EnerSys (ENS) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2010 EnerSys earnings conference call. My name is Katina and I'll be your coordinator for today. 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, Chairman, President and Chief Executive Officer.

Thank you, Katina. Good morning and thank you for joining us for our conference call. During this call we will discuss the results of our second quarter of fiscal 2010 and we will comment on the general state of our business. But first, our Chief Financial Officer, Mike Philion, could not be with us today, so joining me on the call this morning is Mike Schmidtlein, our Vice President and Controller and Mike Hastings, our Vice President and Treasurer, who also handles our investor relationships programs.

Now before we continue, I will ask Mike Hastings to cover information regarding forward-looking statements. Mike?

Thank you, John. Good morning to everybody. 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 dates of such statements. For a list of the factors which could affect our future results, including our earnings estimates, please see the 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 September 27, 2009, which was filed last evening with the 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 October 29, 2009, which is located on our Web site at www.enersys.com. Now, let me turn it back to you, John.

Thanks, Mike. As reported earlier this week, our net sales for the second quarter were $367 million and adjusted diluted earnings per share were $0.32. The improvement in earnings over our first quarter was primarily due to higher volume and the benefit of our call savings programs.

We continue to be pleased with our ability to maintain appropriate pricing in the face of volatile lead cost. This helped us achieve a 24.1% gross profit in the quarter, a significant improvement over the 22.8% in the first quarter and was good progress towards our target of a minimum gross profit of 25%.

We have benefited substantially from the restructuring investments we have made during the last two years. Without these cost reductions, our first half adjusted diluted earnings per share of $0.55 would have been substantially less. We are beginning to see a pickup in orders and firmly believe we have turned the corner on the recession. This pattern is reflected in our earnings and revenue guidance for the third quarter.

We are anticipating third quarter adjusted diluted earnings per share will be in the range of $0.35 to $0.39, and we will see another sequential increase in revenue. Clearly, part of that revenue increase will come from higher pricing that is necessary to offset higher lead cost.

The LME cost of lead has increased substantially this year from an average of $0.44 per pound last December to approximately $1.05 per pound. This reinforces our commitment to pricing actions designed to recover higher cost.

We continue to have positive cash flow with net debt down $9 million from the prior quarter. And we remain with $219 million of cash and short-term investments. As we have stated in the past, we plan to use a portion of this cash to fund acquisitions and the anticipated growth in our base business.

For example, you may have seen the announcement last night that we signed a definitive agreement to acquire the Oerlikon battery operations in Switzerland. Their revenue is over $50 million annually, and they have an excellent reputation in both the reserve power and motive power markets. We believe there are many synergistic opportunities between Oerlikon and EnerSys which will lead to substantial savings in the future. We are pleased with the opportunity to have this great brand as part of EnerSys.

Looking at the balance of the year, we are encouraged with our growth prospectus. As we come out of this recession, we believe our base business will have solid growth, particularly with the strong pent up demand that historically occurs in many of our markets. In addition, we are confident in our ability to grow profitably in areas and segments where we have a low market presence. To achieve this high growth potential, we are now actively focused on expansion plans and additional acquisitions. which will increase our presence in these areas.

In summary, we are excited about the opportunities we are currently pursuing. We are more active now than we have been for some time with potential acquisitions and expansion plans. In addition, we have not altered our longstanding focus on providing the best overall value to our customers, continuing our cost savings programs, and maintaining effective pricing management, all of which will help us improve margins.

Good progress continues on our cost saving actions and pricing managements. Both will help to meet our minimum gross profit target of 25%. We have continued to improve from the low of 17.6% in the third quarter of fiscal 2008 to this quarter's 24.1% gross profit. Although we remain concerned about the short-term lag in pricing to offset higher lead costs, we are highly confident in the long term we will reach our gross profit percentage target through the combination of cost control, higher volume, improved mix and effective pricing management.

Now, with that, I'll turn the discussion over to Mike Hastings for further information on our results and our earnings guidance.

Thank you, again, John. Our second quarter net sales decreased 30% over the prior year to $367 million. On a business segment basis, net sales in the reserve power business decreased 20% to $198 million, while our motive power business decreased 40% to $169 million. The second quarter decrease includes approximately 21% due to lower volume, 3% from weaker foreign currency translation, and a 6% reduction in average selling prices.

