EnerSys (ENS) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter fiscal 2011 EnerSys earnings conference call. My name is Eric. I will be your audio coordinator today. (Operator Instructions). As a reminder, the conference is being recorded for replay purposes.

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

Thanks, Eric. Good morning and thank you for joining us for our conference call. During this call we will be discussing the results of our first quarter of fiscal 2011, and we will comment on the general state of our business. Joining me on the call this morning is Mike Schmidtlein, our Chief Financial Officer, and before we get started, I will 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. 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 July 4, 2010, 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 Company's Form 8-K, which includes our press release dated August 11, 2010, which is located on our website at www.enersys.com.

Now let me turn it back to you, John.

Thanks, Mike. I am pleased we were able to report last night another record in quarterly earnings. As you know, our adjusted diluted earnings per share were $0.48 in the first quarter, which was within the estimated range we gave as guidance in May and was a record for any first quarter in our history. Last quarter we also reported record earnings for any fourth quarter in our history. This is now the fourth consecutive quarter that we have reported an increase in adjusted earnings per share.

Our ratio of profitability improved, even though sales declined in the first quarter compared to the fourth quarter. We achieved a sequential increase in gross profit percentage from 21.4% in the fourth quarter to 22.2% in this first quarter. And our adjusted operating earnings increased from 8.3% to 8.8% of sales in this quarter.

Recent order patterns have also provided additional good news. Our quarterly -- or our monthly order rate over the last few months has grown significantly. Our backlog is at record levels, and the current order rate implies an annualized sales rate of approximately $2 billion.

During the last several months, we have received very mixed signals, as I am sure you have also, about the direction of the global economy and what is going to happen in the next few quarters. Although none of us can be sure how much the economy will continue to grow, our strong order flow and backlog at this time bodes well for us to have a strong second half of this fiscal year.

Even if the growth rate slows down from the recent pace, we believe our revenue and earnings in the second half of fiscal 2011 will be significantly higher than the first half.

In anticipation of this potential growth, we continued to invest in our business. During the first quarter for example, we used $32 million in cash to increase inventory. A portion of this was for normal buildup for summer plant shutdowns, but a substantial portion was to place inventory in various warehouse locations around the world for a major new customer.

We still have $174 million of cash and short-term investments at the end of the quarter, and this gives us comfort in making investments to grow our existing business, as well as to continue to pursue acquisitions around the world.

As you may have noticed, we recently announced that we received an award valued at approximately $10 million to supply batteries for China nuclear plants and awarded $39 million, approximately $39 million, for batteries for submarines in five navies around the world. We believe these are further indications of our global leadership position in the industrial battery market.

Although we are confident we could increase our market share, we will do so only with the appropriate pricing of our products. We will continue our long-held focus of providing best value to our customers, and we will continue to reduce our costs where possible.

Since our last conference call in early June, we broke ground for our new plants in central China, and we remain on schedule to produce batteries there next summer.

I want to take a minute to discuss our European operations, which, as you know, account for about half of our revenue. That market was hit much harder during the recent recession than was the case in the Americas or Asia. Much of our restructuring actions taken during the past two years were focused on our European operations, and we are now seeing the good results of those actions. Adjusted operating earnings in Europe as a percentage of net sales increased from 0.4% in the first quarter of 2010 to 5.3% in the first quarter of fiscal 2011.

While I am pleased with the progress we have made in Europe, we still need improvements to reach our minimum target of 10% operating earnings.

Increases in volume and continued cost reductions will help us achieve the target. However, pricing has been more challenging in Europe, due to the competitive dynamics of the market.

Our team is continuing to improve product mix, customer mix and pricing. As an example, we are increasing sales of thin plate, pure lead products across all segments of the business, and we're anticipating price increases starting in September across most segments of our European business. We believe these price increases, along with further product mix improvements and cost reductions, will improve our returns even further.

On the acquisition front, results from the Oerlikon and Douglas transactions are on track according to plan, and we have not let up in the pursuit of other companies that would be good value to our business.

As you know, we are looking at numerous companies in the lead-acid battery business, particularly in geographic areas in which we are not the market leaders. We are also continuing to seek out good companies in alternate technologies to expand our offerings.

I'm pleased about the potential of our Company to grow revenue and earnings in the foreseeable future. Our market leadership position is strong, and we have the expertise in our management team and the solid capital structure to help us grow. We have tremendous opportunities, and we plan to take advantage of these opportunities as they become available.

As stated last night, we expect our adjusted diluted earnings per share to be in the range of $0.49 to $0.53 in the second quarter of fiscal quarter 2011, the midpoint of which would result in the fifth consecutive increase in our quarterly earnings and would be a record for any second quarter in our history.

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

Mike?

Thank you, again, John. Our first-quarter net sales increased 28% over the prior year to $435 million. On a regional basis, Europe's first-quarter net sales increased 21% to $188 million compared to the prior year. Our sales in the Americas increased 37% to $206 million, while our Asian business first-quarter sales experienced an increase of 21% to $41 million. The consolidated first-quarter increase includes approximately 19% due to higher organic volume, 6% from higher selling prices, 6% from acquisitions, partially offset by a decline of 3% from weaker foreign currencies, all compared to the prior year.

