EnerSys (ENS) 2011 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the third quarter and fiscal 2011 EnerSys conference call. My name is Ann and I will be your coordinator for today's call. As a reminder, this conference is being recorded for replay purposes.

At this time all participants are in listen-only mode. (Operator Instructions). We will be facilitating a question and answer session following the presentation.

I would now like to turn the presentation over to Mr. John Craig, Chairperson, President and CEO. Please proceed sir.

Thanks Ann. Good morning. Thank you for joining us for our conference call. During this call we're going to be discussing the results of our third quarter for fiscal 2011 and we'll comment on the general state of our business.

Joining me on the call this morning is Mike Schmidtlein, who is our Chief Financial Officer. And before 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 date 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 Two, 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 January 2, 2011 which was filed with the US Securities and Exchange Commission.

In addition, we will also be presenting certain non-GAAP financial measures. For an explanation of the differences between the comparable GAAP financial information and the non-GAAP information, please see our Company's Form 8-K which includes our press release dated February 9, 2011 which is located on our website at www.EnerSys.com. Now let me turn it back to you, John.

Thanks Mike. I'm pleased we were able to report last evening another record in quarterly earnings. In fact, the earnings for this quarter was a record for any quarter in our Company's history.

As you know, our adjusted diluted earnings per share were $0.71 in the third quarter, which included a $0.05 favorable tax settlement and was above the $0.59 to $0.63 guidance we gave in November. This is now the sixth consecutive quarter we have reported increase in adjusted earnings per share, and our fourth consecutive quarter that we have had a record earnings in that given quarter.

Our adjusted operating earnings percentage for the quarter was 10%. This was the second consecutive quarter we have reached our 10% goal for this metric.

Our Americas business segment achieved operating earnings of 13.8% and our European business segment doubled its adjusted operating earnings from $8.2 million in the third quarter of last year to $16.4 million in the first -- third quarter of this year.

As we stated last quarter, 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 improved year-over-year profitability. Even with these benefits we still have not reached our 10% target for this region. Therefore, there's still considerable opportunity for increased profitability in Europe and we remain highly focused on the target.

The reported operating percentage in Asia business segment decreased in the third quarter of this year to 6.7% from 15% in the third quarter of last year. Higher manufacturing costs, expenses related to business development in the Asia region and the impact of lower pricing in the China telecommunications markets contribute to the lower operating earnings.

The higher manufacturing costs were primarily the result of expenses associated with the transition of our smaller Shenzhen, China operation from a manufacturing facility to a sales and distribution center. The business development expenses are primarily attributed to the start up cost during the construction of our new Chongqing, China manufacturing facility and expenses in India as we continue to evaluate expanded opportunities there.

If you exclude these higher manufacturing costs and business development expenses, operating earnings in the Asia region would've been approximately 11%. We believe these short-term additional costs are a good investment for future profitability.

The economic activity in our markets continued to improve [as] is one of the reasons why we're still at record backlog. For example, the December quarter worldwide industrial truck orders were up approximately 36% versus the prior year and 13% versus the prior quarter. The strong order activity bodes well for the future orders of electric forklift batteries.

The final phase of our thin plate pure lead expansion in Warrensburg, Missouri was recently completed. This will provide additional capacity during a time of continued increased demand for these higher margin products. We will continue to invest in expanding our manufacturing capacity and broadening our product applications to meet the strong demand for these high-performance batteries.

On the acquisition front, we have made considerable progress in negotiations with several companies and we hope to report the completion of one or two of these transactions in the near future. We're actively exploring additional acquisition and growth opportunities with a strong focus on new technologies and geographic expansion, which will increase earnings and shareholder value. I continue to be very optimistic about our future.

As I indicated before, we will continue our global strategy of cost reduction programs, increasing our mix of thin plate pure lead products, and growing our business organically and through acquisitions. We will stay focused on price management to offset higher priced commodities. But most importantly, we will continue to provide our customers the best overall value with our products and services.

Now I would like to acknowledge the great work of our employees [that are] doing all over the globe. Their efforts in providing the best value to our customers has enabled EnerSys to be the global leader in our industry. This Company has grown from approximately $200 million in the mid-1990s to approximately $2 billion today in the strength and dedication of our employees. For that, I would like to thank them.

As stated last evening, we expect our adjusted diluted earnings per share to be in the range of $0.68 to $0.72 for the fourth quarter. And now I would like to ask Mike Schmidtlein to provide further information on the results in our guidance. Mike?

Thank you again, John. Our third quarter net sales increased 21% over the prior year to $509 million, primarily from solid organic growth of 18%. Higher selling prices and the impact of acquisitions each added 3%, while weaker foreign currencies had a negative impact of 3%.

On a regional basis, Europe's third quarter net sales increased 13% to $236 million compared to the prior year. Our sales in the Americas increased 25% to $225 million, while our Asian business had a strong increase of 46% in the third quarter to $48 million.

On a product line basis, net sales for Reserve Power increased 19% to $253 million while Motive Power continued in its solid recovery phase with an increase of 23% to $256 million.

On a sequential quarterly basis, third quarter net sales increased a percent over the second quarter primarily due to an increase of 6% in organic volume. Pricing and the benefit of stronger foreign currencies were both modestly positive.

There were significant differences in the third quarter sequential growth among our regions and our two product lines. Our Europe business grew by 14%, Asia by 8%, while the Americas had a modest 2% sequential increase in the quarter. On a product line basis, our Motive Power business was sequentially up 13% globally as we continue to benefit from a worldwide economic recovery.

Sales in our Reserve Power product line increased 2% sequentially. This flattening of the sequential growth in Reserve Power came right after the 19% growth in the second quarter.

Net sales for the nine months of fiscal 2011 increased 26% over the prior year to just over $1.4 billion. On a regional basis, our European operations net sales increased 19% to $632 million in fiscal 2011. The Americas increased 32% to $651 million and Asia was up 31% to $133 million.

