EnerSys (ENS) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2010 EnerSys earnings conference call. My name is Yvette and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions).

I would now like to turn the call over to Mr. John Craig, Chairman, President, and Chief Executive Officer. Please proceed, sir.

Thank you, Yvette. Good morning, and thank you for joining us for our conference call this morning. During this call, we will be discussing our third quarter fiscal 2010 results and will comment on the general state of our business.

Joining me on the call this morning is Mike Schmidtlein, our interim Chief Financial Officer. And before we get started here, I'd like to ask Mike to cover information regarding forward-looking statements. Mike?

Thank you, John, and good morning to everyone. As a reminder, we will be presenting certain forward-looking statements on this call that are based on management's current expectations and are subject to uncertainties and changes in circumstances.

Now 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, 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 December 27, 2009, which was filed with the US 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 February 3, 2010, which is located on our website at www.EnerSys.com.

Now let me turn it back to you, John.

Thanks, Mike. As we reported last night, our sales for the third quarter were $421 million with adjusted diluted earnings per share of $0.44. Both our sales and earnings were up significantly on a sequential basis from this year's second quarter, and the earnings exceeded the $0.37 midpoint guidance we gave during our last conference call.

During our October conference call, I said we firmly believe we have turned the corner on the recession, and with another good quarter reported, we believe we will continue to see the improvement in our worldwide markets. In the quarter, revenue increased 15% sequentially over the second quarter, while adjusted diluted earnings per share increased 38%.

The revenue increase was due primarily to higher organic volume, and the earnings increase was due primarily to the higher volume and the good results in our continuing cost savings programs. Although earnings improved significantly, we're not able to maintain the 24.1% gross profit margin reported in the second quarter. The timing of pricing continues to lag increase in commodity costs, and this temporary lag was a contributor to the gross margin reduction to 23.3% in the third quarter.

In addition, even if 100% price recovery were achieved, mathematically, the margins would decrease, although the net impact on gross profit dollars would remain unchanged. We are maintaining our strong focus on achieving our target of a minimum of 25% gross profit. However, as I just discussed, this is more difficult in an environment of increasing commodity costs, such as we've experienced over the last few quarters.

We are not and will not take our eye off the target. Stabilization of commodity costs along with higher volume and cost savings will help us achieve the 25% gross margin target.

We believe we are in good position to take advantage of the projected growth in the worldwide economy. Our strong competitive and financial positions are largely the result of strategies we began to implement in the summer of 2008, when we saw the beginning of the economic downturn. We invested capital to substantially reduce our costs, while continuing to expand -- or the expansion of our thin plate pure lead capacity, conserve cash, and increase our focus on acquisitions.

As you know, the downturn in Europe was substantially worse than the rest of the world. However, we remain confident that our reduced cost base in Europe will pay off in higher future earnings as their economy recovers.

Revenue in the Americas, in Asia, have also been down significantly this year. However, we have been able to improve operating earnings in both regions. We remain very active in pursuing acquisitions, and have completed investments in Oerlikon, Altergy, and Douglas Battery since our last conference call.

These investments will result in a combined revenue in fiscal 2011 in excess of $100 million and will be accretive to our earnings this next year. We had over $200 million of cash in short-term investments at the end of December, so we remain confident in our ability to finance additional acquisitions and organic growth.

Order trends have continued to build, and as a result, we are anticipating higher sequential sales for the fourth quarter. Recent data from the Industrial Truck Association shows increased orders for fork trucks. And on the Reserve product side, in addition to improved orders, we continue to experience increased quote activity.

Despite of the revenue increase, we are expecting, as reported last night, that adjusted diluted earnings per share in the fourth quarter will be in the range of $0.39 to $0.43. Our commodity costs will increase sequentially by approximately $20 million in the fourth quarter. That is equivalent to a $0.29 per share headwind. We may not be able to offset all this increase in the fourth quarter, but we full expect to offset them in the next quarter or two.

Going forward, we will remain highly focused on our customers and provide them with the best overall value with our products and services. We are always exploring new cost savings opportunities while also maintaining our focus on growing the business, both organically and through acquisitions. Our employees have been very successful in endeavors in the past; I believe that we will continue on that path.

Now I would like to turn the discussion over to Mike Schmidtlein for further information on the results and on our earnings guidance. Mike?

Thank you again, John. Our third quarter net sales decreased 9% over the prior year to $421 million. On a regional basis, Europe's third quarter net sales declined 5% to $210 million compared to the prior year. Our sales in the Americas declined 10% to $179 million, while our Asian business third quarter sales experienced a decline of 18% to $33 million.

The consolidated third quarter decrease includes approximately 11% due to lower volume and 4% from lower selling prices, partially offset by 5% due to stronger foreign currencies and 1% due to acquisitions.

On a product line basis, net sales for Reserve Power decreased 6% to $213 million, while Motive Power decreased 11% to $208 million.

On a sequential quarterly basis, third quarter net sales increased 15% over the second quarter, primarily due to improved volume. This is the second straight sequential quarterly increase and is a good sign for the future. Both Europe and the Americas posted solid gains in organic volume of 20% and 6%, respectively, over the prior quarter. The Asia region declined 12%, primarily due to delays in the bid tendering process by certain Chinese telecom companies.

Net sales for the first nine months of fiscal 2010 decreased 29% over the prior year to $1.1 billion. On a regional basis, our European operations net sales declined 34% to $534 million in fiscal 2010. The Americas declined 24% to $494 million; in Asia, 16% to $101 million. The 29% decrease for 2010 includes a reduction of 22% in base volume; 2% from weaker foreign currency translation; and 5% due to pricing.

