EnerSys (ENS) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2010 EnerSys earnings conference call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this presentation.

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, Chief Executive Officer. Please proceed.

Good morning, and thank you for joining us for our conference call. During this call, we'll discuss the results of the first quarter of fiscal 2010, and will comment 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. Mike?

Thank you, John, and good morning to everyone on the call. 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. Our forward-looking statements are based on management's current views regarding future events and operating performance, and are applicable only as of the date 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 operations, set forth in our quarterly report on Form 10-Q for the quarter ended June 28, 2009, which was filed yesterday with United States 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 August 5, 2009, which is located on our website at, www.EnerSys.com.

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

Thanks, Mike. Last night, we reported net sales for the first quarter of $340 million and adjusted diluted earnings per share of $0.23. As anticipated and stated in our last analyst call, net sales were lower than the $393 million in the previous quarter.

Considering the sequential drop in sales, we were pleased that we outperformed our earnings guidance, and were able to keep our gross profit margin at 22.8% -- just slightly down from the 23% in the previous quarter. Price management and cost saving actions continued to contribute meaningfully to our earnings.

As we entered this recession last year, our employees understood what actions were needed, and have done an outstanding job in meeting the challenges the recession has presented. Looking at the current state of the business, we are becoming more confident that we have hit the bottom of the economic cycle for our markets.

As I commented in our call in June, orders have been relatively flat since January, and although orders have not picked up yet, we are experiencing more quote activity in many segments of our business. We have seen even more encouraging news recently, such as the improved ISM manufacturing index and the increase in new home sales. Inventories generally are at the historical low compared to GDP; leading economic index in Europe has increased significantly the last few months.

Recent corporate earnings have generally been better than anticipated, and a significant increase in global equity markets the last several months confirmed that there is more optimism about the economy. More specifically to our markets, recent worldwide industrial truck orders showed a large increase over the trailing three-month average. In addition, we continue to hear more planning activities by telecom firms to enhance and expand their service to customers. All of these indicators are leading to our increased level of confidence that we have seen the bottom of the economic cycle.

We are now assuming modest increases in our sales volumes as this fiscal year progresses. But we are certainly not factoring in significant increases at this time. However, we have a strong belief that there is a growing, pent-up demand for our products that at some point could result in strong increases in volumes, and it would be relatively quickly. Factoring in these current views on volume, price, and cost, we reported last night our guidance for second quarter, adjusted diluted earnings per share of $0.25 to $0.29, an increase at the midpoint of 17% over the first quarter earnings per share of $0.23.

We remain highly focused on achieving the 25% gross margin target we have discussed since last year. We have made substantial progress towards the target since the third quarter of fiscal 2008, in which our gross profit was 17.6% of sales, and has improved to 22.8% in the last quarter. This progress has been difficult in the face of declining sales, but we have achieved it with appropriate cost cutting, unyielded focus on price management relative to commodity cost, and a continued commitment to our customers to give them the best possible value with our products and services.

As we discussed previously, we will spend a total of $35 million on our comprehensive restructuring programs from fiscal 2008 to fiscal 2010. These programs will result in annualized cost savings of $33 million when fully implemented in fiscal 2011. It is important to note that we have realized only one-half the savings at this time, and we have the other one-half of the savings to look forward to.

While we are heavily focused on our margins, we also have good sales opportunities in the near term. Many of our newer opportunities are in Asia, such as the major 3G network buildout now in the early stages in China. China is also planning the construction of over 250 nuclear power plants which will ultimately require hundreds of millions of dollars worth of batteries. There are numerous other new opportunities around the world which confirm our confidence in the growth prospects of our business.

At the same time, we continue to believe there are solid acquisition opportunities for us, as we commented in June. We anticipate some specific acquisition announcements during the next several months. In fact, we announced on Monday we acquired a mining business in the US that will help expand our presence in that segment of the market. We plan to use our existing technologies to enhance our position in the global mining market. We remain very active with other potential opportunities in various segments of our business and in all regions of the world.

Our liquidity remains very strong, with $218 million of cash and short-term investments at the end of June, versus $163 million at the end of March. This liquidity and solid financial condition will clearly help fund acquisitions.