On a product line basis, net sales for Reserve Power increased 14% to $208 million, while Motive Power increased 44% to $227 million. The large increase in Motive Power revenue reflects what we consider a strong recovery in this market, which is fairly normal after a severe recession. This follows historical patterns, and we believe there is good potential for continued growth ahead as the market for Motive Power batteries gets back to normal levels of annual usage.

On a sequential quarterly basis, first-quarter net sales decreased 3% over the fourth quarter, primarily due to weaker foreign currencies. Revenue was virtually unchanged on a constant currency basis. Asia posted solid gains in organic volume of 14% over the prior quarter, while Americas remained flat and Europe declined 10%. On a product line basis, Motive was up subsequently 2%, while Reserve was down 8%.

Although volume did not increase sequentially in the first quarter, we are encouraged by the recent increase in order flow as John discussed earlier. This bodes well for the future, and I share John's confidence for the second half of the fiscal year.

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 August 11, 2010, for details concerning these highlighted items. Our first-quarter adjusted consolidated operating earnings were $38 million or an increase of 16% in comparison to the prior year with the operating margin increasing 190 basis points to 8.8%. This strong first-quarter margin was achieved primarily as a result of stronger sales of approximately $95 million in the quarter.

In addition, cost savings offset higher commodity costs at a pricing. Excluded from our adjusted operating earnings for the first quarter was approximately $700,000 of restructuring costs from our European segment.

On a sequential quarterly basis, adjusted consolidated operating earnings were up $1 million with the operating margin increasing 50 basis points, in spite of the decline in revenue. This was achieved primarily due to higher pricing recovery and the benefits of our continuing cost savings programs.

Our improved operating earnings led to directly to the increase in our adjusted diluted net earnings per share, which were $0.48 in the first quarter, more than double the reported $0.23 in the prior year. The main drivers to the increase in earnings per share similar to our operating earnings were the higher volume and cost reduction initiatives, partially offset by higher commodity costs net of pricing.

Now some brief comments about our financial position and cash flow results. In short, our balance sheet remains very strong with substantial liquidity, secure and favorable debt facilities, and a strong capital position as illustrated by the following three points.

First, $174 million is on hand in cash and short-term investments as of July 4, 2010; second, approximately $250 million remains undrawn from our credit lines around the world; and third, the leverage ratio as calculated in our US credit agreement was 1.6 times, and our net debt to total capitalization ratio was 24% as of July 4, 2010.

Capital expenditures were $11 million for the first quarter of fiscal 2011. Our capital spending for the quarter continued to focus on productivity and other cost-saving projects, expansion of our thin plate, pure lead capacity, and the introduction of new products. Significant spending on our new plant in central China will begin soon. At this time we are estimating our capital spending for fiscal 2011 will be in the range of $60 million to $65 million with the increase over the prior year due primarily to the spending in China.

Our effective tax rate on an adjusted pretax earnings was 27% for the first fiscal quarter of 2011 and in line with our expectations as we believe the mix in earnings from different tax jurisdictions will result in a lower effective tax rate from the prior year.

We continue to pursue potential acquisitions around the globe, and we are currently in discussions with several companies. We remain patient and have not changed our disciplined approach and strategy in seeking acquisitions. So we will be confident of good returns for any that come to fruition.

As noted earlier, our strong capital position and significant liquidity gives us confidence in our ability to finance the transactions we are pursuing. As we look ahead, we expect to generate adjusted diluted net earnings per share between $0.49 and $0.53 in our second quarter of fiscal 2011, which excludes an expected $0.06 per share from our restructuring programs and acquisition activities. Our anticipated second-quarter earnings will be driven by three factors -- first, a sequential decrease in commodity costs; second, we expect revenue will increase modestly from the first quarter; and third, the ongoing benefits from cost reduction activities.

In summary, our outlook for future quarters remains bright, and we look forward to the very good opportunities we see in the future. Now let me turn the call back to John.

Thanks, Mike. With that, I would like to open the lines up for questions.

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

John, I guess I want to talk about the what I call the unusually favorable language in the press release about orders and backlog. Can you talk a little bit about the backlog, the composition of it? It seems like you are pretty enthusiastic about it. A little bit more color as to why.

Yes, it is really, as I said, looking over the last several months here, what we have seen even since the end of the quarter, we have seen our backlog go up about 12%. Order pattern for both Reserve Power and Motive Power are up compared to where they have been running in the past. Order take each day is coming in at approximately or a little bit north of $8 million a day. If you take $8 million and multiply it by 250 workdays, that will get you the $2 billion I referred to earlier. So we are seeing strong order pattern, and even since the end of the quarter, it has been surprising how much it has gone up. And it has really been across the board.

Okay. I guess related to that, can you talk a little bit of the competitive landscape, I guess in two parts? One, in terms of pricing. I know you are trying to put through price increases. How well have they been received out there? And two, you mentioned an inventory buildout to supply a new major customer. Could you give us a little bit of color maybe on the geography or which end market and how did you get that business?

