EnerSys (ENS) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2007 EnerSys earnings conference call.

My name is [Torliesha] and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to your host for today, Mr. John Craig, Chairman, President and CEO. Please proceed, sir.

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

During this call, we will be discussing our fourth-quarter and full-year results for fiscal year 2007, as well as comments on the general state of our business. But before we start, I will ask Mike Philion, and 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 7, Management's Discussion and Analysis of financial condition and results of operation, as set forth in our annual report on Form 10-K for the year ended March 31, 2007, which was recently filed with the U.S. SEC.

In addition, we will also be presenting certain non-GAAP financial measures. For an explanation of the differences between the comparable GAAP financial information and the non-GAAP information, please see our company's Form 8-K, which includes our press release dated June 13, 2007, which is located on our Web site at www.EnerSys.com.

Now, let me turn it back to you, John.

Thanks, Mike.

I am pleased to report that, for fiscal year 2007, EnerSys achieved record sales and record earnings in spite of record high commodity cost. Our sales increased 17% in fiscal year 2007 over 2006. But more importantly, our net earnings increased 47% over the prior year, even with an additional $90 million in commodity costs. These incremental costs were more than offset by the combination of selling-price increases, the continuation of our successful cost-savings program, and the benefit of increased sales volume.

We also increased our market share in the global industrial battery business. I believe we've been able to expand a market share due to our consistent focus on being the best value provider to our customers. I have talked about this many times, but I cannot overemphasize that our focus on best value really works. We are often not the lowest-priced supplier, but our combination of high quality, innovative products, and a very high level of service and delivery provides our customers with what I firmly believe is the best overall value in our industry.

I've spent time recently with many of our customers, and they have reaffirmed that we continue to be on the right track in providing them with what they're looking for in products and services. This certainly is a factor in our success in recovering higher commodity costs with increased pricing. Our customers clearly understand the impact of higher commodity costs and are willing to accept price increases when they are confident that they are receiving the best overall value.

We believe that these extraordinarily high commodity prices, particularly lead, have been driven more by speculation than by fundamental supplier issues. However, we cannot predict the direction of the commodity prices, and we certainly can't control them. So, we will very simply continue to emphasize best value to our customers to recover this added cost.

Now, I'd like to take a minute to talk about our cost structure. As you know, we've had a successful cost reduction program in place for many years. This has helped us, especially during the recent period of high commodity costs. As I stated in prior analyst calls, we are committed to increasing the portion of our manufacturing in low-cost geographical areas from the present level of approximately 25% to around 50%.

Our recent announced acquisition of Energia in Bulgaria is another step in that direction. Energia not only provides us with new growth opportunities in the rapidly expanding Russian and Eastern European markets but also gives us another low-cost manufacturing plant which has substantial potential for expansion. With this acquisition, we also announced plans to restructure certain of our Western European production and commercial operations. These plans are designed primarily to help integrate Energia business into our worldwide operations and help us move forward to our goal of 50% of our production coming from low-cost manufacturing plants. The restructuring will be substantially completed in fiscal year 2008 and will result in over $12 million in annualized savings when fully implemented.

While discussing acquisitions, I would like to reaffirm our strategy as we continue to be active in evaluating potential opportunities. We remain highly focused in the areas listed below -- one, our core lead acid battery business; we continue to look for opportunities to expand our geographic presence and take advantage of good synergies. Recent examples are the acquisition of Energia, the FIAMM Motive Power business, and [La Clanche]. Two -- opportunities for operational cost reductions, such as the purchase of [Mandek], a steel [train] manufacturer in the Czech Republic, and the CFT operations in China. Three -- non-lead acid technologies, such as the acquisitions of GAZ, our nickel cadmium operation in Zwickau, Germany, modular energy in the ATK lithium battery business. We believe there continues to be many attractive opportunities for us, and we will stay focused on this as we move forward looking for value.

