EnerSys (ENS) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2011 EnerSys earnings conference call. My name is Noellia, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. John Craig, Chairman, President and CEO. Please proceed.

Thank you. Good morning, and thank you for joining us for our conference call.

During this call, we will be discussing the results of the second quarter for fiscal 2011 and 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 would 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. 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 these factors which could affect our future results including our earnings estimates, see Forward-Looking Statements included in Item 2, Management's Discussion & Analysis of Financial Condition and Results of Operations, set forth in our quarterly report on Form 10-Q for the quarter ended October 3, 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 our Company's Form 8-K, which includes our press release dated November 9, 2010, 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 evening another record in quarterly earnings. As you know, our adjusted diluted earnings per share were $0.58 in the second quarter, which was above the $0.49 to $0.53 guidance we gave in August, and was a record for any second quarter in our history. This is now the fifth consecutive quarter that we've reported an increase in adjusted earnings per share and our third consecutive quarter that we have reported earnings -- record earnings for (multiple speakers) given quarter.

Our ratios of profitability improved and were driven primarily by incremental volume and our continued focus on price management. We achieved a sequential increase in gross profit percentage from 22.2% in the first quarter to 23.4% in the second quarter. And our adjusted operating earnings increased by $9.6 million from the 8.8% to 10.1% of sales this quarter.

This is also the first time since 2001 that we have achieved our 10% operating earnings target.

Our Americas and Asian operations both reported solid sequential operating earnings growth. Europe's operating earnings for the first half of fiscal year 2011 exceeded their entire operating earnings for fiscal year 2010.

The benefits achieved from our cost reduction programs, new product introductions, and increased thin plate pure lead product sales are a significant part of the reason for Europe's increased year-over-year profitability.

Even with these benefits, we still have not reached our 10% target for operating earnings in this region, thus, we have an upside opportunity in Europe.

As we discussed in our August conference call, our backlog remains at record levels, and the current order rate implies an annualized sales rate of at least $2 billion. The higher order patterns we are currently experiencing compared to earlier this fiscal year indicate that revenue and earnings in the second half of fiscal year 2011 should be higher than the first half.

In anticipation of our second-half sales increase, we have invested an additional $38 million in primary working capital to support the growth we are experiencing. Even with this $38 million investment, our cash and short-term investments of $173 million at the end of second quarter were only down $1 million from the first quarter, as we offset the cash used with our strong earnings, resulting in positive net cash flow from operations. This gives us confidence in making investments to grow our existing business as well as continuing to pursue acquisitions around the world.

As you know, during the recent economic downturn, we decided to continue with our global plan for expansion of thin plate pure lead production capacity. Since we believed at the time that there was increased demand for these products, we increased or expanded our capacity of thin plate pure lead by spending roughly $58 million. The actual and projected growth of this business is more than we anticipated, and we are now currently developing plans to increase manufacturing capacity for these high-margin products.

The broad growth in our thin plate pure lead is coming from most of our business lines, including Telecommunications, Aerospace & Defense, [Motor] Power, and Specialty Products businesses.

Construction of our new China plant is on schedule and the building is over 50% complete. All building construction activity should be completed by the end of this calendar year. As stated earlier, we believe production will start there in the summer of next year.

On the acquisition front, we remain very active in our pursuit of acquiring businesses that will add value to our shareholders in the lead acid battery business, alternate technologies, in geographic expansion, and into markets that we currently are not the leader.

I am encouraged by the progress we're making on the acquisition front and the possibilities of completing one or two acquisitions over the next couple of quarters. As we have stated earlier, with our strong capital structure position, which Mike will cover later, we have the capability to fund the growth of our business and acquisitions.

I'm pleased with the solid foundation we have in place to support our growing business and earnings. Our strong management team, broad and unique product offerings, strong capital structure, and market-leading position are significant assets. We will leverage these and other assets to continue to increase our profitability and take advantage of our many global opportunities.

As stated last evening, we expect our adjusted diluted earnings per share to be in the range of the $0.59 to $0.63 for the third quarter of fiscal 2011. If we exceed the midpoint of our guidance, that would result in a sixth consecutive sequential increase in our quarterly earnings, and would also be a record earnings for any quarter in our history. Now with that, I would like to turn the discussion over to Mike Schmidtlein for further information and our results and our guidance.

Thank you again, John.

Our second-quarter net sales increased 29% over the prior year to $473 million. On a regional basis, Europe's second-quarter net sales increased 23% to $207 million compared to the prior year. Our sales in the Americas increased 34% to $221 million while our Asian business second-quarter sales experienced an increase of 27% to $44 million.

Consolidated second-quarter increase includes approximately 18% due to higher organic volume, 7% from higher selling prices, 5% from acquisitions, partially offset by a decline of 1% from weaker foreign currencies all compared to the prior year.

