EnerSys (ENS) 2008 Q1 法說會逐字稿

Thank you, ladies and gentlemen, for standing by. We thank you for your patience this morning. Due to the high volume of calls, we do thank you for standing by.

At this time we would like to welcome you to the first quarter 2008 EnerSys earnings conference call. My name is Sharon and I will be your coordinator for today.

At this time all participants are in a listen-only mode. We will be facilitating 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 now would like to turn the call over to your first host for today, Mr. John Craig, Chairman, President, CEO of EnerSys. Please proceed.

Thank you, Sharon, and good morning and thank you for joining us for our first quarter conference call. On this call we will be discussing our financial results for the first quarter of 2008, our guidance for the second quarter and comment on the general state of our business.

But before I get started here 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 on this call that are based upon 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 Conditions and Results of Operations as set forth in our quarterly report on Form 10-Q for the quarter ended July 1st, 2007, which was recently filed with the U.S. SEC.

In addition we will be also 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 August 8th, 2007, which is located on our website at www.EnerSys.com.

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

Thanks, Mike.

I am pleased with our first quarter results with diluted as adjusted earnings per share of 36% versus the prior year. Revenue was up 20% over the prior year with solid growth in both segments of the business in all geographical areas around the world. Our order rate continues to be strong and we remain confident about the continued demand for our products and services.

As reported last evening we incurred a restructuring charge in the first quarter of $10 million as part -- as a first part of our European restructuring plan which will total approximately $15 million this fiscal year and an additional $2 million in fiscal year 2009.

Excluding this charge and excluding the onetime litigation settlement income in the first quarter of fiscal 2007, our adjusted diluted earnings per share were $0.30 compared with $0.22 in the year earlier quarter.

Our strong earnings also exceeded the diluted earnings per share guidance of $0.24 to $0.28 per share, given during our last conference call. Our team has done an excellent job of offsetting higher commodity costs through cost reductions, selling price increases, and obtaining the incremental benefits of increased volume. Our success is also attributed to our customers who we believe place a high value on the products and services we provide.

Commodity costs have continued to increase with the price of lead reaching a record high in July of $1.58 per pound. In the first quarter, our cost of lead was approximately $0.72 per pound and we estimate that it will be around $0.81 a pound in the second quarter. The LME price is now at approximately $1.40 a pound which is double the price of the start of this calendar year.

We believe our industry has reacted to these large increases and has experienced greater success in recovering these unprecedented high commodity costs. We know we must achieve even higher selling prices and further reduce our overall cost in order to offset higher lead costs. We believe today there is less resistant to price increases in the marketplace and that we will be more successful with our future selling price recovery efforts.

Additionally, it is our belief that our industry will fully recovered these cost increases when lead prices stabilize in the future.

We continue to be highly successful with our cost reduction program. Over the last 12 months we estimate that our cost savings program has saved the Company over $30 million. The European restructuring plan announced in May is a good example of the actions we have been taking.

The cash cost of the restructuring plan will be approximately $12 million and it will result in over a $12 million savings when it is fully implemented. Also the recent acquisition of Energia in Bulgaria will further extend our low-cost manufacturing capabilities and increase our market penetration in Eastern Europe and Russia.

Last evening we provided as adjusted earnings guidance for the second quarter to be in the range of $0.22 to $0.26 per diluted share compared to $0.23 in the prior year period. Considering the fact that the cost of our lead has increased by approximately $40 million which will negatively impact our earnings by $0.58 per share, I am pleased that we are expecting to maintain second quarter adjusted EPS in a similar range to the prior year.

With that brief overview I now will turn the meeting over to Mike Philion to give further information on our results and our guidance. Mike.

Thanks again, John. Fiscal 2008 has started strong with first quarter sales up 20% and as adjusted to the diluted earnings per share up 36% in spite of an increasingly volatile and challenging commodity cost environment. We believe these strong financial results continued to demonstrate the strengths of our global business and our industry-leading position.

Our first quarter net sales increased 20% over the prior year to $430 million. On a business segment basis, net sales in the Reserve Power business increased 17% to $185 million, while our Motive Power business increased 22% to $245 million. Our first quarter 20% growth rate includes approximately 6% due to our ongoing pricing recovery actions, 5% from foreign currency translation, and 2% from our recent acquisitions.