In summary, we are continuing on our basic course that we have previously discussed. We were pleased with the positive factors in the first quarter that resulted in earnings better than we had forecasted in spite of our expected decrease in revenue. Our restructuring and other cost saving actions are working, as is our focus on cash flow. We are pursuing sound acquisition opportunities, and we are pleased with the potential for growth in Asia and elsewhere around the world.

I am excited about our company's potential for growth in revenue and earnings. We don't know when the demand will pick up, but when it does, we are extremely well positioned to significantly increase operating earnings and cash flow. This is why I continue to believe that we will exit this recession a stronger company than when we entered this recession.

Now, I will turn the discussion over to Mike Philion for further information on our results and our guidance. Mike?

Thanks again, John. Our first-quarter net sales decreased 43% over the prior year to $340 million. On a business-segment basis, net sales in the Reserve Power business decreased 29% to $183 million, while our Motive Power business decreased 53% to $157 million. The first quarter decrease includes approximately 32% due to lower volume; 6% from weaker foreign currency translation; and 5% due to pricing.

The challenging global macroeconomic conditions have been the most pronounced in our European operations, as evidenced by the 51% decline in that region's fiscal 2010 first quarter sales. Our Americas region's first-quarter sales declined 35% compared to the prior year, while our Asia business experienced a decline of 20%.

On a sequential quarterly basis, first-quarter net sales decreased 13%, virtually all due to reduced volume.

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 August 5, 2009 for more details concerning these highlighted items.

Our first-quarter, as-adjusted consolidated operating earnings were $23 million, or a decrease of 45% compared to the prior year, with the operating margin decreasing 30 basis points to 6.9%. A credible first-quarter earnings margin was achieved in spite of lower sales of approximately $250 million in the quarter as the positive margin impacts from cost reduction initiatives, lower commodity costs net of pricing were very evident.

On a sequential quarterly basis, as-adjusted consolidated operating earnings decreased 24%, with the operating margin decreasing 90 basis point, primarily due to the reduced volume levels.

Now, several comments concerning diluted earnings per share. As adjusted, diluted net earnings per share were $0.23 in the first quarter versus $0.47 in the prior year, or a decrease of 51%. The main drivers to our first quarter of fiscal 2010 earnings were the significant reduction in net sales, partially offset by lower commodity costs net of pricing and our ongoing cost savings programs.

While the adverse impacts on our business from the global recession are presently very significant, we remain steadfast in our focus and commitment to drive gross profit margins from roughly 22% today to a minimum of the sustainable 25% in the future.

A cornerstone of the plan to increase future profit margins remains our successful cost reduction culture and actions. Reducing cost is never easy, but remains an essential element in today's economic reality.

We are pleased with the positive impacts from all of our cost reduction activities on our first-quarter operating results, and expect to drive costs down even further in future quarters. As John mentioned earlier, roughly one-half of the $33 million in expected annualized savings associated with our current restructuring actions have been realized. We expect to capture all the remaining $17 million in savings in fiscal 2011.

Now, some brief comments about our financial position and cash flow results. 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 four points.

First, cash flow from operations for the first quarter was $63 million, versus $9 million in the prior year.

Second, $218 million is on hand in cash and short-term investments as of June 28, 2009, compared to $163 million at the beginning of the quarter and $56 million at June 29, 2008.

Third, over $200 million remains undrawn from our revolving credit lines. And fourth, our leverage ratio was 1.1 times, and our net debt to total capitalization ratio was 23% as of the end of our first quarter.

Capital expenditures were $10 million for the first quarter, and are expected to be approximately $45 million for the full year. Our planned capital spending in fiscal 2010 will continue to focus heavily on productivity improvements, cost savings projects, completing the expansion of our thin plate pure lead capacity, and the introduction of new products.

Our book effective tax rate was approximately 31% in the first quarter, and is expected to be in the 30% range for the full fiscal year. As John touched upon earlier, we remain very active in evaluating and pursuing potential acquisitions around the globe. Within the past six months we've seen a noticeable increase in attractive opportunities.

We remain patient and, if not fundamentally changed, our discipline approach and strategy in seeking acquisitions. Our strong capital position and liquidity remaining a meaningful competitive advantage for EnerSys in today's markets. As I mentioned last quarter, [we anticipate] completing some additional transactions during the next 180 days.