On a product line basis, net sales in Reserve Power decreased 19% to $594 million, while Motive Power decreased 37% to $535 million.

Now a few comments about our 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 highlighted items. Please refer to our Company's Form 8-K, which includes our press release dated February 3, 2010 for details concerning these highlighted items.

Our third quarter adjusted consolidated operating earnings were $38 million or a decrease of 3% in comparison to the prior year, but the operating margin increasing 50 basis points to 8.9%. This credible third quarter margin was achieved in spite of lower sales of approximately $40 million in the quarter, as the positive margin impacts from cost reduction initiatives and lower commodity costs net of pricing were evident.

Excluded from our adjusted operating earnings for the third quarter was a $2.9 million non-taxable bargain purchase gain arising from our recent acquisition of Oerlikon. We believe this gain will be consumed in subsequent periods by restructuring charges for that business.

On a sequential quarterly basis, adjusted consolidated operating earnings increased 29%, with the operating margin increasing 100 basis points, primarily due to the increase in volume and our ongoing cost savings programs.

Our first nine months of fiscal 2010 adjusted consolidated operating earnings were $90 million or a decrease of 29% in comparison to the prior-year, with the operating margin flat at 8%. The decrease in the first nine months earnings was due to similar factors, as discussed above for the third quarter.

As some of you may have noticed in our press release and Form 10-Q, we have revised our reporting of segments. The accounting guidance prescribes reporting on a single basis of segmentation, based upon the manner in which management runs operations. Therefore, we will only be reflecting operating earnings on a regional basis in the future. However, we will continue to provide net sales by product line.

Now several comments concerning our diluted earnings per share. Adjusted diluted net earnings per share were $0.44 in the third quarter versus $0.61 in the prior year, or a decrease of 28%. The main driver to the decrease in earnings was the lower volume and foreign currency transaction gains from the prior year, which did not reoccur.

For the first nine months of fiscal 2010, adjusted diluted net earnings per share were $0.99 versus $1.58 in the prior year, or a decrease of 37%. The key influences on our earnings for the first nine months of 2010 were the reduction in net sales and foreign currency transaction gains, partially offset by cost savings and lower commodity costs, net of pricing.

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 nine months of fiscal 2010 was $110 million. Second, nearly $211 million is on hand in cash and short-term investments as of December 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 1.9 times and our net debt to total capitalization ratio was 22% as of December 27, 2009.

Capital expenditures were $31 million for the first nine months of fiscal 2010 and are expected to be $45 million for the full year. Our capital spending for the fiscal 2010 is focused 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, excluding the nontaxable bargain purchase gain, was approximately 30% in the first nine months of fiscal 2010, and is expected to be slightly below 30% 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 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 recently completed the acquisitions of the Douglas and Oerlikon Battery businesses, and the investment in Altergy Systems.

As we look ahead, we expect to generate adjusted diluted net earnings per share of between $0.39 and $0.43 in our fourth quarter of fiscal 2010, which excludes an expected $0.09 per share from our restructuring programs and acquisition activity expenses. Our recent acquisitions in investments are expected to be neutral in earnings for the fourth quarter, and accretive a minimum of $0.10 per share next fiscal year.

Our anticipated fourth quarter earnings will be driven by three factors -- first, $20 million or $0.29 per share of higher sequential quarterly commodity costs, along with related incremental pricing. Second, a sequential quarterly increase in fourth quarter revenue; and third, the ongoing benefits from cost reduction activities.

In summary, we believe our ability to mitigate the higher lead costs in the fourth quarter with pricing and cost savings reflects the strength of our business.

Now let me turn the call back to John.

Thank you, Mike. And with that, I'd like to open the lines for questions.

(Operator Instructions). Corey Tobin, William Blair.

A couple of very quick ones here. John, I appreciate how hard it is to achieve the 25 -- well, I should say I appreciate how hard you guys have worked to achieve the margins that you have, and I'm happy to hear that you're sticking with the 25% margin target, despite the move in lead prices.

Can you just walk us through how you see the 25% target as still being attainable? I guess what I'm referring to is, were there new pockets of cost savings that have come up that you've been able to identify? Or is it just higher volume on the fixed cost base? What exactly -- what factors are at play here that should allow you to still obtain that 25% target, despite the move in lead?

Sure. Good question, Corey. First off, before I answer that, I want to go back and talk about fiscal year 2004, where we were over 25%. We've been there before and I fully believe that we can get there again.

Now specifically to your question. If you go back to our call of August of 2008, we started to see a downturn take place. We said at that point in time that what we're going to do is consolidate our operations; we're going to invest money to pull costs out. Since then, we've closed the plants down; we've consolidated operations; we've put additional automation in place. We are poised to come out of this recession a much stronger company than we entered it.

What it really gets back to is two factors. If the volume comes back, it is my belief that we'll blow through the 25% -- if we control or manage the price versus the cost of commodities. So, as long as we stay in a market that is rational with pricing relative to commodities, and the market comes back, we will exceed that 25%.

Got it. Great. And then a final one, just on the top line. We've talked in the past about how you typically see accelerated growth rates for the -- I think it was three to five quarters coming out of a recession. And I'm just curious, do you still -- as you see the current environment shaping up, do you believe that will be the case?

I do believe that to be the case, but this is a different situation than I think that we've seen in a long time.

