EnerSys (ENS) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter and fiscal year 2014 EnerSys conference call. My name is Pineda, and I will be your operator for today. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

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

Thank you very much, and good morning, everyone, and thanks for joining us. Last night we posted on our website slides we are going to reference during the call this morning. So when you get a chance to see this information, you may want to go to our website at www.enersys.com under the Investor Relations tab.

Before we get into the details of our third-quarter results, 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 may differ materially from the forward-looking statements for a number of reasons. Our forward-looking statements are based on management's current views regarding future events and operating performance and are applicable only as of the dates of such statements. For a list of factors which could affect our future results, including our earnings estimates, the 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 December 29, 2013, which was filed with the US Securities and Exchange Commission.

In addition, we will also be presenting certain non-GAAP financial measures. For an explanation of the differences between the comparable GAAP financial information and the non-GAAP information, please see our Company's Form 8-K, which includes our press release dated February 5, 2014, which is located on our website at www.enersys.com.

Now let me turn it back over to you, John.

Thanks, Mike. Last night we released our record third-quarter financial results of $1.07 per share, which exceeded the guidance of $1.00 to $1.04 per share. The third quarter was a record for sales and EPS, even if you exclude the sales and earnings from our recent Purcell and Quallion acquisitions.

As you may have seen last night, we also released our fourth-quarter guidance of $1.08 to $1.12 per share, which if achieved would be the highest quarterly earnings EPS in our Company's history. In the fourth quarter as compared to our prior year, we will benefit from the increased volume from the Purcell, Quallion and UTS acquisitions.

As you can see on slide three, we reported record quarterly financial performance in all categories. I am pleased with our continued trend of quarter over quarter improvements, and we continue to be optimistic about the future growth of our business for the following reasons. First, Motive Power data show strong electric fork truck orders in all regions with December orders up 18% globally as compared to the prior year December.

Second, in China, we believe the 4G buildout and increased sales of smartphones will lead to increased Reserve Power demand for years to come.

Third, in the US, telecommunication companies have indicated their CapEx spending in 2014 will continue to be strong.

And finally, in Europe we believe there is pent-up demand building in telecommunications due to the slow deployment of 4G.

Now I want to turn your attention to slide four and discuss what actions we are taking to achieve our long-term targets of $4 billion in sales with a minimum of 10% operating earnings. We completed three significant acquisitions this year and will add approximately $200 million in revenue. Our most recent acquisition of UTS in Malaysia expands our presence in the fast-growing southeastern Asian region. Our Quallion acquisition expands our lithium business into new markets for medical and space applications. We are also pleased with our recent acquisition of Purcell's cabinet and closure business as we believe we will be able to pick up market share by selling both batteries and cabinets to our customers. Also, EnerSys' global reach provides opportunities for Purcell's geographic growth in Europe, South America, and Asia.

We intend to remain aggressive in our pursuit of additional acquisitions and build off our manufacturing capacities in both China and India.

Now please turn to page 5. One of our big opportunities and a goal we haven't hit yet is achieve a minimum of 10% operating earnings for our EMEA region. We have made strides in increasing the EMEA operating earnings towards our goal in our third quarter. EMEA had a record operating earnings percentage of 8.5%. Going forward, EMEA profitability will benefit from our recent price increases, which will impact our P&L late in the fourth quarter.

In addition, we have undertaken plans to reduce our costs by further restructuring our manufacturing capacity in Europe. I am confident in our EMEA team. It has taken the right directions to achieve the target of 10% operating earnings minimum, and we should see that in the not-too-distant future.

Last week our Board of Directors approved another quarterly dividend of $0.125 per share payable in March. In addition, our current year stock buyback program totaled $50 million at the end of December. Our balance sheet remains very strong with our debt to EBITDA ratio at 0.7 times. I am pleased in the results and the Company's performance, and I remain optimistic about the future of our Company. We are on track to achieve our fourth consecutive year of record financial results.

With that, I am going to turn it back to you, Mike, to give further information on our results and our guidance.

Thanks, John. For those of you following along on our webcast, I am starting with slide six.