The challenges of this recession have been most pronounced in our European operations, as evidenced by the 37% decline in that region's fiscal 2010 second quarter sales. Our Americas region's second quarter sales declined 26% compared to the prior year, while our Asia business experienced a decline of 11%.

On a sequential quarterly business, second quarter net sales increased 8% over the first quarter primarily, due to improved volumes. As I will discuss later, this is a good sign for the future.

Net sales for our first half of fiscal 2010 decreased 37% over the prior year to $708 million. On a business segment basis, net sales in the reserve power business decreased 25% to $381 million, while our motive power business decreased 47% to $327 million. The 2010 decrease includes a reduction of 27% in base volume, 4% from weaker foreign currency translation, and 6% due to pricing.

On a regional basis, our European operation's net sales declined 45% in fiscal 2010. The Americas declined 30% and Asia 16%. Now a few comments about our adjusted consolidated earnings performance.

As you know, we utilized 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 highlighted items. Please refer to our company's form 8-K, which includes our press release dated October 29, 2009, for details concerning these highlighted items.

Our second quarter adjusted consolidated operating earnings were $29 million or a decrease of 35% in comparison to the prior year with the operating margin decreasing 60 basis points to 7.9%. A credible second quarter margin was achieved in spite of lower sales of approximately $160 million in the quarter as the positive margin impacts from cost reduction initiatives and lower commodity costs net of pricing were evident.

On a sequential quarterly basis, adjusted consolidated operating earnings increased 24% with the operating margin increasing 100 basis points, primarily due to the increase in volume in our ongoing cost savings programs. Our first half of fiscal 2010 adjusted consolidated operating earnings were $53 million or a decrease of 40% in comparison to the prior year with the operating margin decreasing 40 basis points to 7.4% The reduction in first half earnings was due to similar factors as discussed above for the second quarter.

Now several comments concerning our diluted earnings per share -- adjusted diluted net earnings per share were $0.32 in the second quarter versus $0.50 in the prior year or a decrease of 36%. The main drivers to the decrease in earnings were the significant reduction in net sales, partially offset by cost savings and lower commodity costs net of pricing.

For the first half of fiscal 2010 adjusted diluted net earnings per share were $0.55 versus $0.97 in the prior year, or a decrease of 43%. The key influences on our earnings for the first half of 2010 were similar to those impacting the second quarter.

As John discussed, we believe we have seen the bottom of this recessionary cycle for our business. We are encouraged by the pickup in volume sequentially in the second quarter and this trend is continuing into the third quarter. We remained very focused on the achievement of a minimum gross profit margin of 25%, and we're pleased we continued our progress in the second quarter with 24.1%. Increases in volume, continued cost savings and sound pricing management will help further the progress toward our target.

Now, some brief comments about our financial position and cash flow results. In short, our performance continues to be very strong with substantial 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 half of fiscal 2010 was $81 million versus $64 million in the prior year's first half. Second, nearly $219 million is on hand in cash and short-term investments as of September 27, 2009, compared to $163 million at the beginning of fiscal 2010. Third, over $200 million remains undrawn from our credit lines around the world. And fourth, the leverage ratio as calculated in our US credit agreement was 1.7 times, and our net debt to total capitalization ratio was 21% as of September 27, 2009.

Capital expenditures were $20 million for the first half of Fiscal 2010 and are expected to be close to $50 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 half of fiscal 2010 and is expected to be in the 30% range for the full fiscal year. As John mentioned, we remain very active in evaluating and pursuing potential acquisitions around the globe. We remain patient, and we have not changed our disciplined approach and strategy in seeking acquisitions. We have a strong capital position and significant liquidity, and this gives us confidence in our ability to finance the transactions we are pursuing.

As noted earlier, we have signed the agreement to acquire the Oerlikon battery business in Switzerland. We have not disclosed a purchase price but we are confirming that it will be funded from our short-term cash investments that we have in Europe.

As we look ahead, we expect to generate diluted net earnings per share of between $0.35 and $0.39 in our third quarter of Fiscal 2010, which excludes an expected $0.06 per share from our restructuring programs and acquisition activity expenses.