If you take a look -- let's break it down by segment. If you look at Europe, Europe was really hurt the worst. We're down over 33% in our revenue compared to last year in Europe. It's been a tough situation in Europe, and I don't see it coming back on a V shape or even a U shape. I think it's going to take some time for Europe to really turn around.

The US, I think, is going to be a little different. It's going to come back. It's going to be slower than the past but it is starting to come back and we're seeing it in the order take.

Asia is strong for us right now, even though the volumes are down. There's a reason for that, and basically, is limited capacity that we have in the China market today. But I think what we're going to see is going to be the -- when the economy returns, this thing will pop back up.

Now specifically to the large growth that you see after a recession -- if you take a look at our Motive Power business this year, it's down something like 35% compared to last year. Reserve Power is down 19%. Historically, our Motive Power business is larger than our Reserve Power business. That's not the case this year because of the major, major regression that we've seen in the Motive Power numbers.

That is starting to come back. ITA data that we recently looked at indicates that it's coming back -- stronger in the Americas, though, than in Europe -- but it is coming back. And what we've seen historically is that Motive Power tends to go down worse in a recession and it tends to come back stronger than the recovery. And I have no reason to believe that will not repeat itself this time around.

Okay, great. And then one final one just following up on what you said -- there's capacity constraints in Asia? Did I hear that correctly?

That's correct.

And do you see that persisting for some time? Or is it something that should free up here in the next couple of quarters?

There's a couple of things on the China market specifically. And I said Asia -- let me qualify that. China is still going along strong. The rest of Asia is -- the recession is there; it's real; it's down. The rest of the countries we do business with in Asia, it's soft. But China itself is still very strong for us.

So when we take a look at that particular market, being that we have limited capacity, what we're doing is we're holding pricing. In fact, our pricing is probably higher than most of, if not all, our competitors over there. Limited capacity -- we're not going to give it away. You look at our earnings in Asia, they are outstanding this year.

Now what we're studying currently is this -- that we are looking at increasing capacity in the China market. In fact, we're looking at possibly even building a new factory over there. We're studying it right now. We will not make that decision until our models indicate that we can make a real good return on our investment. But it is a study that we have going on currently.

If we do that, we will also put in different product types that will be lower in cost. So the idea, the concept is -- lower cost production in a lower cost region; increased capacity for China and really to attack that market on a much stronger basis.

Great. Thanks for the time and congrats on a great quarter.

Steve Sanders, Stephens Inc.

Nice quarter. On the -- I think you indicated that sequentially, the volume trends continued to look good. Can you quantify that a little bit? Or at least kind of directionally talk about what you're seeing in Europe versus North America, kind of Motive versus Reserve?

Well, as I said earlier, that the ITA data is showing significant improvement over last year. In fact, if you take a look at the month of January, and I realize that's just a one-month period, that the ITA data in the United States was up like 60% over prior-year for that one month.

But if you look at the last couple of months, it's been up in the mid-20s to 30s. So we are seeing a trend that's starting to come up in the US; a little slower in Europe, as I mentioned earlier. So we think that we're -- we think that we've hit the bottom. And I said that the last conference call, we felt we hit the bottom. This quarter, we're up 15% over last quarter.

And I'm not going to give a percent what we think fourth quarter is going to be up; we don't give top line guidance on it, but I think we're going to continue to see increases in our fourth quarter on revenue over third quarter.

Okay. And then back to the potential China expansion. Can you just talk a little bit more about what you need to see to make the go-ahead decision? And then how we should think about the investment there when you -- when and if you do make that decision?

It's a real simple equation. And that equation is, does that make good money for our shareholders? If it's a good return in our five-year models that we're looking at, then we will go ahead and push the button and do it.

And what we've got to really test are a couple of different metrics on that. Do we really believe the topline growth will be what we think it is? Initial indications are yes. Secondly is, if the place that we're looking at, if the cost structure is that low, or much lower than we have today, we can consolidate operations, get our overall costs in China down, then if it generates good returns, we're going to do it.

I've said before and if you know, we're kind of a roll-up vehicle in the industrial battery space. We've acquired 25 different companies since the mid to late 1990s. We've tried to use that approach in the Asia market. The valuations on the companies we looked at are just too high. We're not going to be paying multiples of 12, 15, 18 of EBITDA. So we're looking in another approach. We will be stronger in that market. We will be stronger in it. It's just how do we get there.

Our approach that we've used in the Americas and Western Europe has not worked in Asia because the multiples have been high. So we're looking at the good returns. And I said it's a study going on right now and we'll finalize that study, hopefully, in the next six to eight weeks.

Okay. And then two quick ones and then I'll get out of the way. First, just kind of a general comment on the market pricing. Is it fairly rational in different regions of the world and different end markets?

And then second -- and this is really very much a hypothetical -- if lead sort of stayed in this $0.95 to $1.05 range, you guys got some decent sequential volume increases and got at least a piece of your pricing, is it reasonable to think you could get close to neutralizing lead by the June quarter? I thought you sort of implied that in your remarks, but I know there are a lot of variables that go into that.

Well, the answer is it depends on what lead does going forward. And let's talk specifically about that and try to give you a little bit more insight what happens with lead.

I'm going to talk about lead in the last two quarters and the forward quarter, and I'm going to talk about it based on an LME price -- not EnerSys price, but LME price. And the difference being I don't want to give out our actual price because we do some hedging, we do tolling, and do some other things; but the LME will give you an indication what's going on.