The 26% increase for 2011 includes an increase of 19% in organic volume, 5% each from acquisitions and pricing, partially offset by 3% from weaker foreign currency translation. On a product line basis, net sales in Reserve Power increased 19% to $708 million while Motive Power increased 33% to $709 million.

Now a few comments about our adjusted consolidated earnings performance. As you know, we utilize certain non-GAAP measures in analyzing our Company's operating performance, specifically excluding highlighted items. Accordingly, my following comments concerning operating earnings and my later comments concerning diluted earnings per share exclude all highlighted items.

Please refer to our Company's Form 8-K, which includes our press release dated February 9, 2011, for the details concerning these highlighted items.

Our third quarter adjusted consolidated operating earnings were $51 million or an increase of 35% in comparison to the prior year, with the operating margin increasing 110 basis points to 10%. This solid quarter third quarter margin was achieved primarily as a result of stronger sales of approximately $87 million in the quarter. In addition, cost savings and incremental pricing essentially offset the higher commodity costs we experienced in the quarter.

Excluded from our adjusted operating earnings for the third quarter was approximately $1.8 million of a restructuring cost from our European segment and $0.6 million of due diligence costs.

On a sequential quarterly basis, adjusted consolidated earnings operating earnings increased $3 million with the operating margin staying relatively flat at 10%. Our nine months of fiscal 2011 adjusted consolidated operating earnings were $137 million, or an increase of 52% in comparison to the prior year, with the operating margin increasing 170 basis points to 9.7%. The increase in the nine-months' earnings was due primarily to the benefit of incremental revenue, partially offset by higher commodity costs net of pricing.

Our improved operating earnings led directly to the increase in our adjusted diluted net earnings per share, which were $0.71 in the third quarter, an increase of 61% from the reported $0.44 in the prior year. The main drivers of 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. The third quarter results also reflect a tax benefit of a release of a $2.5 million reserve held in connection with the tax audit in Europe that has concluded with the acceptance of the Company's tax position.

For the nine months of fiscal 2011, adjusted diluted net earnings per share were $1.77. A 79% increase over the reported $0.99 in the prior year. The key influences on our earnings for the nine months of 2011 were the increase in net sales and pricing, partially offset by higher commodity costs. Additional benefits were realized from our cost saving programs and from the third quarter favorable settlement of the foreign tax position mentioned earlier.

Now some brief comments about our financial position and cash flow results. Our balance sheet remains very strong with substantial liquidity, secured favorable debt facilities and a strong capital position. We have $206 million on hand in cash and short-term investments as of January 2, 2011, with over $200 million undrawn from our credit lines around the world.

Our leverage ratio, which must be maintained below 3.25 times as calculated in our US credit agreement, was 1.2 times. And our net debt to total capitalization ratio was 18% as of January 2, 2011.

The growth plans John outlined for acquisitions, investments and added capacity in premium products can all be met with our existing cash and credit facilities. As we execute these plans, we will continue to assess our capital structure for strength and efficiency.

Capital expenditures were $41 million for the first nine months of fiscal 2011. Our capital spending for the year continued to focus on productivity and other cost saving projects, expansion of our thin plate pure lead capacity and our new facility in Chongqing, China. 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 of the prior year due primarily to the spending in China.

Our affected income tax rate of 21.6% for the third quarter and 25.6% for the nine-month period of fiscal 2011 benefited from the previously mentioned $2.5 million favorable settlement of a foreign tax position. Excluding that settlement, the effective tax rate was 27.8% in the nine months of fiscal 2011 versus 28.8% in fiscal 2010.

We remain very active in pursuing potential acquisitions around the world and we are currently in advanced negotiations with several companies. We are patient and disciplined in our approach to these acquisitions, so we will be confident of a good return for any that come to fruition. As noted earlier, our strong capital position in significant liquidity gives us confidence in our ability to finance the transactions we are pursuing.

As John mentioned, we expect to generate adjusted diluted net earnings per share of between $0.68 and $0.72 in our fourth quarter of fiscal 2011, which excludes expected charges of $0.06 per share from our restructuring programs and acquisition activities. Our anticipated fourth quarter earnings will be driven primarily by a modest increase in sequential revenues, partially offset by higher commodity costs net of pricing, and from a higher effective tax rate since we do not expect a similar tax settlement as we had in the third quarter.

In summary, we're confident we will participate in the continuing global economic recovery and the resulting expansions of our markets. We also look forward to the additional opportunities we will have through acquisitions and new product development. Now let me turn the call back to John.

Thanks Mike. At this point we would like to open the lines up for questions.

(Operator Instructions) Michael Gallo, CL King.

Good morning. Congratulations on the terrific results.

My question is just on Europe. It seems like on a sequential basis nice improvement in revenue there. Obviously the margins have improved significantly.

Are you starting to see some signs that Europe is maybe starting to get some traction? Obviously it's been running a little bit behind the US. Is there anything besides volumes that would preclude you from getting to that 10% margin, assuming lead stays relatively stable?

Michael, if you go back and look at last year, we finished operating earnings at 2.3%. At that point we evaluated it. We looked. Obviously the European market was hit much harder than the Americas markets or the Asian markets during this recession.

But that being said, we put together a plan that -- we said we need to get this business to an operating earnings of 10%. And the volumes are definitely helping us. But, as you can see, we're spending quite a bit of money on restructuring costs. We're taking out as much on the cost side as we possibly can.

We're doing, I think, a better job of servicing customers in the market over there today, which is allowing us to get some better pricing. And all in all, we're on target to get to that 10%. I'm hoping we can get there sometime later in our fiscal year 2012, maybe a little bit further than that.

But the guys in Europe are doing one heck of a job in trying to get it to that level. So the answer to your question, if lead behaves itself and we can hold the pricing where it is, we should get there.

Okay, great. And then just had a question on the Asian margins, obviously came down a little bit. You highlighted some one-time-ish items that are recurring there.

Would do you expect a similar margin level there in the fourth quarter? Or should we wait for the new facility to come online to expect to see improvement in that margin? Or would you expect some gradual improvement?