Further, our fiscal 2008 first quarter sales growth was solid in all three regions with growth over the prior year of 21% in the Americas, 20% in Europe, and 7% in Asia. We believe the combination of outstanding products with superior customer service continues to drive our strong topline performance.

Now a few comments about 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 $2.8 million of litigation settlement income in the first quarter of fiscal 2007, and a restructuring charge of $9.9 million in the first quarter of fiscal 2008.

Accordingly, my following comments concerning operating earnings and my later comments concerning diluted earnings per share exclude those relevant highlighted items. Please refer to our Company's Form 8-K which includes our press release dated August 8th, 2007 for more details concerning these and other highlighted items.

Our first quarter of fiscal 2008 consolidated operating earnings were $29 million or an increase of 28% in comparison to the prior year, with the operating margin increasing 40 basis points to 6.8%. This earnings performance was achieved in spite of higher commodity costs of approximately $25 million in the quarter when compared to the prior year. Clearly our commodity cost headwind was more than offset by the favorable impacts of higher revenue, selling price increases, and cost savings.

The most important single factor, combating higher commodity costs in the first quarter, was the continued progress made in our pricing recovery. We estimate that a price increase of approximately $23 million was achieved in our first quarter as compared to the prior year or roughly a 6% increase in revenue.

Our recent acquisitions remain on target and they have collectively added $0.04 per share to our first quarter of fiscal 2008 earnings per share and added approximately $40 million in our revenue. The May 2007 Energia acquisition was dilutive by less than $0.01 per share as we expected, and remains an important initiative to further reduce our costs and expand our reach into fast-growth new markets such as Eastern Europe and Russia.

As John has already discussed, these first quarter results have been significantly affected by the higher cost of lead, which is approximately 29% of our first quarter's cost of goods sold. The average cost of lead incurred by EnerSys, as it affected our first quarter income statement, was approximately $0.72 per pound compared to approximately $0.51 per pound in the prior year or an increase of 39%.

Further we expect our second quarter of fiscal 2008 lead costs to increase to approximately $0.81 per pound or a 62% increase, compared to the prior year.

Our effective book income tax rate for the first quarter of fiscal 2008 was approximately 31% compared to 32% in the prior year. 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 throughout fiscal 2008 and beyond.

We continue to anticipate our income tax rate will approximate 29% for the full fiscal 2008 year.

On April 1st, 2007, the Company adapted FIN 48 Accounting For Uncertainty in Income Taxes. This new accounting standard had no impact on our previously recorded tax liabilities and benefits. The total amount reserved on our balance sheet as of April 1st, 2007, for uncertain tax benefits under FIN 48 is approximately $13 million.

Now some brief comments concerning our diluted EPS. Diluted earnings per share were $0.30 in the first quarter compared to $0.22 in the prior year or an increase of $0.08 per share or 36%. Compared to the prior year's first quarter and expressed on an EPS equivalent basis, our increase pricing recovery was equal to $0.34 per share while our higher commodity cost reduced earnings by $0.36 per share for a net EPS decrease of $0.02 per share. The $0.10 per share of EPS offset achieved in the quarter were primarily from our sales growth and cost savings actions.

Let me spend a few moments on the previously announced June 29th, 2007, block sale by certain of our shareholders including our largest shareholder, Metal Mark Capital. Six million EnerSys common shares were sold to Jefferies & Company with no proceeds from the sale received by the Company. This action coupled with a similar six million share sale in December 2006 has increased the public float of EnerSys stock to slightly over 50% of our 47 million shares outstanding.

We believe this increased float has been beneficial to all our shareholders, as evidenced by higher daily trading volumes and an expanded investor base.

Now a few comments about our financial position and cash flow results. In short, our performance continues to be good. Primary working capital has increased $40 million since the beginning of fiscal 2008 to $426 million, primarily due to our strong sales growth and the normal inventory build in anticipation of customary second quarter holidays and associated plant shutdowns.

As a percentage of annualized trailing three-month net sales, our primary working capital ratio was essentially flat to the prior year at 24.8%. Our first quarter fiscal 2008 capital expenditures were $9 million, unchanged from the prior year. We expect capital spending for all of fiscal 2008 will approximate $45 million.

