EnerSys (ENS) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter three 2009 EnerSys earnings conference call. My name is [Meesall] and I will be your coordinator for today. (Operator Instructions). As a reminder, this 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.

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

Good morning to everyone. As a reminder, we will be presenting 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 as of the dates of such statements. For a list of the factors which could affect our future results, including our earning estimates, see forward-looking statements included in item 2 of management's discussion and analysis of financial condition and results of operations as set forth in our quarterly report on Form 10-Q for the quarter ended December 28, 2008, which was filed last evening with the United States 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 February 4, 2009, which is located on our website at www.EnerSys.com. Now let me turn the call back to you, John.

Last evening, we reported our third quarter results with adjusted diluted earnings per share, up 80% to a record $0.63, compared to $0.35 in the prior-year quarter. With global economic activity declining, our third quarter revenue declined 17% with organic volume down 10% versus the prior-year third quarter.

In spite of this, we achieved another sequential increase in our gross profit percentage from 20.7% in the second quarter to 22% in the third quarter. We continue to benefit from lower material costs and our ongoing cost-reduction programs.

As I've stated in previous calls, our goal is to achieve 25% gross profit. And I am pleased with the improvement we made this quarter, given the current economic environment.

To help reach our 25% goal, we have further actions planned. Last night, we announced the closing of our manufacturing facility in Italy and the move of this production to lower-cost locations. We are in the process of implementing additional significant cost-reduction actions around the world. We anticipate that the plant closing and the other recent actions, when fully implemented, will result in an annualized savings of approximately $13 million, or $0.19 per share.

During this period of economic decline, we are in a very good position in several respects. First, we are enhancing our leadership position in the global industrial battery markets and we believe we will continue to increase our market share by staying focused on our customers.

In this regard, we recently learned that several Chinese telecom companies plan to invest $41 billion in the next two years to upgrade their infrastructure. We estimate that this will result in at least $500 million in new battery purchases and we are confident that we will receive a reasonable share of this business.

Second, as previously reported, we completed our refinancing last spring with favorable terms and pricing. Our all-in interest rate is approximately 5%. We do not have any significant term debt due in the next four years.

And we continue to have positive cash flow. We have $91 million in short-term investments at the end of our third quarter, a substantial increase from $55 million at the end of September. This $36 million increase was achieved even after the payment of approximately $20 million in October for the repurchase of EnerSys stock. We also have approximately $200 million in available credit lines.

Our strong financial conditions allow us to pursue acquisitions, and we anticipate that good opportunities will become available as a result of the difficult economic climate.

We are continuing our major expansion project to increase capacity for Thin-Plate Pure Lead products. This premium technology is used in a wide variety of applications and remains the top performing technology in lead acid batteries.

In addition, we are fortunate to have the financial strength to continue the necessary spending to restructure our operations and substantially reduce our future cost.

Last night, we reported that we expect adjusted diluted earnings per share between $0.30 and $0.34 for the fourth quarter of 2009. This is a sequential decline in earnings, but we believe still a very solid performance in the face of the current economic environment. We remain confident about our prospects for profitable operations, even at the bottom of this economic cycle.

In summary, as stated in our conference call last August, we saw the beginning of a market decline, so we took immediate actions to enhance earnings. These actions helped us achieve our record $0.63 of earnings in the third quarter.

As I mentioned earlier, we are closing our Italian plant, along with other actions, will result in an annualized savings of approximately $13 million, or $0.19 a share, when fully implemented. All of the actions we are taking now will clearly put us in a very strong position when the global economy turns. Stated in other words, EnerSys plans to exit this global recession a stronger company than when we entered this recession.

I'll now turn the discussion over to Mike Philion for further information about our results and our guidance.

Thank you, again, John. Our third quarter net sales decreased to 17% over the prior year, to $461 million. On a business segment basis, net sales in the Reserve Power business decreased 8%, to $224 million, while our Motive Power business decreased 24%, to $234 million.

The third quarter decrease includes approximately 10% due to lower volume, 8% from weaker foreign currency translation, offset by a 1% increase due to pricing actions.

The challenging global macroeconomic conditions have been most pronounced in our European operations, as evidenced by the 28% decline in that region's fiscal 2009 third quarter sales. Our Americas region's third quarter sales declined a more modest 3% compared to the prior year, while our Asia business experienced 1% growth.

Net sales for our first nine months of fiscal 2009 increased 9% over the prior year, to over $1.5 billion.

On a business segment basis, net sales in the Reserve Power business increased 16% to $732 million, while our Motive Power business increased 4% to $848 million. The 2009 nine-month growth rate includes approximately 9% due to pricing actions, 2% from stronger foreign currency translation, and a 2% decline from base volume.

We believe our businesses performed better than the market. Accordingly, we believe we continue to increase our global market share.

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. 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 February 4, 2009, for details concerning these highlighted items.

Our third quarter, as adjusted, consolidated operating earnings were $39 million, or an increase of 19% in comparison to the prior year, with the operating margin increasing 250 basis points to 8.4%. This strong earnings performance was achieved in spite of lower sales of approximately $93 million in the quarter. Clearly, the reduced sales volume impact on our earnings was more than offset by the favorable impact of lower commodity costs and cost savings.

Our first nine months of fiscal 2009, as adjusted, consolidated operating earnings were $126 million, or an increase of 35% in comparison to the prior year, with the operating margin increasing 150 basis points to 8%. The increase in year-to-date earnings was primarily due to pricing and cost-saving actions, offset by higher commodity costs.

