EnerSys (ENS) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the EnerSys fourth-quarter fiscal year 2013 earnings teleconference. My name is Tahesha, and I will be your operator for today. At this time all participants are in listen-only mode. Later, we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. John Craig, Chairman, President and CEO. Please proceed.

Thank you, Tahesha. Good morning, and thank you for joining us. Last night, we posted on our website slides that we are going to reference during the call this morning. So if you didn't get a chance to see this information, you may want to go to our website at www.EnerSys.com and view the slides. Before we get into details of our fourth-quarter and full-year results, I'm 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 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 our 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 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, 2013, which was filed with the US Securities and Exchange Commission. In addition, we will 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 28, 2013, 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 by saying that were very pleased with our accomplishments and fiscal results for the fourth quarter and for full-year 2013. You'll notice on slide 3 that we reported record fiscal full-year results for gross profit margins of 25%, operating profit margin of 11.3%, and earnings per share of $3.55. Our sales for the full year were flat at $2.3 billion. However, year over year, our earnings per share were up $0.52 or 17%. On slide 4, we outlined that for the last three consecutive years, EnerSys has delivered record earnings to our shareholders. Earnings per share have more than doubled over this three-year period, and we don't plan to stop there.

Please turn to slide 5. At our Investor Day on April 2 at the New York Stock Exchange, we outlined our plans for creating additional shareholder value by increasing our annual revenue to $4 billion by 2018, while simultaneously increasing our operating earnings to at least $400 million to meet our minimum OE target of 10%. To meet these goals and profit targets, we plan -- one, growth organically; two, increased mix of premium products, [our fifth place perial ad] for motive power in Europe, our OptiGrid large-scale energy storage solution and our advanced nickel products; three, continue our geographic expansion both through acquisitions of building [due] manufacturing factories; four, continue our acquisition strategy and expand into businesses that complement our existing business; and five, increase our global market share.

Additionally, last night, we announced that EnerSys would be returning cash to our shareholders in the form of a $0.125 per share quarterly dividend, and up to $82 million in share repurchases. Our increased earnings and higher levels of positive cash flow generated afford the Company the ability to return cash to our shareholders while continuing to pursue our growth initiatives. I believe it's important to note that the initiative of dividends does not change our view that EnerSys is still a growth Company. There our numerous global acquisition opportunities available to the Company, and our new product development initiatives should lead to longer-term growth opportunities as well. Our stock repurchase program and the first-year dividend will amount to slightly more than $100 million. Even after spending this $100 million, the Company still has over $600 million in cash and borrowing capacity before we would reach a 2X debt to EBITDA leverage ratio.

I now want to focus on the current business activities and first-quarter guidance. Both our incoming order rates and order backlogs remains strong. Our Americas and Asia segments continue to see solid orders, while Europe, Middle East and Africa are holding steady. Our commodity costs in the first quarter will be rising sequentially as the higher LME lead and other commodity costs work their way through our P&L. These higher costs will be partially offset by our recently announced price increase in higher sequential sales volume. Based on this information, last night we announced our first-quarter guidance of $0.78 to $0.82 earnings per share. In closing, we had a great fiscal 2013, and I'm looking forward to another strong year in fiscal 2014 and the opportunities and challenges we will face as we strive to achieve our $4 billion sales target and $400 million-plus operating earnings target. We want to thank you for your continued support in EnerSys. And now I'd like to turn it back to Mike to give more information about our results and guidance. Mike?

Thank you again, John. For those of you following along on our webcast, I am starting slide 6. Our fourth-quarter net sales decreased 4% over the prior year to $572 million, primarily from volume declining 2%, along with a 1% pricing decline for lower commodity costs and a 2% decline in currency translation, offset by 1% from acquisitions. On a regional basis, our sales in Asia decreased 17% in the fourth quarter to $44 million, while Europe's fourth-quarter net sales decreased 3% to $242 million, and the Americas were down 2% to $286 million. In Europe and in the Americas, currency translation was a significant factor for the decrease. In Asia, volume declined 24%, due primarily to the completion of a large order from a customer, partially offset by revenue from our acquisition in India. On a product line basis, net sales for motive power decreased 6% to $293 million on a 5% volume decline, while reserve power decreased 1% to $279 million, reflecting its price and currency declines. Both product lines absorbed 1% to 2% currency declines.