Keep in mind that we fight for our inventory. So in theory, what happens is the lead costs for our fourth quarter -- we already know what it is, because the actual value or price that we paid in third quarter rolls to fourth quarter. Okay? So we're FIFO-ing the inventory.

If you look at quarter two on a P&L standpoint, the LME cost of lead was $0.68. If you look at it in the third quarter, it's $0.87. If you look at it in the fourth quarter, it's $1.04 -- $1.04. Now, the price is already set; we've already spent the money for the lead. It's at a $1.04 average LME. Lead dropped down to $0.91 this week.

So when you take a look, what is your ability to get pricing when lead drops down? It's obviously tougher. So when you take a look at the headwind that we have in fourth quarter over Q3, it's a $0.29 per share headwind. And we're offsetting most of that. Most of it's coming through to cost savings, increased volume, and a little bit on pricing; but we're not going to capture all of it on pricing in the fourth quarter.

But it will level out and neutralize itself in the first quarter or second quarter if the LME price stays flat -- it stays where it is. If it goes up or down, obviously, those metrics are going to change.

Okay. And I think you -- didn't you put through some price increases kind of late third quarter -- or late calendar third quarter, early calendar fourth quarter?

Yes, we have one -- there was an 8% price increase that's going through right now. And again, it's what is your ability to capture that? That 8% increase was based on lead going to a high of $1.18 a pound. And as I mentioned earlier, down to $0.91 a pound. So it really comes back is -- how confident are we that we can get the full pricing, the 8% going through when lead dropped down?

That's reflective in the reduction that we did in our fourth quarter guidance. It's a timing situation of price of our product that we can get versus what's happened with the LME. If the LME would have stayed (multiple speakers) --

Okay. (multiple speakers) -- the pricing environment, rational, any pockets that are more challenging than others?

The challenging one right now -- the Americas is in very good shape. I mean, there's one that is very rational, generally speaking, in the Americas. Europe is tougher. And it's rational -- I'm going to put it on a scale of 1 to 10. I'm going to say the Americas is -- let's just arbitrarily say a 7 or 8; Europe would be a 5 or 6. Okay? Irrational would be a 2. All our markets are rational, but some are just better than others.

Okay. Thank you very much.

Elaine Kwei, Piper Jaffray.

Hi, John, great quarter. (multiple speakers) Thanks for taking my question. Quick question on the China telecom. You mentioned that there was some delay there. And I was wondering if you have any insight into whether that was an industry or a company-specific issue? Or if this is sort of a broader macro issue with China potentially tamping down a little bit on lending and the economy there? And would that change your outlook?

I don't think it's the latter. I think what it is -- and this is not untypical that you see a tender that goes out and they're taking some time to do it. They had had some excess inventory in certain locations they're using up.

This is not uncommon. We see this virtually every year that we anticipate that the tender is going to go out, it's going to be completed. Internally, with this one particular customer -- and it is basically one customer -- we don't know the whole reasons; they haven't divulged that, but we fully expect that that's going to -- the tender is going to be satisfied and it's going to be moving forward.

Great. And in terms of your current capacity there in Asia, is that currently sufficient to meet demand? Or you're really feeling the pressure in terms of needing to either make a decision on acquisitions or potential new construction?

We could keep running the business as we are today, and we're making very good money over there. Let's face it though, it's a smaller operation. It's something like $33 million of our total revenue in a quarter. It needs to be bigger.

If I had to pick one disappointment I've had over the last 10 years is that we've not been able to find a big acquisition in the Asia market. We need to grow there. We need to grow faster. It's a high priority for us. And we haven't been able to do it through the acquisition model, so we're looking at different things. We will not give up on growing our business in Europe.

And as I reminded our President of our Asian operations, that $300 million to $500 million is what I expect that to get to some day.

Okay, great. And just lastly, how significant is the Motive Power segment there currently? And do you see that coming up with that same growth at the same rate?

I think you're going to see growth there, that's going to be relatively strong. I think there's a couple of things that's unique about that market, in that many of the Chinese manufacturers are buying very inexpensive batteries.

One thing we will not do is build products that are will not perform to our standards. Because if you build one in Asia that has the EnerSys brand on it, that can spread to the rest of the world. So we're going to keep with top quality products.

We are going to continue to see growth over there. You've got a number of the OEMs that have put their manufacturing in China today. We are selling to those OEMs. And I think we will continue to see growth in that market also.

Great. Thank you so much.

Walter Nasdeo, Ardour Capital.

This is Shawn Lockman for Walter. Just wanted to get -- the way I look at it here, just doing a quick calculation, it looks like we're going to finish the year with about $12 million in restructuring charges. You talked a little bit about restructuring as far as the acquisitions go. Is there a level we should be looking at for next year on that?

Well, you know, the program itself, which John has referenced -- and it was approximately a $50 million program over four years, of which about $30 million plus $35 million was cash; the rest was non-cash write-off -- it's still that -- those already announced programs have -- will largely have -- we will have incurred most of the costs by the end of this fiscal year. And we will see some additional incremental benefits, call it about $9 million, we believe, in fiscal '11.

So for the programs to date, we think we will have executed them in terms of incurring the costs this year. And then we will enjoy some additional benefits next year -- call it another $0.10 to $0.12.

So as we look ahead then to, say, the operating expense line, should we be looking for improvements there, just in terms of margins? Are just steady as where it is right now?