Now, several comments concerning our diluted EPS. As adjusted, diluted net earnings per share were a record $0.63 in the third quarter, versus 35% in the prior year, or an increase of 80%.

During our third quarter of fiscal 2009, we experienced unprecedented volatility in currency rates. When considering all the impacts from foreign currency on our third quarter earnings, which are primarily from translation, transaction exchange, currency hedging, and purchases of dollar-denominated lead, all currency impacts were approximately $0.04 of our total $0.63 of EPS.

Additionally, when considering these total third quarter currency impacts, they are approximately $0.10 per share better than we expected when we provided our third quarter earnings guidance.

For the first nine months of fiscal 2009, as adjusted, diluted net earnings per share were a record $1.62 versus $1.00 in the prior year, or an increase of 62%. The key influences on our earnings for the first nine months of 2009 were sequentially declining sales volumes, volatile lead costs, coupled with pricing recovery actions, and our ongoing cost-reduction initiatives.

Now, some brief comments about our financial position and cash flow results, but in short, our performance continues to be very strong, with growing liquidity, secure and favorable debt facilities, and a strong capital position as illustrated by the following five points.

First, cash flow for the nine months of fiscal 2009 was $85 million and for the third quarter, $20 million. Second, $91 million is on hand in short-term investments, primarily in U.S. Treasury securities, as of December 2008, compared to 45 -- or $55 million, excuse me, at the beginning of this quarter. Third, over $200 million remains available from unused revolving credit lines.

Fourth, our leverage ratio was at 1.5 times and our debt to total capitalization ratio was 34%, as of December 2008. And fifth, we expect our cash flow for the fourth quarter of fiscal 2009 to remain strong.

As John mentioned earlier, we expect to generate diluted net earnings per share of between $0.30 and $0.34 in our fourth quarter of fiscal 2009, which excludes the expected $0.25 per-share charge from all our existing and recently announced restructuring programs.

Our anticipated fourth quarter earnings will be driven by four primary factors. First, a sequential quarterly reduction in fourth quarter revenue, primarily from declining unit volumes and lead-based pricing. Second, a sequential quarterly reduction in commodity costs. Third, a sequential quarterly reduction in the net earnings benefit from foreign currency experienced in our third quarter. And fourth, the ongoing benefits from cost-reduction activities.

In closing, we believe that the unprecedented macroeconomic challenges of today also present us with tremendous opportunities to improve our business in the future. We have consistently demonstrated our global organization's ability to anticipate and adapt quickly to rapidly changing market conditions while delivering solid financial results. We are convinced that, whenever economic growth resumes, EnerSys will be even stronger and better positioned. I remain highly confident in our Company's future.

John, let me turn the call back to you.

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

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

Good morning, guys. I was kind of impressed by the 1% price realization in the December quarter. Certainly, it seems to me to be a cause of concern about that, to maintain pricing in the current environment. Can you, A, just give us a little background color around how you were able to achieve the 1% in the quarter? And, B, can you talk a little bit about how the pricing environment currently stands right now?

Obviously, the market is going to set what pricing is, and we're finding right now that the industry seems to be reasonably disciplined on maintaining pricing. The way we view it is the relationship between commodity costs and the price of our products. And all in all, if you look over a two-year period here that -- we've actually lost money. In other words, our pricing has been less than the commodity costs.

There are some quarters where the commodity costs are a little lower than the pricing we're getting, and vice versa. All in all, I think that pricing has come down because commodity has come down but I think the ratio between our pricing and the commodity costs has stayed reasonably consistent.

Now going forward, how's it going to go? Again, it goes back to what our competitors do. We're the world's largest industrial battery company. We're going to continue to provide the best service and best value to our customers. And we think our pricing is set in line with that philosophy.

Regarding the cost-restructuring measures, if you said this, I apologize. But what's the timing of you realizing those benefits, and have you set a timing -- timeline for hitting that 25% high-water mark that you want to hit?

The first part of the question, on the $13 million savings, the $0.19 per share, we expect that to be fully implemented by the first part of fiscal 2010. I think we're probably looking May or June for 100% implementation, if not sooner. And I think we're on course with that. So I think we're in good shape there.

The second part of your question was -- .

Was profit target.

The gross profit target, the 25%. That's a tough one, on the timing with it. If the volume stayed up, if the volume stays up, we would probably be very close to the 25% right now. We're going to continue to stay focused on that particular objective.

If volume goes down, obviously, it's going to be harder to hit the 25%. But I view this as almost like two steps forward, one step backwards. We will get to the 25%. When we get there, in part, is going to be determined by where the volume goes. You look in our guidance for the fourth quarter. Obviously, we're projecting that the volume more than likely will come down some.

I guess in a related question, the restructuring actions you've taken, embedded in that, what is your thinking about the outlook in the near term? Are you looking for a significant degradation in the topline in volume, or do think we're pretty much troughing? What's embedded in your outlook as far as your customer base?

I'm going to go back to August when we first said that we thought we would see a downturn take place, and I think the way I described it then was we're going to plan for the worst and hope for the best. It didn't come out quite as bad. In fact, it came out very good for us.

I describe today the global manufacturing environment to be this. It's frozen. People just basically seem to be in a freeze mode. They're not spending a lot. We've actually seen systems where people didn't invest in replacement batteries, and they've actually had their UPS systems go down. And of course, we get quick orders on that thing and they're kind changing their philosophy and they're coming back.