Well, I cannot disclose at this time who the new major customer is. We do not have their permission to do it. But I can assure you it is a very large name. It is one where they do business globally. We have been in contact with them for approximately nine months, and the business has started. We are starting to see revenue right now from it. And we are putting the inventory in place to support some substantial growth for that particular segment of the business.

How did you win the business? Was it on pricing? Did they elect to leave because they are dissatisfied with the previous supplier?

Dissatisfied with previous suppliers. And in their business, what they found was their customers were telling them they ought to look at doing business with EnerSys, and the primary reason for that was twofold. One was the quality and performance of our products, and two was the service that we have in case something does go wrong that we are right there on the spot globally.

Okay. And when will you expect to start shipping or have you started shipping?

We are shipping now.

Michael Gallo, CL King.

Just a couple of questions, John. Did you comment at all about -- perhaps I missed it -- the Asian segment operating margins? Obviously it was down both sequentially and year over year. Do you expect that to get better in the second quarter quarter? Just a little more color on what is going on in Asia. Thank you.

Let me try to answer that for you. The Asian segment for the first quarter this year was lower than we would normally expect it to be. It was kind of a two-part issue with pricing. They had a -- the timing on the pricing on some of their Chinese telecom business and in Australia with some of their sales in the currency that impacted them really dropped their pricing about $1.2 million below where we expected it.

In addition on the manufacturing side in China, as the number of days that were worked in the first quarter, which on our FIFO flow of inventory would roll out -- or excuse me, that were worked in our fourth fiscal quarter that roll out on a FIFO basis in our first quarter also contributed to a decline.

So I would tell you that we expect to see our Asian business improve back to what we will call a targeted 10% operating earnings for the balance of the year. But, as you look back from a year ago to the first quarter, the results from that quarter for Asia were really higher than I think you would expect us to be able to sustain. They were at almost 20%, and part of that had to do with some very fortuitous pricing in comparison with their cost flows. And the other was, as we noted in the Q from a year ago, there was about a $1.1 million gain from a sale of some assets in that region that helped that operating earnings from last year.

Mike, I think one other thing to add that, when you take a look at our full-year operating earnings in Asia last year, it was at 15%, and we don't anticipate holding 15% -- in holding that high of a number, we are not going to be competitive long term with it.

The good news about Asia and where we see it going, we think that the first quarter will be our weakest quarter on a percentage in operating earnings. The second thing is that we do have some expenditures in there in the first quarter that are associated with the new Chinese plant that is going online. And third and most important is, when the new China plant is fully operational, our cost structure will be much less than what it is today. Along with that plant, the construction of that plant, we are also putting a new design product in there, which should enhance our margins going forward.

That's very helpful. And then just a follow-up question. Perhaps you mentioned it and maybe I missed it, could you comment on whether you expect the revenues to be up sequentially as you start to ship new product here to that new customer you mentioned in the second quarter?

Well, we normally don't give guidance on the revenue side, but what we have said on it that we expect that we will be slightly higher in the second quarter over our first quarter. And that kind of defies the historical patterns that we have because typically our second quarter is a lower quarter because of summer shutdowns, primarily in Europe, but also in other regions of the world. So even this quarter, we anticipate the second quarter will be higher than the first quarter, and as I said, that does not follow the normal pattern.

That is good color. Thanks a lot.

Steve Sanders, Stephens Inc.

Just to follow up on the new customer, I know you can't name the customer, but can you bracket the potential size of the opportunity and/or talk a little bit about the product mix and the margin impact?

It has the potential of going north of $50 million, but we are not there yet with it. We have got a lot of work to do to win over that business. But it could be sizable.

Okay. And in terms of the margin profile, is it a midrange product? Is it a mix? Does it have some premium in there? How would you characterize that?

All of the above. It is across the board.

Okay. And then with regard to lead, you had obviously a pretty stiff headwind this quarter. It seems like your commentary about the back half is pretty encouraging, but I'm curious what you are thinking about lead in the September quarter versus the June quarter. Are you going to make some progress?

Well, lead is a hard one to predict, and we don't try to manage lead -- the LME I should say. We don't try to manage the LME because we cannot. It is what it is. But what we do do is we look at our hedge positions, and we look at our pricing strategies. We currently have approximately 38% of our lead hedged for the next three months at a price of $0.89 a pound. The LME this morning was at $0.94. So we are in a good situation on that portion of it.

I think the other thing that I mentioned in the prepared remarks, we are going to go for a price increase in Europe across the board. The competitive environment in Europe has been much rougher than it has been in other parts of the world, and we think it is time that we get a little bit more aggressive on pricing. We do add best value to our customers, and we are going to do what we can to get the pricing up on it.

Now, as far as the lead goes, once again, we have a fairly large percentage of our lead -- in fact, it is 38% of our lead -- is on automatic pass-throughs, and so that is going to help with it. But we need to keep focused on our pricing management.