On a product-line basis, net sales for Reserve Power increased 25% to $247 million, while Motive Power increased 33% to $226 million.

On a sequential quarterly basis, second-quarter net sales increased 9% over the first quarter, primarily due to organic volume up 8% and pricing up 1%. All geographic regions posted solid gains in organic volume of between 7% to 9% over the prior quarter.

On a product line basis, Motive was flat sequentially while Reserve was up 19%. Reserve Power's 19% sequential improvement reflects the strength of our Telecom, UPS, and Aerospace & Defense businesses. Although volume did not increase sequentially in the second quarter for Motive Power, we are encouraged as the second quarter is typically down from the first quarter for this product line due to summer vacations, particularly in Europe.

Net sales for the first six months of fiscal 2011 increased 28% over the prior year to $908 million. On a regional basis, our European operations' net sales increased 22% to $396 million in fiscal 2011.

The Americas increased 36% to $427 million; in Asia, 24% to $85 million.

The 28% increase for 2011 includes an increase of 19% in base volume, 5% from acquisition, 6% due to pricing, less 2% from the weaker foreign currency translations.

On a product-line basis, net sales in Reserve Power increased 20% to $455 million, while Motive Power increased 39% to $453 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 November 9, 2010, for details concerning these highlighted items.

Our second-quarter adjusted consolidated operating earnings were $48 million, or an increase of 64% in comparison to the prior year with the operating margin increasing 220 basis points, 10.1%. This strong second-quarter margin was achieved primarily as a result of stronger sales of approximately $105 million in the quarter.

In addition, cost savings offset higher commodity costs net of pricing. Excluded from our adjusted operating earnings for the second quarter was approximately $2.7 million of restructuring costs from our European segment and $0.5 million of due diligence costs.

On a sequential quarterly basis, adjusted consolidated operating earnings were up $10 million with the operating margin increasing 130 basis points due to the 9% revenue growth and higher pricing recovery and the benefits of our continuing cost savings programs.

Our first six months of fiscal 2011 adjusted consolidated operating earnings were $86 million, or an increase of 64% in comparison to the prior year, with the operating margin increasing 200 basis points to 9.5%. The increase in the first six months earnings was due to similar factors as discussed for the second quarter.

Our improved operating earnings led directly to the increase in our adjusted diluted net earnings per share which were $0.58 in the second quarter, an increase of 81% from the prior year's $0.32 per share. The main drivers to the increase in the EPS, similar to our operating earnings, were the higher volume and cost reduction initiatives, partially offset by higher commodity costs net of pricing.

For the first six months of fiscal 2011, adjusted diluted net earnings per share were $1.06 per share, nearly doubling the $0.55 in the prior year. The key influences on our earnings for the first six months of 2011 were the increases in net sales partially offset by higher commodity costs, net of cost savings and 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, $173 million is on hand in cash and short-term investments as of October 3, 2010.

Second, approximately $225 million remains undrawn from our credit lines around the world.

Third, our leverage ratio, which must be maintained below 3.25 times as calculated in our US credit agreement, was 1.4 times, and our net debt to total capitalization ratio was 21% as of October 3, 2010.

Capital expenditures were $24 million for the first six months of 2011. Our capital spending for the year continued to focus on productivity and other cost savings, the expansion of our thin plate pure-lead capacity, and our new facility in Chongqing, China. Spending on this new plant in central China is accelerating. At this time, we're 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 adjusted pretax earnings was 29% in the second 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 from the prior year.

We continue to pursue potential acquisitions around the globe and are currently in discussion with several companies. We remain patient and have not changed our disciplined approach and strategy in seeking acquisitions, though we will be confident of good returns from 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 of between $0.59 and $0.63 in our third quarter fiscal 2011, which excludes an expected $0.06 per share from our restructuring programs and acquisition activities. Our anticipated third-quarter earnings will be driven primarily by a modest increase in revenue.

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 you, John.

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

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

Good morning, guys. John, I guess the first thing I wanted to delve down into is your comments about margins in Europe and that 10% target. Is this just a function of volumes getting back, or is it a mix function? Are you going to have to continue to pull through restructuring savings to hit those targets? Can you talk a little bit about A, your ability to get to them and what kind of timeline you are thinking about to get to that kind of a target.

Well, to answer your question, the bottom line to it, it's all of the above that you mentioned there.

And let's back up a little bit on Europe. Europe was absolutely devastated from the standpoint of the recession that took place. At one point, our Motor Power business was down close to 50%. There was a real slope that took place in Telecommunications business; a real slope that took place in UPS. Fortunately, we are seeing that turn around right now.

In fact, what we are seeing is a replacement of some products that we put in place in 1999, 2000 during the tech boom. We are seeing replacements take place in that.

We are seeing the start of 4G in Europe, so the telecommunications industry is starting to pick up for us in Europe.