It's hard to predict what's going on in this economy right now. But as I said, we're planning on seeing our sales go down some, but -- and it's reflected in our midpoint $0.32 guidance. But there will be coming a time where this thing will -- the freeze state will unthaw. How fast will it unthaw and when, I cannot project that.

Thanks a lot. I'll get back in queue.

Paul Clegg, Jefferies & Company Inc..

Hi, guys, thanks for taking the column and congratulations on the strong call, and congratulations on the strong performance this quarter. You obviously blew away expectations this quarter, and yet your guidance is down sequentially by a fairly significant amount. I guess my question is why do you have better visibility now into volumes being down next quarter, relative to the visibility that you had when you first gave guidance for the December quarter?

Obviously, our guidance for the last quarter, we were off on it. We did better than we performed, and as I said earlier, we plan for the worst, hope for the best. And we had some things that came very well.

Our implementation of cost reductions were significantly better than what we thought they would be in this quarter. Our ability to maintain that ratio between pricing and lead cost, we did better than what would put in our guidance with it. To answer your question, it's very difficult for us right now to project. This is the most volatile period that we've ever seen, and what we're going to do with it, as I said, we're going to plan for low numbers and try to beat them.

So there is, I mean, a certain amount of conservatism being built in. And I guess -- your beat was primarily, though, really on volumes, it sounds like.

I was say our beat -- was not really on volumes. It was more on our ability to hold that pricing to commodity cost and our cost-reduction activities, the execution there.

Can you say for the coming quarter whether or not currency is a tailwind or a headwind for you? And are you expecting, when you give that guidance range, are you expecting it to be a very significant factor at all?

Mike, you want to pick up on that?

Sure. To answer your question, we think that clearly FX will be a bit of a headwind sequentially. But let me frame it because I know that there was a lot of moving parts in Q3's currency. And let me just go back to the obvious.

We exceeded our guidance, as I'm sure everyone saw in Q3. $0.10 of the beat was because of currency. Clearly, the currencies are extraordinarily volatile. But the trick here is, in total, only $0.04 of the $0.63 was because of all the currency movements.

Now let me be specific. In other income, everyone can see that we had a $14 million currency gain in Q3. What is not visible is the huge headwinds which brought that big gain literally down to a modest $0.04 favorable. The other factors are translation, FX hedges, and the FX impact of dollar-denominated lead.

So, in short, you can see the big transaction gain in that one line item. But what is not visible is all those other headwinds that are embedded essentially in cost of sales and the other line items.

So in summary, sequentially we do believe currency will be a modest -- in an aggregate sense -- EPS headwind. But it's the old problem with everyone today, it's volatility. And while we think we understand the general shape of currency influences, we just can't be certain whether we're going to have it exactly correct.

To pick up on that, just to summarize what Mike is saying, at $0.63 a share, we had $0.04 favorable because of FX in total. In other words, without that FX, we would've been at $0.59. However, relative to the guidance we gave, we thought we would be unfavorable $0.06 in FX, but we were really favorable $0.04, the total being $0.10 favorable to our forecast.

Further, what Mike is saying, in the next quarter, we don't expect it to be favorable. We expect it to be unfavorable. So hypothetically, if we were unfavorable in the next quarter $0.01, $0.04 plus $0.01, we would be unfavorable $0.05 on a sequential basis.

That's very clear and that's very helpful and I appreciate that. If I could, one final one. The Italian restructuring, you're going to record a $23 million charge. $17.5 million of that comes in the March quarter. The remainder -- is that spread out over a number of quarters, or is it in the June quarter all at once?

It will be spread, but it will be probably more heavily weighted in the first half. And just one additional clarifying point, if I may, on Italy. As John referenced, much of those initiatives are clearly underway and more will gain traction in Q4 and our first quarter.

The $0.19 earning benefit the John referenced, believe me, it doesn't all just kick in in Q1, it will come into the quarters over time. But we certainly expect, as we get into the latter half of fiscal '10, we will see a majority of that benefit starting to be realized in our operating results.

Thanks very much. I'll jump back in the queue.

Corey Tobin, William Blair & Company.

Good morning, nice quarter. Let me start with two housekeeping questions and then some bigger picture stuff. First, it seems like Accounts Payable was a big use of cash this quarter. Is that correct and was there anything in particular going on there?

You're right, and no, nothing in particular. But let's put, again, the obvious into perspective. We are certainly seeing a decrease in volume. So we have ratcheted back, very quickly, purchasing to essentially get into alignment with production levels. So in its simplest form, Accounts Payable dollars are falling quicker on a relative basis than the corresponding reductions in receivables and inventory. So, clearly, you have it right.

Do we expect that trend to continue indefinitely? It depends where volume goes. I think the ratio of primary working capital, which got skewed a bit in the current quarter because of that phenomenon, will probably settle out a bit as these forces get in more alignment. Total primary working capital was down, I believe, about $60 million, Mike?

It was down $60 million from the beginning of the year. That's correct. So the dollars in primary working capital, we continue to expect we'll see further benefits, hence why we're so confident that our fourth quarter cash flow will continue to be very, very strong.

And the dollars in primary working capital ticked up a little bit as a percentage of revenue. Can I infer from your comments that that should tick back down in your expectation over the next couple quarters?

I don't know. I think the primary working capital dollars clearly are heading down meaningfully. The ratios are trickier, so I don't think we have enough visibility to give you an accurate read. But it's -- to me, right now, the dollars are very important and clearly, they are coming down appropriately. And we continue to manage it dynamically.