Mike, do you want to add to that?

Yes, I was going to say, Steve, in my prepared remarks, when I was commenting on the guidance, I did note that we expect that we would have a sequential decrease in commodity costs for this upcoming quarter ended in September. So we will see a little bit of benefit in the quarter, but beyond that, as John pointed out, we really don't have much better information than you have in terms of where the lead costs might be going.

Okay and then two quick ones. Mike, if you could talk a little bit about the increase in the restructuring cost, and then maybe, John, second, on your target to get Europe to 10% EBIT margins, can you put that in context in terms of the pace of the recovery, revenue levels, timing, just any additional color you could shed on that?

Well, on the restructuring, I would say the first quarter at $0.7 million was less than we had expected as we had previously given guidance that it would be higher than that, 3 to 4 times higher. So we do expect the catchup to occur in the second quarter, and that is what we were referencing on the $0.06 that we said would occur in Q2.

But overall we would expect to see -- you know we had -- we would expect over the course of the year to see something in the range of up to $10 million to fulfill the programs that we had previously identified and have been working on over the last three years. Some of these costs we cannot incur or record until we have made specific announcements and specific commitments.

So we will continue to see on programs already announced charges go out. So the $0.06 that I identified in our guidance is pretty well in keeping with our previous expectations.

Okay. Thank you.

To go into the question of when are we going to get to 10% operating earnings in Europe, let me go back a little bit in history here. I want to go back to our fiscal year 2009.

In 2009 our revenue was north of $2 billion. In fact, it was $2.27 billion if I remember correctly on it.

At that year we finished at $1.42 a share. I'm sorry that's fiscal -- yes, 2009. 2008, I'm sorry, 2008. In 2010, I'm going to jump ahead two years here, in 2010 we finished short of $1.6 billion. We were down $448 million, down over 20%. That year we finished at $1.44 a share.

In other words, we were down $448 million in revenue, but our EPS was $0.02 higher. The reason for that was because of the focus that we put on the cost reductions. We saw a downturn taking place. When it took place, we said we are going to consolidate operations. We are going to pull costs out. We have done a very good job of doing that.

Now to your question. The question when we would get to 10%? If the volume comes back this year in the fourth quarter, third or fourth quarter, it is possible that we could hit 10% this year. It is possible. It is about volume; it is about pricing management, which we talked about earlier, which we have some plans that we are going after that; and it is the implementation of the cost reductions. We need to get the volume back up where it was. And when you take a look at the order take that is coming in right now, it is looking promising.

Now that being said, I'm going to couch it with there's a lot of things that could change. There's a lot of things that people are looking at the economy that it is counter to what we are seeing in it. We are seeing great orders coming in right now, but there's a lot of people that are saying just the opposite. If it holds and if we can manage the relationship between pricing and the cost of commodities, it is possible that we could reach that 10% sometime this year in Europe.

Okay. That is helpful. Thank

William Bremer, Maxim Group.

Could you give us a little more color on the thin plate, pure lead? Are you still operating at full capacity there? I heard in the earlier remarks expansion. Can you give us an idea of what it accounted for in this first quarter?

Yes, when you go back and you look at our thin plate, pure lead, about a year and a half ago, we announced we were going to essentially double the capacity of thin plate, pure lead. During the recession, we did not cut back on that. We felt that the market would come back. We would need that capacity. We've completed about 80% of that capacity right now, and right now we are running at about 100% utilization of it on thin plate, pure lead. We are hoping to get the rest of it on here in early fall, which then we have to look at the next step of how do we increase thin plate, pure lead capacity in other plants, and we have a plan to do that. And the product has been just tremendously successful in everything from starting applications on the very high end to the telecommunications. It has been very successful in Motive Power applications, smaller Motive Power applications, and in telecommunications. And it is a higher margin product. It is outperforming anything that is out there, and it has been a real winner for us.

Okay. Great. That is all I have right now. Thank you.

Tim Mulrooney, William Blair & Co.

I've just got a couple of quick questions. As volume continues to return, do you still expect to achieve your 25% margin target?

Yes. The only exception that would be we are finding that in some of the customers that we have coming at us right now that our large volumes, and we are compromising on the 25% going down to, say, 21%, 22%, but there is no SG&A associated with it. So the drop-through is big.

So we have both targets there, 10% operating earnings. The reason that we focused on 25% and put so much pressure on that, as we saw volumes come down and we said we are not going to decrease on our selling expense or we are going to continue to be best value and provide service for our customers, we did not make cuts in the SG&A area, not significant cuts in that area. We wanted to stay focused on customers.

Therefore, the only way you are going to keep the earnings up is to get your costs down and cost of goods sold, thus driving the gross profit up to 25%. Now so the good news is that we're getting these high margins -- or I said should say, large contracts can come through that are less than 25%, but the drop-throughs to the op earnings line are great. I still believe and we're going to keep focused on the 25%. It is going to be a tough one to hit, but we are going to keep focused on it.

