EnerSys (ENS) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2011 EnerSys earnings conference call. My name is Fab and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) I would now like to turn the conference over to your host for today, Mr. John Craig, Chairman, President and CEO. Please, proceed.

Thank you, Fab. Good morning. Thank you for joining us for our conference call. During this call we are going to be discussing the results of our fourth quarter and our full year of fiscal 2011, and we are going to comment on the general state of our business.

Joining me this morning on the call is Mike Schmidtlein, our Chief Financial Officer. Before I get started, I'm going 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 the factors which could affect our future results, including our earnings estimates, see Forward-Looking Statements, included in item 7 of management's discussion and analysis of financial condition and results of operations set forth in our annual report on Form 10-K for the year ended March 31, 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 May 31, 2011, which is located on our website at www.EnerSys.com. Now, let me turn it back to you, John.

Thanks, Mike. Earlier this week, we confirmed our record results, which we outlined in our May 11, press release. In fact, once again, the earnings this quarter were a record for any quarter in our Company's history. Our sales for the fourth quarter were $548 million, and adjusted diluted earnings per share were $0.75.

Our quarterly sales were up 22% year-over-year and 8% sequentially, and the earnings exceeded the $0.70 midpoint guidance we gave during our last conference call. For the full year we reported approximately $2 billion in net sales in adjusted diluted earnings per share of $2.52.

This performance is even more impressive when you consider that our year-over-year, rising lead costs minus the offset from increased selling prices provided a headwind of $46 million or $0.66 earnings per share.

Our record annual results were truly a team performance. Sales at each of our geographic regions were up at least 20% year-over-year. Europe operating earnings were up over 200% to $57 million. Americas operating earnings were up 40% to $126 million. And we continued to make substantial investments in premium products and new technologies.

Europe's adjusted operating earnings performance percentage for the full year improved to 6.4% versus 2.5% in the prior year. But more importantly, we exited the year at 8.2%. Our European team has taken significant steps to increase profitability and I commend them for their efforts.

However, our operating earnings target remains 10%. And, there is still considerable opportunity for increased profitability in Europe. I have confidence that our European team will be able to achieve our 10% target.

Our Americas business segment continued their strong, operating earnings performance by achieving 13.9% for the fourth quarter, which is comparable to their full year results.

Our Asian business segment experienced declining operating earnings performance due primary to reduced pricing in China telecommunications market and our continued investments in both China and India. Asia's operating earnings performance for the full year was 5.9%, but about 8% after you exclude our Asian investment costs.

In February, we acquired ADSL Power Solutions Lithium-ion Battery business. The addition of ADSL broadens our lithium battery product offering to include batteries for satellites, military portable energy packs, and telecommunications applications. We plan to expand our lithium business through organic growth as well as additional acquisitions.

We believe that the economic activity in our markets continued to improve over the previous year, but at a moderating pace, while our backlog is still at record levels. For example, in the February through April period, worldwide industrial truck orders were up approximately 26% versus the prior year. This strong order activity bodes well for the future orders for electric fork truck batteries.

In March, we refinanced our existing credit facility and entered into a new, five-year $350 million revolver. This new facility enhances our capital structure by expanding the maturity to 2016, reducing annual interest expenses, increasing liquidity, and providing more flexible covenants in terms. Our strong capital structure ensures that we will have the financial flexibility to fund our future growth opportunities as we have access to over $450 million of cash, investments, and global credit lines.

You'll recall in the fall of 2008, we said we will exit this recession a stronger Company than when we entered this recession. In fact, we have done that. Fiscal year 2011 revenues were down 3% versus our fiscal 2008 pre-recession levels. However, our earnings per share increased by 77%. But more importantly, our reduced cost structure should generate even higher earnings with our projected growth in revenues.

Now, I'd like to turn the discussion back to Mike Schmidtlein for further information on our results and earnings guidance for the next quarter. Mike?

Thank you again, John. Our fourth quarter net sales increased 22% over the prior year to $548 million, primarily from solid, organic growth of 16%. Higher selling prices and stronger foreign currencies increased revenue 2% and 3%, respectively, while the impact of acquisitions added 1%.

On a regional basis, Europe's fourth quarter net sales increased 24% to $258 million compared to the prior year. Our sales in the Americas increased 19% to $245 million, while our Asian business increased 25% in the fourth quarter to $45 million. On a product line basis, net sales for reserve power increased 16% to $263 million while Motive Power continued in its solid recovery phase with an increase of 27% to $285 million.

On a sequential quarterly basis, fourth quarter net sales increased 8% over the third quarter due to an increase of 4% in organic volume, 2% from stronger foreign currencies, and 1% each from pricing and acquisitions.

There were significant differences in the fourth quarter sequential growth among our regions and our two product lines. Our Europe and Americas business grew by 9%, while Asia was down 6%. On a product line basis, our Motive Power business was up sequentially 12% as we continue to benefit from a worldwide economic recovery. Sales in our reserve power product line increased 4%, sequentially.

Consolidated net sales for fiscal 2011 increased 24% over the prior year to just under $2 billion. On a regional basis, our European operations net sales increased 20% to $890 million in fiscal 2011. The Americas increased 28% to $897 million, and Asia was up 30% to $177 million.