Our capital structure and earnings are solid, and we believe this gives us an advantage in the industry as a credible buyer. Last evening, we provided earnings guidance for the first quarter of fiscal 2008 to be in the range of $0.24 to $0.28 per diluted share, excluding the expected charge of approximately $0.14 per share from the restructuring plan I discussed earlier. I am pleased with this anticipated level of earnings for the first quarter, which on an adjusted basis will exceed our performance of the fourth quarter of fiscal 2007, even in the face of higher commodity cost.

Now, with that, I would like to turn the meeting over to Mike Philion to go into further details on our results for 2007 and our guidance. Mike?

Thanks again, John.

Our record fiscal 2007 sales of 1.5 billion and our net earnings of 45 million or $0.95 per diluted share were primarily driven by strong demand for our products and services, improving pricing recovery, continued reduction in our cost and yes, challenging commodity cost pressures. We believe these record results continue to clearly demonstrate the strengths of our global business and our industry-leading position.

Our fourth-quarter net sales increased 17% over the prior year to 414 million. On a business-segment basis, net sales in the reserve power business increased 9% to 169 million, while our Motive Power sales increased 23% to 245 million. Our fourth-quarter 17% growth rate includes approximately 7% attributable to our ongoing pricing recovery, 6% attributable to foreign currency translation, and 1% due to our acquisitions. Our net sales for fiscal 2007 also increased 17% over the prior year to approximately 1.5 billion. On a business-segment basis, net sales in our reserve power business increased 13% to 642 million, while our Motive Power business increased 21% to 862 million. The full year's 17% growth rate includes approximately 5% attributable to pricing recovery actions, 4% related to foreign currency translation, and 2% due to our acquisitions.

Further, our fiscal 2007 sales growth was strong in all three regions with year-over-year growth of 24% in Asia, 18% in the Americas, and 16% in Europe. As John mentioned earlier, we believe the combination of outstanding products with superior customer service has led to our strong topline performance and market-share gains during the past year.

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 3.8 million of litigation settlement income and a 2 million income tax benefit in fiscal 2007, plus restructuring charges of 8.6 million in fiscal 2006. Accordingly, my following comments concerning operating earnings and my later comments concerning net earnings exclude those relevant highlighted items. It's important to note that our fourth quarters in both fiscal 2007 and 2006 do not include any highlighted items. Please refer to our company's Form 8-K, which includes our press release dated June 13, 2007, for more details concerning these and other highlighted items.

Our fourth quarter of fiscal 2007 consolidated operating earnings were 22 million, or a decrease of 6% in comparison to the prior year, with the operating margin decreasing 130 basis points to 5.4%. This earnings performance was achieved in spite of higher commodity costs of approximately 38 million in the quarter when compared to the prior year. Clearly, our commodity cost headwind was largely offset by the favorable impact of higher revenue, selling price increases, and cost savings.

The most important factor combating the higher commodity costs in the fourth quarter was the continued progress made in our pricing recovery. We estimate that a year-over-year price increase of approximately 24 million was achieved in our fourth quarter, or roughly a 7% increase in revenue.

For the fiscal 2007 year, as adjusted, consolidated operating earnings were a record 90 million, or an increase of 17% in comparison to the prior year, with the operating margin remaining flat at 6%. This full-year improvement in operating earnings was driven by the same factors experienced in our fourth quarter, plus the successful integration of our acquisitions.

We over the past two fiscal years, we have completed six acquisitions that have collectively contributed $0.07 per share to our fiscal 2007 earnings. Approximately 90 million in sales and 8 million in operating earnings are included in our fiscal 2007 results from these successful transactions, the most significant of which was the FIAMM Motive Power transaction which occurred in the first quarter of fiscal 2006.

Our ongoing cost-savings programs remain another important element of improved earnings in fiscal 2007 and for future years. Two important cost-reduction initiatives for fiscal 2008 have recently been launched, namely the European restructuring program and the Energia acquisition. These two actions will further reduce our costs by approximately 5 million in fiscal 2008 and by over 12 million per year by fiscal 2009. We remain highly focused on continuously identifying new cost-savings opportunities throughout our global business.

