EnerSys (ENS) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the quarter-one fiscal 2009 EnerSys conference call. My name is Nora and I will be your coordinator for today. (Operator Instructions). 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, Sir.

Good morning and thank you for joining us for our conference call. During this call, we will be discussing our first-quarter fiscal 2009 results as well as commenting on the general state of our business. But before we start, I would like to ask Mike Philion, our Chief Financial Officer, to cover information regarding forward-looking statements. Mike?

Good morning to all and thank you, John. As a reminder, we will be presenting certain forward-looking statements on this call that are based on management's current expectations and assumptions which are subject to uncertainties and changes in circumstances. EnerSys' actual results may differ materially from the forward-looking statements for a number of reasons. Our forward-looking statements are based on management's current views regarding future events and operating performance and are applicable only on the dates of such statements. For a list of the factors which could affect our future results including our earnings estimates, see forward-looking statements included in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operation set forth in our quarterly report on Form 10-Q for the quarter ended June 29, 2008 which was 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 yesterday, August 5, 2008, which is located on our website at www.EnerSys.com. Now let me turn the call back to you John.

As reported last night, we experienced record sales and earnings for the first quarter of fiscal 2009. We also booked record orders and our backlog reached an all-time high. Our revenue increased 38% compared to the first quarter of our prior fiscal year. We experienced strong revenue growth in both our motive power and reserve power businesses in across our three geographic regions.

As adjusted, diluted earnings per share increased by 60% over the prior-year from $0.30 last year to $0.48 this year. We continue to experience solid growth in all of our established markets and continue to successfully penetrate emerging markets and introduce new products. In addition, we continue to experience increased demand for our thin-plate, pure lead products; our lithium products and our specialty nickel-based batteries.

Our substantial increase in earnings was largely due to selling price increases of approximately 19% in the first quarter compared with average prices in the prior-year quarter. While we recover the incremental commodity cost increases we experienced in the first quarter, we still have improvements to make to recover the full cost increases we've experienced over the last couple of years. We still experienced a year-over-year decrease in our gross profit margins of 1.1%. We remain committed to the 25% gross profit target that I discussed at our last meeting.

On a sequential basis, our gross margins improved or increased from 18.2% in the fourth quarter of fiscal 2008 to 19% this quarter. But this still remains far below our 25% target. We remain highly focused on this objective and we believe it will be achieved by continuing to close the selling price, lead cost, timing gap along with our ongoing cost savings programs.

As previously announced, we completed the sale of our Manchester, England plant and the refinancing of our U.S. credit facilities in this quarter. Both of these actions will result in significant ongoing savings. Although the general global economy clearly seems to be entering a period of slower activity, for the most part we're not seeing it in our business. Even if the organic rate of growth of our base business were too slow, we believe we could offset this was higher rates of growth in certain geographic areas and with newer high-growth products. Our confidence to continue growth is supported by recent consensus forecast of global GDP growth of about 4% in both 2008 and 2009.

We continue to expand into emerging markets globally. We believe the markets for our products in these areas will continue to grow rapidly and that we will continue to gain share in these markets. In the product area, we also experienced rapid growth in our thin-plate, pure lead products in many applications for telecommunications, aerospace and defense in numerous specialty areas.

Our $50 million capacity expansion project for thin-plate, pure lead products remains on track and we continue to see strong demand for this type of product. This investment coupled with our investment in Bulgaria, our restructuring -- European restructuring program as well as our expansion into emerging markets should result in significant earnings improvements in the future.

In addition, we continue to experience growth in our batteries used and renewable energy applications. We all recognize the importance of obtaining more energy from wind turbines and solar panels. We believe this activity will grow rapidly and we are well positioned to supply high-performance, cost-effective batteries for these systems.