The 24% increase for 2011 includes an increase of 18% in organic volume, 4% each from acquisitions and pricing, partially offset by 2% from weaker foreign currency translation. On a product line basis, net sales in reserve power increased 18% to $970 million while Motive Power increased 31% to $994 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 May 31, 2011, for details concerning the highlighted items.

Our fourth quarter adjusted consolidated operating earnings were $56 million, or an increase of 51% in comparison to the prior year, with the operating margin increasing 200 basis point to 10.3%. This solid, fourth-quarter margin was achieved primarily as a result of stronger sales of approximately $98 million in the quarter. Cost savings and incremental pricing essentially offset the higher commodity costs we experienced in the quarter.

Excluded from our adjusted operating earnings for the fourth quarter was approximately $1.6 million of restructuring costs from our European segment, $1.2 million of due diligence costs, $8.2 million related to our recent debt refinancing, and $0.6 million of cost from the final, secondary offering of shares by our initial equity sponsors.

On a sequential quarterly basis, adjusted consolidated operating earnings increased $6 million, with the operating margin up 30 basis points. Our fiscal 2011 adjusted consolidated operating earnings were $193 million, or an increase of 52% in comparison to the prior year with the operating margin increasing 180 basis points to 9.8%. The increase in the earnings was due primarily to the benefit of incremental revenue partially offset by higher commodity costs, net of pricing.

Our adjusted, effective income tax rate of 25.6% for the fourth quarter benefited from our stronger earnings in Europe. Our 25.5% adjusted tax rate for fiscal year 2011 also benefited from the $2.5 million favorable settlement of a foreign tax position in the third fiscal quarter. Because we don't anticipate a repeat of such a settlement in 2012, we believe our tax rate for fiscal 2012 will be modestly higher than 2011.

Our improved operating earnings led directly to the increase in our adjusted diluted net earnings per share, which were $0.75 in the fourth quarter, an increase of 67% from the reported $0.45 in the prior year. The main drivers to the increase in EPS, similar to our operating earnings, were the higher volume in cost reduction initiatives partially offset by higher commodity costs, net of pricing. The fourth quarter results also reflect the tax benefit of a lower tax rate resulting from a change in the mix of earnings among our various legal entities in multiple jurisdictions.

For fiscal 2011, adjusted diluted net earnings per share were $2.52, a 75% increase over the reported $1.44 in the prior year. The key influences on our earnings for fiscal 2011 were the increase in net sales and pricing, partially offset by higher commodity costs. Additional benefits were realized from our cost savings programs and lower tax rates.

Now, some brief comments about our financial position and cash flow results. Our balance sheet remains very strong with substantial liquidity, secure and favorable debt facilities, and a strong capital position. We refinanced our credit facility on March 29, 2011, and used excess cash and $100 million of our new $350 million revolver to repay the existing Term A Loan. We now have $109 million on hand in cash and short-term investments as of March 31, 2011, with over $350 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 1.0 times, and our net debt to total capitalization ratio was 17%. Our current plans for acquisitions, investments and added capacity and 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 $60 million in fiscal 2011, compared to $45 million in fiscal 2010. Our capital spending for the year focused on productivity and other cost savings projects, expansion of our thin plate pure lead capacity, and our new facility in Chongqing, China. The increase in spending over the prior year was primarily due to China.

We remain very active in pursuing potential acquisitions around the world and are currently in advanced negotiations with multiple companies. We expect to close on several over the next few months. As noted earlier, our strong capital position and significant liquidity gives us confidence in our ability to finance the transactions we are pursuing.

We expect to generate adjusted diluted net earnings per share of between $0.66 and $0.70 in our first quarter of fiscal 2012, which excludes expected charges of $0.05 per share from our restructuring programs and acquisition activities. Our anticipated first quarter earnings will be driven primarily by a modest increase in sequential revenue, offset by higher commodity costs, net of pricing.

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

Thanks, Mike. And with that, we would like to open the line up for questions.

(Operator Instructions). Your first question will come from the line of Michael Gallo with CLK.

Hi, good morning. Good quarter. I just want to dive in a little bit on Asia. I was wondering, John, if you can break down how much of the fourth quarter impact operating margin was that pricing pressure versus some of the investments that you're making? And has the pricing environment in Asia gotten worst? Because obviously, you had some investments there in the third quarter, but still, the margins were a lot better in the third quarter on an operating basis. Thank you.

The pricing in the Asian market, specifically in China, has got a little tougher. And, there is a lot of reasons for that but it really comes back to competition that exists there being one issue. The second thing is, the spending in telecommunications in China, the growth rate has slowed compared to where it was running.

So, that is the primary reason that we've seen the reduction in there, and of course we're not going to chase after low margin business. If it's a low margin business and we're not making a fair return on it, we are going to walk from it.

Now, there's been some recent developments in China, which more likely will have a positive impact on EnerSys. You may have read that the Chinese government is cracking down on battery manufacturers, specifically lead acid battery manufacturers, because of lead. There is approximately 2,000 battery manufacturers in China today, I have read that there's projections that somewhere between a third to 50% of those could be closed down and may not start up again because of the environmental, or lack thereof, of environmental concerns that they have for their employees.

