EnerSys (ENS) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the EnerSys fourth quarter earnings conference call. My name is Erica and I'll be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions) I would now like to turn the presentation over to your host for today's call, Mr John Craig, Chairman, President and CEO. Please proceed.

Thank you, Erica. Good morning and thank you for joining us. In case you missed it, last evening we posted on our website slides that we're going to reference during this call. So if you didn't get a chance to read the press release and you want to take a moment and pull this information up on your computer, now would be the time to do it. Before we get into the details of our fourth quarter and full-year fiscal results I'm going to ask Mike Schmidtlein, our Chief Financial Officer, to cover information regarding forward-looking statements. Mike?

Thank you, John. 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 that could affect our future results including our earnings estimates, see Forward-Looking Statements included in Item 7, 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, 2012, 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 29, 2012, which is located on our website at www.enerSys.com. Now let me turn it back to you, John.

Thanks, Mike. I'd like to start off by saying, I am personally very pleased with our accomplishments and financial performance for fiscal year 2012. This is the first time in EnerSys' history that we reported over $3 in adjusted diluted annual earnings per share and had annual sales of $2.3 billion. Both of which were all-time records. Before we talk about where we're going as a Company, I'd like to look back and review how we got to where we are today. If you look at Slide 2, you can see our sales in fiscal year 2008 were $2 billion with adjusted earnings per share at $1.42. Then we entered the Great Recession. From fiscal year 2008 to 2010, our sales dropped $448 million or 22%. But when you look at our adjusted EPS, we went from $1.42 to $1.44, or in other words, sales down 22% and adjusted earnings per share up 1%. At the start of the recession, we took major steps to reduce our total cost, which included shutting down some of our higher cost manufacturing operations, investing over $60 million in new products and increasing manufacturing capacity for higher margin products.

These actions set the foundation for our record sales and profitability that were reported. In fact, when you compare fiscal year 2010 to 2012, as shown on Slide 2, you can see that our sales increased 45% and our diluted earnings per share increased by 110%. Our focused growth strategy as shown on Slide 3, has guided us to our past performance and we will continue to follow this strategy for future growth. While accomplishing our record sales and earnings in 2012, we were also very active in planting the seeds for future growth. Some examples are -- we initiated additional restructuring in Europe to keep driving our costs down. Our target for Europe remains at 10% operating earnings which we continue to progress towards. As you can see on Slide 4, acquisitions and investments were made that expanded our geographic reaches into South America, South Africa and India. These acquisitions were not accretive in fiscal 2012. In fact, they generated a loss of $0.04 per share.

In fiscal year 2013, we estimate that these will contribute over $0.05 to our EPS which would be a positive swing of $0.09 year-over-year. We completed our Greenfield plant in Chongqing, China that will double our chinese manufacturing capacity when fully utilized. The China plant startup costs and India development expenses of over $5 million that we experienced in fiscal 2012 will dissipate this year, which also will increase our earnings per share. Our plans are to continue expanding our sales and market share in the fast growing emerging markets. Over the next several years, emerging market sales will become a higher percentage of our overall business. Those are the seeds planted in fiscal 2012. You can expect we will continue to do more of the same in fiscal 2013. You can expect more geographic expansion in Eastern Europe, the Middle East, Africa and Asia. You can expect that we will keep the pipeline full of new products.

For example, we have recently introduced our thin plate pure lead offerings into our Motive Power business and you can expect more Lithium and other non-lead advanced technology expansions in the future. You can expect we will always focus on being the best value supplier for our customers. Our strong balance sheet and significant liquidity will allow us to execute our strategic initiatives as outlined in our growth strategy. Another benefit from our strong balance sheet is that it provides the Company the opportunity to buy back stock when we feel our share price is undervalued. As announced in our 8-K released yesterday, our Board of Directors approved a new $50 million stock buyback program. Our continued success is due to the great execution of our employees globally, providing best value to our customers. As I said at the beginning, I'm very pleased with the progress that we've made thus far but I hope you can see, I'm even more excited about our future. With that, Mike, I'm going to turn it over to you.

Okay. Thank you again, John. I am starting with Slide 5. Our fourth quarter net sales increased 8% over the prior year to $593 million, primarily from acquisitions adding 4% along with solid organic growth of 3% and higher selling prices of 2% offset by a 1% decline in currency translation. On a regional basis, our sales in the Americas increased 18% in the fourth quarter to $290 million and our Asian business increased 19% to $53 million, while Europe's fourth quarter net sales decreased 3% to $250 million, all compared to the prior year. On a product line basis, net sales for Reserve Power increased 7% to $282 million, while Motive Power increased 9% to $311 million. Please now refer to Slide 6. On a sequential quarterly basis, fourth quarter net sales increased 3% over the third quarter with 1% from acquisitions and 2% from higher volume. Asia experienced a strong sequential increase in revenue of 17% with improving pricing prospects. The Americas were up 3% as sales growth in the Americas remains good, particularly in South America. Europe was up 1% with Western Europe mostly in a recession, while Eastern Europe, the Middle East and Africa remained strong growth opportunities for us. On a product line basis, our Motive Power business was up sequentially 5%. Sales in our Reserve Power product line increased 2% sequentially.

