EnerSys (ENS) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second=quarter 2012 EnerSys earnings conference call. My name is Grant and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session toward the end of this conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to John Craig, Chairman, President, and CEO. Please proceed, sir.

Thank you, Grant. Good morning and thank you for joining us. Last night we posted on our website slides that we're going to reference this morning. If you did not get a chance to see those slides, you can go to our website, which is www.EnerSys.com, and view the slides as we are going through the presentation this morning.

Before we get started and get into the details for our second quarter and first half of the year, I am going to ask Mike Schmidtlein, our Chief Financial Officer, 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 could 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 defense and operating performance, and are applicable only as of the dates of such statements.

For a list of factors which could affect our future results including our earnings estimates, see forward-looking statements included in Item 2, management's discussion and analysis of financial condition and results of operations, set forth in our quarterly report on Form 10-Q for the quarter ended September 30, 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 November 5, 2012, which is located on our website, www.EnerSys.com.

Now let me turn it back to you, John.

Thanks, Mike. I'd like to start by saying that we are very pleased with our accomplishments and financial results for our second quarter and first half of this year. You'll notice on slide 3 that we reported second-quarter records for sales of $554 million, gross profit margin of 25%, operating profit margins of 11.6%, and earnings per share of $0.92.

We reached our minimum target of 25% gross profit for the second consecutive quarter. Year-over-year on a sales increase of 1%, earnings per share was up almost 60%. Sequentially, these results are even more impressive when you consider our second-quarter sales and profitability are impacted by the vacation season in Europe and the Americas.

On slide 4, our first-half financial highlights show similar records for any first half in our company's history. Our earnings per share of $1.87 is 48% higher than last year's earnings, which were $1.26.

I now want to focus on our current business activities and third-quarter guidance. During the summer we experienced our normal seasonal slowdown in orders. In September we experienced our normal increase in orders, which continued through early October. However, in the past few weeks our order intake has slowed, which is not our normal historic pattern.

Based on this information, last night we announced our third fiscal quarter guidance of $0.77 to $0.81 earnings per share. The guidance assumes our third-quarter orders continue at the lower levels that we have recently experienced. Should the slowdown in our business continue, we would view that as an opportunity to execute a further consolidation of our global operations, with the objective of reducing our cost and increasing our future profitability.

That is exactly what we did during the last economic downturn, and we exited that recession a much stronger company than when we entered it. What thing we will not do, we will not cut back on customer service or slow down the introduction of new products. We will do what it takes to meet our customers' demands.

Last week EnerSys made two announcements about new product introductions that are detailed on slide 5. First, we announced EnerSys was entering the large-scale energy storage market with our new OptiGrid megawatt scale energy management system. This product is designed for utilities and large industrial users who are increasingly discovering the large energy storage systems like OptiGrid are effective tools for power grid stabilization.

EnerSys is uniquely positioned to meet this growing demand since we have the financial resources, extensive production capabilities, and proven product portfolio to serve this market. Conservatively, you could estimate that this large-scale energy storage market will grow to be larger than our existing markets, which are about $10 billion in size.

Second, we announced the addition of two advanced premium products to our Hawker material handling equipment line. We are offering advanced lithium and thin-plate, pure lead advanced battery packages with onboard chargers and controls. These batteries are designed to require less time to charge by employing rapid charge, so users do not have to change batteries on the electric trucks.

In closing, we have had a great first-half fiscal-year 2013. The second half may present some challenges due to the global economic conditions. However, with our proven ability to reduce costs during slower economic periods and our addition of more premium and unique products, we believe we are well positioned to exit any economic slowdown stronger than when we entered it.

Now I will ask Mike Schmidtlein to provide further information on our results and guidance.

Thank you again, John. I am starting with slide 6. Our second-quarter net sales increased 1% over the prior year to $554 million, primarily from volume adding 2% along with solid growth from acquisitions of 4%, offset by a 4% decline in currency translation and 1% lower pricing.

On a regional basis, our sales in the Americas increased 10% in the second quarter to $277 million and our Asian business increased 25% to $62 million, while Europe's second-quarter net sales decreased 12% to $215 million, all compared to the prior year.

Europe's revenue decline was due to a negative 8% currency impact, 6% less volume, 1% less pricing net of 3% from acquisitions. On a product line basis, net sales for Reserve Power increased 7% to $285 million, while Motive Power decreased 4% to $269 million. Both product lines absorbed a 4% currency decline.

Please now refer to slide 7. On a sequential quarterly basis, second-quarter net sales were down 7% for the first quarter, with 6% from less volume. All regions had less revenue than the prior quarter. Europe and Asia declined 9% while the Americas declined 4%.

On a product line basis, our Motive Power business was down sequentially 12%, while sales in our Reserve Power product line decreased 1% sequentially. Lower volume in what is traditionally our weakest quarter was the principal factor in all the regional revenue declines.

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 is included in our press release dated November 5, 2012, for details concerning these highlighted items.

Please now turn to slide 8. On a year-over-year quarterly basis, adjusted consolidated operating earnings increased $21 million with the operating margin up 370 basis points. On a sequential basis, our second-quarter earnings decreased $6 million with the operating margin down 30 basis points. From a historical perspective, operating earnings remained strong at 11.6% of sales.

Our Americas business segment achieved an operating earnings percentage of 15.8% versus 11.1% in the second quarter of last year, and 15.4% in the previous quarter, primarily from the impact of rising organic volume compared to the prior year.

Europe's operating earnings percentage of 6.5% was above last year's second quarter of 6.0%, but lower than the prior quarter's 7.3%. Europe's organic growth was down 6% from the prior year and down 7% from the prior quarter.