But to Mike's point earlier on the [DPO] side, I'm sorry, on the payables side, just the phenomena that's taking place by cutting purchasing back quickly, you're not going to work down the receivables and the inventory as fast as you're going to work the payables. And the payables coming down so fast has driven that percentage up. That will flow through. That will go down -- if everything else stayed constant, the percentage would come down.

Understood. Shifting gears for a second, can you give us a feeling for the annual volume, or what percentage of revenue, currently goes through the Italian operations?

That's a tough one because we tend not to mix -- we view our plants as call centers, not as profit centers. It's less than 5%, we know that. But I don't have an exact number on what that would be, because, again, we don't look at plants as revenue generators.

Understood. But less than five -- in terms of an order of magnitude, less than 5% is how we should (multiple speakers).

That's correct.

Shifting gears a bit, the thin plate business, I know there's a lot of CapEx invested this year, and the Q calls for an additional $50 million or so next year to go back into capacity expansion there. Any change in terms of the demand on the thin plate business? And do you still expect -- or, I guess, what's the degree of variability that might come through on that $50 million budgeted CapEx for the thin plate expansion next year?

It's more than budgeted. We're in the process of spending it right now. We're going to tone back slightly, but not that much. And the reason for that is -- we are mostly through the project right now. But the demand for the product is off slightly to where it was, but the applications that we have available for that, we are convinced that we will be using that capacity and it's still a very sound investment.

As I said earlier, we're going to come out of this stronger, a stronger Company than we went into this recession. The last thing we want to do is cut back on our long-term strategies. The Thin Plate Pure Lead product, we have never have the capacity to meet the demand on it. Right now, we have the capacity because there is some slowing up that's taken place in telecom industry, but we fully expect that we will be utilizing that capacity in the next year or two. Mike, do you want to add to that?

Just a clarifying point. The $50 million that you referenced is the total multiyear expected spend for the Warrensburg thin plate expansion. Now, that is being toned down, but that $50 million is a multiyear investment.

Understood. And while we're on this point, CapEx expectations for next year in total?

The CapEx expectations this next year, when we look -- this year, we're looking between $45 million and $50 million. I expect that will be down slightly. But, again, we've got some longer-term initiatives here that we're not going to see the payoff in the next year or year and a half, but we're going to continue to stay the course on longer-term thinking. We're not in a cash crunch or anything like that. We're not in a situation where we have to pull way back on CapEx spending. We're longer-term or longer-view investing into the Company.

Last one, if I could. I know you don't like to guide to revenue, but since, Mike, you already mentioned that you anticipate, I think it was, some volume slowdown next quarter, can you give us a feeling for order of magnitude as to what you're thinking about at this point, based on January order flow, and whatnot? Are we speaking of a sort of 10% decline, similar to what we saw last quarter, or is there a good chance that accelerates more toward a 20% level? Thanks.

Just to pick a number on it, I think it's going to be less than 10%.

Great. Thank you.

Todd Cooper, Stephens Inc..

My first one for Mike. Sorry if I'm still a little confused, but on the other income of $13 million, depending on how that is taxed, it seems to be -- to come up -- to account for more than 10% of the FX that you -- $0.10 of the FX that you talked about. What else is in there?

Again, the $14 million, $13.8 million currency game, which is visible in other income, as you referenced, is offset by those three other huge headwinds that I referenced, translation, which is about a $6 million headwind, hedging, and the impact of dollar-denominated lead, which is also a headwind in dollars of that order of magnitude. And those are embedded in the various line items above operating earnings.

So, net net, when you add those, you're looking at that net $0.04 -- let's call it $3 million, a little under $3 million. So that's just the housekeeping and the absolute numbers of that $0.04. Again, to be repetitive, $0.63 of earnings, the net of all those FX items was $0.04 positive.

And Motive Power revenues declined on a sequential basis, yet your operating income was up for Motive Power. What was behind that?

You're right, the overall Motive Power revenue was down, but, again, when you look at our ability of -- the pricing to commodity ratio, we did slightly better than that and we also have some very nice cost savings that came through.

Okay. John, given the opportunities that you outlined or highlighted in China, I'm curious what is the mix between Reserve and Motive Power manufacturing in China?

That's an interesting question, because what we are doing right now, we're in the process of looking how we add additional capacity in China to meet this demand that we are anticipating that's going to come after us. And the point of it is that this is going to be very heavily Reserve Power business, this telecommunication business, and what we're doing is we're actually going to be shifting some of our Motive Power business, manufacturing, outside of China into Europe to help load the plants up there.

And when we start shipping product to Australia, as an example, that product will be coming out of -- could be coming out of Poland going to Australia and we will use that capacity in China for the demand that we're looking at in the telecom business.

And after you close the plant in Italy, will that leave you still with 21 manufacturing facilities worldwide?

No, we will go down one facility.

So, 20. You had -- counting Italy, didn't you have 22 manufacturing facilities?

Actually, it was 23, and we're down one.

And how many employees in Italy will be laid off?

It's going to be under 200 in total.

Is it roughly a cost to you of about 30,000 per employee?

I don't have that number here. It's a little higher than that, and I'm not sure what it is right off. Again, when we're looking at the total project, the total plans that we have in place, as I mentioned earlier, it's -- that $0.19 savings. I'm going to guess it's probably about double that, the 30,000 that you mentioned.

