacations on our manufacturing costs; and, third, the non-recurring tax benefit expected of $0.04 per share.

In closing, I remain very confident in our Company's future and believe demand for our products will remain strong as favorable macroeconomic conditions continue to exist throughout our global market.

Now let me turn the call back to you, John.

Thanks Mike.

When you look at -- or as I mentioned earlier I am very pleased with our first half performance. When you look at our EPS we are up 36% on an adjusted basis and up 108% on a GAAP basis compared to prior year. This was in face of the price increases that we've seen in lead of approximately 60% since the beginning of this calendar year. This once again illustrates why I am so highly confident in our ability to continue to drive further price increases and reduce costs and improve our overall earnings.

With that, I would like to open the lines for questions.

(OPERATOR INSTRUCTIONS) [Dan Wang] with Lehman Brothers.

Good morning. My first question was regarding the comments around -- that you put into place additional price increases the last few weeks. Could you help us understand in terms of the percentage increase that has been put into place?

Yes. We have been looking in the range -- depending on what part of the world -- the 6 to 8% range. We've announced a couple of increases and we have additional work that is being done in each of the areas or regions of the world where we are looking at additional increases.

So in terms of the 4% increase that you saw, could you give us a little more color on the split between motive versus reserve? I think the trend has been more so from motive.

Yes; in rough numbers the increases in motive power is approximately doubled to what it is in the reserve power segment.

And in terms of just trying to get a feel -- the 4% that you are seeing. How do you think that transfers to the overall industry? I think everyone has seen the impact of higher lead costs. But just trying to get a feel if you have a sense on a relative basis?

It is a very good question you asked there. It is one of the reasons that my confidence level today is much higher than it has been on price and recovering. We are seeing less resistance in the marketplace today than we ever have on price increases. The market has become conditioned to seeing these pass-throughs on commodities. Our competitors here -- you look at customers, obviously customers aren't going to like it, but I think the real answer to the questions is what are the competitors doing?

We are virtually seeing all of our competitors follow the same trend that we are. And that is going after pricing.

We consider ourselves the price leader. Leader being that we are going after to get the higher prices and we are going to continue that mode. We have been very aggressive in that area. I've mentioned in prior calls our number one priority is to -- is pricing.

When we are in a volatile market condition like this you can only do so much with cost reductions in other areas. You have to have the ability to pass it through. Fortunately our marketplace is in a position now where it's in -- following that and as I said there's less resistance today than I've ever seen.

Okay. Jumping over to the lead hedge position that you currently have from your Q. I mean at current elevated prices seems to make sense but at what level of spot prices would you consider adding onto that for contract position?

For competitive reasons that is a question I would prefer not to answer. Obviously that is one that we have tossed around a lot internally and we are working on. I will say that since Q went out that we are forward bought and approximately 5% of our usage in the last 12 months had a price of about $0.59.

So we have taken some further positions since the end of September and we will continue to assess the market and do what we think is right for the business. In a volatile market like this, it is a bet either way when you are putting hedges out.

Our overall thought process on it is, we are ultimately going to get to a point where we have a larger percentage hedged and the idea of being that -- I will pick a number just to illustrate the point between 20 to 30% of our requirements, hopefully, some day will be hedged. But I don't think that now is the time to jump in at a full 20, 30% on a hedge.

We just have to continue this, try to see where the market is going and work with it.

So about 5% sounds about maybe 25 million pounds?

That's right.

Finally your comments about your plans for capacity or capital expenditures. I think you mentioned investment in new products, entering new geographies, and as well as adding additional manufacturing capacity. Could you provide some details around that?

Certainly. One of the things that we are very cognizant of, we want to run our operations at close to maximum capacity. Some day -- and we do not see it and I don't want to imply that we see it in the near future -- some day there will be a slowdown that will take place.