The operating earnings percentage in our Asian business segment increased in the second quarter of this year to 10.6% from 0.9% in the second quarter of last year, but was less than the 13.1% in the prior quarter. Asia's operating earnings were $6.6 million for the second quarter, reflecting higher revenue and less impact from the startup of our plant in Chongqing as compared to the prior year.

Please move to slide 9. Our second-quarter adjusted consolidated operating earnings of $64 million was an increase of 49% in comparison to the prior year, with the operating margin up 370 basis points to 11.6%. Higher volume and lower commodity costs were the primary factors. Excluded from our adjusted operating earnings for the second quarter was approximately $1.4 million of highlighted items.

Our adjusted consolidated net earnings of $45 million increased 56% from the prior year to 8.1% of sales for a 290 basis point improvement, with the book tax rate increasing to 28%. EPS increased 59% to $0.92 per share, a second-quarter record on higher net earnings and fewer shares outstanding.

Our adjusted effective income tax rate of 28% for the second quarter decreased 100 basis points from the first quarter due to the discrete items benefiting the second quarter. We believe our tax rate for the third quarter of fiscal 2013 will be between 25% and 27%, although we expect -- for the full year we expect a rate of 28%. Our rate for the full fiscal year of 2012 was 25%.

I refer now to slides 10 and 11. We have provided information on a day-to-day basis similar to that of our second quarter from the prior pages. These two pages are full-year reference, and I do not intend to cover the year-to-date results other than to say with EPS of $0.95 and $0.92 respectively for the first and second quarter, these two quarters were fairly similar in results, both of which were records.

Please now turn to slide 12. Now some brief comments about our financial position and cash flow results. Our balance sheet remains very strong. We now have $212 million on hand in cash and short-term investments as of September 30, 2012, with nearly $400 million undrawn from our credit lines around the world.

We generated nearly $79 million in cash from operations in our first half of fiscal 2013. Our leverage ratio, which must be maintained below 3.25 times as calculated in our US credit agreement, was at 0.5 times. And our net debt to total capitalization ratio was under 10% percent as of September 30, 2012. Capital expenditures were $27 million in the first half compared to $24 million in H1 of fiscal 2012.

We expect to generate adjusted diluted net earnings per share of between $0.77 and $0.81 in our third quarter of fiscal 2013, which excludes expected charges of $0.08 per share from our restructuring programs and acquisition activities. We continue to believe we are well positioned to take advantage of future opportunities.

Now let me turn the call back to John.

Thank you, Mike. Now we will now open the lines up for questions.

(Operator Instructions) Michael Gallo, CL King.

Good morning. John, my question as you look at a little bit of slowing in sales, obviously it's hard to tell how much of that is election and/or fiscal cliff related versus real-end market demand. I was trying to get a sense for how much cost you think you can take out. Is it mostly Europe or do you see some opportunities in the Americas as well? At what point do you start to really take those costs out?

It seems like up until a month ago, things were chugging along really at record levels. So help me kind of frame the thinking on that.

And you're right, they were chugging along at record levels and as I said, we've just seen this in the last few weeks; it's starting to slow down. Taking a conservative look at the guidance, we are going to assume that it continues to remain this slow through the third period, or third quarter here. Keep in mind, we're halfway through the quarter already. So orders that we take in, we've got to look at the percentage of what we take in and what we actually ship.

Long-term, I'm not at all concerned about this. This is a blip that it's down. The need for our types of products and batteries is going to continue to grow, but we are going to see a period here this particular quarter where it's down.

Now to your question on the cost. The cost, we have plans in each of the areas -- in Europe, in Asia, and in the Americas. There are opportunities. If I had to prioritize those opportunities, I would say that the biggest one we have is with further consolidation of the acquisitions that we did recently, looking at some of the lithium business.

We bought a number of different companies in lithium. There are redundancies there that we can take advantage of. And now that we have the time and the resources to do it, we will go ahead and implement those plans.

It's the same thing in China with our new plant coming online in Chongqing. Some of our older or existing plants, even though they are low cost compared to the Americas or Europe, in the China market our Chongqing plant is significantly less in cost. So we're going to take advantage of that operation also. So it's really across the board.

Thanks, John. Then just had a question, obviously, unfortunate tragedy here with Hurricane Sandy. But is it too early to even frame what kind of opportunities this might present for your US Reserve business, both on the telecom side and in UPS?

You answered it; it's too early to tell on it. I will say, though, thus far we have seen any slowup in orders that normally would be coming out of the region because of what's happening. Things obviously have stopped with the tragedy that has happened there, or slowed up. How big that could get, it's hard to speculate. We really don't know and we probably won't see the beginning of that for a week or two.

But obviously, you will slow up now as everything is just shut down, and then you would expect things to probably pick up.

Absolutely, and when it picks up there should be some pent-up demand there, too.

Great, thank you.

Zach Larkin, Stephens.

Good morning, gentlemen. Thanks for taking my call. Just kind of to follow up on some of the order commentary, John, obviously what we are seeing now is different than what you would normally experience this time of year. But considering other times where you guys have gone through some economic pressures and obviously some of your businesses will get more pressured by that than others. But is the order pattern that you are seeing now any different than what you have seen maybe in other kind of shorter-term contractions?

I would say this is more of like a normal. It's not anything close to what we saw in 2008, 2009. It's just a -- it's a minor blip right now, and hopefully it will come back here in November and December, but time will tell.