As you recall, if you go back to 2000 when we really started EnerSys, one of the things, 98% of our business was in US. Our manufacturing facilities were in the US. One of the things that we said at that time was, as we expand globally, we are going to put US standards in place for all plants, no matter where they are in the world. And we did the same thing in China. So, we have very clean, environmentally friendly plants in China. So, we're not concerned about it impacting us.

The point is, if this thing takes place as many are projecting, we think the competition is going to be severely hurt in China, which should be beneficial to EnerSys.

Okay, great. And on that same note, just a follow-up, any update on where we stand on bringing the new facility online?

It is on target. We expect to have preliminary production late this summer. We did have some delays because of rain and things, but we are catching back up, on time, within budget, and everything is a go.

Great, thanks very much.

Your next question comes from the line of Brian Drab with William Blair.

Good morning, congratulations on another solid quarter. First question is for Mike. Could you give us an estimate of the EPS impact of the refinancing that you did recently in terms of annual EPS?

On a prospective basis or are we talking about just on the quarter?

On an annual, run rate basis, if you could.

Okay, so we refinanced and we incurred an $8.2 million charge in the quarter, that you can calculate easy enough. Of that $8.2 million, approximately $5.9 million of that was related to the interest rate swaps on the previous term A debt, and presumably that $5.9 million, which has now been mark-to-market, and it's hit our P&L in the quarter, that will move out over the next two years during its original maturity schedule, and could bounce around a little bit as it is marked to the market each quarter, obviously. But, theoretically, we should benefit from $5.9 million less interest expense over that time period.

Okay. Okay. Thanks. And, looking at the motive market, could you give us a little bit of a sense for what you're seeing in terms of trends in the forklift market? It would just be interesting to hear the detail in your perspective there. Also a secondary question here, we're seeing more articles pop up these days about lithium batteries being used more and more in forklift applications and I wanted to hear your thoughts on that.

Sure. If you take a look, as I mentioned earlier, when you look at the February through April timeframe and compare it to prior year, industrial fork truck orders are up 26%. If you look at it sequentially, in other words the three months prior to April, or February through April, it's up 8% globally.

So, the orders have continued to remain pretty good compared to prior year. And, as I said earlier, we expect that those will translate into orders for industrial fork truck batteries which obviously we are going to benefit from that.

To your second question, we could provide lithium-ion batteries today. We can make those batteries. We've had two shows, one in Chicago, which is a very large show for industrial fork trucks and one in Germany. In both those shows, we had lithium-ion batteries on display.

And the way to view it is this, for a normal battery that we would sell to go into an industrial fork truck, it was $6,000 for a lead acid battery. Now, the lithium-ion battery is $50,000. And, the reason for that, the price of lithium batteries is significantly higher than it is for the lead acid batteries.

Now, the only way that lithium-ion, in our opinion, is ever going to make it in the industrial fork truck business is that if you can redesign the industrial fork truck to offset the premium for the battery. In other words, $6000 versus $50,000, if you can pull $42,000 out of the other end of the fork truck and save the money, you've got it. Right now, we don't see it happening.

Now, there is one exception. There is a company in Europe that has what's called a pallet jack. It is a very, very small, hand-type fork truck and they have just introduced a lithium-ion battery in that one element. To date, I don't think they have sold any of them but they are making an offering on it. So, I hope that gives some clarity to it.

No, it sure does. Thanks a lot, guys.

The next question will come from the line of Elaine Clay with EnerSys

Hi, this Connie Wang for Elaine, actually with Jefferies. I just want to say congratulations for the great quarter and thank you for taking my question. Can you give us an update on the commodity cost that you're seeing as well as lead pricing for Q4, and compared to what you're seeing pricing for it today? And also, what is your hedging strategies for lead going into the year?

Yes, when you take a look -- remember we trifold our inventory. In other words, what takes place three months earlier, hits our P&L, so whatever the cost was three months ago in lead, we see it three months later hitting our P&L.

But, if you look at our fourth quarter, and I'm going to talk only LME, because I'm not going to talk about hedging and other things in there, but if you look at the LME average that hit our fourth quarter P&L, it was at $1.08 per pound. If you look at Q1, it is at $1.16 a pound.

Now, what happens is, on price recovery, we eventually get the price to offset the cost increase, but it takes time. In a given quarter, in this example that lead has gone up $0.08 a pound, it is going to take us three to four months to recapture that.

Now, it depends on the contracts that we have. Because 35% of our business roughly is an automatic pass-through, and some of those contracts say that you're not going to get that pass-through for two or three or four months out,. The other thing is that if we see -- go for a price increase, it usually takes about two to three months to fully implement that.

To make a long story short, when you look at our first quarter, we anticipate that our revenue will actually be higher than our fourth quarter. Modestly higher than fourth quarter. That's unusual for us, by the way, because the fourth quarter usually is our strongest quarter. But, you also will notice that in our first quarter guidance, that it is less than our fourth quarter, midpoint 68 versus our actual at 75.