We will continue to pursue opportunities in many emerging technologies that will help drive profitable growth for our Company. Our continuing success in our base business along with many newer opportunities that are adding to our revenue earnings are reflected in the guidance we provided last night for the second quarter of 2009. We anticipate that adjusted diluted earnings per share will be in the range of $0.49 to $0.53 for the second quarter which compares to an adjusted earnings per share of $0.35 in the prior-year quarter. Assuming the midpoint of our guidance range, this is a 46% increase year-over-year. I'm pleased with this since our second quarter is typically the slowest quarter of our year due primarily to the summer holiday periods.

As I stated last quarter, our number one financial objective is to increase our gross profit margins to a more historically normal level of 25%. We have improved in the last two quarters but we still remain below our target. We believe the appropriate combination of higher selling price and lower cost will result in our achieving this objective.

With that, I would now like to turn the discussion over to Mike Philion for additional comments on our results and our guidance. Mike?

Fiscal 2009 has started strong with first-quarter sales up 38% and as adjusted diluted earnings per share up 60%. In spite of volatile commodity costs and a challenging and uncertain global macroeconomic environment, we believe these strong financial results continue to demonstrate the strengths of our industry-leading business and the soundness of our business strategy.

Our first-quarter net sales increased 38% over the prior-year to $592 million. On a business segment basis, net sales in the reserve power increased 40% to $259 million while our motive power business increased 36% to $333 million. Our first-quarter 38% growth rate includes approximately 19% due to our ongoing pricing recovery actions, 11% from foreign currency translation and 8% from volume. Further, our fiscal 2009 first-quarter sales growth was solid in all three regions with growth over the prior-year of 30% in the Americas, 40% in Europe and 70% in Asia. We believe the combination of outstanding products with superior customer service continues to drive our strong top-line performance.

Now a few comments about our as adjusted consolidated earnings. As you know, we utilize certain non-GAAP measures in analyzing our Company's operating performance specifically excluding highlighted items. 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 yesterday, August 5, 2008, for more details concerning these and other highlighted items.

[Our first quarter of fiscal 2009 operating earnings were $43 million or an increase of 47% in comparison to the prior-year] with the operating margin increasing 40 basis points to 7.2%. This earnings performance was achieved in spite of higher commodity costs of approximately $70 million in the quarter when compared to the prior-year. Clearly our commodity cost earnings pressure was more than offset by the favorable impact of higher revenue, selling price increases and cost savings.

The single most important factor combating higher commodity costs in the first quarter was the continued progress made in our pricing recovery. We estimate the pricing actions increased first-quarter revenue by approximately 19% when compared to the prior-year. Further, our first-quarter pricing recovery was strong in both business segments and all three regions.

Our first-quarter results have been significantly affected by the higher cost of lead, which is approximately 34% of our first quarter's cost of goods sold up from approximately 29% in the first quarter of fiscal 2008. Lead cost increased approximately $60 million in the quarter compared to the prior-year. And on a sequential quarterly basis, our lead cost increased approximately $10 million when compared to the fourth quarter of fiscal 2008.

Our effective book income tax rate for the first quarter of fiscal 2009 was approximately 25% compared to 31% in the prior-year. After adjusting for the highlighted tax benefits in the first quarter, our as adjusted book effective rate was roughly 29%. As I commented last quarter, further reductions in our income tax rate remains an important focus. I expect our as adjusted book income tax rate will approximate 29% for the full fiscal 2009 year and we remain confident in meaningful additional reductions in fiscal 2010 and beyond. Now, some brief comments concerning our diluted earnings per share.

Diluted net earnings per share were $0.48 in the first quarter of fiscal 2009 compared to $0.30 in the prior-year or an increase of $0.18 per share or 60%. As we mentioned earlier, our improving pricing recovery was the main contributor to our strong first-quarter earnings growth. While we are pleased with our consistent earnings growth over the last seven quarters, a 25% gross profit target remains our steadfast goal. Our pricing recovery, commodity cost, timing gap has steadily improved but the unrecovered cumulative price cost pressure since the beginning of fiscal 2005 exceeds $100 million or approximately $1.50 per share of earnings and over 200 basis points of annualized gross profit margin pressure. We remain confident in our ability to further improve earnings margins.