As we all know, there's a lot of uncertainty right now with the election, the uncertainty with the fiscal cliff, the uncertainty of Europe. And I think that our customers are kind of holding back right now. At least our orders indicate that they are holding back. But as I said that I am not worried about this coming back because the need for stored energy, the need for our types of products, is only going to increase in time.

Then as you look at that jumping onto the new products, as you look at the new Motive applications, what's the customer acceptance that you are seeing? Maybe give a little bit of color on price points versus some of your traditional offerings, if you could?

Let me make a couple of general statements. On anything that we are looking at new product development, a minimum 25%. And I would say on the new product development 25%, I don't get real excited about that. We're looking for margins that are way in excess of 25%, 30%, 35% gross profit is what we would like to see on new designs.

If we are going to spend our money and time developing new products, we want to do it on things that's going to change the mix of our business, change the mix so that it goes to higher margin products. So I would anticipate in time that we will see the margins increase.

So Mike, do you want to add to that at all?

I think where we are providing a higher value situation, particularly in Motive Power where users are going to be able to use opportunity charging and fast charging to be able to use one battery versus maybe multiple batteries, gives them an opportunity to save money. So we think of those as being win-win solutions.

In a fork truck when you have to take the battery out at the end of a shift and put another battery in, that's time and money. We're trying to come up with designs that you can opportunity charge it, fast charge it, so that you have less charging time and more run time and you're not paying workers to take the battery out and replace it.

They can charge it during their breaks, during lunch, in between shifts. It's called opportunity charging. And we are trying to do that not only with lead acid batteries but with lithium batteries, too. I shouldn't say try to do it, we are doing that. So I think it's something -- it's what we call best value for customers. It's giving customers something that others are not giving them today in the marketplace. And with that, obviously, are going to come a higher front-end cost to the customers, but in the long run they will save money.

With that higher front-end cost, obviously a lot of benefits to that. Are people pretty open and accepting of kind of the cost-benefit analysis?

Yes, they are.

Great. Thank you.

John Franzreb, Sidoti & Co.

Just a little bit about the recent weakness in the order trends. Is there any particular geographic or product line bias that we should be aware about?

It's somewhat across the board. I think in each region, whether it's the Americas, Asia, or Europe, we are seeing that. I would say that it's more in the Motive Power area than the Reserve Power area. The Reserve Power area down, but not near as much as the Motive.

And I think the big reason for that is we continue to see spending and telecommunications in US market; cloud computing in the European market; although them in the Asian market, in China specifically, the telecom spending has slowed up. But what we are hearing right now, there's going to be very large orders being placed for new equipment installation in the China market going forward.

Now how much of that we actually get or bids that we win, we'll have to see. But the telecoms right now in China are talking about spending again.

That's good news. John, regarding the restructuring charges, I guess two pieces to this question. One, I think I kind of budgeted for you doing more restructuring in the second quarter than you actually executed on. Can you talk a little bit maybe about deferrals and what you are planning and the timing of it?

The second part of this is that you say you have a couple of items that you are thinking about doing if things get worse or the trends continue. Why not execute them anyway?

Well, let me pick up and then I'm going to ask Mike to pick up on it, also. When you take a look at the new products that we have and the resources we have and you are running along fairly -- as we talked about earlier, we were really chugging along well, I think was the term. We were running near record volumes, and everyone is very, very busy with things.

When you are running a factory near capacity or at a very high end, it's tough to shut down an operation and move it someplace else. Let me be more specific on it. I'll go back to in the operation we had in Italy. During 2009 when we shut that factory down, if the recession would have ended early and the volume would have came back quickly, we would have been in real trouble because we wouldn't have been able to keep up.

And the reason for that, shutting that factory down in Italy, we had to move that production to Bulgaria and Bielsko Biala, Poland. It took time to do that and it takes resources to do that. So there are a lot of projects, but we have X number of engineers and manufacturing people to do it. And when we execute something like this, it has to be planned thoroughly and controlled because if it gets out of control it can get very expensive.

Mike, you want to add to it?

As you know, John, one of the reasons that we highlight restructuring and mergers and acquisition type costs is because the timing of them are not as certain as some of our base business. So it's because these two items are less certain. We may make a decision on a restructuring action, but we then have to make a formal communication generally to those employees. And sometimes they may have to make some decisions on what they might elect to do. All of that can affect the timing of when you record that in your financial statements.

So I realize that in quarters passed, there's been times when we may have said expect a charge of $0.05 or $0.06, and it came in at $0.02 or $0.03. And I think it demonstrates the uncertainty that does come in those two areas.

As we look at the $0.08 that we put into the guidance for our Q3, it does contemplate that we will likely take a major action in that quarter, but we haven't concluded on what or where that is going to be. So that timing is a little bit tenuous, if you will.

Fair enough. One last question, it seems like the pricing environment in Europe has held up reasonably well, at least it did last quarter. How are you thinking about pricing in Europe, in particular across both product lines?

Well, I think that we are -- obviously, as lag goes up, we would like to get the pass-throughs or we will get the pass-throughs on that automatically. And as you know, Europe has a larger percent of automatic pass-throughs. So we should see price increases come through on that.

I think that we are competitively priced, and a lot of that obviously depends on what our competitors do. I think the bigger opportunity for us, though, is not just at pricing existing products, but it's on the product mix. The switching from flooded calcium products, let's say, to thin-plate pure lead.

We are trying to do everything we can to sell the premium products. But in that sale, you have to demonstrate there is a real advantage to justify the customer paying that premium. We have been pretty successful at doing that thus far, and we're going to will continue to stay focused on that area.

Okay, thank very much.

Elaine Kwei, Jefferies.

