EnerSys (ENS) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2008 EnerSys earnings conference call. My name is Lacy, and I will be your coordinator for today. (OPERATOR INSTRUCTIONS). As a reminder that is conference 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. Thank you for joining our conference call. During this call, we will be discussing our fourth-quarter and full-year results for fiscal 2008, as well as commenting on the general state of our business. But before we start, I'll ask Mike Philion, our Chief Financial Officer, to cover information regarding forward-looking statements. Mike?

Thank you, John, and good morning to everyone.

As a reminder, we will be presenting certain forward-looking statements on this call that are based on management's current expectations and are subject to uncertainties and changes in circumstances. Our actual results may differ materially from the forward-looking statements for a number of reasons. For a list of the factors which could affect our future results, including our earnings estimates, see forward-looking statements included in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operation" set forth in our annual report on Form 10-K for the year ended March 31, 2008 which was filed last evening 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 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 11, 2008, which is located on our Website at www.EnerSys.com. Now let me turn it back to you, John.

Thanks, Mike. As you saw in our financial results reported last night, our performance by most measurements was at record levels. We reported record sales of over $2 billion and record earnings at an adjusted $1.42 per diluted share. These results came from the great work of our employees and the solid support from our customers as we participated in strong markets around the world. Each of our three geographic regions and both of our reporting segments contributed to our increase in revenue and earnings. These results included the continuation of our increased share of the industrial battery market, as a result of the value we bring to our customers from high-quality innovative products and excellent service.

Our substantial increase in earnings came in spite of the headwind of $240 million in incremental commodity costs this year, which is a negative impact equivalent to $3.43 per share. We were able to more than offset these costs through our continual cost savings programs, higher volume and increased leverage leveraging our fixed costs, and improvement in the portion of incremental commodity costs that we have recovered through price increases. Although our pricing recovery improvements in fiscal 2008 we still only recovered 85% of the incremental commodity costs. We will remain focused on improvements in this area.

We will continue to focus strongly on reducing costs to give our customers the best value possible while improving our profit margins to a level more appropriate for our industry. We recently announced the sale of our plant in Manchester, England, which is part of our comprehensive plan to migrate manufacturing operations to lower-cost facilities. Our acquisition last year of Energia in Bulgaria was a key element of that plan, allowing for the expansion of low-cost manufacturing in the future.

In addition to reducing manufacturing costs, we have succeeded in holding operating expenses to a level of 13% while revenue increased 35%, with the expenses as a percent of sales dropping from 14.7% in fiscal year 2007 to 12.3% in 2008.

While revenue growth has been strong globally, we're particularly pleased with the increase in demand for our unique thin-plate pure lead products in a variety of applications, including telecom, Aerospace & Defense and many specialty products. Due to this demand, we have recently announced a two-year $50 million capital spending program to substantially increase our capacity for thin-plate pure lead batteries; and this capacity will be fully online next year.

In May, we began refinance an existing U.S. credit facility. This new structure will be advantageous to the Company. It gives us a more flexible platform to finance acquisitions and grow our business.

We have completed 12 acquisitions since EnerSys was formed in 2000 and these acquisitions now account for over two-thirds of our revenue and earnings. We continue to look for good opportunities in many product areas and geographic areas.

We continue to believe strongly in the long-term growth potential of our markets we serve, and we believe we will continue to share favorably in that growth. Also, we plan to expand on that by pursuing acquisitions in internally developed areas and opportunities, which will provide long-term benefits from new products and geographic expansion.

We are already pursuing new opportunities in the solar and wind and power segments, batteries for hybrid plug-in vehicles and thin-plate pure lead backup power for nuclear submarines, along with new products to serve the telecom, UPS and Motor Power markets. We will remain highly focused on new developments in emerging technology areas in storage energy solutions that earn good returns for our shareholders.

The continued success we are experiencing in many areas is reflected in the new guidance we provided last night for the first quarter of fiscal 2009. The previous EPS guidance provided in mid-May was an adjusted diluted EPS of $0.40 to $0.44 per share. We now anticipate first-quarter earnings to be in the range of $0.45 to $0.49 per adjusted diluted share as our business continues to perform very well. This compares to an adjusted $0.30 per share the prior year.