I am now on Slide 7. Net sales for fiscal 2012 increased 16% over the prior year to $2.28 billion. On a regional basis, our European operations net sales increased 12% to $995 million. The Americas increased 21% to $1.08 billion, and Asia 16% to $205 million. The 16% increase for 2012 includes an increase of -- 8% in base volume; 4% from acquisitions; 2% due to pricing; and 2% from stronger foreign currency translation. On a product line basis, net sales in Reserve Power increased 13% to $1.09 billion, while Motive Power increased 20% to $1.19 billion. 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 29, 2012 for details concerning these highlighted items.

Please now move to Slide 8. Our fourth quarter adjusted consolidated operating earnings were $69 million or an increase of 22% in comparison to the prior year, with the operating margin up 120 basis points to 11.5%. Higher volume and incremental pricing offset the higher commodity costs and operating costs we experienced in the fourth quarter compared to the prior year. Excluded from our adjusted operating earnings for the fourth quarter was approximately $2.6 million of highlighted items. Our adjusted consolidated net earnings increased 24% from the prior year to 8% of sales for a 110 basis points improvement, with the book tax rate holding steady at 26%. EPS increased 31% to $0.98, a quarterly record on higher net earnings and fewer shares outstanding.

Please now turn to Slide 9. On a sequential quarterly basis, adjusted consolidated operating earnings increased $12 million with the operating margin up 170 basis points. Our Americas business segment achieved an operating earnings percentage of 15.3% versus 13.9% in the fourth quarter of last year and 13% in the previous quarter, primarily from the impact of rising sequential organic volume compared to the prior year. Europe's operating earnings percentage of 7.5% was below last year's fourth quarter of 8.2%, but higher than the previous quarter's 6.6%. Despite a 5% growth from acquisitions, Europe's revenue was down 3% from the prior year as organic volume was down 6% and currency translation had a negative 2% impact. Asia's operating earnings were $5.3 million for the fourth quarter, reflecting higher revenue and less startup costs in Chongqing and no disruption costs in Jiangsu. The reported operating earnings percentage in our Asian business segment increased in the fourth quarter of this year to 10.0% from 2.7% in the fourth quarter of last year and 7.0% in the prior quarter. Sales in the quarter were $53 million, up from the prior year and prior quarter on stronger sales in Australia and Japan.

I am now on Slide 10. Our fiscal 2012 adjusted consolidated operating earnings were $218 million or an increase of 13% in comparison to the prior year. However, the operating margin decreased 30 basis points to 9.5% from over $70 million in higher commodity costs. This 13% increase in fiscal 2012's operating earnings was due to higher volume and pricing offsetting the commodity cost increases. For fiscal 2012, adjusted diluted net earnings per share were $3.03, 20% above the prior year's $2.52, on similar tax rates of 25% but with over 828,000 fewer shares outstanding. The key influences on our earnings for fiscal 2012 were the increase in net sales, partially offset by higher commodity costs, net of cost savings and pricing. Our adjusted effective income tax rate of 26% for the fourth quarter increased 300 basis points from the third quarter due to discrete items benefiting the third quarter. Our tax rate for the full fiscal year of 2012 was 25%, which we believe our tax rate for the first quarter of fiscal 2013 will be between 27% and 29%, although for the full fiscal year we again expect a tax rate of 26%.

Please now turn to Slide 11. 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 now have $160 million on hand in cash and short-term investments as of March 31, 2012, with over $375 million undrawn from our credit lines around the world. We generated over $200 million in cash from operations in fiscal 2012. Our leverage ratio which must be maintained below 3.25 times as calculated in our US credit agreement was 0.8 times, even after over $100 million in acquisitions and share buybacks in the last year. Our net debt to total capitalization ratio was 20% as of March 31, 2012. Capital expenditures were $49 million in fiscal 2012, compared to $60 million in fiscal 2011. Our capital spending focused on our new facility in Chongqing, China. Our plans 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 efficiencies. Our backlog even when excluding recent acquisitions remains near record levels. Our Motive Power organic sales in the quarter were up 5% year-over-year. The worldwide industrial truck -- fork truck orders for the three months ended in April were flat to the prior year's period, with Europe down 4%. In Asia, fork truck orders remained strong and were up 7% year-over-year and the Americas were up 2%. We expect to generate adjusted diluted net earnings per share between $0.88 and $0.92 in our first quarter of fiscal 2013 which excludes expected charges of $0.03 per share from our restructuring programs and acquisition activities. We look forward to the opportunities we will have with additional acquisitions and we will continue to use the strength our balance sheet to capitalize on opportunities in our markets. Now let me turn the call back to John.