Okay. Congratulations on a good quarter.

Richard Baxter, Ardour Capital Investments.

Thank you. A little follow-up on the China telecom opportunities. Do you see -- can you explain a little the drivers that you're seeing from them? Do you expect some other countries to be following on? Is this sort of like -- the impetus for, like, the FCC following the Katrina here, or something else?

What we've seen on it, that has been in the press, that -- it's our belief that the Chinese government has opened up certain frequencies for the telecommunications industry there. And part of it is a stimulation package in China. And that's actually hit the press. We have had the telecoms approach us to look at our capacity, how much capacity did we have to meet the potential demand that's going to be coming at us, but there's been several articles that's been out about the $41 billion. In fact, one I read the other day, it says on the $41 billion, $25 billion is anticipated to be spent first year.

Okay. Thank you.

Dan Whang, B. Riley & Company.

Good morning. First question was -- you had commented, John, about the market sort of freezing up. I know you're a fairly short-cycle business. Could you comment about the level of inventories out there in the supply chain? I know everyone is tightening up, but do you think that it's a possibility that the tightening up could be going too far and creating some potential pent-up demand near to midterm?

There is going to be pent-up demand. I totally agree with that. It's just when does it unfreeze, as I said earlier. The thing about the batteries is they do wear out and they're going to need to be replaced, whether it's a telecommunication system or UPS system or an industrial fork truck.

The fact of the matter is they're going to have to be replaced, and it's just when does that take place and how do they replace them? Do they do it as standard maintenance or do they wait until it fails? It's expensive to wait until they fail. I think we're going to see it open up, I just don't know when it's going to be.

As far as the inventory out there, there tends not to be a lot of inventory in the pipeline on this because normally, if someone buys a battery, they buy it because they need it right away. There's very little that end users would buy and put in inventory. In fact, that's kind of unheard of in our industry now. The only time that really happened was back in the telecom boom, when we had telecom companies who were buying ahead on batteries.

Okay. It seems like, obviously, the monthly trends sort of slowed down in the latter couple of months of the quarter, maybe continue into January. Could you give us a little bit of flavor for how the monthly trends look?

I'm sorry -- I didn't understand. Could you ask it again please?

It seems like the monthly demand probably slowed down in the last couple months of third quarter. But I was just wondering if you could give us a feel for how the monthly trends looked?

They have definitely slowed down, as I said earlier. And I described it as things are going into a freeze. The orders are not coming through as strong as they were six months ago. And whether it's down 10% or 12% through this next quarter, I think it's probably going to be, as I said earlier, slightly under 10%. It may be a little higher than that. We just don't know at this point in time.

But I think what we're going to see is in future quarters, whether it's the first quarter of next year or second quarter, we will see that pent-up demand start to come through. But I don't believe it's going to happen in our fourth quarter.

In terms of the various restructuring movements and consolidation moves, where are you currently on capacity utilization? Where do you think the consolidation moves will take that utilization?

I don't have an exact number right here, but I can give you order of magnitude, that we were running on the north of 90% about a year ago. As I've mentioned many times in the past, with being a roll-up vehicle in the industrial battery business, if you will, in other words, we bought 23 companies over last 15 years, we have never really had the time to go back and take certain higher cost operations out of commission and put the production in lower cost areas.

We knew all along that we're going to see a slow off. How big it would be, obviously, it's bigger than we anticipated, but we knew we're going to see a slow off. It's always been our plan to take and reduce those high-cost plans and move to lower-cost manufacturing. I've said in the other calls that I see this as a great opportunity for us. It's a good opportunity for us to back up, take out some of the high-cost factors that we have, continue to stay focused on the new product development, and I am convinced we will come out of this being a much stronger Company in the future. This has given us the opportunity to clean a lot of those issues up.

I would guess today we're probably running in the 70% range of capacity utilization, and with this move, I don't know what's going to be, it's probably going to take us up to 75%.

I guess the other benefit to the move is that, I know in the past you talked about probably a global manufacturing footprint and maybe it had been about 25% or so coming from low-cost countries, and longer-term, we're going to take that to about half your footprint. I'm sure this will accelerate that process.

That's exactly right. You're exactly on the mark with it. Today -- when we first started looking at this thing, we set the target to get to 50%. At that time, we were running about 20% in low-cost areas. Today, we're way over 30%, probably 34%, 35%. And this is a move that is going to take us to the next level.

Will they actually ever get to the 50%? I don't know, because I'll tell you, some of our other what I would call higher-cost operations have done a tremendous job in automating processes and reducing costs out. The objective is not to have 8% in low cost. The objective is to have the lowest cost platform in the industry. That's what we're moving towards.

That's great. Congrats on a great quarter.

Let me clarify one thing. I believe today we are the low cost. We're going to move to a new level.

Michael Gallo, C.L. King & Associates.

Good morning. Congratulations on a good quarter. The question I have is just, when you look at your costs, obviously, just to follow up on, you mentioned obviously you are the low-cost provider. Talk about some other areas where you see opportunities to move those gross margins up from, say, 22% to 25%, or just other cost areas where we might expect you to be able to take costs out over the next year or so.

I don't want to go too far in details with that because I'm sure I've got competitors listening on the phone today. But just to give you some ideas of some things. There are some product design changes that we can make that would take lead out of the product, but not impact -- negatively impact the performance of the product.