Good morning. You guys have been making great progress on the margins even in a pretty challenging environment. But going forward with somewhat lower orders and volumes potentially, do you expect any pressure on gross margins for that? And then also has the volatility in lead still been within the range that you typically manage around?

Yes. As you said, if volumes are down and you are not running production, because we are not going to just build products to put on the shelf and increase primary working capital. We need to bring the production down. Bringing production down with high fixed cost, manufacturing variances will increase.

So that is definitely a headwind that we have to face, and we have to take and manage that through. Fortunately, we have some very good plant managers globally. They understand it. They know what they need to do, and they will do everything possible to control that cost.

On the lead side, you're right, you go back to summertime, lead was in the mid-$0.80 range a few weeks ago. It hit a high of $1.08. This morning it was down to $0.98. So that volatility is within a range, but it's tough to go get pricing when you bought lead -- obviously, we FIFO our inventory -- you buy lead at $1.08, let's say, and then the market drops down to $0.98; it's tough to go in and try to justify getting that pricing.

So yes, those are headwinds, and those are headwinds that we are very familiar with and we have to manage those headwinds. And we have demonstrated over time that we are very good at managing those things. The problem with it is one quarter or two quarters, we may not get all the pricing we want to offset the commodity cost, but the next quarter we'll get it, or the quarter after that. In the long haul, we always make up for it. We always get it back, but it does take time.

Okay, great. Just in the near term in terms of flexibility that you have on those fixed versus variable costs, would you say you would be able to address a good amount of the slowdown just with what you can do very quickly, or just trying to get a sense of what the -- how much room you have to move there.

I think that our scheduling group has been working with all the plant managers and they are looking at scheduling the facilities based on the demands they are seeing for their products and trying to keep some upside for products that may be required as a result of Hurricane Sandy. But we will do some of the things that are easier, if you will, rather than taking a shift down only to find you might need that demand in future weeks or months.

We will look at the holiday weeks and see whether or not we want to take an extended period over Thanksgiving or Christmas, and those are some of the things that every plant is looking at as they look at their individual supply and demand requirements.

To your earlier question on margins, I would say to John's point, some of the lead that was in the mid-$0.80s in the June, July, August timeframe, that's rolling through our third quarter. And the $0.98, $0.99 we have been seeing more recently is more going to be a fourth-quarter phenomenon. So we still expect for the upcoming quarter a pretty strong margin at the gross profit line.

Okay, great. Thank you so much, John and Mike.

William Bremer, Maxim Group.

Good morning, John, Mike, Tom. Let's just touch base on your outlook a little bit here. Slowing order pattern intake, I understand that. Due to what has occurred here in the Northeast with Sandy you have to anticipate, as you mentioned a little earlier, significant pent-up demand.

Now if I take a step further and analyze your inventory, especially your finished goods, we've got $156 million there. That's almost one-third of a top line of a quarter here. Maybe help give us a little color on the cycle of turning that, and what's the breakdown there of the inventory? Some of it Motive versus Reserve. I've got to anticipate you guys really bringing that all through right now. That could be a tremendous backend of the quarter here. Give us a little color on that.

Well, there could be. Again, it's very hard to predict what's going to happen with the hurricane and what we are going to see out of that. We have an operations planning group here at corporate that works globally with every manufacturing operation. Virtually every machine that we have at every factory, we know the capability of that machine and the production planning is extremely critical.

If we take a factory and we are running 100 one day and trying to run 300 the next day and 50 the next day, that just is millions and millions of dollars of waste. So it's one that we are very good at. Our operations planning people are excellent at controlling that particular element.

Now to your question on the inventory. What we do is we look at every SKU in every business segment, and we're looking at what is the proper inventory to cover -- we call it between the uprights. You want it between the uprights. If it goes too far one way, you haven't got enough inventory. If it goes too far the other way, you've got cash sitting on the shelves. So we have got to manage that thing.

Right now, generally speaking, our inventory on our primary working capital is higher than I want to see it. We are over 27%. We need to bring that down slightly. So in bringing it down doesn't mean you just crash and bring it down. It means you gradually bring it down.

So it will take some time to do it, but we will get that number down. But the number one target, though, is we will have that inventory for our customers. We will meet the customers' demands. That is a must.

Can you give us an idea of where that inventory is stored in a globalized fashion? Do you have significant amount of that inventory right here in the Northeast?

We have enough within the United States, depending on the type of product. If it's a product that -- in the Northeast we have a distribution center in Allentown, Pennsylvania, as an example. We have inventory in New Jersey. So as far as getting the inventory, as far as getting the products to the region here, I'm not overly concerned about that. We've got the products and the production. We can handle that.

Can you give us sort of a breakdown? How much do you have on the Reserve side and how much do you have on the Motive side?

I don't have the numbers here in front of me. I don't know if we have that. We could get that number very easily, Bill, but I just don't have them here.

Okay, I understand. Let's go to Europe here. In a sense, can you give us a little more color? What are you seeing there? Is it still as gloomy or are things picking up regionally in certain areas? Give us a little color there.

As we look over the last few quarters, you've done a great job of holding the operating margins given degrade of the top line there. But do you feel as though things are just holding or getting better, or are they getting a little worse in certain regions?

I'm going to answer that question both with the Motive Power and the Reserve Power. What I'm going to start with is the ITA data, the Industrial Truck Association data that's looking at orders of electric fork trucks, and this is looking at the month in September. Unfortunately, I don't have October data, but I have September.