Please now refer to slide 7. On a sequential quarterly basis, fourth-quarter net sales were up 3% to the third quarter, due to higher organic volume. Europe was up 5%, and the Americas region was up 4%, while Asia declined 12%. The decline in Asia again reflects the completion of a large order from a customer. On a product line basis, our global reserve power business was up sequentially 5%, while sales in our motive power product lines were flat. Both product lines' volume increased in all regions, with the exception of motive power in Asia, which came off a strong third fiscal quarter.

Now a few comments about our adjusted consolidated earnings performance. As you know, we've utilized 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, excluded all highlighted items. Please refer to our Company's Form 8-K, which includes our press release dated May 28, 2013, for details concerning these highlighted items.

Please now turn to slide 8. On a year-over-year quarterly basis, adjusted consolidated operating earnings decreased approximately $10 million, with the operating margin down 130 basis points. On a sequential basis, our fourth-quarter earnings decreased nearly $5 million, with the sequential operating margin down 90 basis points. From a historical perspective, operating earnings remains strong at 10.3% of sales. The declines primarily reflect lower volumes from the prior year and higher commodity costs from the prior quarter. Our Americas business segment achieved an operating earnings percentage of 13.5% versus 15.3% in the fourth quarter of last year, primarily from the active higher warranty accruals related to lithium products. On a sequential basis, the fourth quarter declined 300 basis points from 16.5%'s record margin, posted in the third quarter, on higher commodity costs and warranty accruals.

Europe's operating earnings percentage of 7.4% was comparable to last year's fourth-quarter 7.5%, and was up from the previous quarter's 6.5%. The operating earnings percentage in our Asia business segment decreased in the fourth quarter of this year to 5.5% from 10% in the fourth quarter of last year, and was down from 6.6% in the prior year. Asia's operating earnings were $2.4 million in the fourth quarter, reflecting 17% lower revenue from the prior year, as discussed earlier.

Please now move to slide 9. Our fourth-quarter adjusted consolidated operating earnings of $59 million was a decrease of 14% in comparison to the prior year, with the operating margin declining 130 basis points to 10.3%. Lower volume and higher commodity costs were the primary factors. In our first fiscal quarter, we will see in our results the continued impact of rising lead costs, which began last September. Excluded from our adjusted operating earnings for the fourth quarter was approximately $1.8 million of highlighted items. Our consolidated adjusted net earnings of $39 million decreased 17% from the prior year to 6.8% of sales, for a 110 basis-point decline, with the book tax rate increasing to 28%. EPS decreased 18% to $0.80 on lower net earnings and higher shares outstanding. Our adjusted effective income tax rate of 28% for the fourth quarter remained flat with prior quarters. We believe our tax rate for the first quarter of fiscal 2014 will be between 26% and 29%. And for the full year, we expect a 27% rate.

I refer now to slides 10 and 11. As usual, we have provided information on a year-to-date basis similar to that of our fourth quarter on prior pages. These two pages are for your reference, and I do not intend to cover year-to-date results.

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 nearly $250 million on hand in cash and short-term investments as of March 31, 2013, with over $450 million undrawn from our credit lines around the world. We generated over $244 million in cash from operations in fiscal 2013. Our leverage ratio, which must be maintained below 3.25 times as calculated in our US credit agreement, was at 0.3 times. Even with anticipated share buybacks and dividends, we expect our leverage ratio to remain near zero until we acquire additional companies.