You will see, because the costs are not all -- you'd have to look both in operating expenses and up above the gross profit line, because they would be directed throughout our P&L. But yes, we would expect, all other things being equal, that that would be a uplifting effect.

You know, we talk a lot about the 25% and Mike brings up a very good point there. Internally, that's something that's a daily conversation about 25% we drive the organization at. And I constantly get reminded by employees -- there's that area called SG&A that we're attacking also. And we are attacking that.

When you take a look at consolidation of customers, specifically in Europe, we've taken out a number of people in the sales side because it's redundant. We're matching our sales force to our customers. So there's improvements that's being made there constantly. But Mike's right, the same things that we're looking at are both above the gross profit line or cost of production and in the SG&A area.

And one final thought on that, Shawn, is that -- that's just one leg of our cost savings stool, if you will. A lot of the costs that we generate every year are what we describe as grassroots -- every facility comes up with, as part of their annual budgeting process, they come up with a list of cost improvement programs that we track through our intranet.

And they deliver in and of themselves significant savings. And oftentimes they are coming from the people on the line who have found a better way to do the process that they are participating in. And that's a very important part of our ongoing savings.

Great. Thank you. And just one finally -- if I could just get a little bit more color. We talked a little bit about volumes in both, I guess, Motive and Reserve increasing sequentially. It seems that -- are you guys seeing a little more momentum there building in Europe as opposed to Americas, on those two sides? I mean, on a sequential basis?

Or -- I mean, how should -- what's a good way of looking at that, just in terms of the momentum that might be building as far as economic recovery?

Well, I think you're seeing more recovery take place in the US than you are in Europe. It's going to be faster. But that being said, if you take a look at our third quarter, Europe on a percentage basis has performed better than at the top line than what the Americas did. So -- but I still believe, and what we're planning on -- hope I'm wrong -- but we're hoping or I think we're going to see a slow recovery in Europe.

Great. That's it for me. Thanks, gentlemen.

Michael Gallo, CL King.

Congratulations on a good quarter. My question, just one follow-up as it relates to Asia. Any -- give us a little bit more color on what you think the size of a potential capital investment might be, just in terms of general range? And then if you have any concerns about some of the recent efforts to try to slow things down over there and whether you think that can have an impact over the next couple quarters?

Well, it's a fair question. And let me just start off by saying we haven't finalized numbers on it as of yet; but if we were to build a plant, a new plant in China the size we're talking, it's going to be more likely under $30 million. So it's not going to really disrupt our $200 million cash and our $200 million credit facilities that we have open right now. It's going to have some impact but not that major.

To your second point of your question on the slow-up, I don't believe you're going to see a major slow-up take place in telecommunications over there. The cell phones are still a big part of the economy there. The government is, as we mentioned earlier, opened up licenses, anticipated a $41 billion investment. Even if it's cut back to $35 billion, which I don't anticipate that happening, it's still going to be big for us.

Great. And then just -- can you give -- maybe I missed it earlier -- could you just give us an update -- I think there was $33 million run rate of cost savings you had been targeting for the fiscal year; where are you on that? And there's some additional cost takeouts or areas that you are looking at as you head into fiscal '11. Thank you.

We're at about $19 million right now. We've got about another $14 million to go in fourth quarter in our actual savings.

And will -- you should get the full benefit of that starting first quarter of fiscal '11?

That's correct. Mike, I think there was an additional -- go ahead.

Yes, well, John referenced, we would expect it on a year-over-year basis an additional $14 million of savings, which would take us somewhere in the $30 million range for the full year, being both restructuring programs we've referenced and the grassroots cost savings initiatives that I described in a previous answer.

So those items will be there. Then there should be some additional incremental savings next year that will arrive from some of the actions that we took late in this year, that would not have given us any benefit to speak of in the first three quarters. So that carry-on effect is, call it $9 million next year.

I think the other thing to take into account, when you look at Oerlikon and Douglas, the two battery companies that we just acquired, both those companies were not performing to the level that we think we can get them to. And the way we'll get them to those levels is basically put their production in -- we'll consolidate facilities.

And basically, what we're going to see on those, the cost structure is really going to be an increase in variable cost-only to us. Our fixed cost is already there in these factories. We have the capacity to build those products today in existing factories. So I expect that we'll see some restructuring take place there, but I also believe that we'll see major pickup next year in earnings relative to those acquisitions.

On those acquisitions, I think the way to view them this year, there will be a breakeven. We may be mildly dilutive -- it'd be less than a $0.01 for the fourth quarter. In going forward next year, it will be in excess of $0.10 a share accretive.

Great. Thank you.

William Bremer, Maxim Group.

Can you give us some color on your higher margin products? Thin plate pure lead -- how that's performing? The capacity there, if there's any issues?

And then I know renewables is a small portion of your business. Can you just give us a little update on what you're seeing there?

And then finally, I guess this is really a housekeeping question -- just a run rate on SG&A going forward embedding the two acquisitions.

Okay, well, let's start with thin plate pure lead. As you are aware, we've invested about $50 million in a process of investing that. We have capacity in place to support the current demand going forward, which is a good thing.

The demand for that product continues to be strong and we are finding new customers. We have a couple -- in fact, we've signed one this week, so I can't divulge on it yet or talk about it yet, but I see nothing but upside on that particular product.

Everyone that's tested that product, they all agree that it is superior to anything else out there in the lead-acid battery business. As you are aware, that we built this year's diehard -- platinum battery. It was rated number one by Consumer Reports by far and away. And our telecom customers and other starting application customers are seeing similar results.