Now, a few comments about our financial position and cash flow results. But in short, our performance continues to be good. Primary working capital increased $18 million since the beginning of fiscal 2009 to $596 million primarily due to our strong sales growth and the normal inventory build in anticipation of customary second-quarter summer holidays and associated plant shutdowns. As a percentage of annualized trailing three-month net sales, our primary working capital ratio was 25.2% and was up a modest 40 basis points when compared to the prior-year and fiscal 2008 year end.

Our first-quarter fiscal 2009 capital expenditures were $13 million compared to $9 million in the prior-year. We expect capital spending for all of fiscal 2009 will approximate $60 million which includes the previously referenced major expansion of our thin-plate, pure lead manufacturing capacity.

Net debt as defined in our credit agreements was approximately $424 million at the end of our first quarter of fiscal 2009 with our leverage ratio of 2.2 times. Since the end of fiscal 2008, net debt is essentially flat with our leverage ratio improving from 2.5 times at March 31, 2008 as earnings have continued to increase. Our average interest rate was 5.4% in the first quarter compared to 6.5% in the comparable quarter last year and also 6.5% for the entire fiscal 2008 year.

As covered in our June 30, 2008 press release, we successfully completed our $522 million debt refinancing at the end of our first quarter. We accomplished all three of our financial objectives -- namely, first, providing future capital structure flexibility; second, providing additional borrowing capacity; and third, minimizing our long-term cost of capital. This new facility will properly support our Company's future growth whether by acquisitions or organically and is expected to reduce fiscal 2009 interest expense by approximately $4 million or $0.06 per share compared to fiscal 2008. We appreciate and sincerely thank all our debt investors for their tremendous support and confidence in our future business prospects.

As John previously covered, we expect to generate as adjusted diluted net earnings per share of between $0.49 and $0.53 in our second quarter of fiscal 2009 which excludes the expected $0.02 per share charge from our ongoing European restructuring program. Additionally, we expect to experience the historically normal sequential quarterly decrease in our second-quarter sales volume due to the impact of summer holidays in Europe and the U.S.

The current state and future direction of the world's economy remains a dominant daily news story. Certainly we are highly focused on its impact in our business. However, based upon current order trends, customer forecasts and our record backlog, we expect our business will continue to perform well during fiscal 2009.

In closing, I remain highly confident in our Company's future. We have consistently proven that with our sound strategy, steady execution, outstanding products and employees, we can successfully grow revenue and earnings. Now, John, let me turn the call back to you.

I would like to now open the lines for any questions that you may have.

(Operator Instructions). John Franzreb, Sidoti & Co.

Could you talk a little bit about the seasonality you're referencing here? Is it more on telecommunications side of the business or is it more on the motive side of the business? Can you just walk us through that?

It is really on both John. It's primarily in Europe to an extent. It is larger in Europe than it is in United States. But in Europe with holidays and things, historically we've seen just a slower period.

The second thing is even in the United States with plants that are -- take shutdown as an example in the auto industry, a two-week shutdown is typical. And many plants for maintenance take shutdowns during this period. So historically, we've seen this as being a slightly slower quarter than some of our other quarters.

And you touched on Europe. What about on the motive side of the business? There has been some talk going on that Europe is weakening that business could be exposed to any kind of pullback in Europe. What are you hearing from your customers about the [potential fall] in Europe right now?

As we mentioned, our backlog is at record levels. Our orders through the end of the quarter record levels. If you look at our guidance even on lower volume, second quarter, we're coming in at a guidance at midpoint of $0.51. So we do think things remain pretty strong. That being said, looking at current months, there is a slow-up on orders that are coming in. How much of that is actually due to the holiday season or is there something that's slowing we're not seeing it, it is hard to tell. But it is not a situation that we're running a red flag up at all at this stage.

So when we think about the current quarter coming up, we should be thinking about lower volumes but higher margins. It is that a right takeaway there John?

Yes it is.

Okay, good. I will get back in queue. Thank you.