Looking further ahead, our number one financial objective is to increase our profit margins while continuing to grow the business and serve our customers. Over the last four years, substantially higher commodity costs have resulted in our gross profit margins declining from 25% to under 20%. We're highly focused on our return to historically normal 25% gross profit. We believe this is a balanced expectation and is necessary to provide an adequate return to our shareholders while ensuring that we have the capital to continue to provide innovative and high-quality products and services for our customers.

We will continue to do everything we can to reduce cost. We lag in the amount of incremental pricing required to offset the unprecedented increase in commodity costs. We will therefore remain firm in our resolve to recoup the increased commodity costs to help achieve our 25% gross profit margin target.

I'll now turn the discussion over to Mike Philion for additional information on our results, guidance and new credit facility. Mike?

Thanks, again, John. Our record fiscal 2008 results continue to demonstrate the strengths of our global business and industry-leading position.

Our fourth-quarter net sales increased 41% over the prior year to $582 million. On a business segment basis, net sales in the Reserve Power business increased 50% to $253 million while our Motive Power business increased 34% to $329 million. The consolidated growth rate includes approximately 9% from base volume, as demand for our products and services remains strong. Also in the fourth quarter, the growth rate includes approximately 19% due to our pricing recovery actions, 11% from foreign currency translation and 2% from acquisitions.

Further, our fourth-quarter sales growth was solid in all three regions, with growth of 72% in Asia, 54% in Europe and 21% in the Americas. We believe the combination of our outstanding products with superior customer service continues to drive our strong top-line performance.

Net sales for our fiscal 2008 year were also strong and increased 35% over the prior year to over $2 billion. On a business segment basis, net sales in the Reserve Power business increased 38% to roughly $900 million while our Motive Power business increased 33% to $1.1 billion.

The 2008 year's growth rate includes approximately 14% due to pricing actions, 11% from base volume, 8% from foreign currency translation and 2% from acquisitions. We believe our base volume growth of 11% is higher than the markets in which we serve. Accordingly, we continue to increase our global market share.

Our top-line performance continues to be solid as the benefits of our global reach and highly diversified customer base and end markets are very evident. While we cannot forecast the future, our current orders and backlog remains at record levels. Although some modest softening in the U.S. Motive Power market has been experienced recently, the remainder of our global businesses continues to be very strong.

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 the European restructuring charges in fiscal 2008. Accordingly, my following comments concerning operating earnings and my later comments concerning diluted earnings per share exclude all relevant highlighted items. Please refer to our Company's Form 8-K, which includes our press release dated yesterday, for more details concerning these and other highlighted items.

Our fourth-quarter as-adjusted consolidated operating earnings were $39 million, or an increase of 74% in comparison to the prior year with the operating margin increasing 130 basis points to 6.7%. This strong earnings performance was achieved in spite of higher commodity costs of approximately $90 million in the quarter. Clearly, our commodity cost pressure was more than offset by the favorable impact of higher revenue, selling price increases and cost savings.

While progress is ongoing in raising our selling prices due to increasing commodity costs, as we expected, significant earnings pressure continued to be experienced in our fourth quarter as pricing recovery still lags rising costs. We estimate that price increases totaling approximately $80 million were achieved in our fourth quarter or roughly a 19% increase in revenue.

The earnings gap attributable to this cost/price timing imbalance was approximately $10 million in our fourth quarter or $0.14 of earnings per share. As John previously mentioned, we remain highly focused on this earnings pressure and are steadfast in our resolve to eliminate this gap.

Our fiscal 2008 full-year as-adjusted consolidated operating earnings were $133 million, or an increase of 47% in comparison to the prior year, with the operating margin increasing 50 basis points to 6.5%. Similar factors affected our full-year results as described for our fourth quarter.

Our fiscal 2008 results have been significantly affected by the higher cost of lead, which is roughly 33% of our year-to-date cost of goods sold. We estimate that our fourth-quarter lead costs alone have increased approximately $80 million or over 125% compared to the fourth quarter of the prior year. Additionally, we estimate our full-year lead costs have increased approximately $220 million, or 75%. Further, we expect our first-quarter of fiscal 2009 lead costs to increase by over $70 million, or over 75% compared to the prior year. These higher costs clearly illustrate why improved pricing recovery is still needed.