When I look at Europe in total and I compare it to the trailing three months, it's flat. It's 0% increase. It's flat. So I would say it's stable, but as I said, the first couple of weeks -- or actually the last couple of weeks of October, orders, our orders were off slightly. That's the red flag that runs up.

If you take the last, let's say, two to three weeks of October and you take that off, we wouldn't have the same feeling about things. In fact, we would probably have come out with higher guidance except for the last couple of weeks here. But it is a red flag, the uncertainty, that we pulled the guidance down.

And again, keep in mind we are halfway through the quarter now. So orders that we take now, a lot of those are going to fall into fourth quarter and beyond, not in third quarter. That's reflected in our guidance.

Got you. Thanks, John. I appreciate it.

Michael Lew, Needham.

Thanks, good morning, John and Mike. You've discussed the characteristics of the order slowdown. Have you also experienced a significant drop-off in quotation activity across the various markets?

That's an excellent question. And I would say the answer to that is no, the quote activity is still good; just not seeing the orders.

Okay. How would you characterize the current backlog? Are you starting to see cancellations or deal renegotiations? If so, where is the most pronounced?

Let me back up. I said we are not seeing the orders. We're still seeing good orders, but they're not at the high level we were running during the second quarter. So we are seeing good orders, but they are not at the same level. Ask your question again, please.

The question was on with regards to the backlog. Are you seeing a deterioration in backlog with regards to cancellations or renegotiations?

We saw a reduction in backlog, not because of cancellations, because we're not seeing cancellations. But we saw a reduction in backlog because of the summer slowdown that takes place. Historically, backlog comes down during the second quarter, but I will tell you it's down single digits. It's not down much.

Okay, so that would be along normal trends then. It's kind of following normal trends. That's a fair way to think about it?

Yes, it's followed the normal trends, but right now the backlog historically would go up because orders will be coming in in October, November, that would be stronger.

Right, got it. Okay. Also, with regards to the new initiatives, you mentioned the addressable market for OptiGrid. What are they for the nickel, zinc and lithium offerings? Have you sized that yet?

With the system -- let me back up and talk a little bit about OptiGrid and the whole concept on this. When you take a look at the systems that have been out there, they've been designed by electrical engineers. They've been designed by non-battery people. And if you look at what's most critical in this thing, it's the battery. It's the electrochemistry.

When you take a look at what failed, it was the batteries. What caused the fire? In some cases, they've had fires. It was the battery. That's where our expertise is, is with the batteries. The electronics and doing the AC portion of it is not as complex as doing the DC portion of it.

So we think that we've got a real advantage because we do understand the batteries very well, and we do have experts that we are working with on the electronics or the AC side of it, too.

Now, our system is being designed that is not only lead acid, it's also lithium. It's also nickel-based systems. It can use competitors' batteries. Our system is versatile enough that we can handle just about any electrochemistry to put into this.

We are starting out and we are building a unit right now, that in our press release we talked about that it's going to be a customer demonstration unit, and we are going to use lead acid batteries to start with that. But if the customer wants a different technology, a different electrochemistry, we can easily put that in.

Okay. Back to the nickel, zinc, and lithium offerings as they've been offered for the forklifts, have you sized that opportunity?

We have sized it. I personally think that putting a lithium-ion battery in a large fork truck is going to be a very small market. Putting it in pallet jacks and smaller material handling equipment, there are those that have gone out with it already, those being a fork truck manufacturer. They have a product offering, but they are selling very little of it.

The problem with lithium-ion is it's expensive, and to justify that premium, thus far the market has not been willing to pay a large premium for it. Now there are some that are buying it. There are some are out there, but it's a very small niche market at this stage. But if the market wants it, we are prepared to go. We manufacture the cells; we can manufacture the whole thing.

Okay, thank you.

Brian Drab, William Blair.

Good morning. Can you talk a little bit more about the dynamics playing out in Europe and whether you are gaining share in Europe, or continuing to gain share, given the difficulty that some of your Asian competitors are having competing with you on price in Europe?

Yes. We believe that we have picked up market share, and we haven't done or picked up that market share by giving lower pricing. We've done that by selling what we call best value, and having customers recognize that what we provide in a product is better than our competitors and the service is better than competitors. So we believe we have picked up some market share in Europe. But we're not going to go after market share for the sake of market share. We want to go after quality market share.

Are you seeing, though -- I thought one of the dynamics that's playing out for you with the higher cost of lead in Asia, that some of these Asian competitors are having a more difficult time competing with the outside of Asia.

That's very true, and that's on the Reserve Power side. About half the market at one point in Europe were suppliers from China or from the Asian market. When you look at the VAT tax that they are not getting a rebate on now and you look at the difference in cost between the LME prices and the Shanghai exchange, it makes us much more competitive on a price standpoint.

Okay, great. Then shifting over to the OptiGrid discussion again, there is a lot of superlatives being associated with this energy storage market, and I think the one thing that's clear is that it's going to be big. But I'm just wondering what percentage roughly, or what fraction of the market do you think is associated with batteries themselves compared with the electronics and associated systems?

We don't know the answer to that. I've seen numbers that have been as high as $200 billion that some have projected. And you notice what we said this morning, that we believe it will be larger than the markets that we serve today, which is approximately $10 billion.

The neat thing about this from a risk reward standpoint, this is really good for us because the risk associated with this is relatively minor. I mean, it's not a multi or hundred million dollar investment or anything like that. We built a system up and we demonstrate that system, and we can kind of pay as we go. As the market develops for this, we will get further into it.

We will continue to spend money if the market grows. So I think from a risk-reward standpoint, we've got little invested in it. I think it's going to be a growth market and if it is, we're going to participate in that market. And having the product offering that we have, the batteries that we have, it's just a natural for us.