As John has already discussed, our fiscal 2007 results have been significantly affected by the higher cost of commodities, Lead alone, which is roughly 25% of our cost of goods sold, represents approximately 80% of the 38 million year-over-year increase in total commodity costs absorbed in our fourth quarter. The average LME cost for lead incurred but EnerSys as it affected our fourth-quarter income statement was approximately $0.67 per pound, compared to approximately $0.43 per pound in the prior year, or an increase of over 50%. For the full year, EnerSys' LME lead costs averaged approximately $0.56 per pound, compared to $0.41 per pound in the prior year, or a 37% increase. This represents roughly 70% of the 93 million year-over-year increase in our commodity costs. As you may recall, each $0.01 increase in the cost of lead is equivalent to $0.07 per share of earnings pressure. Accordingly, in fiscal 2007, we absorbed $1.05 per share of added lead cost. In spite of this major challenge, we increased as-adjusted earnings per share by $0.09 during the year.

Lastly, we expect our first quarter of fiscal 2008 LME led costs to increase to approximately $0.70 per pound or a 37% increase compared to the prior year.

Now, a few comments concerning our net earnings -- diluted net earnings per share were $0.22 in the fourth quarter of fiscal 2007 compared to $0.25 in the prior year, or a decrease of 12%. For the fiscal 2007 year, as adjusted, diluted net earnings per share were $0.87 compared to $0.78 in the prior year, or an increase of 12%.

We are pleased with our earning results when considering the formidable business challenges we have faced in fiscal 2007. I can assure all of our shareholders that our longer-term strategy and objectives for significantly improving earnings and enhancing shareholder value remain our highest priorities.

Our effective book income tax rate for the fourth quarter of fiscal 2007 was approximately 31% and 28% for the full year, which included a third-quarter, non-recurring tax benefit of 2 million. When excluding this non-recurring tax benefit, our fiscal 2007 income tax rate was approximately 31.5%. As I commented last quarter, further reductions in our income tax rate remain an important focus, and I expect significant additional progress will be achieved in fiscal 2008 and beyond.

Over the last three years, we have reduced our income tax rate from 38% to 31.5% with our goal of 26% by fiscal 2009. Each additional 1% reduction in our income tax rate is equivalent to approximately $0.01 of earnings per share. Accordingly, our fiscal 2007 earnings have been increased roughly $0.08 per share as a result of our progress to date. We anticipate our income tax rate will approximate 29% for fiscal 2008 with the first half of the year at roughly 30%.

Finally, concerning taxes, our cash income tax rate for fiscal 2007 remains very favorable at approximately 16%.

Now, let me make a few comments about our financial position and cash flow results. Our cash flow performance and liquidity position continues to be solid. The relationship with our bank group and rating agencies remains very good, as evidenced by the following -- one, fiscal 2007 cash flow from operations was up approximately 70% to 72 million with our year-end cash and short-term investments up approximately 150% to 38 million; two, net debt as defined in our credit agreements has decreased approximately 10 million since the beginning of fiscal 2007 to 384 million with our leverage ratio decreasing from 3.4 times to 2.8 times; three, we have well in excess of 100 million in borrowing capacity available under our existing credit facilities and we remain in full compliance with all our loan agreement financial covenants; four, we reduced our credit spread on our term debt in the third quarter by 25 basis points to LIBOR plus 175, which will save approximately 800,000 of interest expense per year, or roughly $0.01 of earnings per share; and five, recently Standard & Poor's revised its outlook on EnerSys from negative to stable and affirmed our BB credit rating. We believe our capital structure is financially sound and well positioned to support both our future organic growth and acquisition opportunities.