Our anticipated third-quarter earnings will be driven by three factors -- first, a sequential quarterly increase and third-quarter revenue; second, higher sequential quarterly commodity costs along with related incremental pricing; and third, the ongoing benefits from cost reduction activities.

In summary, we as a management team remain highly confident on our Company's future as a consequence of all the good opportunities ahead. Now let me turn the call back to John.

Thanks, Mike. With that, let's open the lines up for questions.

Thank you. (Operator Instructions). Your first question comes from the line of John Franzreb representing Sidoti & Co. Please proceed.

Good morning, guys.

Good morning, John.

Actually, my first question is regarding the motive business. Given your confidence that you've seen the worst of the recession, could you kind of talk us through what are you seeing out there in the motive side of the market that gives you that kind of confidence?

Sure. John, if you take a look at the first half of this year, our motive power business was down 47%. That is a major, major drop, big drop taking place. But if you go back and look at it historically, you'll find that it's not surprising. Whenever there's a slow up in the economy we do see motive power batteries drop off much faster than you see spending -- or much harder than what the recession is.

On the other side of it, whenever there is -- you're coming out of a recession or downturn, motive power batteries tend to go up very strong. And the reason for that, there's a pent up demand. If somebody has two fork trucks and they're down a ship they'll only use one, if the other fork truck breaks down.

These batteries do age even if they're setting idle. They do age just by not being charged. So we're anticipating that we are going to see strong demand for motive power come back. We are starting to see that in our order pattern, which is up, and we are starting to see that in our backlog, which is also up.

Could you quantify that, John? That's great news.

John, I don't want to give percentages on that at this point. We tend not to give that information out in forward-looking. As you know, we don't give guidance as far as revenue for the next quarter. We only give earnings.

Okay. Regarding China, certainly you talked in the past about how much potential spend is in that market. Can you talk a little bit about how that played out during the quarter or how you expect that to play out in the current quarter?

Well, I think when you take a look at our earnings in our Asian operation they're quite impressive. We have been very successful in there. I will say that we are holding our pricing quite well. It's one of the reasons you see the earnings up so high.

I think from a market share standpoint that, if anything, we're not gaining market share in that region. In fact, we may be losing a little bit, because of two reasons. One, we do hold pricing high, and two, today we're running 100% capacity utilization.

So we are looking at expansion plans. We have expansion plans underway right now to increase capacity in China, and we are looking even further to make a substantial increase in capacity in that region.

Okay, and one last question, could you talk a little bit about the pricing environment, how much pricing you've pushed through so far, how much do you expect to push through facing the current lead price environment and what are the competitors doing on that kind of price increases?

I think I'd answer that question the same way I have last three conference calls, because there really hasn't been much change. The market's very rational; competitors are doing similar things that we are doing in pushing pricing. I think it's a very rational market and I still consider us to be the leader in pricing.

We have said many times that we are not the low-cost, low-price battery company. But we will provide the best value to our customers. In the long run, when you take a look at the overall cost to buying one of our products compared to one of our competitors, we think that we are actually the low cost on that end. But we are not the low cost on the initial pricing.

Okay, thanks a lot, John.

Your next question will come from the line of Michael Gallo representing C.L. King. Please proceed.

Hi, good morning.

Good morning, Michael.

My question, just wanted to delve down into the incremental pickup in volumes. Are you seeing it broad based? I think if we would go back a quarter or so Europe has been lagging and Asia has been strong. I just want to understand, I guess, are you seeing a broad-based pickup in volumes? Are there still some areas that are weak? And then motive versus reserve, are you seeing both segments picking up or is one picking up stronger than the other?

I think it's pretty much across the board that everything is picking up but it varies just by percentage. The US I think is up a little bit more than Europe but it's not a significant factor. The point is that all of the areas of the world for us we're seeing pick up. And it's in varying degrees.

Now, relative to your question on motive versus reserve, motive is clearly picking up more than reserve at this stage. But you have to put it in perspective. Reserve power business is down 25% year-to-date. Motive power is down 47%.

So we are seeing pickup in reserve, no question about it. We are seeing a bigger pickup take place right now in motive and the reason is it was down further.

Very helpful color, thank you.

Your next question comes from the line of Paul Clegg representing Jefferies. Please proceed.

Hey, good morning guys. Congratulations.