The reason for that is right to the point that you've hit on, is that it's taking us time to recapture that cost increase for price to catch up with it. We are anticipating we will get about half of the increase in the commodity cost in Q1. We'll pick up the rest of it in later quarters, in Q2 and Q3.

Okay, thank you. That's very helpful. And, as a follow-up, can you give us some color on your acquisition strategy, that is, what end markets and geographies you are targeting next?

Well, as we said many times in the past, our acquisition strategy is for geographic expansion, it's for looking at new technologies, broaden our products, we're looking for bold-on operations, I will refer to them, as lead acid battery companies that we would acquire, basically, we are looking at all of those right now.

Geographic expansion, we talked about India, we've talked in the past about Africa, we've talked in the past about South America, we remain active in those areas, and there are other lithium companies we are currently looking at. I can't go into a lot of details on any one of the things obviously, but as we said earlier, that we are looking at some additional acquisitions here in the next quarter.

In the last, I'm going to say, four or five months, we completed two acquisitions, one being ABSL, another was the company in Greece that we acquired, a small investment in Greece, but as we've said, in the next few months, we anticipate we'll see a couple more come at us. We are very active in the M&A area today.

That's great, thank you very much.

Your next question will come from the line of Paul Clegg with Mizuho.

Hi, guys, thanks for taking my questions and congratulations on the continued strong results. We've seen some negative data points in the economy recently, in fact the most recent days. It seems to contrast to the order flow on the industrial battery space that we are seeing and certainly that you are seeing. So I was hoping you could remind us, has your order book been more of a leading or lagging indicator in past recessions? And then, how far in advance or behind does it tend to indicate? (multiple speakers)

It's been a leading indicator in the past. It's been a leading indicator. And, as I said, the order book coming in supports a higher first quarter than a fourth quarter on revenue.

Now, we look at the same data and what we are seeing with the IMS Report yesterday coming in at the low 50s and it was anticipated to be significantly higher. We see what's going on with Greece and Europe, the problems that they are having. We have got our eye very closely on this thing right now because the data that is coming in, our backlog and everything, as I said, supports a higher first quarter, but it is concerning what we are hearing right now.

And, I think about 45 minutes ago, the industrial production for the US came out and it was down in April compared to where they were anticipating it to be. So there are some signs out there that things are we weakening. The impact of the end of QE2 and if there is a QE3, the impact that will be on that, those are things we have got to keep a very close eye on. But I've said this many times in the past, we look at the upside, we look at the downside, we position EnerSys so that we can respond either way.

And, if it does go down, there are opportunities for us to consolidate things even further, and we do very well on that. But at this stage, we are not looking, focusing as much on the downside as we are on the upside, because we think that ultimately this thing will pull through.

Okay. And then, question on pricing power as well. Last quarter it didn't seem like there was a lot of pricing power, but you certainly weren't having to give any back; it was basically lead costs. Has that changed at all? Are you seeing any more traction on being able to raise pricing beyond lead?

We have raised pricing beyond lead in some market places because of other commodities going up and we talk a lot about lead, but we look, not only at lead, we look at total cost. And things that are going up that are outside our control, whether it is oil, plastics or whatever, we attempt to pass that on.

As far as our internal costs for labor and everything else, that is our responsibility to manage it and that's where we have to be competitive. In other words, what I'm saying, if lead goes up or oil goes up or plastic goes up, it affects all of our competitors. Okay? But what we've done a better job in is reducing our labor and our overhead cost on it, but we will keep focused and try to pass along the cost of those other ones.

Now, on pricing, we are seeing one competitor that is wanting to go after and get higher volume come through and we've lost some business, because of pricing. Remember our strategy, we're going to provide the best value in the market place. And, our prices tend to be a little bit higher.

But overall, the best value our customers are getting, whether it is through service or performance or product quality or product performance, that's what we are going to stay focused on. And, if it is a low-margin contract, low margin business, we would prefer to walk away from it and let our competitors have that low margin business and not invest in the future to build plants that are going to generate low-margin products.

So right now, I am very comfortable with where we are. The reference I'm making towards the pricing situation is a relatively minor one, but it is really the first time I think we've seen anything that would indicate that there is some pressure out there.

Okay, if I may, just one last one regarding the tax rate in the June quarter, actually or for 2012, you mentioned in the prepared remarks that the tax rate would be a little bit higher in 2012, and yet Europe is recovering. So I was little confused by the contrast there. It would seem like if Europe continues to recover and have a disproportionate impact on your numbers, that the overall tax rate might be lower in the June quarter?

It's a good observation on your part, and you're right on that. The exception of what Mike's point was that we had a one-time that took place. And your point is that the percentage of earnings coming through in Europe is stronger than what it would be in the Americas on a percentage basis, then you are exactly right. But if the Americas hold up and Asia holds up -- or the Americas, specifically, holds up or gets a little bit better, the tax rate percentage wise could be higher. Mike, you want to pick it up a little further?

Yes, your point was right, Paul. The fourth quarter we received the benefit of strong European revenues and operating earnings and that drove the tax rate down without having any one-offs, if you will, from a tax audit resolution coming through to our benefit. So, if Europe can continue with the stronger earnings that they've achieved in the fourth quarter, then you could still see rates comparable to 25.5% in the fourth quarter, but I would hedge a little bit and that's why we said it would be nominally higher. But I don't think you need to be much more than 100, 150 basis points different.