I'll give you a hint on that. Where we have products that are thicker plate -- you know, we've talked about thin plate products, and you've got that grid in there that has a certain weight to it. If we can take off 25% of the lead on the grid in the battery and not impact the performance, we will do that. In other words, putting a thin plate -- one of the plates in the battery, a negative plate, as an example, making it thin plate, that will be a substantial cost reduction.

The second thing is there's a number of automation projects that we have going on right now that have substantial savings coming with it. Third thing is with consolidation of customers within the industry, it really -- we are reassessing our total sales organization. Are we properly aligned to have the right structure in place or do we need some of the overhead that we have?

We are not going to take away from servicing the customer. That's one thing that we've been very good at. We do try to -- we do take a close look at our SG&A, and we are higher than probably most of our competitors. But we're going to continue to provide top service.

That's very helpful. Thank you.

Dana Walker, Kalmar Investments.

Good morning, everybody. John and Mike, when you talk about volumes potentially being down 10% in Q4, I presume you're talking about in relation to Q3, not to year over year.

That's correct.

So the year-over-year volumes, in that seasonally your business tends to mount through your fiscal year, will quite likely be off 15 to 20.

On a fiscal year basis?

Comparing March to March. If you were down 10 --

They'd have to do the math on it. We finished last year at, what was it (multiple speakers) [263], I think it was.

The math would be down lower, because we were exiting and having sequential growth at the end of last year. As John said, we've not done the math, but I think on a year-over-year Q4 basis, it's certainly down in the near 10% zip code. Didn't do the precise math.

Okay.

The point is, that John's amplified, is we're continuing to see -- we are continuing to see the pressures from the global economy. We -- candidly, we just don't know where they're going right now, the trends that John has laid out very well. We wish we had better visibility, but we just don't at this stage of this recession cycle.

Can you speak to the different performances that we've seen in your geographies where Europe was very soft, units down mid-teens, whereas in the Americas, as a for instance, you were only down five? Can you provide some color?

I think the best way of viewing that is Europe, from a manufacturing standpoint, is in worse shape than the United States, from our viewpoint.

Can you provide some more detailed color on Motive? What are you seeing -- to the degree that you have visibility on new versus replacement battery requirements? How does that look?

It appears to us that the OEMs on the industrial fork trucks are looking at cutbacks, that they are projecting that the volume on new trucks will be down.

Are your dealers -- and are you hearing directly, though, from customers that the replacement demands behavior is meaningfully different than you would ordinarily expect it to be in a soft market?

I can't say -- it's interesting. Interesting question, because I recently was with a group of customers, dealers in the United States, completely across the United States. In some regions of the United States, they're not even seeing -- they're seeing a slow-up right now. They're doing well on the replacement business.

Others are saying that they're seeing real problems. It's a mixed bag out there. And -- but I think, all in all, my takeaway from it is that you've got a number of customers that are looking at it and saying, look, I'm not going to spend until that battery absolutely dies. I'm going to get away from the preventative maintenance program of replacing things and I'm going to wait until it dies. I think there is some of that out there today.

When you talk about your Q4 guidance at the EPS level, given the trend or given the progress you've made on gross margin, would you expect your gross margin to be sequentially lower?

Again, it's hard to say. But at this writing, what we think the answer is, we don't think so. We think the gross margin will hold up relatively well. Clearly, the topline is going to be down sequentially, but we think gross margin broadly will be about the same.

Will Bulgaria be the beneficiary of a fair amount of the volume that once was made in Italy?

It's going to be split between Bulgaria, Poland, France, and Germany. And what we have to look at it is the capacity utilization of all those plants. By taking the fixed costs out -- let's take a higher-cost plant, which would be the France plant. It would seem like, why would you put production in there?

If the other plants are running at maximum capacity and you take a look at and you run the analysis on putting it in France on a variable basis, because we already have the fixed asset there, it's still a savings for us. Even if we put it in the France plant. What we're going to do is we're, obviously, we're going to run it in the lowest cost plants we can, but there will be some benefit that Bulgaria should see from this move.

How would you describe your Bulgaria experiment thus far? Is it going the way you would like to go?

I would describe it this way, that it was rougher than we thought it was going to be to start up, and right now, we are on target to where we want to be. But if you had asked me that six months ago, I would've said it's running rougher.

But, fortunately, what's happened is that we got in there, we found out there was a bigger challenge than we thought. We put additional resources in there, in people and engineers. They did an outstanding job of getting their arms around it, turning it around, and now it's back running on target.

A question on currency for a moment. You've made a case in the past that you have natural hedges within your income statement. That would mean that translation ought not to hurt you badly. As you look at currency, or at least from a guidance standpoint, where currency would be sequentially negative, as one looks on the income statement, is the difference going to be that you won't have the natural hedges that we'll see in other income and yet you will still have the embedded stuff that's going on above the operating line? Or should we look at it differently?

Let me give you the macro again, and then I think that your answer will be more evident. There is no question our business still is fundamentally naturally business hedged. And it's the volatility within a short time period that can skew that.

Let me go back to fiscal '08, and some of you may recall I indicated, which is still the case, that when you look at the total earnings from fiscal '08, which was $1.42 a share on an as-adjusted basis, we had about a $0.05 favorable impact from all those four elements of currency that I explained earlier, translation, transaction, etc..

And clearly, the third quarter of this year was an aberration. We had a much different currency profile than you would ever see. Now, we have adjusted on the margin some of our hedging strategies to mitigate some of that. But in short, I still believe that we are fundamentally still naturally business hedged. And it all comes down to volatility in short time periods.