I think that if lead stays below $1.00, we have a much better chance of achieving that. It is when lead starts running away and it has that dilutive effect because oftentimes in our pass-through mechanisms we are only able to achieve a recovery of the cost increase itself without adding the additional traditional margin on top of that.

Mike has a very good point to that because if we were making 25% on a customer today and price of lead went way up and we passed through every penny of that lead cost, meaning that the gross profit dollar would stay the same, what would happen is the percentage would drop down.

Okay. Great. Thank you. And then just one more question. On your new $39 million contract in the submarine market, I was just wondering if you could provide any color over what time period do you expect this revenue to be recognized?

Late this fiscal year, early next fiscal year.

Jeff Bencik, Kaufman Brothers.

I just have some questions in terms of your pricing actions, how did that change sequentially by region? I know you talked about Europe being a little bit more difficult. And then going forward, what sort of magnitude could we expect in terms of price increases specifically in Europe?

Let me try to answer that for you, Jeff. For the quarter, as we moved sequentially from Q4 to this Q1, we thought we had a recovery of a net of about $0.01 on our pricing in comparison with the movement of our commodity costs. And we think, as I pointed out in my comments, I think we will see an additional benefit as we move into the second quarter. So they are not large swings, but they are positive swings in terms of net pricing versus commodity costs for those two periods when we are looking sequentially.

Okay. And then if we focus on Europe a little bit more, obviously it was down 9% sequentially. Is that mainly FX, or how should I think about that? And then also is it weaker or stronger in Motive versus Reserve, and just how do you see that trending going forward?

Well, my calculation was down 10%, but I will not split that with you. It was down approximately $20 million in total. In other words, we finished the fourth quarter at $208 million, and we came in, I think, it was $188 million in Europe for the first quarter. A little over half of that was FX.

So there is still volume impact, and most of the volume impact was in Reserve Power. Motive Power was up. Motive Power is doing very well in Europe right now. The Reserve Power is the one we have had some delays on.

In fact, I mentioned earlier -- or if I did mention earlier, our first quarter we expected to see revenue higher than it came in, about $10 million higher. We finished at 435. We thought it would be closer to 445. And thus, our earnings would have been higher in the first quarter. The reason that we did not hit the 445 is because we had some pushouts. But if you take a look at those pushouts and what happened with it, most of them Reserve Power in Europe, what happened with it is our backlog went up and our order take went up. So I'm confident in the second half of the year based on what we see right now, but I am disappointed in the first quarter that we saw about $10 million pushed out.

Okay. No, that makes sense. In terms of your guidance for next quarter, at what FX rate is that based on?

Our guidance is based on I think $1.00 -- let me check here, $1.30 Europe.

Okay. And then just one last question, and this is more of a general type of question. John, where do you see us being in the business cycle based on Reserve, Motive power and then also the Aerospace and Defense?

Well, I will start with Aerospace and Defense, which is extremely strong for us right now. As I mentioned, we had the five navies, $39 million in new contracts. We have additional things that are happening there. So I'm very pleased with what we are seeing take place in that segment.

On the Motive Power segment, when you take a look at it globally on new truck orders, it is up approximately 30% on a global basis, which it is looking pretty well on the industrial fork truck situation. We are seeing that globally.

Reserve Power is up right now compared to where it has been running. It is steady. I'm hoping that eventually we see somebody in Europe that breaks away from 3G and wants to go out with 4G, which I think will drive a lot more batteries. We are seeing the expansion of 4G take place in the Americas or upgrades in the Americas I should say, that is adding to our volume. So it is hard to tell where these industries are going in total and projecting, but the one thing I can hang my hat on is looking at the backlog in the current order flow. And, as I mentioned earlier, it is up considerably. In fact, our order flow right now is up about 50% over what it was the prior year.

Okay, and then I'm sorry, I lied to you. One last question. The net debt was up slightly in the quarter. Is that all due to the inventory build for these new orders?

As we pointed out that our cash flow from operations was negative in the quarter, but the inventory growth that we identified of about $32 million after you pull out the currency impact on it, was the investment that we are making that we think is going to pay off in future quarters.

So we feel like we are still positioned very well. We are able to have enough cash available to fund the working capital that we expect with this increase in sales growth in the second half of the year.

Yes, we have been running several quarters north of $200 million in cash, and one of the questions I constantly get asked is what are we going to do with that money. And I will answer it this way.

One is, we are going to take and invest in the primary working capital that is needed to support the growth in our business. As I mentioned earlier, a major new customer coming online. We want to be sure that we have the product available to support their demands plus the other demands of customers. Two is growth in geographic locations. We are spending money right now on a plant in China, the construction of a new facility in China. So we do plan on seeing our net debt go up. We do see that the $200 million in cash that we had is going to go down, because we are going to continue to invest in the growth of this business. We think it's a good return for our shareholders to continue to grow EnerSys.

Walter Nasdeo, Ardour Capital.

Most of my questions have actually been touched on already, but one of the things I was curious about, as you look at going forward your expected growth in Europe and as those markets come back, are you seeing any kind of regional pockets of strength over there that are giving you some optimism just on a discrete basis?