Hey, Paul, how are you doing?

Good, good. Congrats on the strong quarter and on the outlook. A couple of questions on the Oerlikon acquisition -- how much of that business is -- it sounds like it's mostly reserve but is there a motive component also? And does it have any impact on guidance? And I guess when we see it finally fully consolidated in your numbers, does it have any positive or negative impact on margins?

Yes, about two-thirds of the business plus is in the reserve power market, the remainder in the motive power market. What we are looking for in the next 12 months is no adverse impact on earnings per share. And going forward it should be substantial increase that we would see coming out of that entity because we think there's a lot of cost saving synergies.

Now, in the next quarter or two could we see a little bit of a dip until we get -- in our EPS because of this? The answer is, yes, because we have to integrate this within the company. And it's one that we may see a little bit of adverse impact. But I don't think it's going to be anything more than a couple cents, if that.

Okay, okay. And then regionally you talked about being at a very, very high capacity factor within Asia. If we think about your -- you've got a lot of cash on your balance sheet. If you think about your acquisition ambitions, should we be thinking Asia?

Well, Asia is one of the areas that we've talked on for acquisitions for quite a while. And it's one that we have been very aggressive and looked at a lot of different companies. But the only thing is we're very disciplined on what we buy. And paying multiples of 15 to 18 is not my cup of tea. So we haven't been buying companies over there because we haven't found the right one.

We are highly focused right now on expansion because we have approximately 800 employees in that region today and we have great people and engineers over there. So we are focusing on expansion. We do plan on increasing our capacity in that region. But, again, I wouldn't rule out an acquisition if we can find something that's the right value.

Okay, great. And then maybe on pure thin-plate led and your higher margin products, how much of a factor has that been in driving the strong sequential results in fiscal 2Q and then your optimism about 3Q? Are you seeing a material uptick in the demand for the higher margin products?

Yes, we are seeing a pickup in that. Material, I don't know that I would say it's that material that it's -- it's not driving us from $0.37 midpoint to -- or from $0.32 this quarter to $0.37. That's not the big pickup in mix. The big pickup for the next quarter is really on volume. And we're pretty much assuming a little bit of a pickup because of the thin-plate pure lead but it's not significant at this stage.

And could you remind us just when you complete the capacity extension on --

Capacity expansion will be completed in the fourth quarter of this year, our fiscal fourth quarter. We have capacity right now to meet demand. So the capacity expansion really isn't the issue. The capacity is there to meet the demand right now, because we've added incrementally to it. So we've caught up on that.

We have a lot of opportunities going on to sell more thin-plate pure lead. It is a premium product, demands a higher price. And we're moving production that way or moving a lot of sales that way. But it's not going to be a cliff to step up in earnings in any given quarter. It's going to be gradual over a period of time as customers test the product, they learn the product and then they pick up with it.

An example would be like with the Sears contract. It's a little bit of pickup and then it takes off from there. So it's going to be a relatively slow growth I would say over a few years to really see the total impact on this.

Okay, thanks a lot, guys.

Your next question comes from the line of Dan Whang representing B. Riley & Company. Please proceed.

Yes, good morning.

Hi, Dan.

Obviously the 8% sequential pickup in sales obviously very good news. How did the total patterns in sales look through the months of the quarter and into October so far?

Well, again, those are reflected in the $0.37 guidance that we have out there going from sequentially $0.32 to $0.37 as I mentioned. The big pickup that we are anticipating with that is in volume. So the order pattern is there at this stage to support that pickup.

Okay, and obviously you have all the cost savings and pricing. So with that pickup should see some pickup in gross margins as well, just safe to say.

Well, I don't know that it's safe to say that because the reason for it, if you take a look at lead and how lead has gone up so fast and so quickly here that the pricing as you know, Dan, lags recovering that lead cost. So what we're anticipating is just the opposite in the third quarter. I think what we're going to see is going to be an adverse impact because lead went up so fast and we are increasing pricing, but we won't see that right away.

Okay. And just something over to the Oerlikon acquisition, are there any unique products that they offer? I think it looks like certainly opportunities in the cost synergy side, but also their opportunities on the top line maybe to cross-sell EnerSys products with to Oerlikon's customers and vice versa?