Now, several comments concerning our diluted EPS. As-adjusted diluted net earnings per share were $0.42 in the fourth quarter versus $0.22 in the prior year or an increase of 91%. Compared to the prior year's fourth quarter and expressed on an EPS-equivalent basis, improved pricing recovery was equal to approximately $1.14 per share while higher commodity costs negatively affected our earnings by approximately $1.28 per share.

This would have reduced our EPS by $0.14 were it not for the equivalent of $0.34 of additional earnings, primarily from our sales growth and ongoing cost savings actions. As adjusted diluted net earnings per share were $1.42 for the full fiscal 2008 year compared to $0.87 in the prior year or an increase of 63%. Similar factors affected our full-year results as described for our fourth quarter.

Now, some brief comments about our financial position and cash flow results. In short, our performance continues to be good with adequate liquidity to both operate and grow our global business. Primary working capital increased $192 million since the beginning of fiscal 2008 to $578 million, principally due to our sales growth and the increasing cost of commodities. As a percentage of annualized trailing three-month net sales, our primary working capital ratio at March 31, 2008 was 24.8% compared to 23.3% at March 31, 2007. This modest increase in our primary working capital ratio was primarily caused by the increasing percentage of our total business outside of the United States.

Our capital expenditures were $45 million in fiscal 2008 compared to $42 million in fiscal 2007. We continue to expect capital expenditures will approximate $60 million in fiscal 2009 as we continue to believe in the future growth prospects for our business.

Net debt, as defined in a senior credit agreement, was $423 million at the end of our fiscal 2008 year, with a leverage ratio of 2.5 times.

Our average interest rate was 6.5% in fiscal 2008 compared to 6.6% in the prior year. We remain in full compliance with all our credit agreements and have well over $100 million of available but unused credit under existing facilities at March 31, 2008.

Let me take a minute and update you on our recent refinancing activities. We are very pleased with our progress to date and expect to be completed later this month. Our objectives for this refinancing were threefold. First, refinance our existing $450 million senior secured credit facility well in advance of its expiration in March, 2009. Second, provide future capital structure flexibility and add appropriate additional borrowing capacity to support our Company's future growth strategy, whether it be organic or from acquisitions. And third, access the most attractive and complementary debt markets today to minimize our long-term cost of capital.

As you may know, we successfully issued 172.5 million of convertible senior unsecured notes in late May as part of this plan. This issuance was very well-received by our investors. The final element of our plan is a new $350 million senior secured facility with an undrawn $125 million revolver that is expected to close in late June. For fiscal 2009, we expect this refinancing will result in interest savings of approximately $4 million or roughly $0.06 of EPS when compared to fiscal 2008.

One other noteworthy item is the investment-grade credit rating for our new senior secured debt of BBB- from Standard & Poor's. We appreciate their confidence in our Company.

As John mentioned previously, we expect to generate diluted net earnings per share of between $0.45 and $0.49 in our first quarter of fiscal 2009, which excludes the expected $0.04 per share charge from our ongoing European restructuring program; the expected $0.09 per share charge from our refinancing activities; and a $0.16 credit from the sale of our Manchester manufacturing facility.

Historically, we have experienced a sequential quarterly reduction in both revenue and earnings during our first fiscal quarter of each year. We do not expect this pattern will occur in the first quarter this year. Demand for our products and services is expected to be substantially similar to that experienced in our fourth quarter and we expect sequential quarterly earnings to increase.

Our anticipated earnings increase will be driven by three factors. First, stable quarterly revenue, as referenced above. Second, a modest sequential increase in total commodity costs of $6 million. And third, the ongoing benefits from cost reduction activities and improving pricing recovery.

Lastly, LME lead costs have dropped by over $0.35 per pound over the past 45 days and are currently in the $0.90 per pound range. We certainly welcome this recent drop in lead costs but it remains uncertain to us as whether this is a temporary or a sustained market correction. Assuming LME lead costs averaged in the $0.90 per pound range for the next three months, we would experience a significant decrease in our lead costs by the third fiscal quarter of 2009.