And would be the customers there? Is it the utilities or municipalities?

It would be both those and also large industries. Especially when you look outside the United States and you see different areas of the world in the power grid and how bad they are in some areas, that this is just a natural for that.

Okay, thanks very much.

Kirk Ludtke, CRT Capital Group.

Good morning, everyone. You mentioned earlier opportunity charging in the Motive Power market, and I'm curious about how that will -- how you think that will affect market share going forward. And if you can maybe expand on when we would start to see that and if you can quantify any share gains, that would be great.

It's hard to tell how big it will get. I think it's going to -- obviously, it's going to be the high end of the market. And when our salespeople go in, they will have an -- I'm going to call it a ME2 product, one that will compete with our competitors. They're going to have a better product. And then they're going to have a top-of-the-line product, so it's across the board.

I think it's going to -- you are going to see certain customers that really understand and calculate the value of the price difference between a standard battery and a premium battery. And to say I want that premium battery because I can save money in the long run, either that it runs longer or I don't have to charge it. I can charge it faster or I don't have to replace the battery at the end of a shift, and save money.

It may be 10%, 15% of the market to start with, but I don't know what that is. We're going to have to just take and continue to have our marketing programs in place and push it, and hopefully, the market will accept it.

That's interesting. That's helpful. Does it, because it increases the utilization rate of the equipment that's already out there, is there a negative impact on demand as well? So the market shrinks because utilization rates go up?

I think the question you are asking is that typically on a ME2 type battery, you would sell two batteries for a fork truck. In this application you could argue that you could get by by selling one. So theoretically in units, you would sell half the units. I think that's your question.

Yes, yes.

Now the price point on that premium product is much more than the battery that you would buy two with, so there's going to be a higher price point. The other thing is that the life of that battery is going to be less because you're going to be running it hard, and so you are going to have a shorter life of that battery.

So I think what you're going to see with this thing is the unit volume will go down to start with, but it will pick up because the replacement market will be greater. You are not looking at a seven or eight-year battery then. You're probably looking at about half that.

So the benefit for the end-user is now he doesn't have to devote real estate to a charging room to be able to have that second battery. He can keep just one battery, so he has a smaller footprint in size as well.

Got it, that's interesting. So it's a complicated equation, but can you talk a little bit about the timing of how you are rolling this out?

Well, as I mentioned, on the smaller fork trucks what we're using -- I'm going to call them mono blocks. Those are 12-volt batteries; they're thin-plate pure lead type batteries. We have announced that for the smaller fork trucks already.

Now the 2-volt batteries which are for the larger Class 1 type fork trucks, those are 2-volt cells that are wired together to form the battery. We have built 500 of those already and they are in test -- actually, we have sold them, and I'm going to call it a beta site.

We are making further investment because the customers that have it thus far really like the product. They are experiencing what we have been talking about with the fast charge. So we are going to be making the next phase of investment here. We're in the process of doing that right now to increase that capacity. And with that, increasing that capacity, our cost will actually come down to what it has been running.

Great, I appreciate it. Then just a follow-up on the lead question someone asked earlier. I think the takeaway was that eventually, you do recover increases in lead costs. But were you saying that there will be some unrecovered lead costs in the December quarter?

I didn't say that per se, and I think what Mike alluded to was when you look at our cycle with it, it's possible we will see a little bit in December, but more of it would be in our fourth quarter.

Okay, I appreciate it. Thank you.

Bill Dezellem, Titan Capital Management.

Thank you. I actually would like to follow up on a prior questioner's call with the fast charge battery versus utility and approach it slightly different, which is first of all, do we understand correctly that over time you would expect the utility market to be substantially larger than the fork truck market since utility could be bigger than all of your markets combined today?

If you believe what with some of the analysts are saying and what they are projecting, the answer is definitely yes, but those are the projections. On how big that will grow, we don't know, but I have seen numbers as I said earlier up to $200 billion. They're saying the business will get that big.

I think that's probably a little bit large. But even if it's a fraction of that, there's $10 billion or $15 billion, that's still a pretty good-sized market for us when our industrial battery market globally is only about $10 billion.

How about the issue of timing, in terms of how quickly that you believe EnerSys would achieve sales in the fast-charging arena versus how fast you would achieve sales in the utility arena? Let's say over the course of the next three years, which of these two, therefore, ends up being a bigger business for you and we should have our eye more focused on?

Just for clarity for everyone else's sake, those are two separate markets. The fast charge is for the Motive Power, and the OptiGrid is for Reserve Power, the utility market. And again, to answer your question on it, it would be pure speculation. We don't know. We don't know.

I am pretty optimistic, though, on the fast charge for Motive Power. What we've seen on that thus far, the premium associated with that, that customers are willing to pay that premium.

The advantages -- let me jump a little bit because we have a lithium-ion offering also with this, as we said in the press release. The lithium-ion is a more expensive proposition. And lithium-ion has some real advantages to it. You can charge it fast; you get greater cycleability and a lot of other things with it.

The problem with it, it's expensive. So we have the lithium-ion offering; we have the thin-plate pure lead offering. And we think that we will see those products sell quite nicely as time goes on. I happen to believe the thin-plate pure lead will outsell the lithium because of the price difference on it.

I think fast charge for us will hit faster than the utility.

I do, too.

That is helpful. Then a couple issues just relative to the overall market and the slowdown. Let's start with China, first of all. You made some reference to the Reserve Power market and potentially some pickup there. But I'm curious more generally speaking, are you sensing that your Chinese business is experiencing a little softness in line with the talk about slowdown in Chinese GDP, or what are you experiencing relative to that?