Thanks, Mike. I'd like to now open the line up for questions.

(Operator Instructions) Zach Larkin, Stephens.

Congratulations on the quarter. Thanks for taking my call. First off, I wondered if you guys could touch on margins and what your expectations are as we move through the year. Obviously, the most recent quarter we just saw some stellar margins. Do you expect both on kind of the gross and operating line to see those hold steady or what type of color could you provide us as we think about going --

I think you have to look at the factors that are going to drive that. I think it's going to be commodity costs in total. If you look at lead this morning, spot prices I saw earlier this morning was $0.875 a pound which is down to where it was running. Obviously, when you look at the metrics, cost is down, just mathematically it's going to drive a higher percentage of gross profit. But I think that right now with lead going down and staying down where it is and our ability to hold pricing on it, we should see some very nice margins going forward. However, if lead goes up, if it spikes back up again, that volatility that we've talked about for so many years in the lead market, it could switch the other way.

Okay. Thanks very much. Then I wondered if you could talk about with us, some of the new movements into nickel, zinc, what types of applications are you specifically targeting? Is there any type of competition out there? How is that progressing with the recent acquisitions?

When you look at the nickel-zinc and you think about nickel cadmium and cadmium's, the problems associated with it, not only from a battery performance standpoint but some of the environmental things. It would start out by looking at displacing some of the nickel cadmium businesses out there. Second, we think we will get superior performance on it. The areas specifically that we use it, is a lot of railroad applications in Europe, some UPS where temperature extremes are in place. We would be using in those markets also.

Okay. Thank you very much. Congrats again.

Brian Drab, William Blair.

Congratulations on a great quarter, a great year. First question is on the forklift market. Another company in the industry recently said that the outlook from their perspective was for the forklift market -- Americas, okay, modest growth; Europe, stable, that might be surprising to some. I think the comment was still given with relative caution but stable in Europe and then China down modestly. Is that similar to your expectation for the next 12 months?

I agree with all with an except on China. I think China's going to continue to grow and we're seeing it in our orders.

Right. Okay. Let's see, with respect to China then. Do you feel like we're past the disruption related to the regulatory shutdowns, in general in China? Is that kind of a thing of the past for the most part?

I don't think it's totally absorbed yet but I think that most of it is, but I think there are some other problems that are developed with China product outside of China that are relatively new. Let me explain what I mean by that. If you look at the cost of lead as I mentioned earlier, the spot market on LME this morning was at $0.875 per pound. The Shanghai Exchange where you buy lead in China is $1.09 a pound. So you've got about a $0.22 per pound spread between that -- or in other words it costs more to build the batteries from a lead standpoint in China than it does in Europe or the Americas. Second point is, the euro this morning, below $1.25. The net effect of that is when you look at the VAT taxes added on, batteries coming out of China, you look at the spread or the increase in cost they have to pay for lead and you look at the currency difference, what it says is, it's going to be more difficult for Chinese manufacturers to build and ship batteries to other parts of the world. It's going to be more costly for them to do it. If you look at our European market, about a third of the Reserve Power batteries that are used come from China. So what we think is going to happen is you're going to see the cost go up on batteries from China going into Europe which is going -- it's going to put our position more competitive than it has been in the past by building our products in Europe and shipping to European customers.

Okay. Then that dynamic is clearly, I guess what is affecting our pricing in Asia -- Mike mentioned the improved pricing environment in Asia. Is that the main factor that's driving that?

I think if you look at costs that I referred to earlier on the batteries from a lead perspective, you look at the factories have been shut down in China because of environmental reasons. The net effect is that our competitors have increased their pricing to the customers in China. When pricing went way down, we walked from a lot of business. We held our pricing. Now that pricing has come back up, we're starting to see our business pick back up again on certain products.

William Bremer, Maxim Group.

Great quarter. Love the consistency here. Very nicely done. What was the average price of lead for you guys in the fourth quarter?

We typically would not give that out specifically, but let's call it somewhere in the mid $0.90 range.

Okay. Then John, can you give us a little more color on what's happening here in Europe and how that affects your business, Western versus the Eastern block?

Well, as everybody knows who's on the phone, Western Europe is extremely volatile right now. Where this thing is going to end up with Greece and several of the other countries is a big unknown. We have our own viewpoint on it, but we are planning for the worst and hoping for the best. We are seeing our business is down in Europe but it's holding. It's flat. What we're going to do is increase our sales and marketing presence in Western Europe to try to pick up additional share by not giving pricing, but by picking up quality customers. But we're really going to increase the emphasis in Eastern Europe, Middle East and Africa to pick up business in new markets that we are not as large in today as we want to be.

Okay. Then finally, your slide mentioned that you're taken the existing thin plate pure lead and applying it to new applications. That seems to be a focus here. Can you give us some examples of that?