We closely manage our primary working capital levels. Primary working capital increased 55 million since the beginning of fiscal 2007, primarily due to our sales growth, and as a percentage of annualized trailing three-month net sales was essentially flat at 23.3%. Our fiscal 2007 capital expenditures were 42 million compared to 40 million in the prior year. 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 fiscal 2008 will approximate 45 million.

As John mentioned previously, we expect to generate diluted net earnings per share of between $0.24 and $0.28 in our first quarter of fiscal 2008, which excludes the expected $0.14 per-share charge for our European restructuring program. The three primary factors that will impact our first-quarter earnings are, first, an anticipated sequential quarterly increase in our first-quarter sales volume as demand for our products remains strong; second, continued progress in further improving our pricing recovery and reducing our cost; and third, the anticipated sequential quarterly increase in commodity cost.

In closing, I remain very confident in our company's future. We have consistently proven that, with our sound strategy, steady execution and outstanding employees, we can grow revenue and earnings and further extend our industry leadership position.

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

Thanks, Mike. I continue to be optimistic about the opportunities we have to significantly grow both revenue and earnings and increase the value of EnerSys for our shareholders.

I was recently reminded that, when Mike Philion and I joined the predecessor company in 1994, revenue was about $250 million. Today, we are over 1.5 billion, which is a compounded rate growth of about 15% over the last 13 years. We can't promise the same for the next 13 years, but on behalf of more than our 8000 employees worldwide, we promise to do everything we can to continue our success.

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

Thank you. (OPERATOR INSTRUCTIONS). Bill Benton, William Blair.

Good morning. Congratulations again on strong execution there.

First I just wanted to touch base. Obviously, we've heard from Exide and C&D recently and they seem to be saying opposite things to me I guess when I look at it. Exide kind of talked about improved pricing in all businesses, but stress in kind of the reserve segment, and C&D talked about softness in motive and signs of pricing aggression there. You guys obviously seem to be experiencing something completely different than both of them.

So, I was wondering if you could just maybe address that and kind of the health of the pricing obviously which has improved, and the market demand. Also geographically if you could, we've seen kind of a tale of two different worlds I think between the U.S. and outside the U.S. in many of the companies.

Yes, Bill, I can't really address the two companies that you named, Exide and C&D, but I can talk about EnerSys and what we are seeing. We continue to see the growth in the Motive Power area to be pretty strong, actually. It's both in Europe and Asia and in the United States; it's stronger across the board.

On the reserve power side, because the consolidation has taken place at many of the large telecoms, there has been some hold-back on CapEx until they really get together and decide where they are going, the direction they are going in. But we are doing very well in that area in the U.S. We are picking up share, and I think the reason we are picking up share in both reserve power and in Motive Power is because what I referred to earlier about being what we call the best value provider.

Right. Now, are you seeing a difference I guess within the U.S. versus -- I mean I know, telco you probably are to some degree there, but in motive kind of in the U.S. versus outside the U.S.?

No, we are strong in all three regions in Motive Power. In the U.S., on the reserve power side, we have picked up market share. So even the market being slowed up a little bit because of the reasons I mentioned earlier with telecoms and so on, we still are picking up market share in the U.S. in reserve power.

Okay. I know you launched the Sears Die Hard business I think this quarter or maybe it didn't impact it all because it was late, but could you talk about the impact that you are seeing there out of that new business?

Well, it's very strong. In fact, we are shipping. It has taken off much better than any of us ever anticipated. It's very high growth, but that's a business segment that, with the transportation side, that will be in only in the high-end. We use that product, as you probably recall, a similar-type product in military applications. It's an extremely high-end product and we're only looking to hit the top of the market with it. There are others that are interested in it; they have contacted us directly about it. It's been a real success for us.

Okay. Then how long -- I mean I guess we're looking at a spot lead market (inaudible) I think you said $0.70 was included in your guidance for next quarter. The spot lead market continues to go up and I do you guys have been real good about going to get pricing. What are the customer saying at this point when you've got the spot market up here about, you know, additional pricing increases? I mean, they seem to be aware of it but how are they feeling about that at this point?