Okay. Thanks very much.

Your next question comes from the line of Steve Sanders with Stephens Inc.

Hi, good morning, guys, good quarter. First, just a couple of follow-ups on Asia. John, do you have any sense in terms of the timeline for enforcement on some of those environmental and safety issues in China? And second, could you bring us up-to-date on where you are in India? I think last call you talked about having a dozen people or so on the ground there and evaluating acquisitions in greenfield. Just give us an update on that as well.

The China situation is on the verge of a panic situation. I mean, they are walking in and closing plants down. In fact, one of our plants was closed down for a couple of days. They walk in and it is a ready, shoot, then aim approach they're taking. They walk in and they say shut your factory down. We want to look it over. They shut it down a couple of days. They said you've got a clean bill of health, and they went away. Other factories are still closed. And, it is a very, very aggressive approach that is being taken right now. So, I think you're going to see the impact pretty quickly on this thing.

If you look at the worldwide usage in ton, it's roughly 9.5 million metric tons that are used annually. About 4.5 million of it, a little less than half, of the lead in the world is consumed by China. So, this could have a drastic impact on what's happening in that particular market. Which again, I think it would be positive for EnerSys.

Right.

As far as India goes, we have a lot of activities going on right now. Everything from a plant construction to an acquisition that we are looking at and we just need to find the best way of getting further into that market, to give good returns to our shareholders.

And as I mentioned earlier, and you alluded to, we have approximately 12 people on the ground over there. We are selling product into the market today. The idea, the concept, is that we will sell in at a breakeven, because it is very costly to ship product from our European operations into India. But, we are going to -- market is going to set the price, and our cost is higher right now. But, we are establishing ourselves in that market and we anticipate to be further into it in the not-too-distant future.

Okay. And then, it sounds like the order book on the Motive side continues to be very strong. The quarterly results through 2011 would reflect that. I wanted to see if you could talk a little bit about how Reserve feels. You obviously had a big second quarter there and then the sequential growth moderated a bit, but we obviously hear about the data center markets being strong, the telecom spend picking up. So as you sit here today, do you feel like the Reserve side of the business is in a position to see some acceleration as we move through '12? Or is that a bit aggressive?

The comments that you have made on Reserve, in telecom, in EPS, I would agree with in the Americas. In the Americas, telecom is strong, EPS is strong. EPS globally is relatively strong right now. EPS total is 9% of our total revenue, okay. So it is an element but it's not that large. If 9% total.

Now, the real big area in Reserve Power is telecommunications and as you said, it's going well in the America's. But let's talk about Europe, it's a different story. When you look at Europe, it is flat, in fact it may even be down a little bit at this writing. Europeans in Western Europe are not spending the money on 4G at this phase.

Now in the Middle East it's a different story there. We're getting a lot of activity taking place in the Middle East. What I think you're going to see happen is -- let me back up on Europe, the primary reason that Europe is off is because of some regulatory issues that have taken place and a number of other things that the telecoms have actually cut back on their spending or held back on their spending.

Eventually, what we are going to see is one of them are going to jump into 4G, and when that happens, I think you're going to see the floodgates open up, because once one telecom starts into 4G, and if the market accepts it like they do in the US market and other places in the world, you will see the other European, Western European, telecom companies get further into and you will see a real pick up on it.

So I think there is, if you will, I will call it, a pent-up demand that's there, that's going to hit, I just can't tell you when. In total if you look at the Reserve Power business right now, total growth globally, I think you're looking at high single digits here for the next 12 months.

Okay. Okay. Thanks for that. And then final question, I guess you continue to expand in thin plate pure lead so that's good for the product mix. The ABSL acquisition is good for the premium product mix. Where did you exit the year in terms of premium products as a percent of total and how should we think about that playing out through '12?

There's a number of people in the room that are smiling right now, because we got into a debate about that yesterday and how to define premium products, so let's back up a little bit on it. Years ago on the lead acid side, when we looked at just lead acid, we were talking about thin plate pure lead in our square to Motive Power designs. And we used to say that it was roughly a 12% to 14% -- those were premium products, 12% to 14% of our revenue.

Today those two products are capable of producing 25% of our revenue. Okay? But, now we're into the definition of what is a premium product, because we bought ABSL, and we've come out with a number of new designs in the chargers, which are all premium products that have great opportunities. So I think we've got to redefine what a premium product is. But to the heart of your question, what used to be 12% of our revenue is now 25% of our revenue. And most of that has been thin plate pure lead. Thin plate pure lead is 18% of our revenue today, 18% of the 25%.

Okay. Thanks very much.

Your next question will come from the William Bremer with Maxim Group.

Morning, gentlemen. I love the consistency, congratulations. When was the last pricing performed on, say, the Americas and as well as the European operations?

April.

Okay. Do you have any plans going forward now that lead is where it is?

Well, Bill, I won't disclose that at this point because we're not ready to announce anything. I think it's one of those things that we go through a very formal approach before we talk about a price increase. But, I can tell you that our people are constantly assessing the market. They're assessing what the competitors are doing. As I've said in the past, we tend to lead the price increase and hopefully the competitors will follow.