It is a premium-priced product. It is one that is going to cost the customer more, but they're going to get best value with it too. So -- and again, we do have the capacity to support it with the investment. Even during the recession, during the downtime where people were cutting back, we did not cut back on that investment, because we believe that strongly in that product line.

The second part of your question?

Just on renewables, an update there.

We do about $30 million that's relative to -- our eco-batteries. It's around $30 million. It's not a big business for us at this stage. And as I've described in the past, we're just waiting for that industry to take off, whether it's wind or solar. We have the products today. We can ship it at any time.

Wanted to see if there was any type of uptick since the last quarter and it doesn't sound as if there is.

Not really -- modest.

Right. Okay. And then just a housekeeping question on the SG&A going forward.

Yes. Bill, your question on the SG&A and whether the -- what the impact the expansions might -- or the additions might have on that, you know, we wouldn't expect a lot of incremental SG&A per se; some selling expenses related to some of the additional products. Most of the back-office shop work we would not expect to incur that on an incremental basis.

So, that should in and of itself have a dilutive effect we would expect to see if this quarter we saw operating expenses at 14 -- call it 14.5% of sales. All things being equal, we would expect that to go down. But as you know, operating expenses as a percentage of sales is far more susceptible to just your overall volume range, because the G&A portion doesn't flex very well.

In selling, in my model that I use, I kind of use about a 50% flexing ratio. But -- so we would expect those two acquisitions should have a mildly dilutive effect on that percentage of sales for SG&A.

And then one final -- how many additional employees are we taking on with those two acquisitions?

Do you remember the number? It's a relatively small number. Let's talk the Douglas side first. I believe it's 14 people. Their factory, we did not take on that at all and it's very similar in Europe. It's a relatively small number.

Basically, what we're doing is acquiring the distribution and sales customer list, and we're taking their product designs and putting in our factories. Mike, do you want to add to that?

Just in the short-term, there is a transition period, at least in Oerlikon, where we would be picking up additional incremental employees. So in the shorter-term, yes, there is an addition; but in a longer-term, six months to a year, it would not be.

Good point.

Okay. Excellent. Gentlemen, thank you.

John Franzreb, Sidoti & Company.

My first question is in the Motive business. I'm kind of wondering here if you're seeing different buying patterns from distributors versus OEMs?

Different buying patterns -- could you go a little bit further on it, John? I understand --

I'm just wondering if your OEM customers are more aggressive on buyings? Or is it your distributors restocking? What's going on in the Motive side?

Okay. Well, first off, the distributors won't stock. They earn and turn. They're going to take and buy that battery, and match it to that fork truck and get it out the door as quickly as possible. They're not going to want to sit on inventory at all.

I don't see any change taking place there. And remember, in the US market, that's predominantly through distributors, fork truck distributors that we sell the product. So that market, I don't see much taking place with it.

The OEM business in Europe, though, which is primary where you go-to-market there, that is a tougher market. They have higher volumes that they buy. And with the business being off as far as it is, it's a tough and very competitive market from a placing standpoint.

That's exactly what I was wondering, John, given that you said that your pricing pressures was tougher in Europe versus US, that it might a restocking of distributors here in the US versus more aggressive pricing on the OEM side in Europe. I wondered if that was the scenario that was kind of playing out?

Yes. But there's really no inventory of Motive Power batteries at the distributors. I mean, they're going to keep very, very little there. Yes, they'll have some, but these are big items that take up a lot of space and they're not going to be -- for these guys to make money, they're going to have to earn and turn. And they've got to get that battery in, match that fork truck and get it out the door. They rely on us. We carry the inventory.

That's too bad. And can you talk a little bit about the UPS market? I mean, certainly, some bellwethers are kind of pointing to a better spending environment in that market in the year ahead and certainly they're talking about a rising tide in today's Journal. Can you talk a little bit about what you're seeing in the UPS market?

Yes, my source on this thing is talking with customers and talking with our sales guys that are talking to customers. And the simplest way of putting it is that it was a good market; the banking industry crashed; banks stop buying; the data centers -- it's slowed up. And what we're seeing now, what we're hearing from our customers, the OEMs for the UPS industry, that their order take is up.

But what kind of magnitude or is this gradual?

It's a gradual. And I don't have the percentage off the top of my head, but it is one that is improving quite nicely.

Excellent.

Remember, though, that -- and the reason -- and part of the reason I don't have that number, when you look at UPS total on our business, it's something like 7% or 8% of total revenue.

Right. Now going back to a previous question, you mentioned that pricing is going to be tougher as leads come down. What percentage of your business currently has automatic lead price adjustments? Because I would think that people would be more willing to keep pricing up as aggressively as they can in the near-term.

Good question. And that one depends on the mix of customers in any given quarter. So you're going to look between 30% to 40% globally. We use the norm at 35%, if you look at it over history. But in a given quarter, that could switch up or down because of the mix of customers.

And what's the buys that drives that higher?

What's the buys that drives the mix higher?

Yes, the customer buys?

Well, it's just -- certain customers buy on an automatic pass-through and others do not. And if one month that -- let's say that you buy in automatic pass-throughs and the other person doesn't, then in one month you order a lot of batteries and the other person doesn't, we're going to have a higher percentage. So it's just a mix of customers.

The second point to it is Reserve Power tends to be a little bit higher than Motive Power. However, that being said, the Motive Power in Europe is high because it's with OEMs. But where the real pass-throughs kick in is really is in Europe. They're much higher in Europe than they are in the Americas.