As we look ahead, we expect to generate diluted net earnings per share of between $0.25 and $0.29 in our second quarter of fiscal 2010, which excludes an expected $0.06 per share charge from our restructuring programs and acquisition activity expenses.

Our anticipated second-quarter earnings will be driven primarily by three factors. First, a very modest sequential quarterly increase in second-quarter revenue. Second, essentially flat sequential quarterly commodity costs; and third, the ongoing benefits from cost reduction activities.

In closing, we are convinced that when economic growth resumes, EnerSys will be even stronger and better positioned. I continue to be highly confident in our company's future.

John, let me take the call back you.

Okay, thank you, Mike. Let me open the lines to questions at this point.

John Franzreb, Sidoti & Co.

I guess I want to start with the gross margin, really impressive given the sequential drop in sales and your ability to -- what I assume is to drive across side more so than the raw material side. Is that a fair assessment in how you're able to keep the gross margin relatively high despite the drop in revenue?

Well, really, it's twofold. As we said earlier, it's about the price management that we have in place and our cost reduction activities. As I said in the prepared remarks, our organization has been highly focused on gross profit of 25%, the target. We actually -- even the volume drop, we were a little disappointed -- we didn't get the 23%. We were shooting very hard for it, and we were highly focused on hitting that number.

Well, can I ask you a question? What is the impact of higher lead -- roughly around $0.86 -- on your realizing your gross margin targets? How is it impacting the ability to get there?

In the short run, it is going to adversely impact us. When we take a look at lead going from roughly in the $0.50 range up to the $0.80 range, timing wise, we will see a period where our pricing will not catch up with the commodity cost. Ultimately, it will. In future quarters, we will see it.

Lead goes up, and it takes us roughly three to four months to finally realize that price increase. But fortunately, our industry is one that I think has been somewhat disciplined in passing the price of commodities along to the end-users.

And moving up to the top line, John, you said that you're confident that this is the bottom. You are forecasting the sales volume sequential increase in the second quarter. Could you talk a little bit about the mix in that confidence in volume increases? Is it driven more by the Reserve side or the Motive side?

It is really driven by both. And let me be specific on it. If you take a look -- Industrial Truck Association data -- for the month of June, that particular number that came in -- if you compare it to the trailing three month average, new truck orders were up something like 17%. When new truck orders are up, we will see that three or four months later in batteries coming through.

Second point to it is if you take a look historically in the US market, electric fork trucks have been about 59, 60% of the total number of fork trucks. In the last couple of months, it has been trailing in the 70 to 75%, so the ratio is much higher on electric fork trucks. And we believe that is because of the green effect that we are all reading about. So there is a positive indicator there.

On the telecom side, we are hearing a lot about planning of new activities. We are -- customers -- we are engaged in conversations with them about expansion. We are recently had a customer visit one of our factories and asked the question -- if you had to ramp up 25%, how quickly could you do it? Because they are starting to see some orders or quote activity, I should say, that is happening in their business which is an indicator that down the road, we will see an increase.

Excellent. One last question. Could you provide some more color around Keystone -- incremental revenue or operating margin contribution -- what your expectations are there?

Yes. Let me start out by saying, John, that one of the things that we are strategically focused on that I think we have done an excellent job over the years is to take year existing technologies that we have and go into new marketplaces. As an example, if you go back to 2001, we basically supplied telecom, UPS and industrial fork trucks.

Today, we provide batteries for nuclear submarines. We provide batteries for aircraft. We provide a Sears Diehard battery. We are looking for new areas and opportunities where we can take our existing technology and expanded it.

The mining industry globally is about $100 million. So what we are looking at is global expansion in the mining business, but not only with the batteries that we can provide for that industry, but also about bringing in another product line that we have, which is called cap lamps. So we are aggressively going after than $100 million market.

Now this particular acquisition in the US was a relatively small acquisition. But I think it's indicative of what we are trying to do globally by approaching that particular market segment.

And how much will it add to the top line, John? Annually, maybe?

About $11 million.

Michael Gallo, C. L. King.

Just a question -- I guess as I looked at lead prices starting to spike up here somewhat in the last week or two, whether you have some concerns given the weak volume environment overall that you could get stuck in the lag again once you get through the periods -- or the amounts that you're hedged, as you get into the back half of the year. I guess what I'm wondering is whether you have any concerns with the recent spike that you could see a lag in the margins as you come through the up cycle, given where the overall volumes are in the industry. Thank you.