In closing, I remain highly confident in our Company's future. We have consistently demonstrated our global organization's ability to adapt quickly to rapidly changing market conditions and successfully grow both revenue and earnings.

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

Thanks, Mike. And with that I would like to open the line up for questions.

(OPERATOR INSTRUCTIONS). Christopher Agnew, Goldman Sachs.

The first question -- how should we think about the margin improvement going forward, by division, by geographic region? Where do you expect to take out more -- or save more costs, and where should you be able to get more pricing?

Will let me address the pricing side first, Chris. I think when you take a look at lead, when they went to a high of $1.82 a pound back last October, our pricing was going up as lead was going up. In other words lead, would go up, we would increase prices. Three to six months later, we would see that price increase come through and hit our P&L. And we have constantly been playing catch up.

Now what has happened is lead has gone from that peak of $1.82 to under $0.90 a pound. Our objective now is to hold as much of that pricing as we possibly can. We spent a lot of time with our sales force recently. We have talked this through. We feel we led the industry when we needed to take price up, and we feel we need to lead the industry now on holding pricing as much as we can.

That being said, however, about 40% to 50% of our business is on automated pass-through. So we will save price reductions on that particular portion of it.

The second part I think of your question is really around costs and where we see costs going. As you know from the restructuring that we have in Europe, there is still a long ways for us to go. We're making major investments in the Bulgaria operations. We mention we shut down our Manchester, UK plant. We're moving production from high cost factories to low-cost factories.

So I think in our Reserve Power business, we think we're going to see substantial pick-up in margins in the next twelve months or so.

Great. On the Bulgaria plant, where is utilization currently and what is your ability to expand into and maybe move manufacturing into that facility?

One of the reasons we bought that plant, Chris, is the facility itself is approximately 450,000 square feet. It was only generating about $19 million in revenue at the time. It required a capital investment of somewhere in the vicinity of about $15 million to take and really upgrade the equipment and facility and to move equipment and production, I mean, from the high-cost plants to low-cost. So it has got a lot of opportunity.

Great. And then just one last question, please. If lead prices continue to fall, at what point do you think you need to give price back to customers? Where would you get pricing -- negative pricing pressure?

Well, I don't know the answer to that. All I can save is we're going to do whatever we can to hold it in the market and our competitors are going to help determine that. If our competitors have the resolve to hold pricing like we do, I think we are going to see a very good situation. But I cannot project what our competitors are going to do. All I can say is internally that we're steadfast; we're going to do everything we can to hold pricing on that portion that does not have automatic pass-throughs.

Paul Clegg, Jefferies.

Congrats on the strong quarter and the outlook.

Just a couple of things here. I guess there have been some questions about the way you guys account for lead hedges. Can you just confirm for us that the hedge cost does not actually hit your P&L until the lead in question is sold? Maybe we can just kind of walk through that dynamic. Because I think there was some concern that you would see margins get pressured as lead costs came down.

Well, Paul, as we spoke, our lead hedge accounting is absolutely correct under U.S. GAAP and international GAAP. It is plain vanilla. I mean it is about as straightforward as it comes.

And to your point, there is no question there is matching between when a hedge is physically taken and when ultimately it hits the P&L.

As part of any strategy, and ours is no different, we hedge to mitigate volatility. And certainly with rearview mirrors, none of us could have anticipated lead falling. And you see this in our 10-K. We disclose it all the time.

So certainly, we do have some modest lead positions that will still need to run through our P&L from our hedges. As I recall, there was roughly 60 million pounds at fiscal year-end that will take, let's call it, three months or so until it fully flushes through our P&L.

So Paul, as you know, we do have FIFO timing etc., but we would expect essentially all the lead hedges to be completely through our P&L by the third quarter.

Okay, great. And just a follow-up. Was there some significant specific contributor in your decision to raise guidance so quickly after you gave your first guidance about three weeks ago?

Yes. I think what it was, Paul, that three weeks ago when we gave our guidance, we did not have the luxury of looking at through May, our results, our actual results. Our April and May came in significantly stronger than we anticipated.