Motor Power has been very strong. As I've said many times in the past, when Motor Power goes down, when you see a recession, it will go down greater than the recession. When the recession starts to turn around, you will see a pickup that will be double digits. We are experiencing that globally in Motor Power. And Europe being a big portion of our business, it's good to see that turnaround take place there.

Now you also will see the restructuring costs that we have in place. This quarter, it's about $3.2 million. We expect to see good returns on our restructuring programs.

In fact, if you go back and look at our earnings in fiscal 2008, first off, our revenue and compare it to 2010, in 2010, our revenue was down 22%, $448 million. But when you look at our earnings, we went from $1.42 in $2008 to $1.44 in 2010, a 1% increase in our earnings per share. Again, 22% down on volume, 1% increase in earnings in a high, fixed-cost manufacturing environment is very, very good.

The reason we had that kind of increase was because of the restructuring programs that we had in place. We continue to restructure in Europe, and we will see further improvements in margins take place because of those activities.

Well, to answer the question, how long do you think it would take you to get there?

It's going to be on the volume side, and what lead does. Our plan right now is we will get there next year in 2012, mid to late 2012.

Okay, great. And one other question, regarding the competitive landscape and the pricing environment, can you just address what that looks like today, say versus three to six months ago? I know some of your competitors are in financial duress. Can you just address that a little bit?

From a pricing standpoint, we are not seeing a major change in pricing. It's been a rational market, generally speaking. Yes, there's exceptions with certain bids and certain customers, but generally speaking, at a top level, it's been rational.

Okay. And one last question, and I will get back into queue. Mike, you kind of referenced relative to the guidance that the December quarter revenues would be up modestly compared to September, if I heard you correctly.

Right.

That would suggest a significant fourth-quarter revenue jump in order to hit that $2 billion target, John, you talked about earlier in the commentary. Is that a correct read there, or did I mis-hear something?

Just one clarity before Mike jumps in. The comment on $2 billion is a run rate looking at the next 12 months. So you would have a portion of that in the second half of the year. Your point is still valid, and I want to be sure that it's not assumed we're going to hit $2 billion this year, okay, that's not what I was saying. I was saying run rate for the next 12 months. Mike?

So really, John, with that, you would probably want to say think of H2 in the $1 billion-type range for the year. So, I think you could -- you will still see -- by modest, this is certainly a single-digit sequential increase that we are anticipating.

Okay. Perfect. Thanks a lot, Mike.

Michael Gallo, C.L. King.

Hi, good morning. Congratulations on the good results. Just had a couple questions -- John, you managed to grow your Asian business, the revenue there, both sequentially and year over year despite having some capacity constraint. It looks like you are squeezing more out of your existing assets. Can you grow that much higher in the near term before you get the new Asian plant open? Or would you expect it to level off at this kind of level near term?

I think it's going to level off, maybe go up a little bit. But in Asia itself with the telecommunications industry, the growth rates that we experienced in the last 18 months to 24 months, I think that's going to slow up a little bit. And the reason for that is that they have had some issues with 3G in the China market, both technical and acceptance by consumers. So I don't think we're going to see big growth in those numbers in the telecommunications area.

The Motor Power is a completely different animal though. The Motor Power side, we started that business about eight years ago; in the first year, we were $4 million. This year we will be north of $50 million. It's been a great business. The growth is good and the margins are good.

So, all in all, we will do well in Asia this year, but I think we're going to see a mix change from Reserve Power over to Motor Power.

Very helpful. And then just final question, John, where do your volumes sit today on a worldwide basis relative to where they were at the peak in 2007? How much is left to kind of recapture? And certainly had very robust volume growth here in the current quarter.

Our peak number was, in fiscal year 2008 was $2,027,000,000. And in 2010, we hit $1,579,000,000, is my recollection on it.

Correct.

And, you could calculate or guesstimate I guess what we've said this morning where we will be this year. And it will be up this year compared to where we were last year.

I guess I was wanting to hit on volumes. Again, volumes, I think if I look back to 2008, you had some very, very high lead prices in there, but is there still 15%, 20% you can get back in volume to get back to where you were at the peak? Or have you bridged that gap?

You are in the right ZIP code.

Right. Okay. Thank you.

Steve Sanders, Stephens Inc.

Good quarter. First, on the pricing side, I think you were going to put through some price increases in Europe, I believe it was September. I just wanted to see if you had some early feedback on that.

Yes. They're going through and they're the normal -- what we go and ask for. We don't get 100% of it, but we get a portion of it. And that being said, if you notice this morning, lead was $1.18 a pound. We are considering the next steps of what we do in pricing.

We have a -- the way we view it is we want to give our customers best value, and we're going to stay competitive on pricing, but as commodity costs go up, we're going to have to pass those along.