Net debt as defined in our credit agreement was $404 million at the end of our first quarter with our leverage ratio of 2.9 times. Net debt has increased approximately $20 million during our first quarter, primarily due to the Energia acquisition and the higher primary working capital levels previously referenced.

Of course, these items were offset by the strong earnings in the quarter. Our average interest rate was 6.5% in the first quarter compared to 6.3% in the comparable quarter last year. As John mentioned earlier, we expect to generate diluted net earnings per share of between $0.22 and $0.26 in our second quarter of fiscal 2008, which excludes the expected $0.02 per share charge from our ongoing European restructuring program.

The three primary factors that will impact our second quarter earnings are first, an anticipated sequential quarterly increase in our second quarter sales volume as demand for our products and services remain strong. Second, continued progress in further improving our pricing recovery in reducing our cost. And, third, the anticipated sequential quarterly increase in lead costs.

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

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

Thanks, Mike. I would like to close my remarks by confirming my optimism about the future of EnerSys. Our team will continue to do everything we can to successfully grow our business in a market that we believe has excellent growth prospects and continue to provide us with good acquisition possibilities.

I also believe that a more stable lead environment will be experienced. And when this occurs we will be able to grow earnings at a faster rate than revenue.

All of us at EnerSys are committed to making this happen; and with that I would like to open the line for questions.

(OPERATOR INSTRUCTIONS) William Blair. Mr. Bill Benton, please proceed.

Congratulations on another strong quarter. First question is your ability to continue to get price. If you would just talk through that. I know you said the environment they certainly get it. Your price realization was pretty -- sequentially it's looked pretty normal relative to last quarter. And I thought we might get a little improvement on prior announced price increases. So I was wondering if you could just talk through that a bit?

Yes, Bill, as I said earlier we believe that our industry in total has gone after pricing. We think most all of our competitors have. It's what we're seeing in the marketplace. We've had situations where we've increased prices and customers have actually left us, gone to a competitor. They found a similar story, that the prices were going up. I think there's a couple of things to look at.

First off, many of our competitors are having financial problems today. So there really is no incentive for them to lower prices or hold their pricing constant; and the second thing is we really don't have a fear of another technology to jump in to displace the use of lead acid batteries in the application that our products are used in.

So as I said earlier, when the price of lead stabilizes, I believe that we will see full recovery take place. It's the rampant increase in the volatility in the lead market that has caused us the real problems.

So you believe pricing is getting easier though, relatively speaking?

Yes.

And then, second question -- you guys have obviously done a great job in terms of reducing expenses here in light of some of these challenges. So just trying to get a sense, I mean you've done such a good job for a while here, how much longer can we go with reducing expenses? I know you got the Energia acquisition and it feels like that's obviously still pretty early but just trying to get some color there.

Yes. I think one thing when people look at cost savings and they say eventually you are going to run out there is obviously a lot of truth and that. I think the difference in EnerSys to most companies, though, over the last 12 years we have acquired 23 different companies. And it's presented a lot of opportunities for improvements and many of these improvements, they are longer term in nature.

As an example, systems improvements that will greatly enhance our overall productivity. We've just touched a little bit on that and have a long ways to go. The bottom line is we have a lot of opportunity for additional cost savings to take place because of putting companies together.

Okay. So you still think you are relatively early on the Energia type of opportunity as well as IT. Is that a fair statement?

Oh yes. The Energia opportunity hasn't even begun to kick in. The Energia opportunity is breakeven at best right now for us, and we won't see the total impact of that to later this year or early next year.

Then final question on your cost for next quarter lead $0.81 (inaudible). And just looking at the charts, the charts show that last quarter those numbers were a bit higher.

I know you guys have been able to buy favorably to the [spot] but I am guessing -- it looks like it's even hold more favorable, relative to the trends last quarter. So want to get a general sense on how you've been able to maybe keep that number lower than I would have expected?

One thing for clarity, on the $0.81 and I know some have talked about that mean hedging and that is not just hedging. That is our total cost of lead going forward which includes the FIFO fact, hedging and a totaling program that we have in place. So when we look at it and we quote that we have 51% of our lead going forward hedged at a -- accounted for, I mean, at a certain price -- accounted for includes all the three. And that is part of what keeps the number lower for us, because we have a very effective tolling program.