At this stage, we've got nothing to announce on it as far as a price increase goes other than we're just going to keep watching the markets, but we understand, and I think all of our employees understand, that we need to recapture 100% of those commodity cost increases. And right now, we're not at 100%.

Understandable. Do your expansion plans at this time include the thin plate pure lead? I know that has been an expansion plan in the past. What about now, going forward?

Well, that's the area that we would look at to continue expansion. We have capacity in the other areas. As you know, we spent approximately $60 million in the last roughly 18 months. They're just about double the capacity of thin plate pure lead. We do have some other projects that are above and beyond that $60 million in Europe.

We want to be sure that we stay ahead of the curve on thin plate pure lead, that high margin or these higher-margin lead acid batteries. And today, we have the capacity to meet that. We have a little bit of excess capacities so we can sell more. We do have plans that go out three to five years that we could pull it immediately if we saw the economy go way up. It would be roughly another $100 million capital investment that we have on the table right now.

But, let me emphasize, we are not ready to push the button on that yet, because of the uncertainty in the economy and everything else. We would take the capacity way up to where it is when and if the market demands that. So again, we are staying ahead of the curve.

Just a comment on that, would that be on domestic or would that be international? Or would you split it up accordingly?

Split it up accordingly, wherever the market is.

Okay. My last question is, recently, the Nuclear Regulatory Commission has been examining the lifespan of batteries used, in worst case scenarios. Right now, I think the standard is four hours. There's 104 domestic, nuclear plants here. What is the opportunity for you guys, if for example, they do expand that Reserve Power to say eight hours?

It's a good opportunity. Great opportunity. Theoretically, you'd double the size of the batteries in those nuclear power plants. It's a good opportunity for us. To dollarize it, I don't have an absolute dollar on it, but it's big.

Okay, gentlemen, thank you.

Your next question will come from the line of Walter Nasdeo with Ardour Capital.

Hello, gentlemen. This is John O'Connor in for Walter. I have a few question. In terms of restructuring charges going forward in fiscal year '12, can you just give us a little color about that? And, will there be any lumpiness, sequentially?

You can see that our restructuring costs this last year were down to prior years. And I think the best way of looking at is, the fiscal '12 will be in the same ZIP code restructuring as it was in '11. It's very closer. Mike, you want to add to it?

I would say, John, that the lumpiness generally occurs whenever you have agreements, but oftentimes, the timing is indicative of the employees' determination of what they want to do, so we can't always control some of those charges. But, I think you would probably, to John's point, see the cost be somewhat close to where they were this year. We would hope that they would be somewhat prorated throughout the year evenly, but I can't promise that.

Now, the one exception to that would be, that if some of the acquisitions that we were talking about, if there were restructuring charges involved with those, that would increase it, if we complete those acquisitions. In fact, if you take a look when we completed Oerlikon, this next year we have some spending for restructuring, that might even take place because of that acquisition. But, those are great investments. Those are really great investments, because that helps us take these companies that we acquired that are breakeven or slightly losing money, to make them very accretive.

Okay, thank you very much. The last question I had was just CapEx in fiscal year '12, can you give us an estimate on that?

Same ZIP code as last year, $60 million to $65 million.

Great, thank you very much.

The next question is from Bill Dezellem with Titan Capital Management.

Thank you, we had a couple of questions. The first one was relative to your gross margin, it was a touch lower in the fourth quarter relative to the third quarter and yet sales were $40 million or so higher. What were the dynamics behind the scenes there that we are not understanding?

Good one. Well, for our fourth quarter, what we saw -- in our third quarter, we actually benefited from having commodity cost go down for us sequentially. In the fourth quarter they spike back up and then pricing was chasing as it will be in the first quarter. So what you saw, and it's reminiscent of what we saw during 2008 and 2009, as our topline, our revenue goes up, we tend to face, because of generally positive economic conditions, we face higher commodity costs, so we have a lower gross profit percentage but are generating ever higher gross profit dollars, therefore dropping through as higher EPS.

So, right now, it has been diluted, as you can see, that we went from sequentially from 23.2% in the third quarter 22.7% in our fourth quarter. And, we expect our first quarter to be higher than our fourth quarter so I think we are hopeful that that percentage can stay somewhere in that ZIP code, but I don't expect it to expand, because we expect our revenue to be increasing in that quarter. (multiple speakers)

I would like to add to that, there are a couple of contracts that we have looked at that the gross profit associated with them are lower than what we would like to see. And, personally on those, I get involved on whether we should do those or not or actually select them.

And one of the criterias we look at when you are building the batteries and putting them on a truck and you ship them and there is virtually no SG&A or selling expenses at all associated with it, in other words I'll pick an arbitrary number. Your gross profit is not 25%, it is 20%, but that 20% drops all the way to the bottom line, we will accept orders like that. Those are pretty good in total. There's just no selling expenses associated with it. So we've had a couple of those that have taken the gross profit line down, but has helped add it to get us to over 10% operating earnings, too.