Capital expenditures were $55 million in fiscal 2013, compared to $49 million in fiscal 2012. In addition, during our third quarter, we repurchased 683,000 shares of EnerSys' stock at a cost of $22.6 million, for an average cost per share of $33. We expect to generate adjusted diluted net earnings per share between $0.78 and $0.82 in our first quarter of fiscal 2014, which excludes expected charges of $0.07 per share from our restructuring programs and acquisition activities. Due to the increase in lead costs commencing in September, we anticipate our gross profit rate in our first fiscal quarter will remain in the 23% to 24% range. On a longer-term basis, we expect to return to our goal of 25% by our second half of fiscal 2014. In conclusion, we expect to continue -- we continue to believe that we are well-positioned to take advantage of the future opportunities. Now let me turn the call back to John.

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

(Operator Instructions)

Michael Gallo, CL King.

Congratulations on another good quarter.

Thank you, Michael.

Question on Europe. Nice sequential improvement in the margins there. I was wondering as you look forward, John, you're focusing on some of the higher margin business, letting some of the commodity business go to others. But how quickly do you think you can improve those margins towards the 10% margins? And any signs that you're starting to see the reserve business move up a little bit? I know you've talked about it, the business overall there being relatively steady for the last couple quarters. Thank you.

Well, couple points on it. Pricing in Europe over the last few years has been very, very bad. It's been low. And our management team in Europe is highly focused on going after quality sales. If we have to cut back on our capacity, if we have to do a restructure because we don't have the buying to support it, we are going to do it. Because we're going to get pricing up in Europe where it needs to be.

Now, that being said, it's going to take some time to do that. We're under contract in many cases, and some of these contracts could run six to nine months, up to a year. But the direction is set. We've changed our incentive programs for our sales people. Their incentives are more on gross profit today than they were in the past. And we are going to push this very, very hard. It's something that -- we have a premium products and services, and we want to be compensated adequately for it. Mike, do you want to pick up on it, too?

Yes, just one other comment, Mike. Europe's motive and reserve power product lines actually had favorable improvements, both sequentially and year over year, compared to their prior period. The aerospace and defense business was the one that was a drag. And it was largely as we were absorbing some recent acquisitions and trying to bring those up to speed. So the core business has been healthy in Europe and is improving.

Thank you very much. And also, John, on the reserve business. Any signs that LTE or 4G, that stuff is starting to happen there?

Yes, it's very interesting. There's some things that we've looked at just recently. And just go back a little bit on the history of telecommunications in Europe. There are over 100 different carriers on the continent itself. And there are about 50 carriers that are cell phones -- actual cell phone carriers. The EU in the past, the direction has been -- they want to lower the cost as much as possible to the end-user. Therefore, what's happened is, that pricing has been driven way down.

In fact, the major telecom companies that own the wire lines, they rent or lease to the smaller players. And the prices they've been charging have been controlled, and they've been relatively low. Therefore, the consumers have been benefiting from it. But the downside of that -- the major telecoms have not had the capital to redeploy for 4G. Now what we are seeing is, people are starting to question that and saying -- hey, we need to change this around.

There's a movement afoot right now, we believe, that hopefully will hit in the next 12 months, that Europe is going to start investing, the telecoms are going to start investing in 4G. They're getting behind the rest of the world. They know that. They know they need to do something. And what we are hearing is, those rental charges or lease charges for the wire lines will go up, thus generating more capital for the major telecoms, thus generating more for 4G. That should be good for us.

Thank you very much.

John Franzreb, Sidoti & Company.

In part of your presentation, you mentioned that you were going to work more on scrap reclamation in Europe as part of that process improvement. I mean you touched on the sales side. How is that progressing, as far as scrap reclaiming in Europe and improving that part of the business?

It's picking up. In fact, we've sent a couple of people from our US operations over to working with our European team. The complexity in Europe is -- scrap collection is entirely different than in the US because of all the different countries and things. But we are progressing ahead. But keep in mind, scrap recently has been higher than what it has been on the LME. So we're very careful that we're not overpaying for scrap. But it is fully our intent to increase the amount of scrap collections that we do in Europe. And in collecting that scrap, we want to be sure that the price of it is lower than what the LME is at any time. So it's an opportunity for us, and we are working ahead with it.