Well, I think what we're going to see is if we could strip out the unusuals and stay in double digits operating earnings, I'm going to be very pleased with that given the situations over there. But when you take a look at the growth in India and the opportunities in India and China, that -- and our cash position, we plan on continuing to invest in that market because of the future.

Or in other words, our operating earnings will be hit or hurt like -- and in this quarter, in future quarters; as I said going from some 6%. Or it would have been 11% if we wouldn't have had those expenses in there. We're going to continue to invest in those markets for the future.

Stated a different way, if we hadn't invested a year and a half, two years ago the way we did in the restructuring programs, we wouldn't be at $1.77 a share through nine months. So we're really long-term viewing where the business is going and going to invest accordingly.

Steve Sanders, Stephens Inc.

Good morning, guys, nice quarter. Just a follow-up on Europe. I think last quarter you talked about maybe getting to that double-digit margin by mid-2012. And I don't know if you pushed that back a bit or if you were talking calendar versus fiscal. But it seems like the volumes are better, so I just wanted to see if you could put a little finer point on the 10% European margins.

Well, again, I can't guarantee anything on where -- what's going to get [to] 10% on the volatility we see on lead and other things. All I can tell you is the guys are pushing very hard. If the volume is there, and the volume continues to be strong, as I said, lead behaves itself, we should be able to get there in 2012.

Okay, good. And specific to lead, you made very good sequential progress this quarter. I think last quarter you talked about March being tougher based on what lead has done. Can you just revisit that and maybe quantify a little bit how we should think about that in terms of March versus December?

Yes. Lead this year has been -- or commodity costs have been a major headache this year. If I look through the nine month period, the cost of commodities for the first nine months of this year compared to the same period last year, we have commodity pressure of $107 million.

Now, we captured $57 million of that back in pricing, so our price recovery on commodity costs is running at about 53%, which is low. And the reason it is low is because if you look at the pattern of how lead has gone up, in our second quarter the average was $0.88. Third quarter, $0.93 and today lead is at $1.15.

What happens, as you know, is that if commodity costs go up, we play, catch-up, it's three to four months later before we can get the pricing. So, if the commodities go up we are behind the curve at 53%.

So if lead goes from $1.15 to $1.20 to $1.30, we're probably going to remain in that 50% recovery range. But if lead goes from $1.15 to $1.10 to $1.05, that percentage should go up. So I can't predict where it is going to go exactly.

But what we're doing is we're hedging approximately 50% of our lead of the next three months and trying to stabilize it somewhat. But lead has been a real headache this year.

You know, you take those numbers and you look at the cost of commodities going up and the 53% recovery, that is a headwind of $0.71 a share to us this year. So it's a big number. So I'm really pleased with the operations and the way it's been performing this year, but I'm not real happy with the way the lead pattern has gone. It has not been good for us.

Okay. And then regarding your expansion into India, can you just comment on the outlook long-term for the Indian market versus the China market? Do see comparable to better margin opportunities there? What do you need to do to establish a meaningful presence in India? Just any additional color on that expansion.

As you know, we didn't really have a presence in all in India. And you know that one of our strategic objectives is global expansion. What we did is we took a couple of people out of our European operations and put them in India.

We now have 12 employees in India, and what we're doing is we're importing product into the country. And obviously we're not going to make a lot of money with the tariffs and everything associated with products that are built in Europe and the US, sending them into India. In fact we're probably -- if we're breakeven on it, I would be happy. But what were doing is we're establishing a market there.

Since we've gone over there, there's been a lot of interest from competitors that are now looking at us and asking would we be interested in a joint venture, would be interested in acquisitions. So at this stage, the initial plan was we were going to do a greenfield there. And we've kind of backed off of that because we're assessing the opportunities now.

But ultimately, our plan is to have a manufacturing operation in India. Ultimately our plan is to have market share in India and China that is similar to what we have in Europe and the US.

Today in Asian market we are about 8% marketshare, where in the other parts of the world we're closer to 30% marketshare. I think there's some real opportunity with the growth that is in those regions, and given our capital structure, and the -- it's the right investments for us to make in the future.

Okay and then last question for Mike, can you just give us some general color on CapEx in 2012? I guess the China spend should be coming down a bit. But you had also talked about maybe expanding thin plate pure lead beyond the February [line] you brought on. So can you just give us kind of directionally some ways to think about CapEx next year?

Yes Steve. I think you should expect our capital spending for next year to be similar in the amount as in fiscal 2011. So if we were in the $60 million to $65 million range, we're expecting to be about their next year.

And you're right. We do plan to continue to expand the thin plate pure lead and we're looking at other facilities where we think that might be well suited to put that product in.

Okay, thank you very much.

John Franzreb, Sidoti & Co.

I don't know if this question kind of dovetails on the lead discussion, but it looks like in the quarter your pricing in the Americas was only up 1% in Europe was up 5% despite the Americas having substantially more volumes. Could you just talk a little bit about that and the dynamics going on there?

John, the dynamics are more set to the pricing mechanisms where Europe has a much higher percentage of pass-throughs. So as lead moves, those pass-throughs drag through. And in Europe those tend to be -- let's call it anywhere from four to six months in arrears.

And so they're taking the costs that came through or that were out there on an incurred basis four to six months ago and that is hitting their P&L, whereas the Americas tend to be more based upon making price announcements. And there is an effective date for that price and then you have that phenomenon. So, those two regions don't necessarily move hand in hand when we do that.

But for the quarter, we actually experienced a slight benefit overall from lead costs. I'm talking Q2 to Q3. And our pricing overall went down slightly but not as much as our decline or the benefit we received in pricing. But you're right. We can see differences in the regions.

I think also to add to that, is the competitive dynamics of those markets are different. When you are running, as we were, in the Americas at operating earnings at about 15%, this quarter we are finishing at 13-something, it's down some. But obviously the Americas market in itself has done a better job of getting pricing than the European market has done. And now you are starting to see the catch-up on the European market because the economy is starting to turn over there.

Okay. That helps, John, Mike. Second question is regarding where we stand in the cyclical recovery in the Motive market. Can you give us a sense of what your thoughts are as to how close you are to previous peaks and how much more volume you can recapture (inaudible)? Just give us some kind of sense of where we are along that timeline.