Well, we've talked often about taking thin plate pure lead into the Motive Power applications. We think starting with the Class 3 smaller trucks, that's some place we plan to go immediately and we would like to see some of the development work we did with the US Navy on the larger size plates to be able to get into Class 2 and Class 1 trucks. So, I think Motive Power for us is the biggest application opportunity, but anywhere that they can use the attributes that come with thin plate pure lead in mission critical type of environments, those are the type of customers that are willing and interested in paying the premium pricing for it because of those performance --

One of the other areas to take a look at, Mike mentioned on the Motive Power and we do put some, what's called block product in Motive Power today, which those are 12-volt batteries. Motive Power batteries on Class 1 through 3 fork trucks tend to use 2-volt cells that are wired up. What we're doing is, we're going to be making thin plate pure lead in 2-volt cells. Now the logic behind it is this, that some people are looking at going with lithium-ion batteries in fork trucks. There are some advantages. You can charge it faster with a lithium-ion battery than you can a lead-acid battery. The problem with the lithium-ion is the cost. If you take a typical battery and charger, let's say it costs about $6,000, to replace that with a Lithium battery you're talking about $50,000. So what we're looking for, is can we come up with a battery that you can charge it faster and not have to pull the battery out during the day. In other words you could opportunity charge it. The solution we're coming up with that will be much less expensive than a lithium-ion is to put a thin plate pure lead in it. From a user standpoint, what that means is during a 24-hour day, they could operate that truck approximately 20 hours with 4 hours opportunity charging. So when the driver is at lunch or on break, they can charge it and then go back to work and they could run it during the full day.

Right.

So it's something -- by the way, we will offer the Lithium product line too. So we're going to offer the lead-acid -- the conventional lead-acid, the high-end product which is the lithium-ion and then a mid-range which will be thin plate pure lead, which we think there's just going to be some real advantages to it. It's going have some of the major advantages to Lithium; however, it's going to cost much less than Lithium.

John, my last question, optimistically, when can we expect to start seeing these thin plate pure leads hit the mobile market?

You can expect it -- it's happening right now. We started the First of April. We're starting that project in the European market. See, we have a premium product with the square tube in the US market. So our decision, we'll start this and see how the market accepts it. We are building them today in our plant in France-- in Arras, France. If the market accepts these, we will expand that operation and be able to build more of them. Then if it's really accepted well in the European market, we will then bring it to the US and potentially even into the Asia market.

Great color.

Michael Gallo, CL King.

Congratulations on the very strong results. John, 10% operating margin in Asia, I think was the best it's been in a couple of years. Obviously, you don't have the startup expenses and you're starting to fill up the facility. Do you expect based on what you see that you'll be able to sustain that double-digit rate going forward?

I think there's -- you have to really break that business down and take a look at a number of things. The headwinds that we have is, we still have some of that $5 million I referred to earlier under startup cost in the Chongqing plant. That plant right now is running at about a 16% of capacity utilization that was planned for. So we still have that headwind or that dragging us even at the 10% operating earnings. The other side to it, is that some of the products that we manufacture under the 2-volt cells, the margins -- even though pricing got better, the margins are still lower than we would like to see them. So we have some opportunities to reduce cost or increase pricing to get that up. The third element is that many of the Asian companies, the real high-end companies are -- have tested and have tried our thin plate pure lead products and they are now buying that product at a greater extent than they have previously. They see the value in the product. To ship it from New Port, Wales where we build that product or from Warrensburg, Missouri is expensive. But the customers like the product and willing to pay for it. Just last quarter, our mix was higher on thin plate pure lead. Now to get to your question. Right now, our forecast for the next six months or so, we believe that thin plate pure lead product will be still there. The orders will still be there. So we expect we're going to be running fairly decent in Asia going forward.

Okay. Great, John. Second question I have is just on Europe. Wanted to dig in a little bit more on some of the Asian imports becoming less competitive. I was wondering, any sense for if it's a third of the market, is it 10% or 20% become really not competitive. I was wondering also whether that spread differential on lead and some of the other issues there provide an opportunity to get some better pricing in Europe despite what's obviously a challenging economic environment.

Well, we hope that -- that's priced out first on the market. It's Reserve Power market -- our estimate it's about a third of the Reserve Power markets are coming in from Chinese manufacturers. In the Motive Power it's non issue. They ship over very few. There are some that go over, but it's a very small percentage of the market. It's really going to focus on the Reserve Power business. We don't know the timing or total impact on it, because in many cases what happens is, there are contracts in place. These contracts that are in place with Chinese manufacturers to an OEM in Europe, it could be that the -- there might be a price adjustor in there, there may not be a price adjustor. Someone's going to get hurt on this thing one way or another. Either a customer's going to pay for it because of the lead spread in the currency or the manufacturer of the battery's going to pay for it. But ultimately what's going to happen, we should be able to get -- if you get beyond the contracts and everything else and it stays where it is, we should be able to be in a better position to get increased pricing.

John Franzreb, Sidoti & Company.

John, you just actually touched on my next question. How much of your business is actually tied to lead escalators and has that changed materially from a year ago.