Well, let me talk about the market and talk about EnerSys both. First off, when you look at the Chinese manufacturers that are shipping product not only to within China but shipping product to Europe and other locations. As I mentioned earlier, the difference in lead cost and the VAT rebate not being there, it's made it tough for those competitors to ship product out.

Now from our end, we don't ship a lot of product out of China. Our plants are there really to support the China market in the rest of Asia. So we ship very little from China to Europe, because we have manufacturing in Europe. So I think it really hurt the competitors very bad. In fact, we are hearing that from a number of different competitors that are really going through some financial struggles right now.

Now, as I said earlier, the Chinese market, the telecoms did slow up. They have -- we definitely see a slowup take place there. We are hearing that it's coming back right now. There have been some press releases come out that they are going to start spending. Specifically, they're talking about 4G now. So as that market picks up, we will participate in that and it will help our China business.

That is helpful. Thank you. The fork truck market in China, that is small enough that it's -- because they are more combustion engine?

Yes, there are more combustion engines in China than there are electric fork trucks. However, that being said, that there is a very strong movement to go to electrics because of the environmental situation. I will say the Chinese government has been very serious in the last year to two years on environmental.

And for those that have been to Beijing or other areas of China, you can see there's a real need to clean some things up. They are taking it seriously. They are much more environmentally conscious than I think they were three or four years ago. So you'll see more of a move towards electrics over the gas fork trucks as time goes on.

Finally, if you don't mind me asking one more question. A little over a year ago, I think it was five quarters ago rather than just four quarters ago, you also had a slowdown in orders and expressed some caution on your conference call after the June quarter results of 2011, if I remember it correct. How does what you are experiencing now compare to what you experienced then? I guess what's the difference and what's the same?

That particular quarter, my recollection is that we projected we would come in in the $.58 range, and I believe that's exactly what we came in. What was it, $0.55, Mike?

Yes, we had a range that had $0.55 at the midpoint, and we came in in that quarter at $0.58, so we saw orders slowing. We advised that that slowdown was coming, and it turned out to be short lived. It was largely based on concerns that we were seeing and that others saw in Europe. And we rebounded to have a $0.80 quarter in our third quarter and then finish the fourth quarter with $0.98.

So it was a very short-lived but a more severe decline than what we are expecting. The guidance that we gave for the third quarter between $0.77 and $0.81 matches up pretty closely with the $0.80 we posted in the third quarter of a year ago.

So what we experienced last year, to your point, Bill, was more severe I would say than what we are experiencing right now. But as to whether it remains a one-quarter phenomenon or stretches beyond that, we don't have an answer on.

Yes, that's the way I would have answered the question or will answer the question. If you go back, you had asked me that question when we came out with their guidance, the $0.55 midpoint, if you'd asked me that question then, I'll answer the same way right now. We just don't know.

There's so much uncertainty out there. But I can tell you when we see things like that, we take the actions and take them quickly so that we don't lose control, that we can bring it down. That we project at $0.55 and we come in at $0.58. For the next quarter, we were up over $0.80. And hopefully, we will repeat that, but time will tell. How long does this thing last? We've seen three weeks of it here, and it's not a catastrophe by any stretch. It's just down slightly.

That's helpful. I appreciate the clarity, if you will, on the uncertainty.

Ross Taylor, Somerset Capital.

Could you gentlemen go through your thought process and discipline when you look at acquisitions versus share buybacks to give us a better understanding? When I look at the stock, obviously you've done a lot of acquisitions. They've been exceptionally profitable over time. But at the same time, we're sitting here with a stock that's trading at 9 times, but we figure you earn next year maybe less.

How do you balance those two things out? Because quite honestly, it strikes me if I were sitting on your board I would be arguing that you probably should be focusing some cash flow on a dividend, some cash flow on a buyback, as well as trying to do opportunistic acquisitions where they are highly favorable.

Well, it's an excellent question and our board has looked at that very carefully. We recently had a board meeting and we went through this in a lot of detail. I think the best way of looking at it is what do you project -- what are the potential opportunities that are out there from the acquisition standpoint?

Obviously, I am not going to talk about those, but what we have done on paper is allocated X number of dollars for potential acquisitions. Now whether they materialize or not, that's a whole different story. But we want to build a be in a position to take advantage of these things.

One of the advantages in a downturn, as I mentioned earlier with China, what's happening in Europe -- or in China -- that with these companies that are financially in trouble, they may not have been for sale a year or two ago, and some of them are starting to pop up now. It's not just in China; it's in other areas of the world. So we want to be in a position to be able to do that.

Think back when we were $200 million in revenue going to $2.3 billion in revenue, we did that because we looked ahead of where we thought we could be and had the money there to do those acquisitions, and we will continue to do that.

Now, if it gets to a point that we don't think we have the opportunity for acquisitions or we don't have the opportunity to do what I call investing ourselves, that's the new product designs, the higher-margin things we were talking about earlier. If we get to a point we don't have that, then we are going to be -- third thing we will do is we will do stock buybacks, which we did $60 million worth last year. And if the market doesn't recognize the value of our stock, we are going to buy it.

The fourth thing would be to consider a dividend when we get to a point that we think that we have exhausted the first three opportunities.

Yes. So, Ross, we do. We have engaged our banks. We have looked at our capital structure. Those are questions that are raised and discussed at the board level. And just a reminder, there is a $50 million buyback authorized that's sitting in a 10b5-1 that hasn't hit at this point, but it is out there.