Well, let me back up on your question. I recently was at the national sales meeting and had the opportunity to meet with approximately 400 of our salespeople in the Americas. The same story takes place in Europe and in Asia. We've done a great job of educating our sales force on commodities. We have it on the Internet so that our sales people can look at it. They've done an outstanding job of going to the markets and explaining not only what has happened with lead and copper, nickel and so on, they've done a great job of explaining it to the customers. Obviously, the customers don't like price increases; none of us like that. But I will say that they understand it, and they understand the reasons why. Again, that's back to our sales force.

The second point on that, though, I think our competitors have really done a great job with this also. I think they have done a great job of explaining to the marketplace that when lead has gone years ago at $0.20 a pound and now over $1 a pound, that we need some relief on it. So the resistance today to price increases is significantly lower than it was just six months ago even.

Okay. Well, congratulations, guys, again on the execution.

Jeff Bencik, Jefferies & Co.

Thank you. Nice quarter, guys. Yes, I just had some questions. In terms of the margins on the reserve side this quarter, it seems like there was a much bigger challenge there. I guess it dropped only 2.5%. Are most of the restructuring actions that you're going to undertake in that area to try to get the margin backed up?

You hit the nail right on the head. This is something we identified actually about two years ago when we saw the consolidation taking place with telecoms and with UPS, an. Just a matter of time that it goes down the supply chain. You have larger customers that have more buying power, and we said at that time, longer-term, looking two to three years down the road, that we need to do something with our reserve power business, specifically in Europe, to reduce cost.

Now, I will back up. We had that same situation five or six years ago in the Motive Power area in Europe, and we've invested in plants in low-cost areas and brought it down. We didn't do the same degree in the reserve power area. Now it's time to do it. So we are anticipating major reductions in cost over the next few years in our reserve power business to make us more competitive.

Okay. Along those same lines, can you talk to me a little bit about the industry capacity utilization in both the reserve and the Motive Power business?

I don't know the exact numbers on capacity utilization. I can tell you on ours that we're running at the high end. We are doing that by design. I'm going to say high 80s right now in capacity utilization.

We've historically tried to keep it high. There will be a downturn someday. We don't know when; we don't see it in the cards right now. But when it does happen, whether it's six months or a year or two or three years or six years from now, we are prepared to handle that because we're running at the high end of capacity. It's my belief our competitors are seeing something very similar to that, but I don't have any hard data to support that.

Okay, but would you say that the Motive Power is maybe in the 90s utilization and reserves in the 80s?

For our business or the industry?

For your business.

For our business, I think it's yes. That's approximation.

Okay. Then in terms of acquisition pricing, can you just talk about the different opportunities you are seeing, and how that compares both in terms of pricing and the number of opportunities versus a year ago or two years ago?

Well, there are still quite a few opportunities out there. I think one of the advantages that we have, especially when we're looking at a lead acid battery company, that the competition to buy those companies is not all that great. That's because of two reasons. One, our industry because of commodity costs, a number of our competitors do not have the cash to go after acquisitions. Secondly, when they take a look at what commodity costs have done to these acquisition targets, it's really reduced the value of them significantly. And the third thing is there's private investors or equity funds are not really going into this business. We don't see that as competitors in there.

Where we pick up the advantage is with the synergies. That's the main reason that they are value for us. Mike, could you pick up on that also?

Sure, I would be happy to. Good morning, Jeff. Just to complement John, as you know, Jeff, we are extremely patient and extremely return-value oriented, so there's no question broadly there's some evaluation expansion, but I can assure you it does not change our view of prudent investments and the return requirements.

Right. I guess what I was trying to get at is, you know, have these competing companies become more rational in their asking price because of the higher commodity costs they've incurred over the last two or three years?

Well, you know, as John said, we've really not seen a lot of what I would call private equity or that type of influx into our industry, so they've really not had a measured effect that we've seen today.

Okay, thank you.