And what it was -- it is not the pricing or lead. It is pure demand for our products. Our volumes are much higher than we anticipated three weeks ago. We're at record backlog and record orders again at the end of this quarter.

Okay. And maybe one just quick housekeeping question. The European restructuring looks like it is winding down. Do you think you will see any more charges past the September quarter?

We will. We will, Paul. And the tail of the program is approaching, as you referenced. But one of the tricky parts is, as you know, GAAP accounting on severance has become what I would characterize as more cash-basis oriented. And so the little trickiness is anticipating with precision how the final elements of the redundant employment actions will play out. But most of it is behind us and we would anticipate by certainly our fourth quarter of this year it will essentially be wrapped up.

Corey Tobin, William Blair.

Congrats on a great quarter. Let me just follow-up quickly on Paul's question, if I could. So given what you have seen here through April and May, looking at volumes for the second quarter, is it safe to assume that we will see a bit of an acceleration in volume growth versus the 9% that you recorded in the March quarter? Is that at this point on the trajectory to be achieved?

I cannot say that it is going to be that much higher. I don't have the numbers here in front of me specifically, but I could say this. That when we look at our business -- and this is happened the last several quarters -- we keep reading in the newspapers about how bad things are in the U.S. economy and other areas of the world being bad. And what we find is just the opposite in our business.

The telecommunications industry is strong. The UPS industry is strong. Motive Power is strong with the exception of the U.S. market. So we watch this thing hour by hour, where we think the economy is going to go and are we missing something with it; and we get pleasantly surprised it seems like every quarter that the demand for our products and services just continues to hit record levels.

One of the things, to complement John, it is tough to read. But historically, we would always expect our second fiscal quarter to be slightly down on a sequential basis, and it is really the influence of summer holidays principally in Europe and some in the U.S. Will that historical pattern develop in the coming year? It is hard for us to say. But we generally would expect that influence of summers to have some downward pressure on top line.

One of the other things, this -- our first quarter is going to be higher than our fourth quarter. Historically, the fourth quarter has always been our strongest quarter. So the dynamics right now -- it has really changed when you look at the historic patterns.

Right. Just to clarify, when you say Q1, the June quarter here is going to be higher than the March quarter, you're speaking with respect to total revenue. But I guess what I was driving towards in the question was that implies a volume -- well not necessarily the volume growth would accelerate, right? Is that -- I guess what I'm hearing is the absolute revenue number will be up but not necessarily volume growth, although it is not excluded. It could potentially happen?

Are you talking year-over-year or sequentially more in that question?

I'm just basically asking in the June quarter, could the volume growth be higher than the 9% booked in the March quarter?

It is possible, but as I commented, we see a substantially similar quarter to Q4. So I would call that about the same kind of unit volume.

Great. Got it. And then shifting gears for a second, you mentioned a number -- you mentioned some initiatives, John, in your prepared remarks with respect to solar, wind and hybrid plug-in vehicles. To what extent are those contributing to the P&L today? I guess another way to look at it would be what percentage of revenue today would you ascribe to those types of applications? Assuming it is relatively small today, when do you really see that starting to kick in?

Well, I think in both those areas, it is relatively small. In the solar and wind, it is in the $25 million to $30 million range total. And the hybrid vehicle, it is a development program. There is no revenue generated in that.

But I think the point there is this, that if these markets take off the way many of us think that they will, EnerSys will be in a position to service those markets. We have a complete line of batteries for wind and solar today. But the industry is not developed to a point that it is ready to go. With oil being up as high as it is, there's a lot more emphasis and a lot more questions being asked of us about where do we stand on that. We're ready to go right now. We can sell the batteries for those applications. We have to wait for the wind and solar industry to really be in gear to take -- and have the demand.

(OPERATOR INSTRUCTIONS). Dana Walker, Kalmar Investments.

Could you talk about segment activity if you're in a position to describe the unit experience in Reserve as well as in Motive in the quarter and the year? And perhaps talk also geographically in the same manner.

On a unit basis, all of our areas are up with the exception of North American Motive Power business. That, we are seeing down. Our revenue, though, in Motive Power in the Americas is up some $30 million. And the reason for that is strictly pricing. But if you look strictly at units, every segment of our business, with exception of Motive Power in the Americas, is up.