Okay, so that is something when you're looking at these opportunities, the buyback, you don't need to get approval. You actually have the ability to buy it back if you find that that is the place you should be putting capital right now.

Well, just on a clarity, on a 10b5-1 that's a predetermined price which obviously we're not going to give that out what it is. But that is something that when we implemented that, it was out for approximately one year. If the stock drops and hits that price or lower, then that would trip the 10b5-1 to start to buy back the stock.

Okay, thank you very much.

There's nothing that we can do at this phase. We can't pick up the phone and say buy back our stock today, okay? We can't do that because it's locked in at that fixed price.

Okay, you could amend that filing at a point in time.

Yes, we could.

We can and we would -- that would be a discussion that we would have if we thought the circumstances merited it.

Okay. Thank you, gentlemen.

William Bremer, Maxim Group.

Just a follow-up. John, can you give us a little take on how you are managing your capabilities in assisting the events that occurred here in the Northeast? Really and truly, this falls right into your wheelhouse of Reserve Power, and then once things start to settle down you are going to start seeing Motive uptick here.

How are you managing your capabilities in assisting the Northeast here, given Sandy?

Obviously, any customer that has any need whatsoever, we are there 24/7. And that's one of the things that wherever there is a potential problem with things, and we are there because it has been our model for a long time about service and taking care of customers. That goes back to the whole thing with best value.

So we have resources that are following very closely what's going on. We are constantly talking to our customers on things. It's early yet, Bill, but I can assure you it's just like what happened in Japan, the tsunami that took place. We were there and did a lot of business with it. In New Orleans, the hurricane there, it was the same thing.

We will put the resources there. If we have to fly in people from other parts of the country to support the business in the Northeast, we will do it in a heartbeat. It has been our -- we have done that many, many times in the past, and we will continue to do that. Taking care of that customer and giving them best value is our number one priority.

The guidance you provided has no impact from the Hurricane Sandy in it. I just want to make that clear.

Well, we have not seen anything that we would view as an appreciable amount of orders related to that. So to answer the question, Bill, that's correct. We don't -- we aren't --.

We still have half the quarter remaining here, gentlemen, right? We still have half the quarter remaining. We have devastation to the extreme up here. I would assume that this has to impact this quarter and the fourth quarter significantly.

Bill, you may be right. We are trying to be sure that we deal in facts right at this stage, and look at orders and things like that. Let's face it, you've got people waiting for a gallon of gas four hours plus in lines up there. There's a mess up there right now. It's chaotic. And you've got to wait until this shakes out a little bit here and gets some stability in it. But I would fully anticipate that we would see increases in orders. When it's going to happen, I don't know.

Okay, gentlemen, thank you.

Howard Rosencrans, Value Advisory.

Thank you. I'm just trying to get a little more clarity on the lead to reconcile your comments regarding the current quarter. You spoke of the lead price moves which we've certainly all seen the move from $0.90 to I guess it was almost $1.10, and now in the high $0.90s. \

How do you -- you had a contribution of I think on a net basis of about $17 million this quarter, and I think you had a net contribution of about $20 million last quarter when you factor in both the cost and the price. Where are you thinking that's coming in in this quarter?

I think you are going to see similar benefits in the third quarter as you did in the second quarter. So some of the lead costs that we had in June, July, August, for the most part are going to roll through in our October through December P&L period. So I think you will see that. Again, through the third quarter margins should remain in the ZIP code of what we have experienced in the last couple quarters.

But beyond that, then you get into prices that are in -- for the last 2 1/2 months have been in the mid and upper $0.98, $0.95, $0.98, $0.99. So that is going to be $0.10 per pound higher than what we had experienced sequentially.

Now for the business that is on pass-throughs, it will obviously react to it, but those pass-through mechanisms tends to be a one-quarter trailing kind of phenomenon. So you would see, all other things being equal, and those other things being our ability take cost out elsewhere in the business, would have a negative impact on the fourth-quarter margins.

Okay, so on a -- because the comparison, the $17 million in the second quarter and the $20 million in the first quarter, those were year-to-year numbers. So for all intents and purposes on a year-to-year basis, you will have lapped the improvement after December. And just for simplicity reflecting flat prices, you will have a slight headwind in the March quarter if you can just think about that in terms of it from a year-to-your standpoint.

I know you will do and you will likely be successful in offsetting with some cost savings. And obviously, there will be some pass-throughs that are somewhat on a lag. But is that in generality how we should be thinking about it for the March quarter?

If you take the assumptions that you said that we do not get pricing, and the mix was exactly constant, you are right. Earnings would go down. You're right, the cost would go up, we wouldn't get the pricing, and the mix would be constant.

Now, the challenge for us is you've got to go get pricing, guys. Number two, we've got to sell up on the higher margin products, so we've got to find a way to offset that. Will we get 100% of it? I don't know, but that's what we're going to try to do. And if we don't get 100% of it in that quarter, it will come in future quarters.

Mike, do you want to add to it?

Yes, it depends on your point of reference on this one, Howard. If we are talking year-over-year, I would continue to expect comparable or even a slight benefit on my commodity cost compared to the prior period. But if we're looking at it sequentially, I'm simply pointing out that with lead costs which have gone up in the last 2 1/2 months on an incurred basis, those have gone up on average $0.10 to $0.12 per pound, that obviously on a sequential basis is going to put pressure on our fourth quarter.

Okay, great color. Thank you, guys, very much. The calls are always very helpful.

Thank you. You have no further questions at this time.

Okay. Well, thank you, everybody, for joining us on the call this morning, and we appreciate your interest in our company. Have a good day.

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