(OPERATOR INSTRUCTIONS). Dan Whang, Lehman Brothers.

Yes, good morning, everyone. The first question was regarded lead hedging. Could you talk about how many pounds you have under current core contract and approximately at what price?

Yes. I don't have the exact pounds in front of me here, but the rough number for the rest of fiscal year '08, we are hedged approximately one-third of -- or we have accounted for one-third of our requirements for the rest of this fiscal year at a price of $0.71 a pound.

I think the approximate need for this year might be, what, maybe like 550 million pounds? (multiple speakers)

That's lower. Mike, go ahead.

Dan, our best guess -- and as you know, this will vary depending on demand, etc., but our best judgment is slightly over 500 million pounds at this writing.

Okay. I guess your strategy around lead hedging has shifted somewhat, and you had kind of stayed away. But I think, going forward, is it safe to say that you will probably keep a close eye on that and remain active in the hedging program there?

Yes. I go back a little bit on our strategy here. Our view on it is that obviously we would like to have enough lead hedged forward that we can predict where we're going with things. Keep in mind, with our pipeline of our inventory, the lead we're buying today will not hit our P&L for three months out. So we know -- we have a pretty good idea where we're going to be in the next quarter going forward.

The big concern that I have on lead, though, if you buy in lead, let's say we were hedging today at $1 a pound and lead were to drop off at $0.60, and if we were locked in at a third of our requirements or 50% of our requirements to that $1, dollar, our competitors could lower prices and put us in a bad situation. So there's that downside that we are concerned about.

What we have found that we were buying at the spot market prices and our competitors are also passing along, as we are; we think it's a pretty good situation. If lead were to stabilize at $1 a pound or even $2 a pound, we could get the pricing back with it in time; our industry will get the pricing back in time. I'm not overly concerned about that part. It's the volatility. Since last May, we saw lead at roughly $0.43 a pound, and recently it jumped up to $1.08. So, it's that volatility that is the tough part to manage.

Right, okay. Since the last conference call, I mean in terms of incremental price increases that you have announced to your customers, could you sort of estimate what that may have been on a cumulative basis since the last time you commented on that?

Yes. My point of reference to the last call, I can't tell you an exact number on it but I can tell you, since November, it's approximately 30% price increases, cumulative.

Right.

Mike, do you recall from last quarter?

No, I don't but John, I think, since the last quarter, we had two more pricing actions. We took a pricing action in April of roughly 6%, and the pricing action we just took in early June of roughly 10%. So Dan, I would say, directionally, we were probably at roughly, since November, at 15, and we've added roughly another 15 since our last call.

Okay. You know, typically, it takes a little bit of time for that to filter through the supply chain, so although we did see a sequential pick-up in pricing from third-fourth quarter going from 7% pricing I guess, is it safe to assume that we will get some additional pricing as you move into the first quarter? Do you know what sort of pricing level you expect in the first quarter? You know, what (multiple speakers)?

Well, you know, it's a tough question because it really goes back to the market dynamics. Let me tried to address it this way. As Mike said, we went out for another 10% just recently, and it depends what our competitors have done. Now, most of our competitors have announced price increases, so it's just the competitive dynamics. Obviously, we were hoping to get 10%, but we will just have to see what happens here.

Okay. The last question was regarding your announced European restructuring plan. I was hoping maybe you could share some details around that. I think Energia, from what I remember, provides meaningful or substantial capacity additions. So is the plan to maybe even pull back on some capacity in Western Europe and allow Energia to provide that, the lower-cost capacity?

Well, there's really two objectives with Energia. Energia, approximately 20 million in sales is where we think we will start out with, mainly in Eastern Europe and in the Russian market. So, we acquired -- because of profitable sales. The second thing is that, even as stand-alone, if we did nothing else with it with Western Europe, there are a lot of productivity improvements we could make to take the profitability way up on that business. So that's issue one.