We've known each other for a lot of years. And you know that I have always said that when you see a recession, the Motive Power market will go down significantly further than the general recession will be. That is the historic pattern and it has repeated itself again.

At one point the European market was down close to 50% on new truck orders coming in, and it was a devastated market. But when it comes back, it comes back very strong; and that's what we're seeing right now. We're up some 30% of sales this year compared to last year in the Motive Power segment. And the primary reason for that is the recovery is taking place.

As I said earlier, if you take a look at the last quarter, that new electric fork truck orders coming in were up 36% year on year. So there is a pent-up demand there that is releasing itself and you've got the replacement market that is releasing itself. And that's why we're seeing some very good results coming through on the Motive Power side.

Now to your question, how long will it last? I don't know. I don't know for sure. All I can tell you historically is when you say downturn like this, when it comes back it's double-digit growth and it comes back for two to three years. Will it last that this time? I don't know.

I think a lot of it depends on what happens on the global economy. And what we're seeing today in the US market, depending on who you read 3% to 5% GDP. Europe is starting to pick up. I think this could go on for some time.

Brian Drab, William Blair.

Good morning. Congratulations on a great quarter. I just have a couple questions in addition to those that have been asked here.

First of all, could you give a little more detail as to what you're seeing in the end markets in Asia? I know the telecom industry is one that you have highlighted as being challenging. Any update on the outlook there and the other markets, specifically that are most challenging in Asia?

Well, let me break it down. When you look at Asia, obviously the largest country that we do business in is China, so my comments to start with are going to be about China.

China telecommunications -- the recent tenders have been put out, they have been tough. The pricing has been very tough on that -- that side of it.

Fortunately, a number of years ago -- I'm going to say about eight years ago we started in a business called Motive Power over there. In fact the first year we did $4 million. We imported product from Europe. It was a start up, very similar to what we are trying to do in India right now. Today that business is north of $50 million, and the margins are very good in that business.

So what we're doing is we're seeing a switch from the telecommunications, which used to be -- it ran actually 86% of our business over there. That percentage has come down quite a bit with the Motive Power kicking in. So it is having to offset a little bit of the business that we're walking away from that is very, very low margin business on that side.

So the telecommunication markets, we've looked at it just recently on a five-year cycle. And what happens is we do see years it gets down like that and there is a pattern where will come back in telecommunications. So we believe we will eventually see the pricing go back up.

The other side is when our Chongqing plant is up in operations, and we totally get beyond the start up costs associated with that, our cost base is going to come down significantly. So it's going to help us both on the cost side and we expect, as I said, ultimately we'll get some pricing on it.

If you look at the other parts of Asia -- anywhere from Japan to Singapore, Southeast Asia or wherever, Australia -- our business is going fairly well there. And the pricing is been relatively stable and it has been performing well for us on it.

Okay, great. That is helpful. And just one other question; there is this major customer that you have signed recently that you have been talking about getting to this roughly $50 million run rate. I believe at the end of the second quarter we were sort of half of that run rate. Any update there on how that is going?

Yes. Our customer -- this particular customer did not want us to disclose who it is. So I apologize for not being able to talk more specifically about it.

But I will tell you that we are running a little bit further along than we were. We're not hitting the $50 million yet on that particular one customer. I will say we picked up a number of new customers since then, which has more than offset that particular part of it.

So we had some start up issues. Two companies working together with things. But we're north of half of the number at this point.

Okay, great. Thank you.

Elaine Kwei, Jefferies.

Congrats on a great quarter again. Thanks for taking the question. Just to follow-up on where we are in the recovery, would it be fair to say that you don't think we have necessarily seen the steepest part of the recovery on the Motive side? And how about on the Reserve side? I'd be curious as to where you compare that, where we are there.

Let's talk both first on a unit volume standpoint. From a unit volume, we're getting close to the levels where we were at back in 2008 in total. And part of that is because of the marketshare that we picked up with thin plate pure lead. Thin plate pure lead today is approximately 20% of our total revenue.

Now specifically to your question, the curve, the way it looks right now, when you look at the orders coming in versus last quarter, I mentioned last quarter we got a run rate that is -- we're right at about $2 billion. It has gone up since then slightly, but it has been a gradual increase. And it keeps -- it seems to increase a little bit each quarter.

But it's not a ramp up like the thing is running wild or anything like that over the $2 billion range. But we're having a run rate right now that exceeds $2 billion.

Okay, great. That's really helpful. And with the lead cost increase that you mentioned, does that number includes both pricing and the volume or just the price? And if so, how would that breakout?

Well, we tried to break it down just to price.

Just to price, okay.

The way I view it and what I want to see, just pure pricing on a unit basis is, I tried to look at -- we can't control what the LME is going to do. We could do something to try to mitigate the volatility there through hedging and through tolling and some other things, but the LME is going to do what it wants to do.

What we want look at is that if the LME goes up, if our cost goes up, I want to know on a unit basis how much of that are we actually passing through. When you have 35% to 40% of your business on automatic pass-throughs, what you into is on timing issues in some cases, where the lead may have gone up and you're not realizing the price -- the same -- the cost increase and the price increase don't necessarily match up.

But all in all, if you look over and historically, we have been able to recapture the pricing with lead over the long haul. And where we really did it is, when lead goes down we're able to hold pricing for a longer period of time.

Great. Just one quick last question. Would you be able to speak a little bit, just general broad strokes on the operating margin recovery in Asia -- just when you would expect some of the sort of unusuals and the business expenses to be worked through? Is this the kind of thing that would be over the next year or so or potentially longer?

I think that whenever you do a new plant start up you're going to be looking at for at least a year with working bugs out and things like that. So you are going to see some disruption on the manufacturing side.

On the India side I don't know, because it just depends on how we end up on the thing. We're very dedicated to being in the Indian market. That is why we have twelve people over there now searching for acquisitions, looking at greenfields.