Again, when I take a look -- all I can do is look at the orders coming in, and I can tell you that the order pattern that is coming in right now on Motive Power is north of -- it's between 35% and 40%. The growth coming in in Europe on the Reserve Power -- or sorry, the orders coming in are in the same zip code, in the 35% to 40% over prior year.

I'm talking about geographic, though. I mean are you seeing any certain areas over there, any countries that are giving you confidence that they are building up?

I cannot point to one -- well, obviously Germany. Obviously we are seeing it in Germany. The growth there in France, some, but I think when you are taking a look at multinational telecommunication companies that are putting and deploying their batteries across Europe, it's a little difficult for us to tell or point to one country where it is going to end up at.

Okay. And how about -- are you guys doing any hedges, currency hedging right now?

Yes.

Okay. How is that working out? I mean obviously this quarter it was -- there was a little bit of friction in there, but are you looking to smooth that out going forward?

Well, our hedging policy is basically -- we looked at place hedges on foreign currency for three reasons. One, whenever we place a hedge on lead that pertains to our European operations, we are going to put a back to back hedge for the currency to lock that down all the way.

Now we have about I think about $28 million, $29 million US dollar equivalent of hedges on the euro that are at an average of about $1.27. So given where we are today in the rate, at the end of the quarter, those were a favorable number, and then they slid to unfavorable over the course of July and into early August, and now they are looking like they are about breakeven. But that is one of the reasons we do it.

The other hedges we would do when we are doing funding for a particular effort such as our central China expansion that we've talked about. And the last one would be for intercompany trading balances that we would expect at some point to be repaid.

So I would say overall our hedging policy, we are consistent with where we have been, and right now, at the end of the quarter, when we marked those to market, they were up slightly, call it under $1 million. And based on where the currency rates are today, they are still pretty good in neutral or better position.

Matthew Crews, Noble Financial.

On the second half of fiscal 2011 later this year on the restructuring charges, will the $2.5 million a quarter pretax be reasonable? (multiple speakers) -- million for the second half?

You know, part of that would require if we were to continue on with programs as we have done in the past. So when I had told Steve 10, I was actually mistaken. I was looking at the savings line. I would say at the end of this quarter we are going to be done with our existing programs in the way of spending. So anything and beyond in H2 is going to be based on if there were new programs established.

Okay. That makes things a little clearer.

Just a housekeeping back up on the organic flow, I didn't catch when you went through the [EU] North American and European organic volumes, 14% growth, I believe, in Asia, US was flat. Was that sequential year over year?

When we were talking about -- we were talking sequential at that point, so we were 14% for Asia. Europe was down. They were down 10% overall. About 4% of that was organic; the rest was currency primarily. And the Americas we said was relatively flat in terms of they were at $206 million for both the fourth quarter and the first quarter.

And keep in mind that looking at Q1 versus Q4 and what we talked about earlier that I think we missed -- I know we missed where we thought we would be on the revenue line about $10 million because of pushouts. A large portion of that pushout was in Europe. So we're looking at Europe being down, it is primarily down because of the pushouts.

Okay. All right. Okay. That takes care of me. Thank you very much.

Paul Clegg, [Jefferies].

Do you have any sense of how much the strength in order patterns you are seeing could be a function of the cannibalization of existing stock having gone too far versus really natural end market growth? Is there any way for you to differentiate that impact even with anecdotal evidence?

I don't have any hard, specific data on it, but I can tell you that telecommunication companies, UPS companies and fork truck companies tend to keep very little inventory on their books. It is not inventory that they build up. As a project, especially in the Reserve Power side, it is project-specific, and this is as much build to order type stuff as it is off the shelf. So I think, again, I don't have hard data on it, but I would be extremely surprised that it is customers using inventory.

I guess I was thinking more of their customers. I know you guys have talked about in the past kind of the snapback effect that takes place when the economy starts to recover that comes from cannibalization having gone on.

Oh, okay. I understand what you are saying. You know, a portion of this -- on the Motive Power side, I definitely believe that is the case. Because you look at our revenue, we are up about 50%. You look at the new truck orders come up, it said about 30%. So I think we are seeing a double hit take place here. I think we are seeing where in the industrial fork trucks, there have been cannibalizations taking place, that they have been using batteries off other fork trucks, and we're getting that impact coming through. Plus, we are getting the impact of new trucks at the same time. I think it is both.

And then I guess a follow-up to that would be then, if that is the case, how long does that go on, and at what point does it kind of start to level off as you lose the effect of the cannibalization having fulfilled the need of the cannibalization impact?

I cannot project what the future is going to hold on that. I don't really know, but I can tell you what the past has been. Whenever you see a downturn in Motive Power, this is looking over a 30-year period, 35-year period, that typically what happens is the growth comes back as double-digit growth for several years.

Now the downturn on this one was significantly larger than we have seen historically. So this could last -- you know, I really don't know the answer, a year, two years, three years. I don't really know. But what we are seeing right now is very strong orders come through on Motive Power.