It has not changed materially. We run probably as a Company total about 35% ballpark, depending on the mix and the customer mix, it could be the low 30%s to up to about 40%.

Okay. Looking at a higher level, you kind of talked about the opportunities in other regions of the world. How big of an opportunity are we talking about there? Is it still in its infancy? Can you give us a sense of scale?

Yes, let's start with India, what we've done there and let's talk about South Africa, what we've done there to start with. You'll get an idea of it. In each of these regions, when we've gone into them what we've looked at is not buying the largest battery manufacturer or the most profitable battery manufacturer in those regions. The reason for that is because what you're going to pay in the front end is going to be a very, very high price. So what we've done is we've went in and bought companies or invested in companies that are second or third tier. And within what we call the 100- day plan, you take them from second to third tier up to an EnerSys standard of being first tier. So when we invest in India as an example and the amount of money we put in to buy the Company was not all that much, but the amount of money we're putting in to upgrade the Company is quite a bit.

That's what I call planting a seed. That's what I call planting a seed. From there, that seed will grow in by taking market share. We'll be bringing in new designs and products that we manufacture globally. We will also look for other acquisitions in those regions. In fact, India specifically, am I happy with our market share there? Absolutely not. We planted the seed. It will grow. We've got to get much bigger. It is our intentions to be Number One in India, Number One in Africa. I said Africa, not just South Africa, but all of Africa and to be Number One in other regions of the world. Now, in South Africa, we do have a joint venture there. We also have one in Northern Africa in Tunisia. We have plans in place where we'll be putting sales offices on the rest of the continent or other areas on the continent to expand our presence in markets where we think we can get good returns.

How big is the total Indian market, just to use your example?

It's north of $1 billion, John, so --

Okay. It's sizable. One last question, to make sure I heard this right. The new Asian facility plant you said was at 16%, one, six, capital capacity utilization?

State again, John, I'm sorry.

The new plant in Asia --

In China, in Chongqing, China. Yes, currently it's running about 16% of what the total capacity.

Where do you expect that to finish the year?

I don't know that answer right off. We're probably going to be in the 40% to 50% range.

Okay.

But keep in mind, when you're starting a plant up like this and you put -- in our view, you put the EnerSys brand or name on that product, it better be top quality. When you put a plant in place, the last thing we want to do is to increase that capacity so fast that we put out products that are not to our standards. So by design, it's a slower ramp-up process. The Number One objective, if there's any questions, when in doubt, shut it down. Okay? Just be sure that it's top quality that's going out the door.

Scott Reynolds, Jefferies.

Congratulations on the strong quarter. A lot of good questions asked so far. I think the one I wanted to ask was on the gross margins in the quarter, what would you attribute -- would you attribute most of the strength quarter-over-quarter to lead prices or would it be some type of mix of better product mix, pricing? Could you break it out percentage-wise, which it would be from?

Well, we did receive sequentially a slight benefit from our commodity costs. Pricing, this is kind of where when our pricing normally is chasing the cost curve, there comes a point where the cost breaks downward and a quarter or therefore later, the pricing will catch and overtake it and that's kind of what you've seen in this quarter. So you had the benefit of very strong volume because $593 million of revenue -- the fourth quarter is traditionally our strongest revenue. So we had good utilization of our factories. We had good pricing in relationship to our commodity costs. Those are really the factors that kind of raise. One of the questions that was asked -- Zach with Stephens asked earlier about the margins and I would say the 24.5% we enjoyed in the fourth quarter, it's going to be in that ballpark, maybe slightly less in the first quarter. That's about as far out as I can look given what I know about lead costs right now or order intakes. But I think for one more quarter you're going to see, again, a very good, strong performance at the gross profit line.

Okay. On the euro fluctuations, how much of that do you have hedged? Is it mostly hedged by all of your operating bases there or is there some type of benchmark that you can give us to say, a percent euro decline would impact operating profit?

When we look at derivatives, I've said this many times in the past, we're not going to go out long on the market and go at risk. When we take a look at our biggest exposure on the currency from a transaction standpoint, it's with lead that we buy in Europe that's dollar denominated but we have to convert euros to dollars to buy the lead. So we will hedge out. So we track our lead hedging, our currency hedging very consistent with our lead hedging. So we're not going to go at a big risk on it. Now, if we have a long-term contract with a customer, that let's say goes out a year or two and it's at a fixed price and there's a currency difference, then we will hedge that whole period, if we think it's the right decision at that time and not take the risk. Mike, you want to add to it at all or --

Yes. I think we feel like we're naturally hedged in that most of the product we produce in Europe is sold in the European market. So you're producing under a euro cost basis and you're selling in euros. Now, where we don't have that circumstance, like John described, when we're buying lead that's denominated in US dollars we do put hedges on those to go back to back with the lead hedges that we have in place. We also have a couple of factories, one in Poland, one in the UK that are producing products, one is denominated in pounds while the other one's in zloty. We will do some forwards between those two to lock down the rates on those transactions. But you throw all of the euro transactions and you can see in our 10-K, there was only about $50 million worth of euros being hedged for all three of those type of events that occur. So we would like to say, in normal circumstances and I realize that the euro has -- it's down below $1.25 at the moment. It's dropping relatively fast. But we typically believe that FX noise is usually only plus or minus $0.03 to $0.05 in a quarter. At the moment, we don't have anything that would lead us to believe we'll see anything greater than that in this quarter.