Issue two is that, with the $17 million that we announced, 12 of it cash, 5 non-cash that we announced recently, that is being invested to move production from certain Western European factories, high-cost factories into low-cost factories, into the Bulgarian plant, which is a low-cost plant. So yes, and again, we want to get our capacity back at the high end, as I mentioned earlier. So it will require that we take capacity out of high-cost factors.

Do you want to add to it, Mike?

Sure. You know, as John covered earlier, Dan, clearly a big part of the focus is to seek cost reduction on our reserve business, so clearly, as we migrate to the point John made, it will have a heavy focus of reserve production shifts.

Yes, I would like to add on that also; that's to start with because as was pointed out in the prior question about the margins and reserve powers, we're going to focus the operation on reserve power to start with, but there are many opportunities with that factory in the Motive Power area also. That factory is approximately 650,000 square feet in size. It will be our largest plant in the world. It is our largest by the world, now that we've acquired it.

Great, well thank you very much. That's an impressive quarter.

John Franzreb, Sidoti & Co.

Good morning, everybody. I want to go back to the Motive Power business. The growth there, John, you said that you have been taking market share in the reserve power and here in North America. You kind of alluded to the fact that you're maintaining share in motive but still growing it against what is I guess a relatively weak North American capital equipment market. Could you just talk a little bit about what's driving demand in North America in the motive?

Year-to-date -- and let's go back to the CapEx spending portion of it. Year-to-date, the ITA data -- that's industrial truck orders -- are down. Shipments are still rather robust; shipments are still looking good.

The second point on it is that we are finding, with our service organization where we've added a lot of service and support, in the last year I can't tell you the number but it's got to be 15 to 100 different service techs that we've added to support that business. We are picking up a lot of the replacement business that we didn't have before, so we are seeing growth take place there.

Really?

Yes. Again, it goes back to this thing of service. Most of our -- in North America, the majority of our business goes through company employees. We have approximately 33 different stores around the country that are highly focused on customers within their given regions.

How big is the aftermarket mix now in motive in North America?

It's hard to get exact data on it because a lot of the aftermarket goes through the same channel that it goes through with new trucks, that being the dealer. But our best estimate is 50%.

Really, okay. The second question is, if I heard Mike's numbers correctly, it was 7% price, 6% currency, 1% acquisition. That suggests 3% we'll call that volume. Is that right for the quarter?

That's for the quarter.

Okay. If that's the case, I would imagine most of that was in motive and that we are actually seeing a down-volume quarter in reserve. Is that the case?

Good observation. And a couple reasons for that. If you take a look at fourth quarter last year -- well, let me back up and talk about reserve power business to start with. Reserve power business supporting telecoms and UPS providers -- what happens is you can get very large orders that can come in or the next quarter, you get very low orders coming in. So it's not normal, the same flow that you would see with Motive Power. You go back to fourth quarter last year, we had some fairly significant orders in the reserve power area that didn't happen this year. But that's not to say next quarter it won't be just the opposite. So it's a little bit of the volatility. In fact, if you take a look at the numbers you quoted there, on a volume basis, in third quarter, we were up 3% compared to prior year, but if you look at annualized, the total volume was up 6%.

Right. So, does the order book, going forward, suggest that you're seeing a rebound in the reserve business or are you just uncertain at this point?

Order book going forward is very strong in both segments.

Okay. The hedging, you are one-third or so hedged for '08. How does that play out? Is it weighted more to the first quarter, first half or is it evenly split?

John, let me get back and one other point to make on the order book -- it's rare that we would see a first quarter be stronger than a fourth quarter.

But you implied in your comments earlier that (multiple speakers).

(multiple speakers) -- is first quarter of fiscal year '08, as we said, our guidance of $0.24 to $0.28, even with higher commodity cost, is higher than our fourth quarter.

Okay, so we are seeing almost a lag effect, some maybe orders push from Q4 into Q1?

They are not necessarily pushed, no. The orders, they weren't pushed; there were just more orders.

They just fell into this quarter? Okay. Got it. Now, the hedging?