When it takes place we want to be sure that we are coming off a base of very high capacity utilization when it comes down. So, therefore, we are not adding capacity in many places. Now I also said in a prior call that today 24% of our manufacturing is in low-cost regions; and it is our objective someday to have that to over 50%.

We are adding some capacity in regions of the world where it is cost-effective and it is really for two reasons. One, to support the market and, two, its cost reductions. A specific example of that would be our motive power business in China. We are adding capacity in motive power in China because we can't keep up with a demand. The margins are very good on that product in China today and we are growing that business.

So there is an area where we are adding capacity. But my basic philosophy on this is, I do not want to add normal capacity if you will. I want to take increased prices and keep our sales volume more where it is. In other words I am not going to take a midcap on investments and heavy capacity where it is not good returns on the investments. We will go for pricing first, before we will do that.

Great. Thank you very much.

Bill Benton with William Blair.

Good morning. Good quarter. Obviously challenging environment (inaudible) good numbers, so congratulations on that.

Just on the acquisition of -- I think you said it was 4.5 million in total. Could you give us some indication on what the new company looks like with about 2 million or so? Did they add a little over 2 million in the quarter?

Just bear with me a second. I wrote that -- when you reference the new company, what are you referencing?

Chaozhou. Chaozhou. Is that how you say it?

CFP?

Yes. CFP. Go ahead, Mike.

Well CFP per se is not a separate entity and as you may recall, we did that for manufacturing capacity, expansion reasons. So it is pretty hard to gauge how much incremental revenue from that. Did we get some? Of course. But the primary purpose of that was capacity in low-cost item.

Yes; to pick up on that a little bit we were looking in total, once it's up and running at 100%, revenue increases of the $25 to $30 million range. When we bought the company they were capable of running 400 [sales] a day and in parallel with acquiring the Company we purchased equipment to literally double the capacity.

So within the first 90 days that we owned that company we have doubled the capacity. We are today running at 800 sales.

Yet at the 800 sale level it's still maximum capacity. We are turning away orders that do not meet our margin requirements. So to Mike's point this is purely a capacity add was the reason for the acquisition.

Can you just maybe review as the quarter progressed how the current demand environment looks in both motive and reserve. It sounds like it was strong. I just want to confirm (inaudible) through the quarter in both those segments.

I think your question is what is the relative strength of demand in both our segments as it exists today as we are looking forward? Is that correct?

Yes.

As I mentioned earlier, it's in all areas across the board. We are seeing very strong demand. If I had to pick the weaker area of demand it would be reserve power and prior to that is because the pricing situation we put in. As I mentioned earlier, we are getting about double the pricing in motive than we are in reserve. So, but demand from a market perspective is very strong globally, in both areas.

Our reserve is strong. It could be stronger but we are rather stubborn in our pricing philosophy.

I appreciate it; and congratulations again.

John Franzreb with Sidoti & Co.

Two questions. One -- given the current price of lead, I wonder if the current price increases will cover it at the current levels? Are you factoring in your price increase today drop in lead cost going forward?

No. We are figuring a bit lead is going to stay up. It is really -- it is going to sound like we are talking on both sides here. From our sales perspective the assumption is, that lead is going to actually go higher. That is our assumption from the sales perspective. That is what we're telling our salespeople. We want them to understand it.

It is so volatile we think that that's a right way to view it from our sales side.

When we look at the markets and the dynamics and everything else I think what we are going to see -- lead is going to stay up where it is probably for the next several months. But we do believe that some period in the future, near future it's going to come down. But we are not going to rely on that. We haven't relied on -- . Our philosophy has been all along from the sell side that lead is going to continue to remain high therefore you have to go after the pricing.

We have been successful with that direction, but if I really back up and view where do I think it's going to go, I would still believe that it is going to go down.

Great. Secondly in light of some of the deceleration we're seeing in the capital equipment market, what are your customers telling you about demand in the motive business?

We are not seeing a slow up take place. In fact if you look at the ITA data, Industrial Truck Association data, it still remains very strong and very positive.