Okay. And just one last clarification. You talked about the ITA data earlier. Is that for your class of forklifts or is that for all forklifts?

That's a good question. There's five classes of fork trucks. One through three is the electrics, and that is to the electrics.

All right, that's to the electrics. Okay, thanks a lot, John.

Dana Walker, Kalmar Investments.

Could you make a comment about distinctions you're seeing in new lift-truck demand versus aftermarket demand?

Well, as I said earlier, the new market -- you look specifically at the ITA data and it was absolutely lousy earlier this year. I mean, down 40% plus and it is starting to come back.

As I mentioned, in January, when you look at it to January a year ago, again, it's only a one-month period, it was up 60%. So we believe if you take and look at the data from a macro standpoint of Class 1 through 3, it's bottomed out and it's coming back. But it's coming back slow right now.

ITA, though, would only capture new lift-truck demand?

That is correct.

What observations -- what type of change in the rate of change do you see, if any, in aftermarket demand for the [X-tans] group of trucks that are --?

Dana, to be frank about it, I haven't looked at it in about six weeks, but I will tell you what I saw six weeks ago and I doubt the trend has changed. That we were down about 50% of what ITA was down. Okay? Meaning that we were seeing strong aftermarket but really bad OEM.

Now that data is about six weeks old. To be honest with you, I have not looked at it in a few weeks. Four to six weeks ago was the last I looked at it.

If -- taking the thought away from the data for the moment and thinking about it at a higher level, how did the aftermarket behave compared to how you expected it to behave during this downturn? Was it consistent or was it odd?

I can't say that it was inconsistent. I think it was -- you know, we expected it to be down and it was down.

Okay. Mike, do you (multiple speakers) --

It wasn't down as much as the new truck orders, but it was down.

Mike, you used the phrase flexing, which I presume you meant by -- meaning operating leverage or relationship between how an expense category might work versus revenue. Is that correct? Is that how you'd used that phase?

Yes, I mean, within any expense category and our selling expenses, we have fixed cost element and then we have elements that are variable -- the sales commission components, things that are driven, that are variably driven. And that's kind of how I would -- I'd say of our -- another way to put it, oftentimes another way to do it would be to say take your incremental volume and add or subtract it at 6% for the drop-through impact on that particular line item.

Yes, the way to look at this thing from the selling side of it, most of our -- we go to market in most of our businesses by company employees. And we have not made a major cutback in the sales organization. We have in some, where we've reorganized things to match customers, as I referred to earlier. But you've got a fixed cost there with the internal sales people. Whether you sell $1 million or you sell $50 million, that fixed cost is not going to change. But what will change is the incentive or bonus that they can make.

Okay? So the point of it is, as volume goes up on a percentage basis, our total SG&A will go down on a percentage basis.

How would you say you treated your sales group versus the way other -- your competition treated their sales group? And what implications does that have for market share?

Okay, I won't comment on other competitors because I don't know what they do. I'm not an expert on them. But I will say this, and I've made this statement many times -- during this recession, we will not take away from customer support, customer -- supporting our customers.

When you look at our pricing, we believe we probably are at the high end of pricing, but we also believe very strongly we provide the best value. And you don't provide best value by cutting out good people and good service. If anything, we've improved our service, our delivery to customers -- the best value. We continue to stay focused on that and we will always stay focused on that.

That's why we talk a lot more about the 25% target and a lot less about cutting the SG&A. I don't want cutbacks in our sales force. In fact, when you take a look at the China market -- and the question was asked earlier about what's going to happen to sales then -- I'm pushing very hard in the Asia market to add salespeople. We need to expand in that area.

So the customer service is the way to look at it. It's a best value to our customers.

If you build in Asia, are you likely to build where you presently have a facility?

No.

Okay. John, thinking about Reserve Power for moment, as you assess the several year outlook, how does it look in the type of recovery scenario that you perceive?

Well, I think you're going to continue to see growth in Reserve Power, because I do believe that the telecommunications industry is going to continue to come out with new devices and inventions that's going to require batteries.

Every time you see something -- you know, as I said before, I love the Verizon AT&T commercial where they keep talking about who has the most 3G. They're going to keep expanding. And guess what? That will become obsolete when 4G comes out. And every time that happens, there are batteries required.

I don't think any one of these companies are going to slow up on development and deployment of new technologies. As I've said in the past, if they do, I think they'll cease to exist.

I suppose if they need to add cell sites, that helps, but isn't most of what enables 4G a software and a hardware fix at the existing cell site?

In some cases, that's true. I'm not an expert in that area by any stretch. What we have found, though, is when they go in and make investments in the equipment, that they normally pull out the batteries, because the batteries are usually a relatively low percentage of the total investment that's put into it.

In other words, if you take a battery life that's 10 years, what we've seen historically in the telecom industry in the cell business, they'll pull them out long before the 10-year period. And the reason for that is some new technology will come along. They're not going to put used batteries in with a new technology.

I think I can answer this question, but given that there was a change made, you have reported your segments on a market basis rather than on a geography basis traditionally, and have provided EBIT on a market rather than -- as well as geography. You've changed that this time.

Yes, Dana. In the past, what we've tried to do is to do both. And in looking at the accounting guidance, we recognized that that guidance only allows you one way to look at your business and it has to be based upon the way management looks at it business. And our management truly looks at our business on a regional basis. And therefore, we dropped the product line look.