Okay. Thanks and I just need a follow-up question on the previous questions on thin plate, pure lead and the capacity factor that you are at, basically you are at 100%, but you're looking for additional opportunities or you're going to expand the rest of your plants and look for other opportunities to increase capacity. Can you talk about the margin impact that you have seen from that, and where we could see that go in terms of meeting your objectives? How significant of a portion of that -- how significant of an impact does that have on meeting your projections for margin?

Well, at the earlier question, when do we get the 25% gross profit? And one of the things that is a strong driver for us to get to 25% gross margin is going to be on thin plate, pure lead. Clearly it is a much higher margin product than standard product. We do sell it for a premium. And, as I mentioned earlier, we have not completed the full expansion that proved a year and a half ago. That will be online in the fall. And selling -- I'm sure we will sell that capacity out, and that mix of higher margin products is going to help us get closer to the 25%. Typically we would like to see a number that is well north of 25% on that product.

I guess, when you look at where you're at today versus the 25%, is that half of the impact, or is it something less than that that comes from pure thin, plate lead?

Well, about 18% today of our total sales or revenue is on thin plate, pure lead. So I'm not sure -- and I can tell you it is north of 25%. We hoped the margin that is -- and we hoped to get that percentage of our total revenue significantly higher. We do have the plans for the next step to increase capacity on thin plate, pure lead, which will help us get our percentage from 18% to something higher. So I'm not sure if that answers your question.

It is in the right direction. I appreciate that. And then just finally, you're looking at a lot of acquisitions all the time in the market out there, and I always like to ask you whether or not sellers are getting more reasonable about their expectations on multiples?

Well, yes, sellers get more reasonable. They come down, but, as the market gets tougher, we come down also on it. So it is one of these things that we are very disciplined. We want to be sure is we make an acquisition, we are doing the right thing for our shareholders. We have done 26 acquisitions in total since 1994. They have been very successful in integrating those companies, and we are going to continue that way with things.

So I mean when you look at the price coming down on some of these companies, it has come down because their earnings have come way off. And some of them have come to a point that companies I was interested in two years ago, I would not touch them today because I think they have gone too far.

Jesse Pichel, Jefferies.

This is [Elaine] for Jesse. Did you mention earlier if this major new customer was in the Motive or Reserve segment?

No, I didn't.

Okay. And I don't suppose you will mention that now?

That is correct.

Okay. Secondly, do you --

With all due respect, it is one that the customer did not want us to disclose at this stage who they were, and I obviously have to respect that. I wish I could tell you what it was, but I cannot.

Obviously that is completely understandable. Just, secondly, I was wondering, do you anticipate any potential impact to marketshare with the planned price increase in Europe? Do you see any potential obstacles there with that given the current competitive environment?

Well, it is always a risk. If you go back a couple of years ago, we said in the Americas that we were going to go for pricing, and we would lose some marketshare, and we did lose some marketshare because of pricing in the Americas. We took a risk, and it is one I think in Europe that we have to look at doing the same thing. And if we lose some marketshare that is lower margin business, then that us so be it.

I think that what happens is that we're going to continue to do everything we can to support our customers, their growth. We are going to continue to provide them the best service, the best products, the best value. But for that I think it is reasonable that our shareholders receive a reasonable return on the investment that we make to support that business.

So to answer your question, it is possible we could lose some marketshare in the process of doing this, but I think it is still the right thing to do. And, as I said, we did it in the Americas. It paid off for us. And I will say that many of the customers that left us, they came back to us because they did look at best value. They can buy a battery cheaper from someone else, but they are not going to get the full service. And in these applications that we are talking about that are very critical, last line of defense type applications, you want to be sure you have got the best quality, and you want to be sure you have got the best service and the best reliability. We provide that, and we think that deserves a little higher price than the standard market.

It sounds like the price increase there is more concentrated in Reserve Power, or is it more across the board?

Across the board.

Across the board? Okay.

Even though our Motive Power business is doing better than our Reserve Power business today, it's across the board that we are doing the valuations where the appropriate places are to go after pricing.

Okay. Great. And just lastly, were you able to take advantage of the lower lead prices in June to lock in a little more supply than you might normally? Do you -- I know you hedge or you have a certain amount locked in, but would you say that you have perhaps taken a little more than normal?

Hindsight being 20/20, I wish we had taken a lot more. (multiple speakers). We tend to be very disciplined in that. We look at somewhere around 50% to forward hedge. I know we have seen it before where lead has gone down to $0.70 -- it was well north of $1.00; it dropped down to $0.70. We did a big hedge at that period of time that sure enough it dropped down below $0.50. It is one that we stick with the discipline. We found over the years that if you have the ability to a degree to pass along in pricing, don't try to manage just the cost side. Manage the margin side. And so we have designed a process where we are looking at, how do you match up pricing that we get for our products versus the commodity costs? Part of it is automatic pass-throughs; part of it is hedging a percentage, a fairly large percentage of what you have in backlog today. And the rest of it out in the future that you hope to get the pricing to match the cost increase on the commodities. And that is what we have done for the last several years, and it has worked reasonably well for us.