Okay.

We are seen it globally by the way. That's not just the U.S. The ITA data that I mentioned is U.S. market. We are seeing the same trend take place in Europe and China -- or Asia.

One less question I apologize if it's been asked but I'm calling from Sedona and I'm getting spotty service here. The competitive landscape -- you kind of implied that pricing has been going through with the customers. Are your competitors being more rational with pricing or are you being price leader and hoping they follow?

Both. I think we are being the price leader and I think that they are being more rational. I think in -- and I see where the price later I've seen some actions where our competitors have actually taken lead position on us in certain markets. Where they have gone out and increased before we did.

So it is not -- I don't want to imply it is just us dragging them along. In some cases they've actually gone out ahead of us. We had plans to do it but they got it out quicker than we did.

That's excellent. Thank you.

(OPERATOR INSTRUCTIONS) (indiscernible) from Goldman Sachs.

Good morning. With regards to reserve power, I'm particularly interested in what your view is as to emerging technologies; and whether you think there are any that could capture significant market share? And if yes what are your activities in the field? Things that come to mind are lithium ion or perhaps also fuel cells so it's just maybe a little bit more exotic but nevertheless worth mentioning.

I will answer it very direct. We do not see a threat to our business in the technology areas. Lithium has been one that's been kicked around for a long time. [Avestar] was the one that was really toting the lithium technology as a side point back when we were part of [Joasa]. We owned a portion of that with Hydro-Quebec; and I walked away from some eight to nine years ago saying that it would never take off, in my opinion.

You may have read that Avestar recently has closed their doors. So the lithium polymer or lithium metal approach, to my knowledge, I don't believe they are going to start back up again.

We have a lithium ion approach that uses a high volume. It is called an 18/650 cell that run in very high volume where we are integrating electronics with it, getting the benefit of lithium technology. But it is not in a large cell basis that Avestar has.

As far as fuel cells it's like one person said a number of years ago. Fuel sales are the wave of the future. They said that 20 years ago and they are saying it today; and I think in 20 years they are going to say it. I don't see it as a direct replacement for the batteries going forward. A lot of work has been done on it and it is just not cost-effective.

I think what you have to take a look at is when you look is when you look at -- we sit and complain about the price of lead being high, but the price of lead is very low compared to what it costs to put the other technologies in place. So I could spend a lot of time talking about it but the bottom line to it is, we do not see a threat to the lead acid battery business in either our motive power space or in our reserve power space.

Thank you.

Michael McDonald with [Brigateen] Capital Partners.

My questions have been answered. Thank you.

Jeff Bencik with Jefferies & Co.

Thank you. Can you talk about your capacity utilization, John, in terms of both the two separate segments?

Yes; we are running in the high 80s right now and we have some upside potential to take on new orders. Looking ahead at some of the things we are currently working on, I am concerned that will we have capacity to support some of them? We have a number of very very good things going on right now which obviously I can't talk about; but working with customers that we haven't worked with, I mentioned one, about a $10 million per year new area that we are going to be entering into.

There are other ones that are not quite as far along as that one. So running in the mid-80s right now. Mid- to high 80s. My concern is not the bottom falling out and us having excess capacity it is just the opposite.

Is motive a little higher than the reserve in terms of utilization or how should I look at that?

Yes it is. Motive is higher, slightly higher than reserve.

How do you characterize the industry utilization for both of those segments, given the strong demand?

It's hard to tell on that. The reason I say that is a couple of our competitors are going through some major restructuring. I would assume that the one is actually taking capacity out and resizing the business to match where they are. My guess is that they are probably -- and I'm strictly a guess because I don't know. I guess -- my guess would be that they are running on the higher end. I think that what we're seeing globally take place right now, I would think the capacity utilization is significantly higher on a percentage basis than what it was a year ago because total markets are up as I said.