Excellent question. I think the answer to that is, yes. Oerlikon has a very strong, very good reputation, a solid product line. We're very pleased to have that product offering in our portfolio going forward. And we're going to see if we can't expand that product line into other regions in other areas.

But your question can we pick up sales using some of the other products that we have, as an example, thin-plate pure lead that Oerlikon does not have. And the answer is, yes. We will definitely look at that. We will assess those opportunities going forward.

Okay, very well. And just lastly, I think you talked about some new products that may be showing up in your offering. Could you comment a little bit more about that? Is it more on the reserve side, the motive side? And any new kind of next generation or kind of breakthrough products or technology offerings?

Dan, I could -- some of the things in there we are working on right now. I obviously do not want to disclose because of competitive situations. But alternate technologies, yes, we are very active in that area looking for the right opportunities. Again, we go back, again, if you look at our diversified markets that we cover everything from putting batteries into missiles or aircrafts or putting batteries into cars like the Sears DieHard.

The bottom line to it is we're looking for stored energy solutions that make money. And we're looking at investing in those areas. And some of these areas that are the alternate technologies, and you look at the business models on them, we just don't see a way yet to make money on them or at least we haven't announced any ways. But that doesn't say we don't look at these things and we aren't actively involved with them.

As an example, when you take a look at our [mod] energy business, which is lithium ion, we are making good money or starting to make money in that area with putting lithium ion batteries in telecom specific applications. So we will continue to search for those. And we're not in love with any one technology. We're in love with stored energy solutions that make money. So we'll continue to search that out.

Great. Thank you very much.

Your next question comes from the line of Walter Nasdeo representing Ardour Capital. Please proceed.

Thank you. Good morning.

Good morning.

Most of my questions have already been asked and answered, but if I could also just kind of jump back to the acquisition strategy that you guys have been deploying. It's pretty disciplined, I understand and we've talked about it in the past.

And as you look at other technologies, are you also looking even outside of the chemistries themselves into power electronics -- or how far afield are you looking to go to kind of give that whole service package to your customers?

Excellent question. The one thing we have to address on the front end with each of these things is, are we competing with our existing customers? And let's take the example you through out, power electronics.

It's an area that we are not looking to get into because many of our customers are in power electronics. And for us to do a start-up, if you will, or to buy something in the power electronics, even if we buy one of the big three or four, I think it would be safe to say if we acquired one of those, the other three wouldn't be interested in buying products from us to help our company. So we're not going to compete with our existing customers. So those are areas we're staying away from.

As far as other chemistries goes, you take any one of the other chemistries, you look at nickel-cadmium is an example. We bought companies in that area, bought a company in that area. We are doing very well with what we bought in Europe, in Zwickau, Germany in the nickel-cadmium company.

Lithium-ion batteries, we have a relationship with a company where we're buying and reselling, packaging lithium-ion batteries for aerospace applications in large formats. On the small format lithium-ion, we're buying batteries there or doing the [mod] energy approach.

We bought a company that makes thermal batteries and lithium-ion batteries for the US military, the one is Horsham, Pennsylvania that we bought from ATK. So, again, we're very selective. We're looking at regions, in areas that we can get into that have a great return for us.

Got you. A little bit just kind of a thought on that, you stated that your acquisitions need to be accretive. Are you talking immediately, within a quarter, within that year that you buy them? Or how excited do you have to be about something to take a little bit of near-term dilution because you think you can really build a strong business platform off of that?

Yes, I miscommunicated, or there was a misunderstanding here because, no, we don't necessarily buy companies that are accretive. We've bought many companies, in fact, I've always said it this way. I like to buy companies that are not accretive out of the chute, because we get them for a very low price and we can turn them around quickly and make money. Those are the ones I really like, because they're the best return on investments.

So if I'm willing to take a short-term risk, we're going to do that with Oerlikon. As I said earlier, that could be short-term mildly dilutive to us. But in the end, at 12 months later, 24 months later, it will be very nicely accretive for us. So we're very willing to take onto a company that will be dilutive in the front end. That doesn't stop us at all.

We look at the long term. We're not a quarter-to-quarter type company. We're a company -- we're in for the long term. I will go back to this. When I started with the company in 1994, we were $200 million in revenue and as you know, we've gone over $2 billion in revenue. And we did not do that with the vision of looking at quarter-to-quarter. We're long-term players.