Okay, okay. And then it looks like you are getting more price in Motive than you are in Reserve. I'm assuming that's just reflective of what the underlying markets are doing. Is there anything more to that?

You know, I think that is probably more of a mechanism of how some of the pass-throughs are working. So you are correct in terms of that Motive is getting -- enjoying a little bit more on the pricing. And when we look at it from a year-over-year basis -- and part of that, Steve, maybe just the comps are a little lower on Motive because they dropped faster and where the lead pricing was from when we were measuring it then. So, yes, they're up, but I think we don't necessarily view the Motive Power as being a landscape where pricing is easier than it is in reserve.

Yes, I would totally agree with that. And if you take a look at pricing, maybe over the short window, the Motive is up. But in total, Reserve Power is going up at the same rate, approximately the same rate as Motor Power is.

Keep in mind we have more business pass through -- automatic pass-throughs on Reserve than we do in Motive. In fact, on the Motive Power side, we have very little automatic pass-throughs in the Americas. So, Mike's right; it's a timing situation on pass-throughs and other phenomenons.

Okay. And then following up on the competitive landscape question, you had a nice new customer win that you talked about last quarter. I'd be interested in just kind of getting an update on how things are going there. And then, see if you could talk generally about your opportunities to take some additional market share based on some of the competitors that are struggling out there.

Well, I mentioned, just a refresher, last quarter, that we had picked up a new customer, someone that we had done some business with in the past. And we estimated that the peak, if we were to get everything in place with that, could grow up to about $50 million in revenue. Right now, we are ramping up and right now the run rate would be about half that $50 million. And that's to be expected because of ramping things up and putting things in place.

It's -- we've had a pretty good experience all in all. Yes, we've had some startup problems with it, back and forth, but we are on target. We will eventually get the, I think the full $50 million, but it's going to take some time to get it up there, so it's going well on that end.

As far as taking market share goes, we have to look at market share versus pricing management. And, bottom line to it is we are going to do what's right for the business. It's easy to pick up market share; just drop your prices way down. We're not going to do that. We're going to optimize between market share and pricing management.

So, all in all, I think that we want customers to come to us because -- or we want to go to our customers and have them buy our products because we are truly the best value in the market.

Okay. And then last question on the M&A side, can you just put some brackets around the size of the opportunities that you are in discussions with, was kind of I think the way you characterized it.

And then, this may be a stretch, but are there any assets out there in China or in that neighborhood that might accelerate your capacity expansion there?

We're constantly looking for different opportunities in how we grow the businesses. I've been in the Company since 1994. We have done -- we've bought 27 different companies. We will continue to look at acquisitions that are good for our shareholders.

There are opportunities in a lot of different areas. I don't want to put brackets around what the sizes would be or anything like that. It's our policy not to talk about particular acquisitions. But I will go as far as to say that anything we're looking at right now, we could fund with the cash and credit lines that we have available.

Okay. Thank you very much.

Elaine Kwei, Jefferies.

Congratulations on a great quarter. I was wondering if we could get just a little bit of an update on the thin plate pure-lead business, just what percent of business that's at now, the utilization? And you mentioned a potential that you are looking at potentially developing that further, and how big of an increase you might consider there.

If we back up a little bit on that, that was roughly about 10% of our production I was going to say two, three years ago. And in essence we've just about doubled that capacity since that period of time. The $58 million investment I referred to plus investments we made prior to that is taking us up to this new level.

This product is a superior product. I mean there's nothing in the lead-acid arena that performs at the same level this thing does. The downside to thin plate pure lead, it's expensive; it's highly automated to (multiple speakers). It's a very technical product.

And, what we have is it's a premium margin product, but to get to your question, right now, we're running 100% capacity. We have additional capacity going online in February, which will take us down in the low to mid 80% range. And the acceptance on the product has been so great, the pricing is out on it. We're looking at making another substantial investment in capacity expansion for that particular product line.

Okay, great. And just on the Reserve Power side, was there anything specific that you saw driving the strength there, in terms of a pickup in telco buildouts or replacements and upgrades, or perhaps some pent-up demand?

Well, I think that it is some pent-up demand. I think there was a lot of fear out there during the dark days of the recession. I think that you're seeing some things that are starting to open up.

I think you're also seeing that the 4G is starting up in Europe. We're seeing expansion taking place in telecom in the US market by further deployment. We're also seeing replacement business up because all of the batteries that were put in place in 1999 and 2000 during the tech boom, those batteries are starting to -- the Asian people are starting to replace them.

There's also been a thing in the US market of going from let's say four hours backup time on a telecom to eight hours. We're seeing that addition take place. So it's really across the board. It's really been a fairly decent pickup that's taken place with this thing. But I will add into it, it's not like it was back in 1999 or 2000 where the thing just went crazy, that people were ordering batteries. It was irrational back then, the growth rates. I think we are seeing a rational growth coming out right now that's based on the points I made earlier.