Well yes, you are right. And that is a concern. We could see a lag. But the next quarter or quarter after that we will catch it up. In any given quarter, we could see a benefit or actually be hurt because of the volatility of lead. But specifically, things that we have done to mitigate that to some degree is approximately one-third of our sales are on automatic pass-throughs.

The second thing is although our hedge position today is, it has been historically relatively low because of the volatility of lead, that we have most of our hedges in the next three to four-month period. So we do have some offsets in that short period of time, three to four months out, to offset the effects of that.

But will we see a quarter that the cost will be higher than the pricing? That can happen. That happened when lead went from $0.40 to $1.80. But eventually, we catch up with it.

If you look at the lead versus cost over a four-year period, we are still slightly behind on retaining -- or getting back all the pricing to offset that cost. But to your question, in any given quarter -- yes, we could see an up side or downside with it.

Paul Clegg, Jefferies.

First of all, congrats on a nice quarter and the strong guidance.

Thanks, Paul.

I just wanted to touch on capacity factors in the space. I know it is a little bit of a tough issue to define in your business, because you deal with so many different products. But can you discuss maybe how capacity factors have changed from where they were at this point last year to where we are now? And then, I have got a follow-up on pricing.

Well, our capacity utilization today is running in the ZIP code of 60% globally. And with that 60%, we have a number of operations that mothballed. They are included in the 60%, but we are not utilizing those. They are mothballed. They're just shut down right now.

Now, the strategy behind us -- if we believed that we were going to see mild, single digit growth in the future, we would close down additional factories, like we did in Italy, and consolidate more operations. Historically, what happens in our business -- when there is a recession like this, or there is a downturn, users stop buying batteries. But then, when all of a sudden the economy turns, there is a strong pent-up demand. We strongly believe there is a pent-up demand that will break loose. And when it does, it will be quick, and we need to be able to respond that.

So we are keeping that capacity mothballed right now, because we firmly believe it will jump high. We can't tell you when. Don't know when. But we believe it will happen. So that is where we stand on capacity today.

Where were you roughly a year ago relative to that 60% today?

I don't know the number right off the top of my head, but it was in the 70, 75% range would be my guess. We could look that up for you. But I don't know what it was off the top of my head.

No, that's very helpful. And then, just a quick follow-up on pricing. Can you give us a sense of what range of year-over-year pricing declines or possibly increases, but I think declines -- you built into your September quarter guidance? And then is there any impact for the mining acquisition in the September quarter guidance?

Paul, Mike Philion. We have essentially a very minimal amount of influence from this transaction. In all candor, really none. As John said, it is a nice bolt on, but it is a $10 million revenue business. It will help us, but it's very modest.

We anticipate, Paul, that we will see a similar year-over-year phenomenon on pricing. Just to repeat, in our first quarter, revenue year-over-year was down roughly 5% due to the influence of declining lead on our price structure. We see it in the same ZIP code. When you look year-over-year, Q2 of fiscal 2010 versus the last year. So again, about the same -- let's call it 5% range of pricing down.

And that's a pull from lead having come down and where you are on your hedges, et cetera.

That is solely the influence of the dramatic year-over-year reduction in lead and other commodities. But it is principally lead, Paul, as you know.

Jesse Pichel, Piper Jaffray.

This is Elaine Kwei for Jesse. Thanks for taking my question. Just on the DOE battery awards that came at yesterday, we saw some awards for competitors in advanced lead acid as well as lithium ion and other technologies. Could you talk about whether you are also involved in the applications, either as a principal or a partner, and whether you could still be in the running for potential awards?

Well, I think you have to take a look at what the $2.4 billion in total, what it was geared towards. That money is really earmarked to help the US auto industry. It is another form of bailout, if you will, to the US auto industry, where they are trying to develop batteries for hybrid vehicles. And if you look the awards that were given, they were given in the transportation segment.

Now, we have looked at it extensively. And we believe that we have better opportunities to invest our money into different areas than in the hybrid vehicle industry, supporting US OEMs. So to answer your question, we did not receive any money, do not anticipate to receive any money for it. When you look at the money that -- the companies that did receive money, they're highly focused on transportation-type batteries, automobile batteries, which that is not our business.