Okay. Regarding the M&A pipeline, John, what are your thoughts about the size of the next purchase? Is it going to be big, small? It seems to me like you've probably wanted something done maybe at this point, but it doesn't seem like it's happening as quickly as you wanted. Can you talk a little bit about the M&A pipeline?

Well, one thing that we're very disciplined on it. You know, what we want and what we get are two different things. I don't want to ever see us buy a company where we look back on it and say it was a mistake to do that. We're very careful, very cautious. We have a number of opportunities that I would say are mid-sized, and some smaller ones that we are looking at right now.

We're spending quite a bit of time on looking at these different things. And we do believe that there is some good opportunities out there. We just have to be patient. We have to negotiate wisely. We have to be sure that what we buy, we can integrate. And we have to be sure that what we buy will give good returns to shareholders.

So we are very active in that area, we are going to continue to be active in the area. And when you take a look at going from $2.4 billion to $4 billion, we're not going to do that just through organic growth. We are going to continue to look for good companies to buy and integrate as part of EnerSys.

Okay, and one last question. You have a competitor that's again in financial duress. Can you talk a little bit about the pricing environment, maybe elaborate about your concerns or positives that you think about, having competitor again that has such problems?

Well, that's -- you would have to talk to the competitor about their situation. I can only talk or speak about EnerSys. I do know that the value that we provide to our customers is worth a certain price, and we believe very strongly in that. And I don't think that we're getting the returns that we should be getting in Europe. And we are taking a position that, as I said earlier -- if we're not seeing the growth at the top line in Europe because customers are going to get lower pricing from someone else, that's their prerogative. We just know that what we've invested, and looking at a fair return, we are going to increase our pricing, and the competitors are going to do what they're going to do.

Are they overly aggressive in pricing right now, John?

What I see over there right now --and it's surprising -- I think that we're the largest in Europe. And I don't think -- I know our European team is taking a very tough, hard-line position on this. And I think that competitors are starting to follow it. I don't have any hard data on that, it's just hearsay data. But I think they would be wise to follow it, would be my guess.

Okay, thank you very much.

William Bremer, Maxim Group.

Let's add to that last question, given the turmoil from one of your competitors. Have you been able to potentially hire maybe some strategic hires, or can you give us an idea of how you are articulating the opportunity that is in front of you to your sales team?

Well, I think if you look back -- and you've heard me say this many times -- that what the strength of EnerSys is, is the people that work with this Company and the dedication they have and the drive that they have. And when our people come up and say there is an employee out there with another Company or competitor or another industry, even if it's a good person, we're going to be adding the right people to generate good returns for shareholders. So our strength really -- just to reiterate it -- it's really that we've got a great group of people. We have 9,000 employees and we work as one. And I'm very pleased and proud of what our people do.

Well, your Company has never been as strong as it is currently now. Kudos to your whole management team and the efforts that you've made there. For the quarter, what was the percentage of higher-margin products?

Well, I would say that it still is staying in that low 20% range, Bill.

It still is, okay.

We noted the project that I referenced in Asia with the completion of a customer that was a higher-margin business. But what we find is, as one project tends to wane off, another one starts back up, somewhere else in the world perhaps. But it keeps it relatively steady. But it's -- I would not say it was outside of the range we would normally share with investors on our premier products, which is in the 20% to 25% range.

Yes, I totally agree with Mike, and he brings up a very good point. Because I will say this without giving too much color to it, that if you look at our Asia business, we have a customer that has kind of filled the pipeline of premium products. But to offset that, our mix of premium products in Europe in reserve power have been very strong this last quarter. So it's -- but if you look at it in aggregate, it's -- Mike is right, it's at a 20% to 25% range.

Okay. The higher warranties that you called out for the accruals are primarily in the Americas. Was that primarily on lithium-ion or -- and is that -- do you perceive that to be going forward as well? Or was that just sort of a firm-up?