It is not just us that experience a -- the topline growth. I think it's our competitors also. Markets are strong.

Presumably that is part of the rationale or the reasoning behind the more rational pricing by the competitors as well.

I think that's part of it. I think also, when you take a look at the public information on our competitors, there's -- if they're going to get profitable. They are going to turn -- go from the red to the black so to speak. I don't see any way they can do it other than the pricing. So I think that it is probably both.

In terms of the new lead coming online, can you talk a little bit more about what exactly was delayed in terms of the new (indiscernible) and what the expectation is in terms of when it will come online?

Yes we have to take and go back and look at specific numbers. I am going to go by memory on this one but at the beginning of the year the reports were looking that we would see a surplus. Supply would exceed demand by roughly 55 to 57,000 metric tons.

There was a report that was put out later that said that number went down to about 25,000. I haven't seen anything recently on it but my belief is that it is probably going to be a slight surplus but not much by the end of the year, when it is all said and done. Specifically what has happened with it, there are a number of mines, Magellan -- which is an Australian mine -- at the beginning of the year was projected, my recollection was 60,000 metric ton is what they are currently putting out. But they were projected at the beginning of the year to put out 100,000.

There are a couple of other mines that were to come online. I can't recall the names right off that have had similar situations. There was a strike at one operation. Bottom line to it, the surplus that we were supposed to see at the beginning of the year the 55 to 57,000 has dwindled away.

When I talked to the experts in the industry -- the lead industry about it -- it appears that it is not because demand being higher than was projected because it was projected to be up. It is not because demand is up so much as it is the supply didn't come online as originally projected.

Okay. So by the end of fiscal '07 or calendar '07 then do we expect that to be roughly in balance then?

I'm going to answer that question two ways. Number 1, the analysts have not been right yet. So we are viewing it and believing it is going to stay high; from the sell side we are going to continue to operate the business and be -- some day -- pleasantly surprised when it comes down.

But again if I get away from the sell side and what our pricing philosophy is and I look at it, and we talk to some the people at some of the mines and some of the smelters and hey, they had delays. That's what it comes down to and they are talking that they are going to add these.

So it's one that everyone is saying the capacity is going to be there. Everyone is saying that the supply is going to come up, but we are going to take the "I'm from Missouri show me" approach with this from the pricing standpoint. Mike, you want to add to it?

Yes. Jeff, and as you know we are certainly not immobilized by lead. The strength of our business is outstanding products and service, cost-savings, the leadership characteristics that I think most people who fall us such as you understand why we have competitive advantage. Do we look at lead closely? Of course we do. For all the obvious reasons.

But there's no question that we are not going to control pricing in dynamic markets. Volatility is probably with us for a long time to come in commodity; and so I sure don't want to give you any impression that as I said we're immobilized because of lead. We are not.

Candidly we are going to continue to do all the things that we think will extend our competitive advantage as we progress.

As I mentioned earlier lead on a spot market is up some 60% since the beginning of this year. If it goes up another 60% or another 100% or whatever, we have got to be able to work with whatever the commodity markets do and continue to improve our profitability. As I mentioned earlier our EPS up 36% on an adjusted basis, on the year-to-year basis. Up 108% on a GAAP basis.

With lead being up that much we have done what we wanted to do and that is, become more profitable even when the markets, even when commodities are going up. And that is what we need to continue to focus on. And not rely on whatever happens on the open market on commodities.

I agree and I think it had been good performance, but I would also understand that if and when lead does turn, your numbers are dramatically lower than what they could be. So I'm also looking for when that happens because, obviously, you'll do much better in that environment.

You are exactly right on that. I think that stated a different way and correct me if I'm not pronouncing what you're saying correctly when lead drops off our earnings should shoot way up.

That's what I'm implying and saying. I'm just trying to figure out when that could happen.

If you've figure it out, give me a call. Because again and I'm not going to be flippant there with it. You look at what the markets and, what the lead analysts have done, they have been wrong in the last year.