And the other thing is if you take a look at the investments or the money that was given out, each of those companies need to match that same amount that they were given. So when we looked at the investment in it and we looked at where we thought ultimately that industry would end up, we believe we have much better opportunities and areas to invest in.

That's really helpful. And secondly, just real quick, could we get a little more color on how things are looking in Europe? It sounds like you are sounding more confident about seeing a bottom perhaps in the US. And I'm wondering if you are also starting to see stabilization in Europe in the two segments, or are things still on a downhill trend there?

From our business perspective, obviously, the recession in the US was devastating not only to our economy, to our business also. It really hit hard. Europe was worse. Europe really took a beating on this thing from our perspective.

I am happy that we are making a little bit of profit in Europe right now. We have made the investments to get the costs down. It will come down back. We are convinced of that. We are seeing some things recently that show some modest pickup.

But again, we're not going to project anything that is going to happen. We're going to wait for it to come. We're going to be very conservative on it. But I do believe that once this opens up, we will see very strong pent-up demand that will break [up] not only out of the US but out of Europe also.

Just lastly, are there any potential additional restructuring plans there?

At this stage, the answer is no and nothing major. And the reason for that is, again, back to this pent-up demand. We have got to be in a position that when it does turn, that we can respond. Our capacity utilization, as I said earlier, that if we were looking at the sales revenue to be at the same level or just modestly higher for the next year or two, we would take additional cost and restructuring out in Europe. But I strongly believe that we will see this come back. And when it does, it will come back very strong, and we have to be prepared to handle it.

Dan Whang, B. Riley & Co.

Just wanted to get your thoughts. Obviously, quarter results very strong and coming in above the high end of the $0.13, $0.17 guidance. And just want to get you take on -- what were the key factors that drove the upside, maybe in kind of the strongest to the least contributing factors?

Well, I think it is really two factors. We projected that our volume would be down. And in fact, it was down. And when we projected that, and we got our organization together, we talked about this is going to be our tough quarter. The first quarter is going to be a tough quarter for us.

And early on, we took the actions to do everything we could to enhance our cost savings initiatives, which we did an outstanding job of, as I mentioned earlier. I think our employees really jumped on it. They understood it. They did a great job of controlling the cost.

The second thing is our price management system. Our price management system, with volatility that we have seen in commodities, we have a system in place that we are reassessing what the market demands are for the product, what our competitors are doing relative to pricing, so we can set pricing that will reflect what has happened in commodity markets.

When lead us at $0.40 and constant, you didn't have to follow the pricing that much. But volatility going from $0.40 a pound to $1.80 a pound one year, 1.5 years ago, we had a system in place where we could monitor it to be fair to our customers and to be fair to our company that we could react. And I think we have done a pretty good job with that. So to answer your question, a lot of it is price management. A lot of it's cost savings.

Okay. And I just wanted to clarify one of the things you had mentioned about the greater openness of the industry from the customers' standpoint regarding pricing, because I guess historically, previous to the 2003 period, I guess you had an industry where it was somewhat deflationary, maybe slightly inflationary, but there were a number of years that I think the industry struggled in getting to the higher commodity costs passed through. But having gone through this last few years, do think that there has been kind of a permanent mindset shift from customers and their willingness to accept pricing?

So therefore, going forward, obviously, there is risk that lead prices could increase further with the economy recovery. But it is not as big a risk as it was before (multiple speakers)

Well, Dan, you hit a very interesting point there in the history of it. And let's go back to that period of time, '03, '02. When we first started seeing commodities go up the way that they went up, I said at the time, we're dealing with a generation of both buyers and sellers that have never experienced price increases. And it was a real education process that we had to go through, as our company, about going after pricing.

And I think what has happened -- that's on the sales site, on our end. I'm convinced, our people totally understand it. Our sales guys are aware daily what's happening with commodity costs and what has to happen with pricing on it. So we have that education that has taken place on our side.

I cannot speak for our competitors directly, but I can say what we're seeing from them from a pricing standpoint, they do the same thing. They raise their prices as commodities go up, they lower them as commodities go down.