Well, it's an interesting point, and it's one we discussed yesterday, and how really to articulate or present this. And the thing of it is, the beauty of it is, the base business is going stronger than it's implied in the numbers. What's dragging it down is some of the lithium businesses that we got into. In fact, if you look at our lithium business this last year, that adversely affected our EPS about $0.15 a share globally. And obviously that's a concern, it's a big concern. And it's one that we are planning on having that turned around and being positive this year.

The good news is, we had record earnings last year, but we also had a $0.15 bad guy in there. The really good news is, if we get it turned around and the base business strong, we should be doing better this year than we did last year. Now, to the warranty issue alone, one of the things that -- we talked about pricing and about quality. And when something goes wrong, we stand in back of it big time. And we had a situation where there were some minor issues with it. And we took the product and we replaced it in many cases, or reworked it or did whatever it took to be sure that the customer was happy. We stand behind what we sell. And that's why we took the hit with this and we shared in that warning expense.

Okay, I got you. And then one last one for me, Mike, a little bit of housekeeping. Given your convert, which I believe is going to strike a 40 spot 6, and given the in-the-money of the underlying stock, what should we be using in terms of shares outstanding here going forward on a fully diluted basis?

Well, right now, the average for the first quarter, quarter-to-date, with nearly two months down, the average price has been about $46 for our shares in that time frame. That's going to yield about 0.5 million additional shares into the count. So to answer your question, the number I would use is about 49.1 million shares.

Okay, thank you, gentlemen.

And obviously that does not include what we talked about earlier on stock buy-backs.

Exactly. Is it active at this point?

The window is not open for us until, I believe, Friday. So commencing Friday, we expect to be in the market.

Excellent, gentlemen, thank you.

Elaine Kwei, Jefferies.

Congratulations on the great quarter and the great year.

Thank you.

Just a question on thinking about the top line growth for the coming year. You're sort of essentially flattish in fiscal '13. And when you -- and that's coming off of some years as double-digit percentage growth. In looking forward, do things feel like growth will essentially be in line with overall GDP in the different regions than what you operate? Or do you see potential for areas of faster growth?

Well, I'm just going to kind of data-dump here on you, give you some numbers and things. And first off, we don't know exactly where it's going to go. But looking at the data, right now if you take our four-week average orders coming in -- and we project that revenue would be over $2.5 billion for the year. So that's a good news thing. And you look at it by region, the Americas are going very strong for us right now.

We are seeing very good things happen in the market. If you look at the ITA data, which is Industrial Truck Association data, and if you look at April versus prior year, worldwide, trucks are up 9%. That's new truck orders. In the Americas, it's up about 28%. Europe, Western Europe was flat. Total Europe was up 2%. Asia is up 3%. But I think the one that's more important, looking at April versus the trailing three-month average, globally it's up 3%.

So I think the motive power area, we're going to see single-digit growth in that area. Telecommunications, I mentioned about 4G taking place in Europe. If that does take off, we should be in good shape there. Spending for UPS systems and backup systems continues to be fairly decent for us. In the Asian market, with telecommunications and what the China telecom companies are doing, and what we're seeing the order take come in, we're very high on that, very bullish on orders coming in. The only downside to that, the margins on the Chinese telecoms are lower than what the margins would be on selling thin-plate pure lead products.

All in all, I'm feeling pretty good about things right now. I think there is a -- if I had to bet or guess, I think our revenue this year will be higher than next year. Now the off-set to that is, we're going to stick with the discipline on the pricing, too. So there may be some loss of business because of low pricing. But we don't want low-margin business. We'll walk from that.

That's fantastic, John, that's super helpful. I was wondering also, just in terms of expenses, and we know you guys are really focused on costs. Could you talk a little bit about how you see OpEx trending this quarter and next? It seems -- the guidance seems to imply a little higher OpEx, even we assume the lower gross margin. And then on the gross margin side, do you think we'll see some benefits from the recent declining commodities by the second fiscal quarter potentially?

Well, there's a couple questions there. Let me take the -- I think your first question co-related SG&A. And right now we are spending more than I would like to see in a short-term basis. If we were thinking short-term, the number is higher than I'd like to see. However, we're not thinking short-term. We're thinking long-term.