Take this conversation also with the conversation on where our gross profit is going and think about this for a second. In selling a product in Europe from a translation standpoint, if the currency is weaker and you translate that pricing or the net sales from Europe to the US to the dollar, it's obviously going to be lower sales. So our sales will be lower because of the currency going down. If theoretically the cost is in euros, then the cost of sales are going to come down. Theoretically, your gross profit would remain the same. The gross profit divided by a lower sales base would be a higher percentage gross profit. So think about -- back to your question on where the GP is going to go, the currency will help us from that end. It's a mathematical phenomenon, has nothing to do with our business, or little to do with our business.

Michael Lew, Needham & Company.

You mentioned positive order trends carrying into the first quarter, can you characterize the quotation activity by geographic region and segments. In other words, you mentioned growth expectations for growth in Asia. Is it the quotation activity that's accelerating, that's what's giving you the confidence?

What's giving us the confidence is when you look at our backlog. If you go back just a few months ago and look at our backlog, the backlog was very high. The order take was lower. In the last 10 to 12 weeks, we've seen orders pick up globally that has held our backlog at, as Mike said earlier, near record levels. So instead of looking in the first quarter of hitting our sales forecast by consuming a lot of backlog, we're going to hit the sales forecast with not consuming the backlog. Now by region, what we're seeing is yes, it's picked up in the Asia market quite nicely. Europe has remained relatively flat. US has picked up.

In Europe, is it fair to say then Western Europe and Eastern Europe you have two different markets, improvement in the Eastern and Western still a bit sluggish.

I think it's fair to say that, yes.

Okay.

Just to add to that, that's why -- Western Europe is what it is. We're not anticipating a major pickup. The beauty of being -- having a diversification that we have, that it's not going to have a significant impact on our business unless it really gets bad but where we're really going to put the emphasis, is going to be in those markets that, as I said earlier, just planting the seeds in. We need to grow faster in those regions. We're going to put more resources in growing in areas like Russia or in Turkey or in Africa and India. In Western Europe, one of these days, we'll get healthy again.

Okay. With regards to the non-lead offerings like lithium-ion or nickel-zinc, you mentioned expanding into new applications. Is the go-to-market strategy going to be the same or are you going to lead with the alternative technology offerings instead of traditional lead. Would you need to increase the sales headcount?

I think when you look at it -- again, you go back to our overall philosophy. We're in stored energy solutions that make money. We're going to look for those applications where we think Lithium or a nickel-zinc or a nickel cadmium battery or even a fuel cell is the right offering for the customer. What we're going to do, is we're going to walk into the customer and say here's your application and we have the different technologies. Here's the price on lead-acid. Here's the price on lithium-ion, here's it on the cadmium battery. The customer can specifically pick the battery that fits their specific application. So it's more of the old concept of one stop shopping.

Okay. Finally on, with regards to the Chongqing plant, you mentioned 48% or 50% utilization by fiscal year-end. What's the preliminary expectation for full utilization?

I think to get it to full utilization is going to depend on the market itself. I think that we will be capable of running the manufacturing plant at a higher level than the market will grow. That, by the way, is by design. The reason I say that is, when we planned this plant, we looked at where we thought the markets are going to go and said that when you build this building you better not build it for a one or two year period, you better look longer range. So it could take quite a number of years to get it totally to 100% utilization or the high 90%s.

Okay.

I don't think it's going to happen overnight. That's by design. What we'll do, we built the building but we haven't put the equipment in place for all the different product types or all of the number of units we want to build. Again, it's going to be a process, a controlled process, a controlled ramp-up in it. But at the end, I think what's going to control it -- to get to your question, is going to be how strong is the demand for the product.

Bill Dezellem, Tieton Capital Management.

Did we hear you mention earlier in the call, that you may be putting thin plate pure lead in Chongqing? If so, what would be the time frame that you would suspect that might happen?

No, I did not say that on this call. What I did say is that we are shipping product into the Asia market that is built in New Port or in Warrensburg, Missouri and there's a premium associated with that. But to your question, if the market demand is strong enough in the Asia market that justifies us making the investment in thin plate pure lead in the Asia market, we would look at putting that operation in one of our factories or even building a new factory to support it. Chongqing would be an option, but it wouldn't be the only option.

That's helpful. Thank you. Then relative to Europe, would you describe how you would characterize the activity level in the March quarter sequentially versus a normal activity level change in March versus December quarter?