We have adapted. If it changes again on us a little, we will adapt again. But it still is the macro view and it is the fact that we have a huge currency advantage. Most of our business is other than dollar-denominated lead, and some of these wild swings is naturally hedged.

The fact that the Euro went from $1.55 to -- or $1.55 to the Euro, to $1.30, you're describing that volatility as having prompted the type of unusual currency behavior that we saw in your Q3.

That is correct. But what is not as visible is cross-rate volatility. Euro to zloty, Euro to pound, etc.. And again, not to complicate it, we understand those very well, and we have managed to tweak some of our currency thinking to take some of the, what I will say, shorter-term volatility out. So we still believe we are naturally hedged and we'll modify accordingly when we see world and market conditions throw a bit of a curveball. Long term, we're naturally hedged. And I'm very confident in that.

I have a final question and it relates to competition. You've described what you're doing to your cost structure. You've described what you would hope to not do on a customer-facing front. How would you compare what you believe you're doing to what your competitors are doing to have greater conviction that you come out the other end of this with -- advantaged?

I think that -- I kind of view it a little differently. We're looking at our customers, what our customers want, what our customers need, and we spend a lot of our time really going at it from that vantage point. It's tough for me, at this stage, to really take and say much about our competitors. They haven't come out with much recently. I did see that one of our competitors had some positive earnings last evening. Another one is cutting back considerably in the manufacturing area, I believe, and having layoffs and stuff. So I really don't have a good answer for you there.

Keep up the good work.

Chris Agnew, Goldman Sachs.

Thank you. Good morning. First question, just follow up on China. Have you any sense of what your market share in the Reserve business is in China? Sort of follow up to that, what is your confidence in the $41 billion in spending that you talked about? And also, when could you see the first orders on this spending coming through?

The first part of the question is our market share. We are lower in China than we are globally. And it's very difficult to get market share in China, so it's a guess on my part because there is not hard data out there like there is in the Western world. My guess is it's probably in the 10% range.

My confidence, on the second part of your question, what's my confidence in that? Again, I don't know on that, other than what we've read, what's come out, what's hit the press on it. Secondly, we have had customers call us and ask our availability of product and to be sure that we can support it, so they seem to be serious about it.

But until you get hard orders on it, I tend to view it on a wait-and-see attitude. I guess the show me. I'm from Missouri state. You have to show me the order before I really believe in it. But I am -- I think there is enough there for us to take and plan our production accordingly, and I think it's going to hit.

Thanks, John. And outside of Asia, in the Reserve business, can you comment -- it had been holding up better than Motive, but comment what you're seeing in terms of volume orders there.

It's still very good growth that we're seeing in the Asian market. The problem with the Asian market, it tends to be much tougher on pricing. If we wanted to go after market share over there, we would reduce our pricing way down, which we haven't -- we're not going to do that. We would have to make investments in capacity.

In other words, what I'm saying, we're running our three factories there all out. We're running the production. To go to the next step would take a major capacity in Asia in the manufacturing areas, and we just can't justify making that investment based on the pricing that we see today.

Now that being said, with this volume that's kicking in, it may open the door up to say that we need to go to the next level on an investment over there in manufacturing.

And outside of Asia?

Outside of Asia, mainly we're in Australia, Southeast Asia, Japan, and again, we're single digits in that area, or about 10% market share in that area. (multiple speakers) I'm sorry, your question was outside of Asia (multiple speakers) --

Yes, yes, I'm sorry. I meant the Americas and Europe. What are you -- I know demand had been holding up better in those markets. But what are you seeing in terms of volume trends in Europe and Americas? (multiple speakers) In Reserve?

Okay, sorry, I misunderstood your question. As I said earlier, it is slowing down in those two regions and we're in what I am going to call a freeze mode right now, and we are seeing reductions. As I said earlier, the fourth quarter, order of magnitude, I don't know the percentage it's going to be down on revenue, but my guess would be probably in the 10% range.

Great. Thank you.

Paul Clegg, Jefferies & Company Inc..

Thanks for taking the follow up. Just a quick one on M&A opportunities. Are sellers getting any more rational about valuations yet? And then, a quick one on tax rate, it was a little higher this quarter. What was the driver there?

Sellers are never rational evaluations. We like the low ones, and so -- (multiple speakers).

I think right now that we're very active in that area. We continue to look at things. I think that if this freeze mode, as I put it, stays in place, that certain areas and certain competitors are going to struggle with it and hopefully the valuations will come down, and we're going to look for the right opportunities. We're not overpaid for companies in the past and we don't plan on doing it now.

Tax rate -- clearly, what you saw in the third quarter was a spike up, and it's simple as a higher proportion of our earnings came from the North American platform. I still expect, for the full year, we're going to be in 31% book range, give or take. But certainly, that dynamic is driven by just the relative profitability in all the tax regions. As we all know, some don't, but the U.S. has a tendency to the one of the higher tax rate jurisdictions that we operate.

Understood. Thanks.

John Franzreb, Sidoti & Company.

You're showing a willingness to back off from hedging positions, when lead spiked north of 150 or so. With it currently down in the $0.50 range, can you, A, review what your average lead cost was in the December quarter, what your expectations are for March, and what your thoughts about lead hedging at the current price level?

Our lead hedging philosophy has been to go short on it, out three to four months, as we've said in the past, and we're not changing that fundamental belief because of the volatility that's associated with it. We have roughly 11% of total requirements -- annual requirements hedged today at about $0.63, which is higher than the market.