So it depends on what approach we take on that. It could work out if we do -- buy a company or do a joint venture it could be accretive immediately and it could be well. If we do a start up over there we are going to experience the same thing we have in China.

As I said earlier, we're looking at the long haul. We're looking at the long-term and I fully expect our Asia business operating earnings on a percentage basis will suffer because of the investments that we're making in the future. And I'm fine with that.

As I said earlier, when you're running 11% operating earnings in that market and the pricing being as tough as it is, and that 11% obviously is without the unusual expenses in there, I am pretty pleased with that. So the real question to me is -- how do we get from 8% marketshare to 30% market share over there, because that's going to out us at a whole other level when we get to the fastest growing area in the world to get our market share up in that region.

Thank you so much John.

[Lena] (inaudible), Kaufman Brothers.

Hi John. This is actually Jeff Bencik.

Hey Jeff.

I just wanted to -- can you give me some additional color on the sequential pricing increases you saw by region? And then also within each region, by Reserve and Motive Power, if there is any significant differences there.

That's breaking it down pretty fine. (laughter) Mike, do you want to pick up on this first?

Well, let's see, I think we have covered that for the most part in the MD&A. But for the quarter, and I think we talked to these mostly on a percentage basis, but we would have had in -- at the Asian region we had a slight price decline because of the pressures that we saw with the tenders.

Europe was up 5%. Americas was up 2%. Now that is for the quarter; that is on a year-over-year basis. On a Reserve versus Motive, the pricing was up 2% and Reserve was up 3% in Motive.

Okay. And then, John, if you can talk a little bit more on the acquisition front. I know you don't in terms of potential size of the acquisitions, also region and more on the Motive or Reserve Power end market?

Well, Jeff, as you know, our strategy on acquisitions -- as I've always said -- is we're in stored energy solutions to make money. We're going to look at those segments where the technology fits the application and it will make a good return for EnerSys.

And those areas we look at are geographic expansions and I talked briefly about that with China and India and what we're doing there. I also mentioned in the past that we're looking in South America and the southern part of Africa also are the target areas that we're going at. We have teams that are actively searching at or in the process of due diligence on each of those regions.

And so -- and it comes down to -- lead asset or new technologies are other areas we're looking at; expansion in our Aviation and Defense division. As I mentioned earlier, that we have one or two we hope to announce in the near future.

To the other question on size, right now and things that we have active we could cover with our existing debt structure. I don't anticipate that we will go back -- need to go back to either the equity or capital markets at this stage. There are some exceptions of things that we would like to look at getting into that could drive that, but I don't think those are imminent at this stage.

Okay. What are you seeing in terms of pricing for these acquisitions? Have they come down in pricing? Or just what are you seeing, general trends on that?

Everybody wants a high price. It never changes no matter what the economic environment is like. Our job is to stay focused on those acquisitions that we think they are good returns, to be very focused and take your time and do it right, be sure that we're not overpaying.

But I would say all in all that -- I wouldn't say that they are coming down on a multiple basis. But when the earnings of those companies are hurting, yes, the overall price will come down.

Okay, thank you.

Paul Clegg, Mizuho Securities.

Hey guys, good morning and congratulations on the great performance. One of my questions had been answered so let me dig in on a more granular one here.

Checks are showing that IC to electric transition still seems like it is still an important theme and continues to be strong. Can you guys kind of quantify whether or not that can have enough of an impact to move the needle? Folks we talked to say it's moving faster but the 80 volt truck market still looks pretty small.

Well, if I understood your question, you're talking about the percentage change between electric fork trucks versus gas fork trucks?

Yes and just the transition as you see more and more -- both in Europe and the States more transition. As the economy recovers a lot of those guys who like they're moving away from the IC trucks towards the electric trucks and possibly at a faster pace.

Yes, they are. In fact I was shocked when I saw some numbers recently that in the US -- and typically the electrics are about 57%, 58%. And the numbers we saw at the time were about 70%; it jumped up that quickly.

Now I will say that if you take a look at during that period of time where it jumped over [a 70], the food and beverage industry was not really impacted that much by the recession where other industries were hurt. So the mix may have changed and it may have been a phenomenon of the recession. But what we're seeing and hearing is even if you take that number, that 70%, and downsize it a little bit, it is still -- there is a dramatic move towards the electrics over the gas fork trucks.

We're seeing the same thing in Asia, by the way. This thing in Asia about trying to clean up the environment over there is real. It's real. They're making an effort. From our standpoint we're seeing they're making an effort.

I have been to fork truck manufacturing plants in China. And if you look at the mix on the electrics, it is much higher -- what they're producing right now -- than there was some years ago.

So as things settle out in the economy -- obviously we don't know how long that is going to take but -- you should continue to have a higher growth rate than the fork truck market anyway on the loaded side.

I think that is a fair assumption. But I would be a little cautious on that, because if you take a look at Europe, Europe is about 77% electric today. So there's not a lot of change that is going to take place in that particular market.

The US, as I said, I think it is possible to go from the 57%, 58% range up. I think the big change you're going to see is going to be in the Asian market.

On the operating margins in the Americas, obviously another good quarter, sequentially down a little bit. But I think you guys had said before that that was probably -- the level you were reaching before we were probably peak and probably not sustainable there. What is a good run rate operating margin on a longer-term basis in the Americas?

I think that's going to depend on our competitors and what they do on pricing with it. I think that if our competitors -- we got somebody out there [get] irrational about it and started lowering pricing, that could be a particular problem. But I think in the Americas what is happening from a competitive standpoint has been very rational.

And I think as I said earlier that our target as a Company for all regions is to be a minimum of 10% operating earnings. And those that are not 10% operating earnings were going to be highly focused on and what we need to do to improve them. I tried to take Asia out of the equation here even though they only run 6% or some as I said earlier, I'm asking them to make further investments over there to grow for the future.

So if they weren't -- if the adjusted number in Asia wasn't north of 10%, we would have a real issue over there. And right now I'm pretty pleased that the adjusted number is 11%. We have talked about Europe up not being at 10% yet. We anticipate that they will exit this year 7% or 8% operating earnings and hopefully we can get that 10% next year.