So if we were to take an investment in something now that wouldn't have a return for two years out and at the end of two years it had a great return, we would do it. But the point is that we're very confident in our models when we put them together that we know the timing, we know the risk, and we know the rewards.

Great. Listen, I appreciate that. Thank you.

Your next question comes from the line of William Brenner representing Maxim Group. Please proceed.

Good morning, John. Good morning, Mike.

Good morning.

Just a question -- let's talk a little bit about the restructuring. Can you tell us exactly where it is, sort of have a gauge of what it is going to be for the full year? Can you give us a little color on that?

Much of it -- let me throw it [to you]. We report that in the Q or do we give that or can we give that information out? I know the numbers but I'm not sure what I can say on it.

Bill, this is Mike Schmidtlein, the Corporate Controller. We're about halfway through our current year where we would expect to spend about $14 million in cash costs for restructuring and about halfway through on the savings that we expect to have incrementally for this year, so --

Now, going into fiscal 2011 do we have any plans to possibly extend that or another realignment?

Well, I think when you take a look at the Oerlikon situation that we announced, we are assessing plans that, yes, we're going to look for a cost saving opportunity going forward.

I think the best way of looking at it, when we bought -- this will be 15 companies since 2001, and we've been very successful in putting these companies together. But the reality is, when you're putting companies together like this, you're picking the low hanging fruit off the tree, so to speak. And as we find other areas and opportunities to go after reduced cost, yes, we will look at restructuring. They're good returns.

Again, the $35 million that we're investing over a several year period here for restructuring generates $32 million a year going forward in earnings. So we will always be looking at those things. Is there anything that we're prepared to announce this morning that says there could be additional restructuring? The answer is, no. Is it safe to assume that just acquiring Oerlikon that we're going to be evaluating all of our operations globally and looking for consolidation? You bet.

Okay, very nice. In terms of your balance sheet extremely strong now, besides acquisitions, any chance of maybe picking up and buying back some stock at these levels?

We would assess that. In buying back stock, and as you know, we bought back I think it was $20 million worth when it was at $11 a share. Right now I think that with the opportunities that we have globally with acquisitions, areas that we have for expansion, that's where we need to put our money at, and it's really, I think it's the best return for our shareholders.

If we keep growing this thing the way we've been growing it, I think it's a great return for our shareholders. And right now I'll say we have more opportunities on the M&A side than we have ever seen.

Interesting. Thank you, guys.

Your next question comes from the line of Arthur Friedman representing Friedman Asset Management. Please proceed.

Good morning, Mike and John. How are you guys doing?

Great, great. How are you doing?

I'm doing good. I'm doing good. I have -- you've answered all my lithium questions in the MOU with the lithium company, so we can get rid of that. So my other questions, very good questions from the other people. So let me just do a couple strategic questions that I like to do. Could you give us an update? You joined that consortium that they formed in the US with the battery companies. Can you give us an update on that? Anything happening there yet?

Well, that consortium was looking for money from the government stimulus package. Yes, we joined it. And they did not get money. So I don't know what the status of it is. I haven't been actively involved in it all but I think it's -- I'm not going to say it's disbanded, because I don't know. But there is little to no activity happening at this stage with it that I am aware of.

Okay, I thought the whole idea was to merge the technologies of different companies to produce a state of the art battery or something like that.

That's exactly right. And, in fact, if you go back on it, I can't tell you the number of companies -- we did have a representative, [Sanjit Despandi] from our company that was on that committee. But what they were looking at was raising government stimulus money in the zip code of about $1 billion to build a factory in the US that all the companies that were participating in this would use. They wrote up the government stimulus package and my recollection on it is that, and they were not funded. And so I don't know what the status on it is from there.

Okay, one other question, in the wind industry do you see anything picking up there that you guys can get in on?

Well, we're in it already. We do about $30 million a year with wind and solar combined. We have the products available. I describe it as we're the tail on the dog on this one. We're waiting for the industry to take off. If it every takes off, we're there. We've got the product line rearing to go. But I think that question really has to go to the wind and solar guys, the people that are in that business. And I'm sure if it does pick up, we'll be in conversation with them.