Bill Dezellem, Tieton Capital Management.

A group of questions here. First of all, in the 10-Q, referencing the increase in inventories, you made reference to a major reserve power customer that will have significant incremental sales in the future. So, first of all, I presume that is a different customer than a new customer that you have discussed here on this call. Is that correct?

No, you found something there that I did not realize when we had the 10-Q. The answer to the earlier question, it is a Reserve Power, not Motive Power customer. I did not realize we disclosed that. Thank you for pointing that out.

You are welcome as I guess that answers that question. (multiple speakers)

Yes, it does.

Then to the next one in the Q, there is the reference to the $36 million annual run rate of cost savings that you anticipate once all of your programs have been successfully implemented. In the first quarter of this fiscal year, where were you at in terms of a run-rate?

Well, of the $36 million, we thought that by the end of last year we were on a run-rate of about $25 million to $26 million with the final $10 million to be realized over the course of fiscal 2011. So going with us being one-fourth of the way through, I am going to say we are somewhere in the $27.5 million to $30 million in terms of annualized run-rate savings.

Thank you and then final question for now is relative to your acquisition strategy. Given that your competitive position has improved dramatically over the last few years, can you and are you raising your acquisition hurdle rate because, again, your position is so much better that you don't have to have the acquisitions to the same degree that you did several years ago, and therefore, you can and should pay less?

We are being much more selective. You're exactly right, exactly right in what you are saying. Some of the acquisitions, as I mentioned earlier, there are some that we have looked at in prior years, and we would like to -- have actually gone after and acquired those companies. And I mentioned earlier that today I would not touch them. And the reason for that is because we have grown so much and taken so much business away from them, that the valuation of the companies have gone way down, and we no longer need them. So you're right. It is one that we are a lot more selective.

When you're just one company and if you go back to 2000 where 98% of our business was in the United States, there was a lot of easy pickings out there, a lot of things to go after. And we had a low point two years ago that the United States is only 36% of our business. We are a little over 40% in the United States today of our business. So it is one that with the strength we have in those regions, it really raises the question, why buy some of these weak competitors when you can pick up your portion of the market share if they go under?

Thank you both for tying a few things together for us.

David Morris, McMahon Securities.

Kind of a little bit of a multiple part question. I guess it revolves around working capital primarily. It looks like not only did you build inventory in the quarter, but it also looks like on the liability side, there were a significant number of reductions that caused a pretty big negative swing in working cap.

And I guess my question is kind of twofold. One, with regard to bookings, is there any concern about order cancellation? I know you had some things that bled forward out of the first quarter. And two, how quickly could you reduce the inventories if you started to see cancellations? And then three, are creditors starting to demand payment faster? Is that why the liabilities came down while the assets were going up? Can you just help us understand what is going on there?

Yes, David, let me try, and I'm going to start with your final question about creditors demanding payment faster. That is not the case. However, I will say the mix of what we were requiring at what time in each of those periods does have a great deal of influence on that. So we may have our vendors of lead that are on 30- or 45-day terms and others that we may have on later terms. So we have not had any reduction in the terms that we have been granted.

But to your point initially about Accounts Payable, that more has to do with the mix of the inventories that we were purchasing and where we were getting those materials from and the terms for those materials.

And with regard to reductions of inventory because of order cancellations, most of the inventory that we have set aside because of the order cancellations, we feel pretty good that we will be able to redeploy that inventory in the worst case that we did not sell it to the intended customer. So we expect to see inventory probably -- may not measurably go down in the upcoming quarter, but we would certainly expect in the second half of the year, you will see our inventories drop back down.

The other point probably to make on our Accounts Payable is our quarter did end on July 4, and a lot of our payments made to vendors, particularly in Europe, are made at the end of the calendar month. And, therefore, you would have seen a normal cycle of us paying bills that in perhaps previous quarters would not have been paid at that time.

Sounds good. Thanks, guys.

Matthew Crews, Noble Financial.

Just on the backlog, could you clarify what the burn rate is on that? If you said you had backlog at the end of the quarter, how fast would you turn that backlog?

In terms of the burn rates, we generally don't disclose the amount in backlog; therefore, it would be kind of hard to describe to you how fast that would be burned up. And given that some of that consists of orders such as the submarine or the recently announced nuclear orders that are going to be out into next fiscal year, so there is not going to be a fast burn on those. But I guess we feel, as we look at our order book, we would say that it currently would reflect a stronger second half of the year and not necessarily a stronger second quarter to this year. As we said, our second quarter would be up modestly over the first.

So visibility over you would say six months is six to, I guess, nine months would be -- nine months is good? But out of -- pushing out 12 months plus, that is -- so I'm just trying to get a sense for the turns. I guess the Reserve versus Motive makes a big difference but --

I think you are right on, looking out about nine months.

Okay. Thank you.

Ladies and gentlemen, we are showing no more questions in queue at this time.

Okay. Well, I would like to thank everybody for calling in today and your interest in EnerSys. So, everyone, have a good day. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes our presentation.