And we understood that many analysts appreciated that, but we also had to comply with the accounting guidance. And that's why we made the change.

All right. One last question. When you restructure and elect to take volumes from one place and put them in another place, and when you acquire and you do the same, you're making some assumptions about not only your capture rate on acquired revenue but as well what your cost profile will be on incremental volume in a new location, when you shut down an old location.

Can you assess the types of assumptions you've made and how they're playing out thus far?

Well, let me start out by saying that it's been 25 acquisitions and all but two of them have been very successful. And the two are ones that we did in the early -- or mid-'90s; relatively small. So, we have a formula that works quite well for us. And we go through a lot of details on a five-year model and look at it. We challenge the top line.

Our engineers go in and look at the product costs of the competitor's product. In many cases, we can take those products and reduce the cost out by running them on our equipment. Then it will be higher automation in some cases. But we've been very successful. I have very high confidence in our ability to take and integrate and buy a company like Oerlikon Company or Douglas Battery, and integrate those in and get the savings we project.

And as I said, the savings on those two acquisitions plus Altergy and fuel cells are breakeven right now. And it will be accretive a minimum of $0.10 next year.

How would you -- and using the same train of thought on the restructuring that you've largely focused on Europe, how would you appraise what you presume might take the pro forma's versus the early experience on the results?

I'm not happy with the final results. Not at all. I thought we would do a lot better than we did. And if I go back and I get in the details and look why, we executed as planned -- right on the mark. But what we didn't factor in was the volume regression being as strong as it was.

So what I'm saying to you is this -- I'm absolutely astounded that we're actually making money in Europe with as bad as that market has been, down 34% year-to-date. And we're still making money. That 34% will come back. And when it comes back, we're in a much stronger position from a cost standpoint than we were prior to entering the recession.

Continued good luck. Thank you.

(Operator Instructions). [David Pack], Jefferies.

Good morning, gentlemen, and congratulations on a terrific quarter. Most of my questions have been answered. I just have a housekeeping question.

Your tax rate went down significantly sequentially, down at 26.4% or so. I was just wondering, just for modeling purposes for 4Q, is that something that we should be thinking about for 4Q and possibly for fiscal '11, just in terms of a lower tax assumption?

Well, what occurred in this quarter, David, was the inclusion of the bargain purchase gain that arose from our acquisition of Oerlikon. And that was about $2.9 million with no tax. And the reason there was no tax was that the bargain purchase gain is something that came out of the recent FAS 141R pronouncement, where the concept of a bargain purchase gain now arises.

And in past, if you had bought a company and you anticipated you would incur future liabilities in a restructuring, you establish those liabilities in purchase accounting. Well, now you do not do that. You wait until you actually make those decisions and you incur those costs. So you end up with net assets greater than the consideration paid; therefore, you have a gain.

But there are no tax authorities around the world that have that same concept. That's really US GAAP concept. So that non-taxable income had the effect of dropping down our tax rate in the third quarter.

On an as-adjusted basis, I can tell you that our as-adjusted earnings for the third quarter, we taxed at a rate just over 29%. Now, I would expect in the fourth quarter that we could see 29 or less percent. And that's why we said for the year-to-date on our as-adjusted earnings, we have a 30% tax rate and we think by the time we finish the year, we will be below 30%.

Wonderful. Thank you. Congratulations again.

With no further questions in the queue, I would now like to turn the call back over to Mr. Craig for closing remarks. You may proceed.

Thank you very much. Let me just try to summarize quickly here where we see things going.

Our focus has been and will continue to remain on customers -- providing best values to our customers on a global basis. We work very hard to try to reduce our customers' cost with a total system design and give them the best quality and service. And for that, I believe that we're getting a premium for our products. But overall cost to our customers, we look at total systems; we try to do everything we can to bring it down.

The second point is -- our orders, we are seeing the improvement; we have hit bottom. We've seen a 15% growth sequentially, as we mentioned earlier. I think we're going to continue to see things turn around and I think there's a lot of upside in the volume that's coming at us right now.

The downside that we see and the one thing that is rather disturbing right now is this fourth quarter -- I really was hoping that we would see our fourth quarter be higher earnings guidance than the third quarter. But when you take into account a headwind of $0.29 on lead and the timing on this thing and how we can get it, it's just one that -- it works out the timing of this call, the timing end of the quarter, and what happened with the LME markets, that there's going to be a delay there. And we won't get it in the fourth quarter as much as we want.

But think about it this way -- if we did $0.44 in third quarter and we didn't have that headwind, $0.29 on top of it would put us at $0.73. Plus we have higher volume coming in, in the fourth quarter. Now I mean, you can't -- I'm not suggesting we would get totally to $0.73, but I am saying that if it wasn't for this darn lead timing situation, we would have been much better in fourth quarter.

The other point on it is -- 25 acquisitions we've completed. We're going to continue on that track. We're going to continue to look for acquisitions. We're going to continue to look for expansions.

I mentioned about China this morning. We are looking at other areas of the world that we're going to be expanding in, and hopefully, we'll announce something in the next few months on that. Having $200 million in cash and $200 million of credit facilities that are open right now, we have the balance sheet to do the type of things that we're talking about here.

As I said about a year and a half ago when we started to enter this recession, our objective is to exit this recession a stronger company than when we entered this recession. And I'm very pleased, with roughly 8,000 employees within EnerSys, we're on target to do that and I know that we're going to accomplish that when it's all said and done.

So with that, thank you very much and have a great day.

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