Okay, because you saw yesterday the news that China and the US have an agreement to build and China's going to help build or actually be the main funder of the huge wind farm in Texas. So that's why I was asking about that.

Yes, and it's one that we have the products available for those type of applications, and we'll have to see how that shakes out. Now, one I can tell you about that's on the other side is in China right now. They're looking at building, my understanding is it's 250 nuclear power plants and there's about 70 of those that are approved already.

And one of the contractors is a US contractor that's used and recommended our batteries, and we're working to be in the race on that particular one. So that's looking fairly good when those are finally implemented. In fact, we've gone as far as to say that we'll build those batteries in China also.

Excellent, okay. Thank you very much for the update and the financials are looking good.

Thank you very much. I appreciate it.

(Operator Instructions). Your next question comes from the line of Dana Walker representing Kalmar Investments. Please proceed.

What was your sequential volume growth, if you wouldn't mind?

7.9%.

Was that units or? That was just revenue was it not?

That's revenue. Mike, do you have it on units?

7.9% was on the operating earnings was the rate of -- of operating earnings for the quarter. But Dana, your question is you want to know --.

No, his question was sequential growth and revenues second quarter over first quarter, we said 8%. I think it was exactly 7.9%.

Yes, well, $367 million versus $340. So it's, yes, somewhere in that range.

But you've described how you're seeing a pickup in volume. What proportion of that 7.9% would you describe as being unit volume rather than just revenue?

Yes, most of that would be on a volume basis with some foreign currency benefit.

Okay. John, your profitability in Europe is quite low. You are restructuring your business in Europe. Would you address where you are now today, where you think you need to go and what additional steps you might need to take?

Yes, excellent question, excellent observation on your part. And this is going to surprise you. When I look at the earnings in Europe right now, which I believe is about $2 million op earnings through six months, I'm amazed that we made money in Europe. I'm amazed at how well the guys in Europe have done and let me tell you why.

Europe has a very high fixed cost basis because of social laws. It's not like the United States, when also when volume goes down you can lay people off. You don't do that. You have to absorb those costs in many cases.

Europe's volume in the first half of this year, compared to the last year, is down 45%, 45% decrease in volume with that high fixed cost. These guys have done one heck of a job in managing through this thing. And thank goodness that we went off on the front end and back in a year ago August we saw and thought that there was a recession coming at us and we took a very aggressive approach to reducing the costs. And I'll tell you, the guys in Europe have just done an incredible job, 45% volume drop and you still make money.

So to answer your question, Dana, where do I think it's going? We continue to implement the plans that we have. We're only two-thirds of the way through those plans, so there's another one-third upside on the cost savings. And guess what? The volume will come back. It will come back. We're weathering through this thing extremely well. So when the volume comes back and that other third kicks in, I think I'm going to be very happy with the results coming out of there.

As I look at your reserve sequential flow through I believe it was 24%, for motive it was 16%. That's comparing Q2 to Q1. Can you talk about the flow through that you would expect to see in Europe as revenue recovers?

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

No. Dana, could you expand on your flow through?

For every additional revenue dollar, comparing Q2 to Q1, in your reserve segments, 24% of that flowed through to the bottom line. That number was 16% in your motive business, Q2 to Q1. My question is, if we were to look at Europe on a flow through basis prospectively, what type of flow through do you expect to see as volume recovers in Europe?

On a prospective basis I don't know that we would necessarily comment because we try to limit it to the guidance without giving revenue or what I would call drop-through you call flow through.

Okay, let's call it a drop-through.

Yes, and I'll take the question up. I do understand what you're asking now and, Dana, that's something that is reflected in our $0.37. Again, we're very religious about sticking to the policies of we're going to give guidance out on earnings on one quarter, not revenue. And it's reflected in the $0.37.

I'm more thinking over a couple years basis. Should the -- I'm thinking as you take costs out and if Europe was sticky down on cost, I presume it's going to be stickier up on cost so that the incremental labor dollar add won't be as high as it might be in other places, unless you might get pretty good flow through in your op.

Yes, I agree with your point. I'll state it -- I think this is what you're asking, now that I understand it. When you look at the fixed cost that we have in place right now at the volume that we're running, how much fixed cost do you need to add to increase the volume? That 45% volume that we had a year ago, if it comes back, how much of that drops through to the bottom line?