And where you see a lot of those expenses are areas with people that we're adding in China to expand our business in China. The people we're adding in India on the sale side to increase our share. The people that we're adding in South America and in Africa, in total. We're adding into Russia, into the Middle East. We are in on a lot of expenses here for future growth.

And I do it this way -- you go back to 1994, we were $200 million; today we are $2.4 billion. We didn't grow by not investing. We didn't grow by looking short-term. These investments that we're making now -- and I'll include lithium in that also, which has high SG&A because these gearing expenses. These are longer-term investments. These are smart investments that we will look back two or three years from now and say that they were the right thing to do. However, you look at the numbers today and you can see a higher SG&A than you normally would. It's an increase.

On the gross profit side, I anticipate that we're going to see improvements in our gross profit. As Mike alluded to earlier, we are [not going to] hit our 25% we're projecting, we are going to be lower than 25% in the next quarter. And the reason for that, it's the old game with lead. Lead goes up, we increase pricing and we are playing catch up. The lead costs this quarter, Q1, will be higher than what it was fourth quarter. And because of that -- in fact, what you're looking at, fourth-quarter the LME was an average of $0.99 a pound, and Q1 the LME average was $1.05 a pound. So we're seeing that kind of increase.

I mentioned going after price increases also. But were not going to have those price increases if we are right in line with the lead. So if lead stays where it is, or comes down, and the price increases hit, we should see second, third, fourth quarters some real improvements, and hopefully we'll be back above the 25% gross profit range.

That's terrific. Thanks so much. I'll jump back in the queue.

(Operator Instructions)

Sean Lobo, Lumera.

Congratulations on a fantastic quarter and what you've done with the business over the last year.

Thank you.

On just the scrap lead, can you help us understand how quickly you can put -- when price increases go through, how quickly those go through, and if lead goes down as you mentioned, how quickly can or will customers take those price increases back?

If there is across-the-board, depending on the customer. And let me be specific on it. If you're on a contract, there's an automatic pass-through which, we have a lot of that in Europe, it can be on what we call M minus 1. In other words, the pricing of the lead is based on last month's price of lead on the LME -- or M minus 2, which could be two months out. Depends on the contract. But generally speaking, when we put a price increase to the general market, we're looking at three, four months, thereabouts, before it's a total effect.

Now, the other thing that we do to be customer-friendly, we don't just all of a sudden say one day -- the price just went up. We give advance notice. And we honor orders that are out there. And if customers want to place orders at the lower price, we honor those. We usually give about 30 day heads-up or notice before we increase the pricing.

Understood. If you could help me also think about in terms of orders, how quickly can you see the backlog develop in terms of reserve in motive power? Is it six months out, is it three months? How do customers think about their battery needs in terms of placing orders?

Again, that varies across the line. If you take a submarine battery, it could be years, literally years, before they --

Yes, I think it's more the forklift on industrial side first?

Fork truck? Many cases what it is, is an ordering shift.

Understood.

And other cases what happens is, that if you take a look at, as I mentioned, that data earlier, what we have to factor in is the lead time for the fork truck manufacturers. In other words, the fork truck manufacturer builds a fork truck, they ship it to a dealer. Let's say the lead time on that is 12 weeks. But we will see the order come in at about nine or ten weeks. So the truck, when it arrives at the dealer, the battery will arrive there at the same time. So the business is so diversified, it varies across the board. It could be anywhere from an order today, ship it tomorrow, to years, literally years. Mike, you want to pick up on that, too?

I would just add that when you take all those diverse pieces and you put them together, our order backlog typically stands a little over two months worth of sales. So that's generally why we only give guidance one quarter out, is because that's what we know for our cost structure and that's what we know about our backlog.

Understood. I have just two quick [administrative] questions. In terms of -- you mentioned last September, you saw the scrap or core metal prices or the core cost go up for you. Why did those prices go up in September? And as you think about it, what sort of your total lead needs comes from junk versus open lead purchases?