That comment is focused on the fourth quarter?

Fourth quarter and full year both.

The Reserve numbers, which were up 50% in the quarter, would your price realization have been meaningfully different in Reserve than it would be in Motive?

No, it is approximately the same.

So your unit --

In fourth quarter. In the fourth quarter, it is approximately the same.

Therefore, your unit growth in the fourth quarter was quite a bit higher in Reserve?

That is correct.

Is that a TP PL phenomenon or is there something else going on there?

I think it is across the board. It is not only thin-plate, pure lead, but it is also our calcium products. We have seen major growth take place in the U.S. market. I think what a lot of this is attributed to that telecoms are competing against each other and they are also competing with the cable industry. My personal belief is that the telecom industry and cable industry does not reinvent themselves and keep going and investing money, that they will cease to exist. There is a very competitive market out there right now. And I think that we're seeing that in our results.

Do you believe that strength that you saw in Reserve in Q4 was a relative anomaly or do you believe that type of firmness and its relationship to your Motive business is sustainable?

It is hard to tell, but I think I don't see a slow-up taking place in the Reserve Power market. We have said that we think that we are going to see high single digit growth in a unit basis going forward. I still believe that, and our backlog and order pattern supports that.

The automatic pass-throughs you describe, are they more oriented towards Motive or Reserve?

In Europe, they are about equal to both. In the U.S. market, it is primarily Reserve and very little Motive.

Your fourth-quarter reserve margin was slightly down compared to where it was in the third quarter. Aside from the restructuring that you are undertaking in Europe, what would you expect to be -- have the greatest influence on your reserve margin?

Mike, do you want to pick that up?

Well I think as John referenced, as we look forward, we are highly focused on taking costs out of Reserve. We do continue to believe our thin plate and other unique high margin Reserve products will grow at a faster rate than the base business. So we're pretty darn optimistic, Dana, that we will see margin expansion continue to be evident. Now clearly, I will give you the obvious caveat. Lead needs to be cooperative in a sense, not highly volatile. But assuming we have some stability in lead, we're very confident we will see meaningful improvements in the next 12 to 18 months in Reserve margins.

Dana, let's go back a little bit of history here at EnerSys. If you take and go back five, six years ago, our Motive Power business was not performing at the same level our Reserve Power business was. We made substantial capital investments in the Motive Power business, both in the Americas, Asia and in Europe, to really improve margins in that area. What has happened is then, with consolidation taking place in the telecom and the UPS industry, getting pricing Reserve Power became tougher.

We needed to make additional investments in the Reserve Power business to get our costs down. That has been our focus. When you look at the restructuring costs that is taking place in Europe, that is primarily all going to the Reserve Power business. Thin plate pure lead, Reserve Power business.

I would say that most of our CapEx that is related to cost savings initiatives is really going to our Reserve Power business.

The second part on it though is the new product introductions that we have come up with. We have a number of unique products that we've taken to the market, to the telecoms and UPS industry, and we're seeing market share pick up with that, and we're getting premiums on those products.

You know, one last thought. One of the things that we all sort of lose track of, this lead cost pressure that we have been under, it has been four years. And it has been over $400 million of pressure. And certainly, as John referenced, the pricing improvement in Reserve is appreciated and is certainly on par with the Reserve this year or with Motive this year.

That was not the case as this four-year journey. We were certainly under more price-related pressure in our Reserve business in prior years. So there is a bit of a catch-up phenomena still embedded in the Reserve markets that we are very confident, ultimately, you will see meaningful improvement.

One last comment if you would offer on TP PL, with your -- you're running close to full out or at full out; maybe you could describe your unit experience in TP PL in Q4, as you see it in fiscal '09 before you get the incremental capacity.

We're running both of our factories seven days a week, 24 hours a day. We're doing everything we can to keep and satisfy customer demand for it. We basically shut our marketing organization down for future -- further customers in that area until we get the new capacity online.

As we compare those numbers though to year-over-year, are you in a position to sell more units for the foreseeable future or are you truly selling comparable amount of units at higher prices?