Now, going through several years of this, I am assuming -- although I don't have hard data on this -- that the buyers are the same way. They know as commodities go up or go down, that there is going to be effects on market pricing. Many of them came to us and wanted to do automatic pass-throughs. And that is part of the reason one-third of our business is on automatic pass-throughs today, because customers want it.

We have always said we're going to be the best in the industry and be easy to do business with. So we work with each of our customers on how they want to take in -- structure the sales of our batteries to them relative to commodities. And we will go a number of different ways on it. So to answer your question, I think there is an education process that took place, both on the buyer's side and the seller's side, and I think it is going to continue to work the way it is.

Great. And finally -- you talked about in September quarter a very modest sequential pickup in revenue, which is a great inflection point. But it seemed like from the tone -- the quote activity you're seeing is much more active relative to the modest increase in revenue that you expect.

Is that kind of a lag factor that perhaps this much more active quoting activity which should translate as maybe a couple of quarters -- I guess that conversion process differs for Motive versus Reserve. But just based on what you're hearing, we should see kind of sequential revenue growth going forward for a number of quarters.

I think that's the case, but I am going to emphasize the word "think." Until I see hard orders on our books, I am not going to project it into a forecast. I can only talk about the hard data that we are seeing outside of our orders. As an example, a 17% increase on ITA orders -- Industrial Truck Association orders that came in -- that is a fact. The things with customers and the hearsay -- but until we see hard orders on our books start to increase, we're not going to put it into a forecast that we are going to hand out to the Street.

Now, that being said, we have said that we are going to see a modest increase, which does imply that we are seeing a modest increase in our orders coming through.

Walter Nasdeo, Ardor Capital.

Most of my questions have already been addressed, and I appreciated that. However, can you please comment on the competitive environment that you are seeing out there as it relates to the bid activity? Is that -- and I know a number of your competitors are facing a little challenging times right now also. Are you still seeing them out active? And are you seeing anybody new poking their heads in?

Let's take the latter part first. There is no one really new out there that is poking their heads in, as you put it. We are seeing the same competitors out there. The competitors that are publicly traded companies -- obviously, we read their -- look at their numbers and see how they are doing. We do follow very closely what our competitors are doing.

And our general belief is our competitors, for the most part, are -- some are in pretty bad shape. And we feel it would be very difficult for them to go out and start dumping -- and going low on their pricing, because if they are losing money to start with, the lower pricing is only going to make it worse for them. So it has been a relatively rational market.

Every now and then, one pops up -- we hear about this guy has done something or strategically, they are trying to do something. But generally speaking, it has been very rational.

Very good. And if you could just comment on the days sales outstanding and the delta on that from the last quarter, I would appreciate it.

Walter, we don't give hard numbers. But in short, as you have seen, our primary working capital, which is receivables plus inventory minus payables, is improved in dollars meaningfully. On a sequential quarterly basis, from the end of fiscal '09 to the first quarter, we were down $41 million in primary working capital. Let's call it just a tick under $400 million. And since the beginning of the fiscal -- let me go back; year-over-year quarters, we are down about $200 million. So -- and there is no question that is a reflection of the dramatic decrease in revenue.

No surprise when we look around the globe. There has been a modest -- a little additional pressure in receivables. Customers have slowed up in payment a little bit. But I'm going to underscore the word "modest." We really don't see any meaningful trend there.

Inventory levels, as you would expect -- dollars way down; turns broadly the same. So as we look at those two very important assets, inventory and receivables, we think we are an excellent shape.

Very good. Thank you for your response.

William Bremer, Maxim Group.

Very nice quarter. John, Michael, can you comment a little bit on restructuring charges going forward? We did $3.5 million -- we utilized that this quarter. Which would we be using for the remainder of this year?

Well, as you know, Bill, one of the tricky parts is precision in sort of the quarterly buckets, because the majority of these costs deal with severance in our Western European operations, where you can't peg the precision level. So I will go back to just the broad themes.

We have previously indicated -- and no particular change -- that we think the total restructuring costs for fiscal 2010 is going to be in the $13 million range. And that number, by and large, is going to be plus or minus a very small level. The quarters get tricky, Bill. We would expect that it will tail off as the year progresses.

So I know I can't give you a precise number, because candidly, we can't be any more precise. So in short, we still see the $13 million for the year, and it will be a little bit of choppiness on a quarter to quarter basis.