Well, let's take and answer the first question on why did they jump up. I think there's a couple reasons for it. The last two winters have been relatively warm. The cold weather destroys batteries. And what happens is, when you have a lot of batteries that fail, that gives you a lot more feedstock going to the smelters. That's reason one. So you had a shortage of junk batteries.

Second thing, we had a number of new smelting operations that went on line. A couple of companies added -- one company got into the business, another company added some major capacity. So you have more capacity out there, or more smelters wanting batteries, and fewer batteries. And just being in a competitive free market, what happened is, you have one smelter bidding for the junk and another one bidding for the junk, and as it worked out, that the junk prices actually were more expensive then the LME. Now that phenomena cannot exist long-term. Basic economics will not allow it to exist long-term. And --

And you're saying that abate now?

Pardon me?

Are you seeing that -- I'm assuming you're alluding to JCI and their new smelter. Are you seeing that sort of price for junk abating in terms of just the --

It has come down. And the last I looked at it, when you figured the weight on an automotive battery, the scrap was cheaper than the LME. And when you looked at it on an industrial battery, the industrial battery junk was still slightly more expensive than the LME. The difference in it, the calculations we use, we figure there's about 53% of the weight in a car battery is lead, and industrial battery, it's about 58%.

Understood. My last question -- I think some individuals on the call before were talking about your distressed competitor. Given just institutional background that this was [excised] old industrial business -- and congratulations on the trademark lawsuit win. Is there actually synergies for you guys just to purchasing operations and using your superior management combining? You talked about revenue growth and organic or acquisitions. Is that something you guys look to consider?

Well, again, I'm not going to talk about any one acquisition or opportunities, or I'm not going to talk about a competitor. You would have to talk to the competitor about that. But I'll just leave it that, as I said earlier, we're looking to optimize shareholder return. And we will look at areas that where we think that we can invest your money -- our money, as shareholders -- and take advantage of the opportunities that the markets present.

You guys have been extremely gracious with your time. I'll follow up offline with any other questions. Thanks a lot, and congratulations on a great quarter.

Thanks.

Tim Mulrooney, William Blair.

Speaking of optimizing shareholder return, I noticed your announcement of the dividend. John, in the past at investor conferences, it never seemed like you were leaning toward a dividend policy, given the potential for volatility in cash flows driven by fluctuations in the price of lead. Can you just kind of talk about what changes the Board -- or what drove your decision to institute the dividend now?

Well, it's real simple. I think the thing I've been talking about all along is optimizing returns. And when you don't have a lot of money, and you can invest and buy companies and get the optimum return, you do that. When you have excess cash, you look forward and say -- geez, can we really spend all this cash on anything? I've always said that dividends is one of those things that you're either for or against it. Which I don't understand, is the logic behind it. [To me] is you want optimize it. You look at it and say -- look at all the opportunities are ahead and how much cash do you need? Look at a downturn in the business, and a downturn in the business, how much cash would you need under the worst case scenarios? If you have excess cash, then you ought to give it back to shareholders.

And if we looked at something -- and I'm going to pick an arbitrary number -- $1 billion or $1.5 billion acquisition, even if we did do a dividend, if we did something that large, we would be going back and restructuring our debt anyway. And going back to the banks where we may consider alternative things, because we don't have that much cash. So we're looking how do you optimize it? And right now, looking ahead at the acquisition opportunities out there. And I mentioned earlier, if we levered up to a 2X, and that's just on our end of it alone, that is not taking into account any EBITDA generated by an acquisition, there's over $600 million there. So there's enough there that we can do what we need to do to grow the business to get the $4 billion target. If there's excess, we should be giving it back. We weren't in the situation in the past where we have excess. We've had a good year. We had a good couple of years. In fact, three record years in a row. We've now generated the cash, and it's time to give some of it back.

That's great, thank you very much.

Gentlemen, we have no more questions in queue.

Okay, well, thank you very much for your interest in the Company. And everyone have a great day.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.