Well, when we looked at the fourth quarter in Europe, they actually had a nearly 2% step-up organically from the third quarter. That's not necessarily unusual because the fourth quarter is generally stronger across the board than the third quarter. So even though we saw some year-over-year step-downs, sequentially it went up by, I think it was just under 2%. So Europe, to John's point earlier, while it's down, while we think Western Europe is struggling. We have other opportunities within that region to pick up the difference.

So would that organic rate of change that you had sequentially, would you consider that normal? Or would basically, you break it down into two pieces and say Western Europe was softer than normal and Eastern Europe was normal or stronger than normal?

Well, I would -- yes, I would definitely say that the strength of the Eastern and Middle East, Africa is what generated that positive sequential improvement.

I think when you look at Western Europe, obviously there's a lot of uncertainty. And you look and you read these Draconian stories about how bad things are and then you look at our numbers and say, well, why are you guys up or why are you even flat in Western Europe? One of the big reasons is the replacement market. Think about it for a second, when you've got a system, a UPS system or a telecom system that's out there running and the battery is 10% to 15% of the cost, and the battery goes bad, you're going to replace it. So the replacement market is still very good in Western Europe. That's why we're holding up. The weakest part of most of these systems, whether it's a UPS system or a telecom system, the part that's going to first is going to be the battery.

Think about flashlights. You buy a flashlight and what happens? What's the first thing you replace, it's going to be the battery. There's a good replacement market out there for us. Now, we're going to see the real pick-up take place, I believe is one with Motive Power, when the economy turns around, yes, we'll see a pick-up there. But I think the bigger one, is going to be when the telecoms in Europe start to expand into 4G. When you see that, I think we'll see a real pick-up in Reserve Power battery spending to place in Europe. As I said earlier, Western Europe, it is what it is. We're not going to do anything about that. We're just going to have to be patient and wait for it to change. We're going to have to make up for that flatness that we're seeing in Western Europe by expansions into the other areas. And by doing that, when Western Europe turns and we do see 4G go into Western Europe, I think we're going to have some real nice growth coming at us.

What is the prospect for 4G in Western Europe?

Right now -- recently what happened was because of some of the legislation that was coming out of the EU about pushing -- taking down roaming fees and some of the other requirements that we're putting in place, a number of the major telecoms got together and they went to the EU, and said look it, we need some help, we want to expand in this thing. What took place with it, the government -- the EU then opened up an investigation with these guys in collusion. I don't know where it's going to go. I think there's -- you look at the license -- over in 3G license, they were selling for north of $50 billion for the license to use it, which was a real mistake for 3G and a lot of them lost money in it. Now there have been some licenses gone out that's been a lot less, but with the programs and the need that they have for additional capital, it's going to come down to what the government's willing to sell the license for and once that happens, just for the government, the EU and the telecom companies to work together. How that's going to come out, when it's going to happen, I don't know. But I don't think it's going to be forever that Europe is going to stop at 3G. I think eventually they're going to expand. I just don't know when.

Thank you. Then my final question is capital expenditures. What is the fiscal 2013 plan relative to the $49 million you spent this last year?

It's going to be -- last year we planned on spending closer to over $60 million. But we only spent $49 million. I'm going to say that our plan is going to be the same and as we find opportunities for further cost reductions, it's going to run somewhere between $50 million to $60 million.

Now, last year you had the big expenditures from Chongqing. Where would you anticipate the bigger dollar expenditures to be this year?

I don't want to get into a lot of details on that because of competitive reasons. Okay? But it's going to be looking at the same things that we talked about earlier. Product development, it's going to be capacity expansion for some of the higher margin products if the demand's there and it's going to be in cost reduction activities.

To John's earlier point, as we continue to build out Chongqing to get it to its ultimate utilization, some of next year's spending is still related to Chongqing.

That's a very good point. Because as I said, we've got the building there. We've got certain production areas running. But as demand increases and we ramp that plant up, we're going to add more to it. The other area that, as I said, we planted seeds in certain locations, India as being an example and we're going to be making capital investments to grow those areas.

Tom Daniels, Stifel Nicolaus.

Most of my questions have been answered and I apologize for continuing to harp on Europe. But I guess I was wondering what you guys think about EnerSys' capacity in Western Europe as well as overall industry capacity as it stands today.

Our capacity utilization?

Yes, just in general.

Well, in general, I think that we would be running in the high 70% -- mid 70%s, 70%, thereabouts. But keep in mind a lot of the restructuring costs that you see, what we've done is moved production from Western Europe to Eastern Europe or from high cost areas to low cost areas and in the process of doing that we've resized some of the capacity. Okay? So we're not sitting on a lot of assets that are not being used. We've resized it to match the market as we see it today and where it's going to, with the provision when it grows larger that we can in fact add more capacity then. But it will be in lower cost areas.

The other thing to keep in mind is some of the European facilities also serve to export product to other regions in our business, whether they're in Asia, Japan, et cetera. So they're not entirely reliant in terms of what their utilization of the capacity, not entirely reliant on their own market. They get the strength or they get the opportunities to sell into Australia, Japan, the United States, et cetera.