Chris Agnew, Goldman Sachs.

First question, thinking about reserve power. How would you describe the different markets you address there -- UPS, telecom and military aerospace? Any notable differentiation in the quarter or as you look forward?

Looking back over the last year, looking at the quarter and looking forward, all three of them are hitting very strong right now. With having the product diversification that we have and the geographic diversification we have, as one area slows up, we seem to find another area that just picks up with tremendous growth for us. At this stage with our thin-plate, pure lead which is used primarily in telecom and military applications, I just wish we had more capacity right now. We can easily sell 20%, 30% more volume if we had the capacity to produce it.

And you said you were on track with your expansion plans. When do you think in -- when do you plan in 2009 to bring on additional production?

It ramps up. The first part we will see should be within the next three to four months but it is a relatively small portion. The biggest portion of it really kicks in at about 12 months.

Okay and on the competitive front, is anyone else out there obviously with the strength in that product attempting to do something similar?

There is one company that has a similar product, but it is not the same product as ours and they are selling it primarily in Europe today. They're not in the aerospace and defense. They do a little bit in telecommunications.

Can you name the company?

No.

Getting to your 25% margins through cost saving and price action, can you split out of the 6% margin you want to make out, how much would be price? How much cost?

When we take a look at it and you get to the 25% and where are the action plans, when we put a statement out like that, we want to be sure we back it up with facts and that we've got the action plans in place. When you look at what we have left on the table if you will between price and commodity cost increase is roughly 200 basis points. So we figured we'd finish this quarter at 19% gross profit, put 200 basis points on it, you're at 21%.

The other 400 basis points are really picked up through the cost saving initiatives we have going on right now in the restructuring. Let me be specific about that, we are spending north of $100 million to pick up at least that 4%. $50 million of it goes in thin-plate, pure lead expansion that we have talked about which is higher margins -- have them at 25% that we have. As you see for the last couple of quarters, we have had a charge -- a one-off because of European restructuring. That program is going very well right now. We had a $0.02 onetime hit in this last quarter.

We're moving production from our high cost plants in Western Europe to Bulgaria, which that will help improve the margins. And we are expanding into the developing parts of the world where the margins are pretty good.

And then a final follow-up to that, what percentage of your production is in -- would you describe lower cost centers?

It is currently in about the 30% range and growing.

Great, thank you very much.

Paul Clegg, Jefferies.

The SGA was up a little more than 20% year over year and I think about 5% quarter over quarter. Can you give us a sense of what drove the higher expense there in the quarter and what could we expect to see play out throughout the year [and the timing]?

I believe on a -- when you look on a percentage basis, we were actually down. But Mike, do you want to pick up on the details of that?

Sure, Paul, I mean clearly one of the big influence is translation. As we commented, top line was up 11%. So clearly you have got to parse through the FX impact and that was notable.

Okay, that makes sense. So the segment operating margins if I'm reading this correctly, you show a big year-over-year step-down in motive and a year-over-year step-up in reserve. Can you just help us understand what is driving that movement and how those dynamics play out in future quarters?

Yes, that's a very complicated one. But basically what it comes down is the timing between commodity cost increase, specifically lead, and the timing of pricing. Just a little bit of background on it, we talk about FIFO'ing our inventory. With the United States, we FIFO that in a three-month period. In Europe, it's on a two-month period. There is more automatic pass-throughs on the reserve power side of the business than on the motive power side.

So when we got behind the numbers and analyzed it, what we found is that the lead cost on reserve power is down compared to prior-year, while pricing is up. On the motive power side, it is just the opposite. Mike, you want to add to that?

Sure. A couple of other things that John has covered influences. As you know, we've had a lot of exciting new product introductions, many in reserve. Thin-plate pure lead is continuing to grow at a substantial rate which certainly has a positive influence on margins. And lastly, the cost savings initiatives in Europe have clearly been very meaningful and helpful and they have been more skewed over the last 12 months to reserves. So I think as John said, it is a combination of those factors.