Yes. To the hedging, you are right that we have more. If you take a look at it, it's not linear through the year. There's more weighted towards the front half of the year than the rear part of the year.

You said you're not completely abandoning your hedging strategy. I know you've kind of -- in the past you've said like, well, it's too high; I want to back off a bit. Over $1, what's your appetite for hedging right now? Do you want to keep it at the current rate going forward or are you going to back off a little bit on that?

We have open orders out right now for lead, but they are not hitting.

They are not hitting, okay. One last question -- the restructuring timeline. When do you expect to complete some of the actions you just talked about? Can you give us a sense of the timeline, by the end of the year, what will be done, what are your expectations there?

Well, as I mentioned earlier, 17 million, $1 total expenditure, 12 cash that will take place. Most of that will be completed this year. In fact, we're looking at 15 million of that to be completed this year, 2 million to roll off next year. If we can pull it forward, we will do it. This fiscal year, as Mike mentioned, there will be about 5 million savings this year, so that gives you a little bit on the timeline. It's basically fully implemented by the fourth quarter of this year. It should be a large percent of it.

Will a bulk of the work be in the first half of the fiscal year or the second half of the fiscal year?

Whenever we do an acquisition, we lay out a 100-day plan. The thing we do in that 100-day plan, it is get things done and get it done quickly. Our operations globally have demonstrated the ability to execute on those at every acquisition we've ever done.

Ray Kubis, who is the President of our European Operation and his team are together almost daily on the next step in what we have to do to get things in place. In this particular acquisition, we were on-site before we closed the deal working with the company as much as we possibly could. So, we are off and running, and we've got a great start on this.

Okay, great. Thanks. Keep up the good work.

(OPERATOR INSTRUCTIONS). Jeff Bencik, Jefferies and Co.

I just wanted to understand the Energia facility a little bit better. If I were to do 650,000 square-foot, it seems like that represents roughly 15% of your total square footage. Should I think of that in terms of the production capacity of that plant as well, that it could be as much as 15% of your total production?

I haven't looked at it quite that way. I don't know the exact percentage. We would have to calculate that. Do you know it, Mike?

Yes. Jeff, as we've spoken, this is a white elephant in the sense that the plant was -- this goes back 20 years when it was under Russian influence. It's way bigger than the 20 million of volume, so clearly, we're going to expand it dramatically, but your math at 15% would be way high. I mean, we look at this thing as a three-year out, 75 million, 100 million, but the point is it's got dramatic opportunity to expand. Clearly, we will go as fast in expanding it as is prudent, so you are right; there's big expansion opportunity there.

The other -- there's an operation, a plastics operation in there which is old which we will not use the plastics operation, so that's going to create a lot what square footage for it. The point of it is that we got it at a very good, attractive -- or we got it at a very attractive price. We don't need brick and mortar. Even with some of the other acquisitions that we've done, as an example (inaudible), we've moved equipment, the Swiss operation there over to Bulgaria. In some of our other Western European plants, we will be just moving equipment out of those operations into this facility we've acquired.

Okay. This is probably too early to answer but I will ask it anyhow -- the relative cost of Energia versus your current Western European plants?

Yes, hold on a second, our guys on the side here are calculating it. They are telling me it's way under 5% in the square footage. Okay, go ahead with your question, I'm sorry.

Yes, I was just trying to get the relative cost of that plant versus your current plants.

I will give you a rough number on labor. Labor there is about $2.50 versus an average of $14 in Western Europe.

Okay. What about healthcare costs as well?

They are lower.

Okay, not on that magnitude but maybe 50% lower?

I don't know an exact number but it's much, much lower than it is in Western Europe.

Okay, thank you very much.

There appears to be no additional questions at this time. I would now like to turn the call over to John Craig for any closing remarks.

Well, thank you very much for joining us for our conference call this morning, and everyone have a great day. Thanks begin.

This now concludes your presentation. You may now disconnect and have a wonderful day.