And I'll just tell you, if you take and neutralize the impact of pricing and lead costs, just assume that to be constant, in concept, what you're saying, it will be big, what will drop through from the top line to the bottom line, because the fixed cost isn't going to go up that much. It will go up, but not as much as -- you're going to get great leverage on that volume.

Your disclosure suggested that your pricing was more negative in Europe than it was in the Americas. Was there other nuances to that or is that a direct read through that you've had to give out more on pricing because of the volume reductions and more competitive environment in Europe?

Europe tends to be on a lot more on automatic pass throughs than the US market, a lot more, much higher percentage. So that's part of it right there. And the other thing is I think the other part to add to it, in the reserve power business in the Americas, we were not as strong a number of years ago as we are today. We have done an excellent job in that particular arena. And you've got some high margin products that are selling.

The third thing is and the big on is the Telco business in the US has not been hit as hard as it was in Europe. European telecom business went off quite a bit for several reasons. And it didn't happen in the US at the same level.

If your reserve business has been more resilient, to what degree would you expect its sensitivity to improvements in the economic climate to be positive? What portions of the reserve business will act better with an improved business climate?

Well, all of it would. I mean, you're going to see -- we've seen a downturn take place in UPS because the banking industry being down, the financial institutions. We have seen some slow up to spending in telecom in the US, but not to the level that we've seen in Europe. So I think it goes somewhat across the board.

Final question, Mike mentioned this and, John, you've mentioned this where you're describing a gross margin goal that exceeds 25% or that's at least 25%.

That's correct.

You've talked about, of course, 25% is a point in -- or a line in the sand. It sounds like your ambition doesn't stop at 25%.

If we were at 35%, my ambition wouldn't stop at 35%. We want to continue to take and make money for our investors, and we want to do the best we can. And it's managing through all the things we've been talking about pricing, what the markets will do. Market's going to set pricing. The market itself will set the pricing. There's no relationship between cost and price.

We are going to do everything we can to take and give best value to our customers and get a fair price for our products, a fair price. The other side to it is we're going to do everything we can to reduce the cost, everything we can short of reducing the quality, reliability. We will not go there. We'll not do that. We will provide best products, but we're going to do it cost effectively.

Are you uncomfortable with a scenario where with some volume recovery this could be a 10% to 12% operating margin business?

Am I uncomfortable with that? Not at all.

Gentlemen, good luck.

Thank you very much.

Your next question comes from the line of Elaine Kwei representing Piper Jaffray. Please proceed.

Hi John and Mike. Thanks for taking the question. I was wondering if you could talk a little bit about how the competitive landscape is looking for you now in this recession as we're coming out of it, whether you're starting to see potential increasing market share there as leader competitors might have fallen by the wayside. And I'd be interested to hear sort of if that differs across regions or businesses.

Well, let's take the first off in China. As I mentioned earlier, I don't think we're picking up market share there. I think we're losing it. And I think the reason we're losing market share over there is because we don't have the capacity in place. And the second thing is that we're higher priced.

I think in the other areas where some of the special technologies that we have, we have customers coming to us that are looking at what is it these guys have that the other guys don't have, what does EnerSys have these competitors don't have, and there's a very strong interest in some of the products that we have and services that we have that our competitors aren't offering.

So I think the answer is, yes, we're going to see a pickup in some things there, a pickup in market share potentially. But it's not going to be because of pricing. It's going to be because of best value. So I think we're seeing some of that take place probably more so in the United States right now than in Europe. There is some of it in Europe, but we're seeing some interesting things happen in the US market.

All right, and we've seen some attention paid, a lot more interest toward grid storage opportunities, and I was wondering if that's something that you guys are focusing on or participating in any sort of demonstrative projects there?

That's something, once again, we've got the product offering today. We're ready to go with it. We have worked with a number of different companies on different things with this. And, as I described it earlier, we're the tail on the dog on this one. Once that industry is ready to roll, we're there.

Okay, great. Thank you so much.

With no further questions in queue I would now like to turn the call back to Mr. John Craig for closing remarks.

Well, thank you, [Katina]. Thank you everybody for joining our call today and talk to you later. Thanks.

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