The last three years.

The last three years, that's right, but -- and we can't use that and we are not going to ever use that as an excuse because commodities have gone up. We've got to find a way to work with what the market is.

Just anecdotally on that point, John and I had the pleasure of being with Alan Greenspan some weeks ago and we talked about all the normal macro issues commodities and cutting to the chase as Alan gave us an extraordinarily thorough technical analysis on commodity. He concluded like we all know that nobody knows with precision when these trends will alternately develop.

It's coming at some point and we will just have to wait and see. But thank you. Good quarter.

Thank you very much.

(OPERATOR INSTRUCTIONS) Dennis Spano with Rutabaga Capital.

Good morning. Just couple quick things. So to understand the pricing in dynamic wing you say that you've announced or different markets are going to achieve different rates but 6 to 8% globally, there's about a three-month lag. So in the December quarter -- I'm sorry, in the March quarter we should start seeing the effects of that -- of those price increases?

We hope to seek to start of it prior to that. But let me be sure that I am not miscommunicating. What we do on a pricing situation we are going to look at it by region. Have to deal with region, certain regions are -- it's easier to take and get pricing than it is in other reasons. But I had the three -- the presence, if you will, of the different regions with Europe, the Americas, and Asia on the phone the other day. And the overall direction and I wasn't giving it to them, they were feeding back to meet what they were doing. There were already on top of it before I even made a phone call to them. They are very aggressively continuing the trend to go after pricing.

Okay.

If we are going to the market with what percentage we get that is going to depend on our competitors and the market itself. If we go out with 8% -- this last quarter when you take a look at our pricing relative to costs, our commodity costs are up some $30 million. Pricing recovery is about 23. We have got about a 75% recovery there.

Actually I thought it was commodity costs were up 14 and pricing was up 12. Is that year-to-date versus quarter or --?

Yes you've got it right. Dennis. John, the numbers he just referenced were the year-to-date ones.

You're right. I understood. The six-month numbers.

Gotcha. Couple other quick things. The China, the cancelling dthe rebate of the VAT, has that already you gone into effect or is that --?

That was announced on September 14th. That's when it was announced and all orders -- it takes total effect on December 9th.

Do you have an estimate maybe in terms of unit what sort of volume China imports into America or exports to America and exports to Europe?

I really do not have a good number on that. There is no data that exists out there. The thing that we have heard in the past, though, with a lot of our major customers is that the Chinese manufacturers have been talking to some of them. Not a lot but a little bit of them. A small portion of them. So, it wasn't anything that was drastically impacting our business.

I have said in the past that the Chinese manufacturers will hit somewhere between 10 to 15% of our business as the areas they compete in. In the smaller areas. But basically what this has done is put them on a competitive playing field now.

Yes. Absolutely. Great. One last thing. Just a naive question, why is the market a little softer on the reserve side versus motive? Is it again just there's a little bit more capacity industrywide or can you just give me a little few quick comments on (inaudible)?

I don't know that the market is any less robust. It may be a little bit -- it probably is stronger in motive but I think the real reason that our numbers are not as strong in the reserve power side is, again, back to our pricing element. There are fewer buyers of reserve power batteries than there are motor power batteries. The second thing is the buyers of the reserve power batteries tend to be very large entities that have a lot of leverage. In the motor power business we sell to fork truck dealers primarily in the North America market.

About 50% of the market in Europe goes through OEMs. The other 50% is the open market. On the other side with telecom you are selling to telecom providers and these are large -- in most cases -- large companies that have leverage.

Yes. Got it. Thanks a lot.

There are no more questions in queue. I would now like to turn the presentation over back to Mr. John Craig for closing remarks.

Well, again I want to thank you for your interest in EnerSys. We appreciate very much and everyone have a great day.

Ladies and gentlemen, this concludes your presentation. You may now disconnect and have a great day.