All in all our target is -- has changed. We want to 10% operating earnings as a minimum at the OE line and we want to push to get everything we can at the gross profit line to make it a 25% minimum. And we're not getting 25% at the operating -- or at the gross profit line today, so we have some work to do in that area.

And then a final question on acquisitions; is anything you're looking at dilutive?

Right out of the chute, the answer is yes. Yes. And mildly dilutive, very dilutive. And as you know, I like finding these companies that are monthly dilutive for about six months or a year. Oerlikon being one that we recently acquired; Douglas Battery being one where we buy these companies that are dilutive right out of the chute. And then immediately we can turn them around by integrating them into our operations and making them accretive within 12 to 18 months.

I like the ones that, if you go back to FIAMM, you look at it the first year, it would've been $0.04 dilutive. And we projected that next year it would have been $0.04 accretive. The reality was we broke even year one. It was $0.10 accretive the second year. So, yes; but we paid very low prices for those two.

Understood. Okay, thanks very much guys. Congratulations again.

Walter Nasdeo, Ardour Capital.

Obviously most of my questions have already been asked and answered. I do have, if I can get your perception on something. In the global Motive market, which I know we talked about quite a bit already this morning, but are you seeing an increase in competition, new competitors coming in? Or is it the same guys that you have been seeing this kind of filling -- as this thing is rising, kind of lifting all the boats or are you seeing new guys coming in?

They're really not new guys coming in. If anything there are fewer people coming in. And the reason I say that is if you take a look in the China market, depending on who you read, there's something between 1000 and 2000 battery manufacturers. And there is consolidation taking place over there.

But as far as the Americas and as far as Europe goes, no, there's no entries to the market.

Keep in mind that building a battery is one thing. But it's a service network and the infrastructure and the support structure that really is where a lot of the value is added to the customers.

I keep talking about best value. And one of the things I've always told our sales guys, when they get a little irritated with me when I say this, is view your product as a commodity. And they get irritated because our product is not a commodity. We have some superior features and benefits with it.

But if you view it as a commodity, how do you set up an organization that will drive sales higher? And what it really comes down to is taking care of the customer. That infrastructure, when we have like 40 stores around the United States, as an example, and when something goes down in the middle of the night, we have service techs there taking care of it -- that is the value.

So if even if somebody were to build a new battery, to put that infrastructure in place would be a very long time to do it. And the relationships we have established with the customers over the last 30 years is something that we cherish.

Got you. And just kind of as a side to that, I have been noticing that some of the -- again, since the markets like you said are coming back on the Motive side so dramatically, I've noticed that some of the fuel cell guys are starting -- their orders are increasing, too, kind of commensurate to that.

Are you seeing any opportunity in there where a fuel cell type of acquisition would make sense as complementary to what you are doing? Or do you think that what you're doing is just so different that it wouldn't come into play going forward?

Well, we have already made investment in a fuel cell company. We announced six, nine months ago, whatever it was Altergy and we do have the minority interest in a company. We do sell fuel cells today in the Reserve Power side.

We could put a fuel cell in a Ford truck very, very quickly. But the problem with it is this. When you get around the government subsidies associated with it, and you really strip down and look at the real cost on it, does not a lot of people going with it.

Now, I don't know the particular orders of data that you're looking at on the increases. But the ones I've seen in the past where their orders are up, there's heavy government subsidies involved with it and there are other deals that are set up like part ownership in the fuel cell company that was one. There was one a couple of years ago where that was going on.

But when you really look at the whole thing, it goes back to -- does the technology 50 application? And the answer is yes. Will the consumers pay for it? At this phase I think that the spread between the cost or price of a fuel cell versus that of a lead acid battery is too great. But, if we are wrong on that, we will start manufacturing tomorrow.

Our Altergy fuel-cell designs I think are one of the most cost effective fuel-cell designs around. I think we would be extremely competitive in that market, and we do it. We work with the OEMs and show them what we have. We have the availability. But so far, there aren't too many that see it going that they're going to change away from the lead acid batteries.

Mike, do you want to pick up on it?

I was just going to say we see it in a lot of instances where you would put fuel cell in with a combination of battery, so we would put them in an almost a hybrid type of an application. So we think there is room for fuel cells. That is why we made the investment. That is why is part of our portfolio and we intend to sell that to customers where that is a good fit for our customer.

Our investment in Altergy really was around what was called hybrid systems in the telecommunications market. And what you have is that in remote locations you will have wind and solar and very large battery backup. This is how we first got into it, because the telecoms were coming to us about thin plate pure lead batteries, so superior battery performance. Then they will put a diesel generator in it.

So what you have is a highbred telecom system that is not hooked to the grid. Well, the problem with the diesel generator it is extremely expensive. That is the cost part of it. They're putting more money into the batteries.

So what we found was that the big problem with diesel generators, we have taken to the OEMs a fuel cell. And many of them really like the idea and the concept. So that fuel cell company has been a good investment for us, not only from the standpoint of what we're selling in fuel cells today.

It is accretive by the way. That particular acquisition was accretive. Our investment was accretive. But the drag along business in batteries and other things has really been a good situation for us on fuel cells. But to answer your question, we could put a fuel cell in a fork truck very quickly if the market goes that way.

And run that through your existing distributor network?

Absolutely.

(inaudible) The setup would just go right through there?

That's right.

Fantastic. Listen, that's very helpful. I appreciate it.

Matthew Crews, Noble Financial.

Good morning everyone. A couple questions here. One, could you characterize the utilization rate both in Europe as well as here in the states with the [TTTL]?

Matthew the last quarter what we talked about -- and by the way I'm going to talk in aggregate, because on those particular products we look at it in total. Because we will ship products from Europe to the Americas and vice versa, and into China and all over the world. So when our (inaudible) planning people are looking at capacity utilization on that, they look at it as one.

Now to answer your question, back before the -- or last quarter before our Warrensburg plant got to the next phase implemented, we were running close to 100% capacity utilization. Today we're running less than 80% because the [additions was] put online. Now we're looking out in fiscal 2012 and we believe that we are covered from a capacity standpoint to handle the volume.