The second point is that we monitor the lead markets daily, hourly. When we see an opportunity that we think that we should be hedging at a good price we will jump on it.

Dan Wang from Lehman Brothers.

First question was regarding the reserve market. I mean, you had solid results there and I was just wondering if you can comment on the demand from the telecom market? Obviously that had seen a little bit of slowing, spending there. Have you seen signs that some of the consolidation effects have run its course and maybe some pickup in spending there?

I don't think it's totally run its course yet. We are seeing still some fairly strong spending in the telecom industry, but I think there is more to come once the consolidations are completed.

I think that there are certain companies that are still sorting out their procurement and their basic systems because they just consolidated. So I thing that we were going to see a pickup take place in the future on it. Maybe that's more hope than actual data at this point but we do believe that there are some companies that have slowed up on spending until they get consolidated.

Asia market is very strong in the telecom. European market is going along and the U.S. market also at mid single digits.

And with regard to the overall strength of the market and I think your commentary more specifically about the second quarter outlook, it seems like your expectation is that just continue to see that you will continue to see broad-based strain. Then I was wondering if you could just comment on -- just based on what you see, the sustainability of the strength? I think it's obviously your exposure to Europe is helping but maybe some additional color around that?

Let me back up a little bit, Dan. Typically if you look at our normal pattern, our fourth quarter is our strong quarter every year by far and away. This year, our first quarter has exceeded the sales in our fourth quarter of last year by about 4%.

Our second quarter, we are projecting to even be higher than this first quarter. What data are we basing it on? It's our backlog that we have right now, our backlog is at a historic high. It's by what we're hearing from our customers; what we see in a weekly order pattern right now. It's strong. Our orders are very strong right now.

Switching over to the pricing environment, I think historically you've been able to get a greater level of pricing from your mode of customers relative to what you have seen in the reserve side. Are you seeing a trend there? Are you seeing a little bit more receptivity from the reserve markets, as well?

There's receptively to the reserve market but not at the same level as on the Motive Power side. And I think that's somewhat reflected in our numbers when you take a look at the motive margins versus the reserve margins.

That being said, we know that we have to further improve the margins on our reserve business; and the big change that we are making there is with Bulgaria to lower our costs. Obviously the marketplace is going to set pricing and pricing is tougher in Reserve Power segment than it is in Motive.

I was just looking further out in terms of -- just taking a stab at your -- perhaps your effective lead cost in the second half of your fiscal year. I mean, I noticed your commentary in the Q about half of your lead requirements for the remainder of the year accounted for at about $0.71 including hedging, in the totaling of the purchase.

Assuming that current LME prices hold at about this $1.40 level, is it kind of a reasonable logic to think, maybe, just kind of an average of that $0.71 in current spot price and effective lead costs could be around the $1.00 range in the second half of the year?

Mathematically that is right on the mark. That's the way we would view it also.

And, obviously, the factors that could offset that potential pickup being additional price recovery?

Well, there's a number of factors that could affect that and I mean what we are talking about here is what the cost is going to be. So price isn't really the issue with it. The numbers that would affect the cost of our lead would be if the volume went down it would change the mix. We are projecting a pretty high volume to come in. Or if the volume went up it would be weighted more towards the $1.40. The other thing it depends on what the LME does.

Finally on the pricing, I think you've talked about additional price increases that you put forth during the quarter. Could you quantify how much pricing, additional pricing you have announced? And if there -- if you expect additional beyond that?

I'm going to give you the numbers through the end of the quarter what we've done since the beginning of the fiscal year. It's in the ZIP code of about 15% that we have gone after. Obviously with lead going up we are going to have to take other actions which -- they are in the works right now, but I'm not prepared to really discuss those since we have not gone to the customers in the market with it yet.

Congratulations on the strong quarter.

(OPERATOR INSTRUCTIONS). Mr. Craig, at this time, no one has entered the queue for questions.

Thank you, everyone, for joining us for the call this morning. We appreciate your support of the Company and everyone have a great day.

Thank you so much, ladies and gentlemen, for your participation and interest in this conference today. You may now disconnect. Have a great day.