Okay. Thank you very much. Then just in overall industry capacity, I guess thinking around if it got really bad in Europe, would you guys be thinking of acquiring maybe some of your weaker competitors who are in tough finance straits or vice versa? Do you think that you could see some significant pricing pressure just if demand goes down and there's too much capacity in the market, how are you guys thinking about those two things?

The way we view it is this, that when you take a look at the balance sheets of many of our competitors, their balance sheets are fairly weak and they need to make money. If it goes down and they start lowering pricing, their situation would more than likely get worse. So it's one that we hope that they don't drop the pricing. It's always a question there. So far it's been fairly rational. So far it's been -- my belief, anyway, that when they're losing money or breaking even and have weak balance sheet, it's going to be very tough for them to take a low margin business.

I would even say, in some cases once that becomes known or suspected, their customers then are going to want to hedge and make sure they have a secured second source. So oftentimes you can pick up additional business without acquiring a company, which in Europe, which is -- we have a very large market share, we have a difficult time of buying anyone of any size in Europe because of the antitrust considerations.

Kirk Ludtke, CRT Capital Group.

I'm on Slide 5 and I just wanted to -- I was wondering if you could -- I see that overall your volume was up 3% year-over-year. I was wondering if you could give us -- if you could go through these segments and maybe give us just directionally how you did share-wise in the quarter, year-over-year? Up? Down? Flat?

All right. Well, clearly we think that we had a slight gain in the Americas. You can see they had an 11% volume improvement. We believe on the Motive Power side our share is approaching 50% and we have a lesser share but a strong position in Reserve. So I would say, we feel that we have a slight market share increase in the Americas. Europe, their volume is down by 6%. In early in the year, we think we lost a little market share to some of the competitive actions of other battery suppliers, but I think later in the year we felt like we were starting to recover some of that. So I would say, we're kind of a push in Europe on market share. In Asia, where we're seeing strong growth and we stepped out of some of the ultra competitive bidding in the major telecoms earlier and that pricing pressure has let up. Our competitors have had enough of not making any money and everyone raised their prices more recently. I think you're going to see an expansion in our market share for no other reason with the number of lead supplier or battery suppliers that have been closed, even though those weren't any of our direct competitors it still has an easing effect on competition in China.

That's fantastic. I appreciate that. That's helpful. With respect to the -- just shifting gears for a second, with respect to the acquisition strategy. You've talked about -- in that context, you've talked about India and China. Just without putting words in your mouth, is it safe to say that the strategy is focused on the emerging markets, higher value-added technologies, that type of thing?

I think that's -- yes, that's fair to say.

Okay. Then do you have any kind of size limitations?

The answer to your question is, I think that anything up to $1 billion we would look at. If it's over that, we would have to take a serious look. When you take a look at doing a stock buyback, as an example we have in place, when we look at the acquisitions that we have on the table right now and we say we can cover those and plus do a $50 million stock buyback, and the concept is if we found something that was really big, say $1 billion, $1.5 billion or whatever. We would probably have to do a primary offering. Our focus was that when our share price drops down and it's low and the market doesn't recognize the value, we're going to buy it back with the intent, if we do find a larger company and we have to do a primary offering, when we do it, if we bought the stock at $20 and the stock price is up to $32, that would help us buy a larger company. So we're trying to manage the balance sheet from that perspective, that it's just not small companies, that ultimately, if we find the right deal that we would consider it if it made sense for our shareholders.

Got it. Well, that's very helpful, I appreciate it.

Sean Britain, Bayside Capital.

Just one cleanup question on Europe. What percentage of European revenue is from Western Europe if that's something you guys can share?

Want to take it, Mike, or do you want me to? You look at Europe in total right now it's running about 50%. You'd be looking at about 15%, would be another area. So it's going to be in the zip code of about 35% would be my estimate on it. I don't have the hard numbers here in front of me. That's just off the cuff. Mike, did you hear that?

Yes. It's going to be the minority of their overall sales, but I think somewhere in the 30%, 35% sounds right.

So just to be clear, that's 35% of total Company-wide sales are from Western Europe?

Yes.

Got it. Okay. That's great. Then just shifting to North America where you obviously had just a fantastic quarter. What percent of the Americas is North America versus some of the more emerging markets?

On the Americas you're running probably 85% that's going to be in the United States.

Yes.

Okay, great. Then just when you look at that 11% organic growth, any kind of key drivers, key end markets, what's driving that? We talked a little about market share on the last question, but anything that stands out as driving that growth beyond just the recovery?

I think Motive Power was particularly strong. It was a -- with the resurgence of manufacturing in the Americas, it's certainly pushed the Motive Power quite nicely in the last year.

(Operator Instructions) We have no further audio questions at this time.

Okay. Well, thank you everybody for joining us. Have a great day.

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