That being said, we have plans. In fact what we have is an overall plan that would require $100 million investment that would be a major conversion for our Company to go to thin plate pure lead. I will emphasize we're not pushing the button to implement that at this phase. It is a long-term plan.

And as the next tranche of volume comes in that says we start to get at 95% or 96% capacity utilization, we will make the next investment. That investment would be about $30 million to take us up higher on it. So we're covered with it right now. We're ahead of the curve on the capacity at this phase.

And that does not include the buildout in China?

Well, the buildout in China does not have thin plate pure lead in it.

I mean just overall capacity.

I thought your question was specifically about thin plate pure lead.

Well, both. It was -- yes, your answer was for thin plate pure lead.

The other portions of it, we're running in the 70% range. We have enough capacity to support the business through fiscal 2012 and into the first part of 2013. Obviously that is subject to change depending on what happens to the economy.

Okay. And just to sort of dovetail that into how the volumes were in late calendar 2007 and the first half of 2008 before the downturn in the manufacturing activity, can you characterize what kind of volumes you were doing then versus what you're doing today?

On a unit basis we're close to being back to the 2007 to 2008 peak levels. In fiscal 2008, our revenue at that time was $2,027,000,000 if I remember correctly. And at that time the FX -- I believe the euro was at like 1.42.

For the year that was the average, yes.

Okay, 1.42. Lead was higher, so the pricing coming through was higher. So we will finish this year below the $2,027,000,000. We won't be that high in actual revenue. But on a unit basis, because of the FX and pricing I mentioned earlier, the unit basis will be very close to what it was at the peak period.

Okay. And then just lastly to kind of gauge the impact on the lead cost in the quarter, could you characterize what the gross margin impact was with not recovering roughly $50 million pricing?

Yes. We looked at that calculation and we would've been right -- Mike, go ahead.

Well, your question is just specific to the third quarter on a sequential basis, Matthew?

Well, what would your gross margin have been recorded for the quarter if you were able to recover that $50 million? You said there was headwind, so I was just trying to gauge what your gross margin would've been if you were able to capture that $50 million. Or if that was -- oh, that was for the nine months.

That was for the full year.

So for the quarter, is there any detail just sort of a highlight what your gross margins would've been?

When we looked at it, my recollection on it hat was right at about 25%. I think we finished at 23.2% and when we look, we would have been close to 25%. But in that there was a mix situation that took place in the quarter which did take the gross profit down.

Now one thing I want to add to this thing, I've become the enemy of hitting the 25% recently in this standpoint, that we've had a number of very big accounts that have come through that are less than 25% GP. And we have accepted those orders because there is no SG&A associated with it. So whatever the gross profit is, it drops straight through.

So if we have one that is 20% gross profit and that 20% drops to the operating earnings, we're going to take it. Go ahead Mike.

I was going to say, Matthew, the other -- actually if you are just talking for this quarter on a sequential basis, lead versus pricing was a slight benefit.

The pressure we have in our third fiscal quarter is because of the way we FIFO our manufacturing costs. We have our summer shutdowns that actually hit our P&L in this quarter. In addition we have the costs related to the actions we were taking in the Shenzhen facility, where we were changing that from a manufacturing facility to just strictly a distribution center. So that was the pressure that we saw there.

When we looked at that, then we said, okay, we've probably -- that was about 60 to 80 basis points of lift that we would have had if you strip those out.

To Mike's point, and that's an excellent point on it, which I forgot about the manufacturing variances. You know, we FIFO our inventory so the manufacturing variances that took place in the second quarter really hit our third quarter P&L.

During the summer months, plant shutdowns are manufacturing variance because all that fixed overhead is there you are paying people for vacations and things. And you're not generating production. Then what happens is you run large manufacturing variances. And it was a big number in the summer months, which it always is, that carries into the third quarter.

That's very helpful. Thank you. And just looking at the tax rate going forward, I know you had the benefit this time. I've been looking at roughly a 28% tax rate. Does that kind of still a good way to look at your normalized tax rate?

I think you are certainly in the ballpark. Our -- the blend of taxes in terms of what jurisdictions throughout the world contribute to our earnings is the biggest driver for us. But we continue to see over a period of time our tax rate declining. And as Europe and improves I think it will have a benefit for us.

Now on the opposite side with Asia being burdened with some of the additional development costs, and they have a fairly low tax rate so that kind of works in the opposite direction. But I think 28% to 29% is a reasonable range to be in.

Mark Wienkes, Goldman Sachs.

Great, thank you. I just wanted to follow-up with respect to the thin plate pure lead product line. Now at 20% of the total revenue I think you said, so about a $400 million run rate. Is the growth there more new customized products for existing customers? Or is it more new customers that you are seeing?

Second, how much revenue with the incremental $100 million of CapEx that you talked about allow for on revenue and then how do you plan to grow that? What's the strategy to grow that in the next year or two years?

I don't know the exact number on the $100 million investment and what the revenue might look like. It's in the $300 million range I believe, but I don't remember the exact number on that. Again, that is a long-term plan on where we would go but -- so we haven't dotted the I's and crossed the T's on that particular portion. (multiple speakers)

I was going to say based on the capacity that just recently came online, I think if you were maxing out those facilities you could probably add another $50 million to $75 million. Beyond that, I think the next steps are going to take probably 12 to 18 months out before you would see the next step in our capacity expansion.

These are kind of what if analysis. If we start seeing that the -- we pick up at lot of new applications, we pick up at lot of new customers with it -- what is the next step? Let's be prepared in case it happens. But we're not ready to write the appropriation request for it or anything like that. So that's why the actual numbers on it, I'm not -- I don't have them off the top of my head.

Now back to your other questions, it is both applications and new customers. Just yesterday we had press releases go out on two new customers that we picked up. And when you look at everything from putting those in military applications where there is tactical vehicles, or you look at putting thin plate pure lead in submarines, or you are putting it in starting applications like the Sears Diehard battery, it goes across the board.