That's terrific. And just lastly, on the acquisition side, are there any alternative technologies out there that are looking more interesting to you guys?

Yes. And you know that we've invested in fuel cells in the past. We've invested in select lithium ion applications. And we will continue to look at any and all stored energy solutions, but as I always say, we are in stored energy solutions that make money.

If you look at the total battery business, the market itself is probably in the range of $125 billion. We're approximately $2 billion. We're going to participate in those areas whether it's putting batteries in rockets or missiles or put them in telecommunications applications or medical. We're going to participate in those stored energy solutions that give a good return to our shareholders.

Terrific. Thanks so much, John.

Thank you.

Paul Clegg, Mizuho.

Congratulations on the strong results. Looking at -- digging into the margin performance a little bit, it was obviously down. Is it possible to break out how much of the improvement sequentially did come from sales mix and thin plate pure lead?

You know, I would say certainly having a higher percentage or a continuing increased percentage in the amount of thin plate pure lead is helping. The aerospace and defense, which is very heavily denominated in that type of a technology, has been a very strong contributor.

Also, some of the things that are going on, with volumes picking up, we're getting better utilization out of our factory. So it's a combination of lead for us sequentially went down a little bit; pricing caught up a little bit; better utilization of our factories; and a better mix with higher percentages of thin plate pure lead.

Yes, and when you talk about that, you just mentioned the figure of going to 80% capacity factors, you're basically at 100% now. You'll go to 80% with new capacity coming online. Does that mean the you will go from the ability to do about 20% of revenues to the ability to do about 25% of revenues from that product? Is that the way to think about it?

Well, in February, it wouldn't give us that much more. It's going to give us a slight pickup in capacity. But I think the thing of it is, as long as the market is willing to pay a premium for that product and as long as we can get a good return on the investment, we will continue to invest in the expansion of thin plate pure lead products in a -- both from a new product design standpoint, new applications, and adding additional capacity.

Okay. And I don't know if you've given this in the past, but what -- how much better are the margins on that product compared to your overall business?

We haven't given that information, but I will say that the premium on the product would run 10% to 15%, 20% higher, depending on the application. Certain military applications because it's so select, it runs even higher than that.

The premium on the margin on the product or the --?

The premium on the price of the product.

Oh, the price of the product, I see, okay. But it is more expensive to produce it at the same time.

And then one last question on the acquisitions. You've been really vocal. I appreciate the straightforwardness on this. But -- and I took one of your product comments to mean that the size of the acquisitions that you are looking at would mean that you would not feel compelled to come back to the capital markets in order to finance them. Or did I misread that?

Based on what we're looking at right now, and what -- I mentioned earlier, hopefully, we will announce one or two acquisitions in the coming quarters; we would not go back to the capital markets.

Now just for clarity, if we found the right deal to come across that would be a larger deal than our current capital structure and cash could handle, we would consider that if we thought it was a good return. But I will say right now that we do not have anything on the drawing boards that would be there.

All right. I'll jump back in the queue. Congratulations again.

Brian Drab, William Blair.

Good morning. Congratulations on a solid quarter. The first question is, I believe the comment was made on the first-quarter conference call that the 25% gross margin level was attainable in the second half of fiscal 2011 if lead price stayed at or below $1. Or, as you look forward now, given where lead is, is that 25% probably out of reach for the year?

Probably for the year. I don't know the answer to it because I don't know where lead going to go, but let's go back to when we made that statement, and I said if lead stayed constant. The fact is, if you look at the fact first half of this year, on an EPS basis, lead has gone up and has impacted our EPS by $1.30 a share. It's that big. We got pricing to offset exactly half of that, $0.65. So in other words, we have a bad guy of $0.65 a share in the first half of this year.

Or, if we wouldn't have had this lead increase that we are seeing, if you take the $1.06 that we had in the first half and add $0.65 to it, we would have reported $1.71 a share, and we probably would have hit the 25% gross profit.

But the fact of the matter is, lead has gone up and continues to go up.

Yesterday, oil hit a two-year high. And if you follow oil and try to charter it against lead, you'll see there's a pretty good correlation. Lead has gone up. It's tracked it; Lead this morning was at $1.18 a pound, up considerably from what it was just a quarter ago. Mike, do you want to pick up on it?

Yes, Brian, I would only add that if you think about our FIFO flow for our inventories and what the LME market has done and knowing that we get benefits from hedging and our tolling operation, but we will see much more pressure in our fourth quarter than we would in our third quarter from some of the movement you've seen in today's LME market.

Now, when you look on a quarter-to-quarter basis, which obviously, we study that very, very closely -- and I mentioned that we had to see -- because the lead that took place, it still didn't -- our earnings per share compared to last year were up 93% -- compared to last year; and we still had this headwind of lead coming at us.