Okay, that's fair enough. What about -- can you sort of break down international to domestic in terms of percentage of orders?

Well, typically, when you take a look at the US, where it's about 36% of our business is US; about 2% between Canada, Mexico and South America; about 7% of our business is Asia, and the remaining 50-some percent is in Europe.

Okay, and you mentioned -- just a lot of my colleagues have done a fine job in putting together the quarter on our behalf -- tax rate you said would be in the low 30s. [Can we] use about 31, 32% for the remaining of fiscal 2010?

Use 30. As I said, the challenge is as the mix of taxable income can ebb and flow, that is really the variable. And it is interesting -- not to prolong it, but no surprise here that the proportion of our taxable income as we anticipate from fiscal '10 will have a much higher component than you can see it in our first quarter when you look at the regional operating results.

In short, it's a higher percentage of our income is going to be from the United States -- the Americas. And that is our highest tax rate region in the world where we operate. So the real variable, Bill, becomes -- is there any significant change as the year progresses in that mix? So in short, as best we can anticipate, we think it is going to be 30%, plus or minus. And that plus or minus will ebb and flow as the mix of our worldwide taxable income would shift modestly.

Okay, thank you. And I hate to press this, but can we go back to gross margins a little? In terms of having a nice, gradual ramp to 25%, are we looking at that target as if in fiscal 2011, nice steady increase from here? Or are we saying this could be a more of a fiscal 2012 story?

Well, it is tough one to answer, because it is volume. It could be a 2010 story. It depends on when the volume jumps. I strongly believe that this pent-up demand is going to uncoil like a spring sometime in the future. I don't know when. And when it does happen, we are extremely well-positioned. Running at 23% right now with volume as low as it was this last quarter, then if this thing popped way up, it could happen very quickly.

Now the other side to offset that would be, as the questions were earlier about the timing on commodity costs versus pricing. And there could be an issue that could hit us adversely there. So I think there is two metrics we have to look at.

One, and the biggest one by far and away, is volume. When you are running 60% capacity utilization, and a one-third of your cost is fixed, it doesn't take a lot of volume to offset that thing. Our margins would go way up if we got the volumes back where they were.

If you look historically, when we were running $550 million to close to $600 million in a given quarter, on revenue, versus the $340 million we have just come in at, our margins were much lower on a percentage basis. We were at a low point of 17.8%, and we were at 19%, 20%, 21%. We weren't close to 23%. Volume comes back because of the cost reduction activities we put in place and managing pricing, when the things line up, it will do very well for us.

Okay, and then one last, final question if you could touch base and give us -- provide us a little more color on your lithium applications.

Well, a little bit about our lithium business. What we do with lithium -- if lithium could get into the manufacturing of that product -- it's extremely expensive. You have seen venture capital money basically in the US market, and as one individual pointed out to me this morning, the United States government, in some respects is acting now as a VC firm to help grow lithium ion further.

It's a business that -- what we are doing is we are going to capitalize on people that manufacture the cells -- we buy the cells -- that's C-E-L-L -- from other companies, and we put those into -- wire them up in the batteries with our proprietary electronics to prevent the thermal runaway conditions, and we sell those.

I will say this -- our Modular Energy group, which was a start-up business for us, is doing to very well right now. This last month, it actually made money for us. That was the first time. It is a small entity. But we got into that business, the lithium ion business, because we want to be able to provide types of stored energy solutions to our base customers, which are telecom, primarily this is going into it to the telecom and some military applications.

So I don't anticipate that we are going to be real large in lithium ion. It depends on what our customers want. If the customers start to move towards lithium ion batteries, we are there to provide it. Although the cost premium on lithium ion is three to four times as much on it. So the advantages aren't all that great in our applications.

Corey Tobin, William Blair & Co.

Most of my questions as well have been answered. But I did have one that I wanted to circle back to this lead issue for a second if I could. I understand that there is a lag between when the price increases are requested of clients and when they actually start to show up in the P&L.

The question I have for you is have you actually gone back at this point and begun requesting price increases? Or is that still something in the near future I would assume depending on how lead turns?

Our sales organization -- our sales leaders globally right now are discussing that.