And so really, those two functions, number one, the straightforward commodity cost phenomenon and then secondarily, a couple of contracts, it sounds like, must be meaningful in size where the gross margin may appear less appealing but to your point enhances your operating margin.

That's correct. But, the bigger one is Mike's point, much bigger than the one I'm referring to.

Great. And then, the second question is relative to your Chinese plant, what are you anticipating in terms of the impact on profitability between now and the opening of that facility; and then, after you open the facility, for the, say, six months or a couple of quarters afterwards?

Well, the adverse affect for this year -- is it roughly $4 million, Mike?

Yes. As we bring this plant up online, we were going to be spending money on staffing, training, recruitment, as well as provisioning of the plant for supplies, MRO materials, so we will see some pressure as a result of that. And when the plant comes up online, as John pointed out, in late summer and starts producing product, and it will obviously won't start at full production. So it is going to ramp up. But, right now, I think that the $4 million number is a pretty good estimate. Most of which you will see it being incurred in the first three fiscal quarters.

When you look at a new plant start up, which by the way I've said many times in the past, I prefer not to do them. I'd rather buy a company and fix it up, because you can do it faster. But in China, we could not find a suitable acquisition that would allow us to do that without paying an inordinately high premium on it. This is a long-term decision. These decisions on putting a plant in place are draining for several years, but we are long-term players. And three years from now, you look back and you will say, gee, we're really glad we have that factory and it's doing well. But we are going to pay for it during the start-up years.

I guess, that leads to two additional follow-on questions. The first one is, given the Chinese government crackdown on the regs, does that all of a sudden make acquisitions in China less costly? Or does it make them more costly because the ones that you would be interested in would have the tighter environmental regs already in place, or the environmental controls in place.

And then the second related question is relative to your original plan with this facility, and the rate at which volumes would ramp up, is that dynamic beginning to change, because of the competitors that are being, and potentially being, shut down where you may see more volume go through your plant and reach profitability more quickly?

Excellent questions. They are questions that we have thought about that we don't have answers to, because it's too early. But, you are right on the mark. Some of these companies are maybe worth going in to take a look at that were going to be closed down and to see what would it cost to bring them up to speed. If you could buy those at a very low price, it's worth considering. The other side of the fence, the ones that have made the investment that are in environmentally good shape, I would think that they are going to go up in price. Answer is, we don't know because this thing has happened so quickly, we are going to have to let it shake out, but it's one we've got to keep a very close eye on.

And relative to your acquisition activities that you mentioned earlier, where you are very active, how much of that is tied to the Chinese market and trying to get a pulse on some of the most recently shut down players and whether you do want to acquire.

Zero, at this stage. We do not have anything on the table that we are actively looking at in acquiring in China, because as I said, this thing has happened just in the last couple of weeks. And we need to see how it's going to shake out.

And as you might recall, Bill, the reason we went ahead with the investment in Chongqing was because of the evaluations of existing Chinese companies when we looked at them over the last three to five years were just too high. So, we finally decided to go with the greenfield route. Now, this may change some valuations, but to John's point, it's just too early for us to do.

I could make the argument very easily that the valuations will actually go up on this because the ones that are going to shut down, that don't have the money to go in to put them in place -- you see, some of these companies are operating -- they are not even licensed. They are just running on their own. They are not even licensed and those are probably going to go very quickly. You've got to keep in mind that in China, it's like one guy told me years ago, on a smelting operation, a smelting operation in China could be a 50-gallon drum where they'd literally would burn the battery to get the lead out to take it down to sell it. So, some of these are very, very small operations. We just need to keep our eye on and look for the right opportunities.

Great, thank you both.

Your next question will come from the line up Mark Wienkes with Goldman Sachs.

Morning, gentlemen. One quick question for you. The incremental margins in Europe were again about 26%, 27% in the quarter and the year, and it brought up the average margin for the European business to mid to high single digits, again for the quarter and year respectively.

Could you speak to the timing, the past, the strategy, why won't margins in Europe ever get to the incremental? Or will they and when?

We're hoping they will, and I think the big reason for it over there, if you take a look at the competition, let me talk Reserve Power side first. On the Reserve Power side, we like to call ourselves the largest market share in Reserve Power in Europe. But in fact, if you take the total number, if you aggregate together all of the Chinese sources that ship product into Europe, they are larger than we are. So, back to what we were talking about earlier in China -- backup, with a strong euro, and today the euro is that 144, 145 roughly, with a strong euro, that makes it very cost effective for customers in Europe to buy Chinese products. So, that's why you see a lot going in. But the things we were talking earlier on the lead situation, what impact is that going to have on it? That may help us get additional pricing in the European market. That could have an impact. And when I was talking about I think it will be good for us, with what is going on in China, it's not only within the China market, I would say it's probably more so in the European market. Or as much as so in the European market.

So, it's less about the cost bases and manufacturing plants across Europe; it's more about the ability to just get price.

It's competition, the ability to get price. Take the fork truck industry as an example, in the US we sell to dealers. These dealers are anywhere from $5 million to say $100 million in size, whereas in Europe you're selling to the fork truck OEM directly. So, the pricing power is much greater in Europe than it is in the US market.

Understood, thank you.

Your next question will come from Fran Okoniewski with Friess Associates.