If you look at lead versus pricing over a longer period of time, say 18 months to 24 months, we are slightly ahead. So in other words, when lead goes up, we have a -- there's a delay to get the pricing, but when lead comes down, we can hold the pricing. So net-net over a longer period of time, it neutralizes itself.

Sure; thanks for all that detail. And then just one more question on the margins in Europe, I may have missed this, but sequentially, the margin stepped down a little bit in Europe from your fiscal first quarter. And does that have to do with lead pricing or -- what was the key driver of the move from 5.3% to 4.5%?

It's -- lead is an element of it. The other thing is mix.

Okay. Thank you very much.

William Bremer, Maxim Group.

Love the consistency, gentlemen. Congrats. Going into -- you've given us some color on the target operating margins for Europe. What could we assume on the Americas? You've done a fantastic job there. What's the target there?

Well, as you saw, we probably hit -- we hit 15% this last quarter. In reality, to hold 15%, I don't think is realistic long term. I mean, I wish I could say it is, but the markets are going to dictate what pricing is. And we've done very well in that arena. If we could just maintain where we are at 15% and grow the top line, I would be very pleased with it. But the reality is that competitors are going to come after that, and it opens the door for other things, so a longer-term view, we're going to do everything we can to hold it, but I think there's going to be a lot of pressure on it.

And Mike, a question on the restructuring charges, year to date it's about $3.5 million; we do have some in the third. What can we assume for the second half here of the year?

You know, I think you're going to see charges comparable to what you saw in the second quarter. So they will probably be in the $3 million, $3 million to $4 million range. We still have the F'11 program that we announced in this quarter. We still have some spending left on that.

We have the Oerlikon program that you might recall; we made that acquisition a year ago. We recorded a $2.7 million, $2.8 million bargain purchase gain, which in effect was there because we would be doing the restructuring after we closed on the transaction. And in fact, we will spend probably between $3 million to $3.2 million, which we have started spending and will continue to spend over the course of this year to conclude that program. As well, some of the programs announced in fiscal 2009 and 2010 will have a little bit more spending. So I think it's fair.

You know, we said in our guidance for this quarter to expect for this upcoming quarter to expect $0.06 of pressure from those highlighted items, $0.05 of which you would probably say are the restructuring charge.

Okay. So we're looking at $3 million to $4 million on the total back half or per quarter here?

Right now, I would say it's $3 million to $4 million in the third quarter, possibly slightly lower in the fourth.

Right. And do you want to comment on '12, what we should be sort of utilizing there?

Yes, I really don't have -- the programs that are out there are not going to -- I don't have a whole lot more information on that, Bill.

Yes, we're going to probably have a little carry-over that's going to go into it. Hopefully, if we acquire additional companies, and we look at further consolidation, these are really good investments. In fact, if I had to pick the best investment we can make, these restructuring programs and putting these companies together and streamlining them.

That's why, again, we were able, as I mentioned earlier from 2008 to 2010, down 22% in volume, up 1% in earnings. It really all goes back in large part to our restructuring programs that we put in place. These are great investments.

And then, finally, gentlemen, what type of tax rate should we be using going forward?

You know, we were at 29% for this quarter, and I'm going to make a caveat for any discrete items that could fall out. Right now, I think you're going to see us continuing in the 28%, 29% rate for the balance of the year.

Okay, great. Thank you so much.

Jeff Bencik, Kaufman Brothers.

I just want to beat a dead horse a little bit more. John, can you talk about, in terms of the acquisition, you've been very conservative in terms of the pricing that you are willing to pay for your acquisitions in the past. Can you talk about the market as a whole and what is happening in terms of expectations for potential acquisition targets?

Could you be a bit -- add a little bit more color to the question? I'm not sure I totally understand where you want to go with it.

Sure. In general, John, you've talked about how many of the acquisition targets have wanted too much for their company. And have you seen those expectations come down in that now that these two opportunities you looked at before and now they've finally come down in price, and now they are more interesting? Or can you talk around that a little bit?

Yes, I think there's a general pattern on the acquisition front. When you first speak to the target, they have a very high price on it, and if we don't think it's worth it, we obviously don't complete the deal. But, in some cases, what happens is with downturns taking place, they come back or we get back to them and they decide to come down, and eventually we reach an agreement on it.

It's still -- it's a competitive market out there. It's one that people aren't going to give their companies away, obviously. In the Asian regions, the multiples are still very high. We keep looking at them and they have not come down at this stage. We did see some that have come down in the US market, which we have acquired and we acquired one in Europe last quarter.

The one in Europe we acquired last year, it was 10 years we were talking to that company. And, the initial price that we looked at and what we actually paid for it were quite a distance apart from each other. So I'm not going to say that because the economy is down, that these companies have become a lot cheaper. That's not really the case. Some -- a few of them have, but not -- across the board, generally speaking, it's down slightly. Do you want to add to it, Mike?