Well, we are selling comparable amount of units currently because of capacity. But the demand for the product is significantly higher. In other words, we could sell a lot more of the product than we have the ability to build it.

And just to clarify something you said earlier, when, Mike and John, you said that you expected your Reserve margins to improve appreciably in a 12 to 18-month time frame, are we likely to -- absent the pass-through phenomenon of lower lead prices, are we likely to see structural benefit in lead or in your Reserve margin in fiscal '09 before some of those restructuring benefits take hold?

I'm not sure I understand the question. Do you, Mike?

No, I'm not positive. Could you just be a little more specific as to the essence of your question please?

I will try my darnedest. You were very confident that your Reserve margins are going to expand. You talked about that visibility taking place over the next 12 to 18 months. Are we only likely to see that in 12 to 18-month time or are we going to see that iteratively as we work our way through fiscal '09?

I think -- my comments are on improving margins on that. I'm assuming everything else is going to stay constant. I'm really focusing on the cost element of it, moving production from high-cost plants to low-cost plants. If everything else were constant, our pricing, the cost of lead, everything else, we will see some fairly nice margin enhancement take place in our Reserve Power business.

And I think that you are going to see that as it comes online. It is going to spread over this year. We will see some of it this year, but I think the bulk of it -- the full implementation is next year.

That is helpful. Thank you.

Willis Taylor, Gagnon Securities.

I wanted to follow up on the hedging questions. Could you tell us how large the hedging gains were that were booked during the year?

Yes, I can give you some just directional. I will caution you, you have to put whether it is a hedging gain or loss into the context of a lot of other moving parts -- where was pricing and where was some of the competitive environment. But yes, in our quarter, our fourth fiscal quarter, the one that just ended, we had approximately a hedging gain -- let's call it in the $5 million to $10 million range. In our fiscal '09 first quarter, the one that we have just given guidance to, we will have a hedging loss in the $10 million to $15 million range. So we would go from a gain to a loss, which is not surprising because of the tremendous drop in lead that we have experienced over the last 60 days.

Now we remain short in our hedge positions. We have approximately 15% of our requirement hedged at any given point. So we believe, certainly, we have remained balanced, short and prudent. But yes, listen, with the benefit of hindsight, we would have done things differently. But that is not why you hedge. You try to create predictable cost structures and you try to match it within reasonable periods of what I would characterize revenue that is largely based on the same general lead costs.

Yes, I think the thing that you have to be careful on, on this, is when you take a look at this loss as compared to what the market was at, at that that point in time compared to our hedge. The other side of the coin is that with lead going down that other let's say 50% that is not hedged, we're getting a big pick-up on it.

Exactly right.

To be specific, I will just pick a month here. In the month of January, we had some lead hedges out there, it was $1.58 a pound. The actual market was $1.18 a pound. That is equivalent to a $10 million loss in that particular month. However, what it does not reflect is the other portion of lead that we did not have -- not hedged -- or it was not hedged, that difference was $1.58 to $1.18. So it is a big difference in it. So we look at it from the standpoint of compared to market and that portion that we had that is lost. It does not necessarily all drop to the P&L bottom-line because we're holding pricing and we're getting the benefit of lead on that other portion I referred to. It is a pretty good situation in total.

You know, and as I said, Willis, there is no question we're going to continue to be short in our hedging but we're going to continue to hedge.

When we took that forward position in January at $1.58, lead was still skyrocketing to the moon. And you can never know with certainty with this volatility whether that was going to be a prudent position or not. But our pricing in that period was in that range or higher. So we do not generally get big imbalances when you compare the revenue that is going through a quarter with what I would call the balanced hedges in that same period.

So to summarize what we're talking about here, when the lead was at $1.58 we had that hedge. Our pricing was higher on our products. A large portion of our lead in that given month was at market price. But we are saying this morning that hey, we did, compared to fair market at that point, there is a loss on that particular portion of the lead that we hedged.

Okay, that is very helpful. And just to be clear, your guidance is taking in account this loss?

Of course.

Yes.

At this time, there are no further questions. I would now like to turn the conference back over to John Craig for closing remarks.

Well, I would like to thank everybody for their interest in EnerSys and I wish you the best of days. Thank you.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day.