Marine applications; we just picked up at lot of different business segments in areas that we weren't doing business with a few years ago that we are now in today because of that superior product.

Right. So is it fair to assume that the improved utility of the products and the applications are probably a stronger force than what -- any impact a more conservative Defense budget might have in that side of the business, the A&D business?

Yes, and I think you're right. I think we're going to I pick up on that. But talking specifically on the A&D business, even with cutbacks in A&D I do not anticipate that we will see a cutback in batteries.

Think about it for a second. You have a $10 million tank setting there and the battery goes bad, I think you're going to replace that battery. And where the defense and military is going to be cutting back is going to be development of new types of vehicles and aircraft on the big spending. But I don't think on the maintenance we are going to see big cutbacks. I don't think they're going to park a tank in the side of a field and let it set because of a battery.

That all makes sense. Thank you.

(Operator Instructions) William Bremer, Maxim Group.

Great quarter, gentlemen. Congratulations. Unfortunately I got dropped off twice so far, so this is my third time dialing in here. The question I have -- (multiple speakers)

You've got a bad battery in your phone. You have to talk to me later.

Tell me about it. The question I have, and I apologize if you might have answered this already, where are you with the Chongqing greenfield operation in terms of construction? Are we about say 50% to 75% complete at this point? And are we on schedule in terms of estimated costs there?

You know one of the things that we did on the front end, I wanted an outside group to really follow this project -- a professional management team, construction management team, to follow it all the way through. And I would tell you the reports I've seen just recently, we're on schedule. We're within budget and it is going well.

We did have some problems with rain delays over there but we caught back up. The building is completed. We're starting to install equipment. We're hiring people.

Part of the expense that you are seeing right now is hiring people and staff and training and everything, which is running up some expenses. But that is back to the difference between the 6% reported [and] the 11% adjusted operating earnings that we talked about earlier. Bottom-line we're on schedule. It is going well.

Fantastic. We can we see some revenue coming out of there?

I think you're going to see the very, very small revenue that is going to start the second half of fiscal year '12. I think it's going to be slow. It's not going to be big.

We want to be sure -- in fact I don't want it to be fast and rush it, because the last thing we can afford to do is have a quality problem coming out of a new factory that would tarnish our reputation. So I want to be sure it is done proper.

Right, I understand. And I know you're not making the thin plate pure lead out of there, but can you give us an idea of what products you will be producing out of that facility?

These are what is called calcium products. They're more of the [me-too] type products to start with on the telecommunications. It's a new design and with new equipment at, we think, a much lower cost structure. So we're going to be much more competitive in that market.

We weren't competitive in it because we were using more of a Western design for the product in China, and we were in a smaller factory that it was not cost effective in Shenzhen. As I said earlier, we're taking that particular factory, going to make it into sales and distribution system. And we will leverage the production that is coming out of that by putting it into the new factory. That is one product line.

We will also manufacture Motive Power batteries there. Third we will also manufacture batteries for the nuclear power plants that we have talked about earlier. And as you will recall, we have orders right now for $11 million of batteries for nuclear power plants in China.

That is for four reactors in China, has said that they are looking at doing I think it was 75 or 77 reactors in total. And there's plans beyond that. They've asked that the first batteries that -- okay we can build them in our Hayes, Kansas plants here in the US. But going down the road once we get this thing up and running to support those additional nuclear power plants, we will be building those in the Chongqing plant.

Fantastic. And you will be employing approximately 1100?

That is the maximum we think we will hit and that I don't anticipate happening for some time.

Okay, John. Excellent. Thank you.

[Howard Rosencrans].

In terms of your operating margin, I mean you had historically talked about the 10% and you have the -- you are already doing that. You've got a 23% -- you only have a 23% GPM. You will get some more lead capture -- lead recapture on the pricing.

Asia is going to grow. The margin is can a get better there. Europe the margin is going to get better. Is it a fantasy to think that in a couple of years you will be doing a 12% margin assuming the economy stays good?

Howard, as we've said before, that 10% is a minimum. And what we do with that 10% if you're not hitting it, you better have a plan in place to get there. And if you don't, we need to spend more time together. That's the way that we view it internally. And we -- our guys have done a great job of putting plans together to get to those minimum numbers.

It is hard to answer that question because what is going to happen with it is -- I will try to illustrate it by saying we try to get to 30% operating earnings. So what is going to happen is going to bring (inaudible) investment in it, the pricing is going to go down, you won't hold it.

So there's a point that you've got to optimize your operating earnings. And for now, I'm going to say we're shooting to hit a minimum of 10% and hold it. But if you hold that 10% and your topline grows like we are talking about, it's a pretty good situation.

Okay, very good. Thanks.

Ladies and gentlemen with no further questions, this concludes today's question and answer session. I would now like to turn the call over to Mr. John Craig for closing remarks.

Okay and thank you very much. In closing, when you take a look at our midpoint guidance for this next quarter which is at $0.70, and as you know we finished the first nine months at $1.77. If you put it together, projections right now at a midpoint would give us $2.47 for this fiscal year.

If you look back three years ago, before we started to enter this recession we had $1.42 a share is what we were. As we said at that point in time, EnerSys will exit the recession a stronger Company than what we entered the recession. And we have in fact done that.

As you can see we have really increase earnings by $1.05 a share since that period of time, or a 74% increase with it. And yes, we're very pleased with what we've accomplished with that. And we're very proud of it also.

But what is even more exciting is the future and the things that we have talked about. We have the capital structure in place. We have the ability to do these acquisitions. We have completed 25 acquisitions since 1994. We know how to do it. We know how to implement them. And I will tell you, it is a very, very exciting time for our Company.

Now, a lot of you on the phone, I've known you for a lot of years and you have known Mike Hastings for a lot of years also. Mike is sitting in the room here today with us, and Mike as you know is retiring here in March. And Mike, I want to thank you for your service and everything like that.

For those that worked with him for all of these years, he is going to be missed. And you know what I'm talking about. So with that, you guys have a good day and thank you very much for calling in.

Thank you, John.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a good day.