Now to your question, where do we think margins are going, we continue to believe that in both segments they will continue to improve. John referenced the timing issue, but certainly we don't want to suggest for a minute our motive business is not well positioned nor do we not expect margin enhancement in motive as we look into the future as well.

And if I may, just one follow-up. The percentage of your current contracts that are actually pass-through, has that changed since the last quarter?

No it really hasn't. We remain in ballpark 40% to 50%

Okay, thanks. I will jump back in the queue.

Corey Tobin, William Blair Company.

Hi, guys congrats on a nice quarter. A quick question, John, you mentioned the opportunity in the renewable space. Can you give us a little bit more color on exactly the role that you played there and the type of functionality [it varies by] and also what the potential revenue from that segment could be as you look out over the next three to five years or so?

A couple of things without getting too specific and I will tell you so far, we are currently doing about 30 million in that area. And I guess you were hoping it grows is probably a better way of putting it. Because of everything we see going on with renewable energy today, we are working with a couple of very large firms about supplying batteries to them right now.

It looks very encouraging but I think the point of it is this Corey. If those markets really take off, we are in a good position -- an excellent position because the batteries are already designed and they are ready to go and we can deploy those things immediately. So it is really not within our control. It is really within those industries. And if oil prices stay where they are, if they stay this high, I happen to believe we're going to see more emphasis put on wind and solar. If that does take off, that is going to be very good for us.

Do you anticipate your solution to be used more in sort of a residential capacity or are you actually thinking a utility scales one?

Both. I think it is less on residential. It would be more on utility.

Okay, great. Thanks.

One point on that though. I know some are looking at -- that everything is being applied directly to the grid and there's no backup storage. If you take a wind turbine as example, that is going directly to the grid. It still requires batteries as a backup for a breaking. I won't get too technical on it. But for every wind turbine out there, it has batteries in it even if it's supplying directly to the grid.

[Arthur Friedman], [Friedman Asset Management].

Congratulations on the quarter. If I'm reading it right, you hit the upper end of your range guidance on June 12. I have two questions. One, can you provide any color into the cost of lead pricing going into '09? Second of all, I wanted to ask about where you see your Company in terms of the emerging market in terms of wind energy?

Well, let's take the wind energy first. As I said in the last -- in Corey's question, we are in a good position if wind turbines take off. Obviously wind turbines taking off, that is really out of our control. We would be a supplier to that. So your guess is probably as good as mine on that. We follow it very closely. I happen to believe with utility cost being up high, there is much higher probability that we are going to see further investments in those areas but time will tell on it.

I could add, John said it well, we just aren't going to control will the demand explode. Just some facts that are I think interesting and show the potential, even today there is estimated to be 0.5 million wind turbines in the world. If you believe in some of the growth prospects, T. Boone Pickens certainly has made a bold commitment and others. As John says, it is relatively small today. It could grow nicely. And we're positioned if it takes off, we will be there to support that segment of the demand.

Now to your first question about lead and where lead is going, that is one that I guess I kind of gave up trying to forecast. It went from a high of $1.82 last October down to a low of $0.70 a pound July 4. Today, it is about $0.95. What we do is we have structured and put a program in place that includes everything from lead hedging to tolling to automatic pass-throughs and can come up with a rather sophisticated model that we think we've positioned ourselves to handle the flexibility or variability in lead.

Some have said that we have -- if they look at the supply and demand curves on lead and they said, gee, lead is way up in inventory right now. It was at the point of about 100,000 metric tons. And when you do the calculation, that is about 2.5 day supply globally, so it is nothing on the inventory side.

Second thing is we have 23 plants around the world. I've been in the industry for 15 years. I've never once seen a shortage of lead. So it is not driven by supply and demand as much as it is driven by investor sentiment.

Thank you very much.

Richard Baxter, Ardour.

Thank you. A question on the thin-plate capacity expansion, for the full expansion, what was the percentage of capacity growth and any changes in the capability?

We are literally doubling the capacity globally.