Hey, good morning, John. Can you talk a little bit about how the battery market is responding to some of the national disasters in Japan? And does that mean anything to you guys over there?

Our order taken -- and I won't throw an exact number, but our order taken in Japan right now is the highest it's ever been. And we took another major were last night.

What?

The unfortunate situation that has taken place in Japan, we've benefited from it.

And is this core product or can any of this simply be the premium products? Or, what are we talking about?

All premium product.

Okay. Great. Thanks.

Your next question comes from the line of Matthew Crews with Noble Financial.

Good morning, everyone. Just a question going back to China, I think it's an interesting discussion here, the infrastructure there on the recycling side, on the environmental side, is definitely not as well developed as the US or possibly Europe.

Are there opportunities there for a company like EnerSys to drive market share by also getting more involved on the recycling side?

I wouldn't rule it out. I wouldn't rule it out. It's one that we will keep looking at and see if we can get into it. But usually what happens is on recycling, you've got to have a critical mass in place, and the critical mass being that it is a collection. The ones that are in recycling that are battery companies are primarily transportation-type batteries or car batteries. Because the volume on car batteries is much, much higher than it is on industrial batteries. So to have the critical mass in place to really support a smelter, you have to have good collections. With industrial batteries, it tends to be less.

Now, that being said, we're not going to rule it out. We will keep looking at it. We have looked at a number different smelting operations over the years and we've never come to the conclusion that it was the best place to invest money.

Okay. All right. Thank you very much.

Your next question comes from the line of William Bremer with Maxim Group.

Just a quick follow-up, and I appreciate all the color. Can you give us a little guidance on the seasonality that we'll be seeing in '12 as we go through it, and as well as the SG&A expenses? We had a nice pullback here sequentially. Just wondering does SG&A now kick up a little bit?

Percentage wise, it should go down. We will have to add a little bit on the sales side, but specifically in the SG&A side, it's not a lot. We should be able to lever that up percentage wise. It shouldn't go down. Dollar wise it's going to go up slightly with volume going through. That's assuming the volume goes through, by the way, and we do finish higher than we have in prior years.

Understood. Thank you.

Your next question comes from the line of Howard Rosencrans.

Hi, guys. If we go forward and look out, it could be F12 or it could be F13. Inevitably, in Europe they are going to go to 4G. China because of the environmental crackdown, or simplistically because you guys pulled it all together there, you make your necessary fill-in acquisitions, you start to get more of a representative share of the worldwide lead market in China.

Maybe you can explain to me, because you have continued to note your, quote, 10% margin which you have now hit, I'm pretty sure this was, the third consecutive quarter, it exceeded it nominally. But it would seem to me that all these ingredients are going to lead to meaningfully higher sales at some point, regardless of if we want to decide it's a cyclical worldwide economy, whatever, at some point, your secular drivers and your under share in Asia, the sales number's going to be meaningfully bigger.

So what would argue against that operating margin not beginning to really move the needle? That's the gist of my question. Thank you.

Well, let's back up. I really think it really has moved the needle already and then I'm going to come to the heart of your question. But if you take a look, again I'll mention if you go back to 2008, or just go back to last year. Go back to last year where we did a $1.44 a share and this year we did $2.52 a share. That's up 75%. And, it's had a big move on the needle.

Now, to your question, let's not talk next quarter or two quarters or three quarters, the need for batteries, for stored energy solutions, in our opinion, is going to continue to be very, very strong going forward. And, it's a great growth market.

It doesn't matter if you're talking about automobiles, if you're talking about backup to nuclear power plants, if you're talking military applications, if you're talking satellites, the grid, it really doesn't matter. All of these applications they are talking about more batteries, more robust batteries. I really believe that we are going to continue to see very, very strong growth. Is it going to be next quarter, next two quarters? I don't know.

Well, next quarter, I do know. I believe it's going to be stronger than the prior quarter. But, I think that we are going to see major growth continue to take place. When we started this thing, as I go back to 1994, when I first started in this industry, we were $200 million in size, we're now $2 billion. How do we get to $3 billion or how do we get to $4 billion that is how we think internally.

And I think that we've got to keep looking for the opportunities that will allow us to expand in that area, that's why on our balance sheet, we are very conservative. We want to have a lot of cash. And our debt to EBITDA right now at 1, we want to be in the position that we can take advantage of these opportunities because you don't go from $1 billion to $2 million or from $2 billion to $3 billion without having a strong capital structure in place. We have that. And, we strongly believe that there's a lot of opportunities coming forward for good battery suppliers.

John, the gist of where I was going is in terms of your margins. Over time, when you get to the $3 billion or $4 billion or wherever the number, what is going to preclude you from driving a meaningfully higher margin over time?

I don't think there's much if anything that's going to stop us because we're going to lever what we already have. We're not going to be adding a new corporate headquarters. We're not going to be adding a lot of other things in place to do it. We should be able lever it up.

Okay. Very good. Thank you. Congrats.

There are no further questions at this time.

Okay, well listen everybody, thank you very much for your interest in EnerSys. We really do appreciate it, and wish everybody the best for today. Thank you very much.

Thank you all for your participation in today's conference. This concludes the presentation.