Well, I would say that even the companies that we're looking at today, we have had discussions with in years past. And I won't say that necessarily that prices come down, but they are perhaps a little bit more receptive to our advances.

Okay. And then can you talk about the sequential volume and price changes by region, what you saw there?

Yes. Are you looking for, Jeff, in terms of looking at it year over year?

On a percent basis sequentially versus last quarter?

Okay. Sequentially for the quarter?

Yes.

Well let's see, you know, I talked about how each of the regions had between 7% to 9% growth; and that's in effect what they saw. And I was referencing it when I said that the organic piece of them. I think you can see from our numbers that America's total was 7.5%; Europe was 10%; Asia was 8.5%.

And, for each of those overall percentages, they had between 7% to 9% was the organic component. So, most of them enjoyed some pricing, although Asia had some pricing pressure. And, currency was a little bit of a benefit for Asia, but not a whole lot. Currency was not much of a factor elsewhere.

Okay. And then finally, if you can just clarify in your capacity utilization, in terms of how much room do you have to grow volumes from here? And just, overall, what is your capacity utilization? What is the industry at, would you say?

Yes, you know, that's a tough question because we're in so many different business segments, whether it's a lithium-ion battery we're putting in a precision-guided missile or putting a battery in a fork truck. But just speaking on a broad brush, when we exclude thin plate lead from this, we're in the 70%'s, low 70% range on capacity utilization.

As I mentioned earlier on the thin plate pure lead, we're currently at 100% going in the low to mid-high 80%s after February. And, we anticipate additional investment in that arena.

With the exception of thin plate pure lead, we've got capacity to cover things going forward. The rest of the industry, it would be a guess on my part, but they're probably the same range we are, with the exception of thin plate pure lead.

Okay. All right. Thanks, John.

Walter Nasdeo, Ardour Capital.

Obviously, most of my questions have been answered. However, what I was maybe trying to get -- I would like to get a little color on, going forward what your expectation is and then, what your product mix is in growing the Asian market. And what are you looking at kind of over the horizon, revenue-wise? And then how do you expect the product mix to play out over there?

Okay, I would say today that we're probably number four or five in that market than our largest competitor. If we're $150 million over there, our largest competitor is about $350 million, would be my guess.

Our objective is to be the market leader over there and to not do it by giving pricing on it, but to be giving -- doing the same thing we've done in the rest of the world, and that's give best value to customers.

Now, to your question, we have a product, block product, 12-volt batteries; it has not been competitive. We basically have gotten out of that business temporarily. We do export product or import product into China from the regions of the world (inaudible) right now, but we're not really manufacturing much of it there. That will change when our new plant is up and running next summer. We will have a more cost-effective product that better fits that product. So I expect that we will see growth there.

Second thing is the Motor Power industry in China going to electrics has been a real pickup for us. And I expect that we're going to see substantial growth take place in that area.

Third area is that we have not been a big player in the UPS market over there. The new products that we're putting in the new plant will support that market.

Fourth area is in China, I mentioned -- or we sent out a press release a quarter or two ago that we picked up $11 million to support new nuclear power plants that are going in China. That's the first of many orders that we anticipate that's going to be coming forward. That first order we'll be building in the US; we will be putting that manufacturing place in China in the new factory.

So I think we will see big growth take place in the market. I think that I've charged that operation to triple the size of their business over time. Whether we get there or not, time will tell but we're working in that direction.

Great. And as you penetrate or continue to penetrate that market over there, what are you finding as far as sales cycles and customer development? Is that something that's completely different than the US and Europe? Or is it similar to the US or Europe, or how are you finding that?

I think there's one thing that's very consistent. There are many things from cultures -- you know, we do business in over 100 different countries across the globe, and there are things that are unique to every culture. But there is one thing that's consistent, and that is customers are looking for best value. They're looking for delivery; they're looking for quality; they're looking for technical support; and they're looking for the right price on that. And I think that's a consistent message, and I think that's one of the things that we pursue globally, and it's worked for us.

The other part of it is relationships and having close relationships. I tell our salespeople, when our customers are thinking of batteries, I want them to not only think of EnerSys, I want them to think of that salesperson by first name that they know them that well. So, I think that in the past that we haven't had a strong enough sales force in the China market; we are adding to that. I say China market -- the Asia market in total.

We've recently added 10 people into the India market to expand or to get into that region, and we're going to keep sticking with our core values of the companies and giving customers best value.

Okay. Thank you very much, guys.

Bill Dezellem, Tieton Capital Management.

I would like to circle back to the thin plate pure lead, if you would please. And first of all, would you discuss the applications where you are seeing the biggest growth that has exceeded your expectations? And then secondarily, would you also please quantify the size of the expansion that you are considering and what that would actually represent in terms of CapEx?