Okay. I guess separate is, can you describe a little bit more about the MOU you signed with Lithium Technology Corp.?

Sure. Lithium Technology Corp., there is a large format lithium battery. There is a niche market for that. What I believe we have that really differentiates ourselves from many other companies is we have the strongest marketing and distribution network globally. And when our customers are looking at a different technology even if it is a niche market, we want to be sure that our salespeople are well-equipped, well versed and have the products there, then we can satisfy the customer demand. As an example, a customer may buy just to pick arbitrary numbers 95% of the business is in lead acid, 10% is in nickel cadmium and 1% is in lithium ion. We want to have the ability to supply everything.

Thank you.

(Operator Instructions). [Kitty Wong], [Trainbaskov].

Good morning. Can you talk about in your guidance what is your assumption for the Eurodollar exchange rate? And if the dollar continues to strengthen, do you see any impact on that guidance?

We don't see any measured change from let's call it the 155 level we are experiencing. But certainly as John said in the lead, we don't spend a lot of time trying to prognosticate currency. Because in reality although it will have translation influences and there will be some impact on dollar-based commodities, lead, et cetera, in short, it really doesn't have a meaningful impact on our business when we look at any extended period six months, a quarter. So to answer your question, we think it is going to remain pretty constant to where it has been in the last three months.

When you take a look at is the dollar strengthened, the top line, net sales would go down. But since in most countries, we are naturally hedged meaning we're buying the material in their currency, the costs would go down also. So net-net bottom line, it has very little effect on the earnings. However, on a percentage basis, it does help. So the currency does not have a big impact on us on the bottom line.

Thank you.

Paul Clegg.

I'm not sure if you will go here with me or not but I wanted to talk about timeframes for getting to 25%, if you have some sort of timeframe in mind? There are a lot of things you guys are trying to do. I don't know if you are talking about trying to get there in 24-month period or whether you could get there by the end of the year?

Our major projects that I referred to earlier with thin-plate, pure lead and restructuring in Europe are 12 months. Let's assume it takes a little time to get everything up and get it running and get it running well. So you're probably looking in the 18-month period on those. So, it's 12 to 18 month on the major projects.

The emerging markets, we're successful at it right now. How well will we continue to be successful on that? Time will tell. I can't really predict that. I can just tell you we're putting a major emphasis on increasing in Eastern Europe. You saw the joint venture we're doing in Africa. There are other activities we have going on right now which I cannot disclose but we're pushing very heavy on growing in the emerging markets. How successful will we be? Time will tell.

What is going to go on with the lead market, our recovery on pricing versus cost. We've seen success in the last two quarters. Our margins are improving. We're going to continue to push on it and time is going to tell on that one also. So to summarize it, the major capital projects I'm highly confident we will get those implemented and be successful 12 to 18 months. The other ones we're pushing on, our success rate on it we will have to see.

Okay and if I may just one follow-up. You guys have obviously done some major overhauls on your balance sheet here. Looking at you -- you have also been an inquisitive company in the past. Looking at opportunities out there today for M&A, is there any particular segment of your business where you feel you need to maybe fill in a gap or add a tool to the belt?

The only place I would say there was a gap would be in certain geographic locations which I don't want to disclose. I think we have sales in those areas today but I think our market share is not where it needs to be. And we need to look at how we increase our market share. I would use as an example a number of years ago when 98% of our business was in the United States or 95% of our business and we look at the map and we said there are big opportunities everywhere. Well Europe. the opportunity is not as big in Western Europe as it was but there are other regions of the world where I think our market share is not where it needs to be. So that is the area I would describe as a gap.

Now more general to your question, we will continue to look for investments in the strategy that we've talked about in the past. Whether it is vertical integration or cost savings, geographic expansion which I've covered, different technologies whether we actually acquire the company or do what we did with lithium, the large lithium format batteries to bring it into a distribution network, we will continue to look for those opportunities.

Thank you very much.

You have no questions at this time.

Okay, well again thank you very much for your interest in our Company and everyone have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your call. You may now disconnect. Good day.