So, fortunately, the little bit we've got out there, the 11%, which is going to hurt us, no question about it, but it's a small percentage. And that's part of the reason why we haven't gone long on it.

The thing we really manage and keep a very close eye on is that pricing ratio to the lead ratio. That's the way we view it, is how well are we doing in that ratio, in that thing there. Because if lead goes way up and we can get the pricing with it, that's fine.

What I am really concerned about is if we would've locked in, let's say, at $1.25, and lead was at $1.50, we would be heroes. But if we were locked into $1.25, and lead's at $0.50, that ratio would be very, very bad. And we wouldn't done $0.63 in this quarter. So we manage it from the perspective.

Did the $0.63 you're referencing -- is that the March quarter is that what it was in December?

That's what we just finished at, the $0.63 a share in this quarter.

And what is your blended expectation going to be in March?

I'll go back. Clearly, we know the obvious. Lead costs on a sequential basis are coming down for everybody, as market prices come down. And we're not going to get into what it is cost per pound because, as John said, that's not particularly relevant. It's how we're managing the dynamic of commodity cost and pricing, which has to be viewed in unison.

So there is no doubt that our costs will ultimately travel with market. And lead is coming down, as you know. As I said earlier, we expect Q4 to sequentially be less than Q3, and you tell us where LME is moving in the subsequent quarters and I'll be able to give you a better gauge when we get beyond that.

But the good news is, I think the obvious, with the recessionary economies that are plaguing all of us, it's unlikely that we're going to see commodity costs taking off on us. Can't know that with certainty, but we think that is one of the things that will give us some -- less volatility, more stable commodity costs, as we look out over the next six-plus months.

You've probably heard me say before, I didn't care if lead was $0.20 or $2 a pound because that's not really the objective there. The objective here is to manage your pricing to the commodity costs, and that's what we have been very successful in doing. I say successful, we're still less than 1 on that ratio. But we're doing much better on it now than we were a while back.

To be fair, I have an atrocious record in forecasting lead. Thanks a lot.

Preetesh Munshi, Piper Jaffray & Co..

Good morning, thanks for taking my question. Congratulations on a good quarter. A lot of my questions have been answered, but we're hearing a lot of buzz, at least at the moment, on energy storage solutions for utilities. Utility scaled solutions. Can you -- and I know you guys have been doing some work in that area. Can you tell us a little more? What do you see there in terms of opportunities, and anything that we can expect to hear in the near term?

First off, we've been a big player in the utility business for a lot of years. Whether it's a backup to a nuclear power plant or any type of utility, there is going to be batteries associated with it. I think maybe what you're referring to (multiple speakers) -- .

No, no. Renewables is what I was referring. I'm sorry. (multiple speakers)

Renewables. That's what I was about to say. I think what you may be referring to is the renewables side. We have a complete product line in our EcoSafe batteries, and we can produce anything to meet the demands of where we think that industry is going.

Now where is that industry going? When fuel costs were extremely high, there was a lot of attention put to it, a lot of questions asked about it, a lot of people were looking at investing. Gas coming down, gasoline coming down, or fuel costs coming down, it's a different story. We don't see the same emphasis being placed on it.

I think what it is is we're kind of the tail of the dog in this one. We've got to wait for the dog to get going here. When that industry picks up and it goes, and you guys can read as much about it as we can, that -- we're ready. Ready, willing, and able, we've got the batteries, we can produce them today. We've got the designs in place for everything with it.

But it's one that I don't know when the renewables is going to pick up. Now with what the current administration is talking about and making investments in it, we may see a pickup in that area will take place. We hope we do.

Yes, because we're hearing -- there's some sodium sulfur guys who were actually gaining some traction there. So, I was just wondering if you were -- would that involve a change in strategy on your part, in terms of when scale-ups are required? Or do you think lead will also have some role in [your] work with the renewables?

I think lead is going to have a very, very big role in it. Because even when you look at lead, if I go back and I say $2 a pound at lead, it's cheap compared to the other commodities. When we look at all different types of stored energy solutions, whether it's lithium or sodium, it doesn't matter what the technology is. We spent a lot of time looking at them.

And one of the things that we find, when you get down to the bottom line, the other technologies work but you have to look at the cost of those solutions compared to lead acid. In many cases, it's very difficult to justify the premium.

We have a complete battery line of nickel cadmium batteries, as an example. We sell nickel cadmium batteries and lithium-ion batteries. But when you look at the cost or the price of those products versus the price of a lead acid battery, you're looking four to five to six times as much. So, I think lead acid is definitely going to have a place if we get to the point that the energy is going to be stored.

Now, in many cases, what happens with solar and with wind power, they're selling directly to the grid. So there isn't really a battery that's a backup storage. It's only going to be the remote locations that we're going to see the need for that.

That being said, on wind, as an example, there are batteries in it but they're not used for storage of the energy to give to the grid later. They're used for safety precautions, or, in other words, the windmill itself could take off, or the generator could take off and self-destruct if there wasn't some battery back-up there to protect it.

Fair enough. Thanks a lot for taking my questions. Again, we look forward to hosting you at our conference on February 19.

Thank you.

At this time, there are no additional questions in the queue. I will now turn the call back to Mr. John Craig for any closing remarks.

Thank you very much. We appreciate your joining us today for the conference call and everyone have a good day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a wonderful day.