Great. And are you seeing any additional resistance in those requests, given that last time, the requests probably went out, it was a bit healthier of the macroeconomic environment -- have you seen any change this time around? I guess another way to ask it is do you anticipate it will be more difficult? Despite the fact that the buyer is more used to it, do you anticipate that it will be more difficult to capture those gains, given the macroeconomic trends?

I don't think it will be, because again, I think it goes back to the competitors, and what the competitors are going to do. If all of a sudden, we had a competitor that decided they were going to drop prices, and we raised prices, the answer would be we are not going to get it. But I think what is happening is with the current state of our competitors' business that what we are anticipating is that as we go out for price increases, that they will follow.

(Operator Instructions) John Franzreb, Sidoti & Co.

Yes, Mike, about the cash -- I was just wondering where it is domiciled.

Well, it is domiciled throughout the world, but again principally in North America, United States and Western Europe. And as you would expect, John, we have got the money in very safe, very liquid, very low-rate of interest, as you would expect. So in short, short, safe, easily accessible.

Okay, so it is not just disproportionately in Europe versus the US, or otherwise should I just kind of view as a geographic --

No, it really isn't, the simple answer. It is more US-oriented. But it is not way out of whack anywhere. And there is no real liquidity concerns in terms of accessing it, etc.

Okay. And regarding acquisitions, you said that you continue to be active. Can you give a sense of size? We have a relatively small one right now. Are you looking at anything larger, or are you thinking maybe a bunch of small bolt-ons might be the way to go?

It's both. There are a couple of very large ones we are looking at -- the large ones being -- I am going to define for us being north of $100 million in revenue. There are some in that bucket that we are looking at. There are a number of small ones.

I would say that -- when you take a look at acquisitions and the success rate on it is one in three are successful, our track record has been significantly better than that. I think a reason for it is that we have a very well-defined process, and we are patient, and we are looking for value. We are looking for success in integration.

So it is going to be everything from the small ones to the midsize to large. We are very open on it. We are going to be [taking] invest money for our shareholders to make them money.

Dana Walker, Kalmar Investments.

Would you comment on thin plate pure lead, how it has performed versus your unit experiences as a company and how you would expect it to perform as the market recovers?

I think that we continue to see growth in thin plate pure lead faster than we do on our other product lines. We have some new applications -- as I mentioned earlier about mining and in different areas. We have some new applications we are going to be coming out with a product on, which I am not prepared to talk about this morning, or don't want to talk about this morning. But it is one that I see that growth taking place faster than in the other products -- the comparable products, which are calcium-type products.

John, if your volumes are down 30-plus percent, though, as a company, how would the thin plate volumes have compared year-over-year?

I don't have the exact numbers on that, but I don't think they are down quite as much. But -- in fact, I am sure that they are not down quite is much. But I don't have exact numbers on it.

And where would your priorities stand? I believe you didn't fully finish the complete capacity build out. Where does that stand in terms of capital spending priorities?

We are moving forward with it. And again, it is because [back] with our confidence that that capacity that we are adding, it will be used -- the pent-up demand situation, the new applications -- I am highly confident that investment that we made -- just as a reminder, it was $50 million total, $10 million in Europe, $40 million in the US. We have slowed up a little bit on it, but on a $50 million investment, maybe we dragged our feet maybe $5 million worth on it. But relatively small.

We want to keep the thing on target because the applications and the opportunities that we are seeing for this are big. Many of the applications that we put these products into, the leadtime on it, the testing time on it could be a year plus. So there are things that we have going on now, product in test, that it may be a year, 1.5 years out before we would actually reap the benefits from it.

Final thought -- perhaps you have commented on this already, and if you have, excuse me. How would you believe that you have done market share wise in the last year to 18 months?

We have picked up modestly. I am not going to say it's big. We -- as I tell our salespeople constantly, market share is not my thing. My thing is making money, bottom line. And if you take market share, and you're doing it just by pricing, it is the wrong thing to do.

If you're taking market share providing the best value to your customers, it is the right thing to do. Our pricing tends to run a little higher than some of our competitors. But the value that we give our customers, we believe, is much better than our competitors.

Gentlemen, there are no further questions at this time. I would now like to turn the call back to Mr. John Craig for closing remarks.

Thank you, everyone, for joining us today and have a great day.

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