Well, let's take your last question first. What I have asked for is a five-year plan, on the high end of what would it take, where do we think this thing could go to? And, we could put together a hypothetical plan that would say it would be $100 million investment over a five-year period.

Now am I saying we're going to do that? The answer is no; we're not there yet with it. We're going to take it a piece at a time as we make the next investment. And I don't have a dollar amount on that yet, but when we make the next investment, we will see how that goes and we will continue the pattern we are on right now.

When we get near 80% capacity utilization and the forecast says we need more, we will make additional investment in it.

Now, as far as the applications that exceed my expectations, it's across the board. I never thought we would see in an F-16, an F-18, a Black Hawk, a C-130 transport, that we would see lead acid batteries flying in those, replacing nickel cadmium batteries.

The telecommunications industry, in seeing that the weakest part of those systems have been the batteries in the past and that customers now are willing to spend more money on batteries to increase the capability of the batteries, which that's what thin plate pure lead does from a capacity standpoint.

Putting them in army tanks, having the Sears Diehard battery, I would have believed five years ago that we would be selling Sears automotive starting applications. Motor Power batteries -- I wouldn't have thought five years ago that we would have thin plate pure lead batteries running in industrial fork trucks. So it's been a technology that has taken off much better than we initially anticipated. Mike, do you want to add to it?

Yes, I would just add, Bill, that two of the areas most recently have done some growth, and one of which is in the aerospace and defense. And it's our business with the United States Navy and their nuclear submarine fleet. And we've recently been awarded the first of some contracts for new boats or retrofits of boats in the Virginia class of those subs, which we are excited about, because, as you probably know, that's the attack sub of the future.

And, when we look at the Odyssey market, we look at some of the auxiliary power units that are going to go into the off or over the road trucking industry. And we think that we can be a significant player in those markets as the anti-idling laws will cause more and more of the truckers to shut their engines off. So, those are two areas that we feel most recently have been areas where thin plate pure lead has been able to show great expansion and promise.

Thank you, both.

Steve Sanders, Stephens Inc.

Thank you. I just wanted to follow up on the inventory. I know you guys have been building some inventory to support your growth, but how should we think of overall inventories relative to where you would like them to be, and then within that, the mix of inventory?

Well, I think if you take a look at, there are certain business segments we have where the lead times are way out there. If you take like a nuclear submarine battery, or you take a diesel submarine battery, these things could be years in the making. We'll get an order and we don't actually build or ship a product for a year or two out.

But on inventory, like a Motor Power battery, we want to keep them at a point that when the customer -- it's like you walking into a store -- you want to buy something; if it's not on the shelf, you're going to go to another store and buy it. We want to be sure we've got the inventory to support those businesses that are an order and ship.

The way I look at it is that, take a look at the primary working capital in total. We lump it altogether. We take the receivables, plus inventory minus the payables. And on this business, typically we're going to run in the 25% to 27% range. That will vary depending on the type of customer we're dealing with or what region of the world we're dealing with. So, in looking forward, we are anticipating higher revenue, as we said. Therefore, we have taken the inventory up to match that. But we also have, because of the higher sales, we also have higher receivables hanging out there too.

Okay, thank you.

Paul Clegg, Mizuho.

Hey, guys, thanks for taking the follow-up. Circling back to John's comment on the new reserve customer, and I think you said you were at half the $50 million potential. I just wanted to see if that was for the December or the September quarter that you meant that remark.

And then, what would be the timing from being able to actually achieve the full potential, the full $50 million, with that customer?

Well, that's going to depend on the customer. My comment, Paul, is made on the orders that we're receiving right now from that customer, would indicate again, looking at the next 12 months, would be at about halfway point. Okay?

Oh, at the next 12 months, okay. But that's sequentially better than obviously where you were because it's a new customer.

The orders seem to be coming up every month, okay? And when we looked at the orders just recently, it implied that we're approximately halfway there to the $50 million.

Now, we're going to keep working ahead. Obviously this particular customer has other options out there, and hopefully, that we will demonstrate that we're worth a larger percent of their business or worthy of a larger percent of the business and we will get it. But there's no guarantees on that.

Okay. And then Mike, if you could give us a little bit of help on operating expense going forward, it obviously ticked up during the quarter, and if you could just talk about what we should expect for the second half?

Well, I think, you know, the absolute dollars are going to be a little bit higher, but as a percentage of sales, which is typically what we tend to look at them, you're going to see them -- I think with the higher revenue, you will see them as a percent; and I'm excluding now the restructuring charges or any of the acquisition-related expenses. But you're going to see something in the 13% range I think would be a reasonable expectation.

Okay, guys. Thanks very much.

And there are no further questions on the line. I'd like to hand the call back to management for closing remarks.

Okay. Well, thank you very much for calling in. We do appreciate your interest in our Company and everyone have a good day. Thanks, again.

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