Our third-quarter net sales increased 15% over the prior year to $643 million from a 9% increase in volume and 6% from acquisitions. On a regional basis, our third-quarter net sales in the Americas were up 19% to $327 million, while Europe's increased 9% to $251 million and Asia increased 29% in the third quarter to $65 million.

In the Americas, 7% organic volume and 12% from acquisitions were the reasons for the increase. Europe had a 6% volume increase, along with a 3% currency gain. In Asia volume increased 34% net of an unfavorable currency impact of 4%, along with lower pricing of 1%.

On a product line basis, net sales from Motive Power were up 8% to $314 million, while Reserve Power increased 24% to $329 million. Motive Power enjoyed a 7% volume gain and 1% favorable currency, while Reserve Power attained an 11% volume increase and 13% from acquisitions.

Please now refer to slide seven. On a sequential quarterly basis, third-quarter net sales were up 13% to the second quarter, due primarily to higher organic volume and acquisitions, up 6% each.

The Americas region was up 14%, and Europe increased 13%, recovering from their normal holiday months. While Asia was up 12%. On a product line basis, Motive Power was up 9%, and Reserve Power was up 18%.

Now a few comments about our adjusted consolidated earnings performance. As you know, we 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 exclude all highlighted items. Please refer to our Company's Form 8-K, which includes our press release dated February 5, 2014, for details concerning these highlighted items. Please now turn to slide eight.

On a year-over-year quarterly basis, adjusted consolidated operating earnings increased approximately $14 million with the operating margin up 60 basis points. On a sequential basis, our third-quarter operating earnings dollars were also up $14 million, and margin improved on higher volume.

From a historical perspective, operating earnings reached a record 12% of sales. The increase from prior year reflects primarily greater volume. Our results when compared to Q2 reflect a normal improvement as our second fiscal quarter is traditionally our weakest.

Operating expenses, when excluding restructuring and due diligence costs, were at 13.9% of sales for the third quarter compared to 14.3% in the prior year. We would expect our fourth quarter's operating expenses to be comparable to our third quarter's rates.

Our Americas business segment achieved an operating earnings percentage of 15.0% versus 16.5% in the third quarter of last year, primarily from the impact of higher commodity costs. On a sequential basis, Americas third-quarter decreased 30 basis points from the 15.3% margin posted in the second quarter.

Europe's operating earnings percentage of 8.5% was an all-time record above last year's third quarter of 6.5% and better than last quarter's rate of 6.8%, primarily from higher volume. The operating earnings percentage in our Asia business rebounded in the third quarter of this year to 11.1% from the 6.5% in the third quarter last year and from the 7.1% in the prior quarter. Asia's operating earnings were $7.2 million for the third quarter, reflecting 29% higher volume in Q3 versus prior year from improvements in the Chinese and Japanese markets.

Please move to slide nine. As previously noted on slide eight, our third-quarter adjusted consolidated operating earnings of $78 million was an increase of 22% in comparison to the prior year with the operating margin increasing 60 basis points to 12.0%. Excluded from our adjusted operating earnings for the third quarter was approximately $25 million of pretax highlighted charges net of $24 million of after-tax net credits. Please see our press release for details of these items.

Our adjusted consolidated net earnings of $54 million increased 26% from the prior year to 8.4% of sales for a 70 basis point improvement with the booked tax rate decreasing to 25%.

EPS increased 22% to $1.07 on higher net earnings and higher shares outstanding. The higher average diluted shares resulted primarily from our convertible debt, which becomes dilutive when our shares rise above $40.60. This convertible debt dilution added approximately 1.6 million shares net to our EPS calculation and decreased EPS by $0.04 in our third quarter. To partially offset this convertible debt dilution, we have acquired approximately 525,000 shares of our stock through our third fiscal quarter. We expect to acquire at least 300,000 more in our fourth quarter.

Our adjusted effective income tax rate of 25% for the third quarter was slightly lower than the prior quarter. We believe our tax rate for the fourth fiscal quarter of 2014 will be between 25% and 27%, and for the full year, we expect a 26% rate on our as adjusted earnings. Our as reported rate for the full year was positively impacted last quarter by the release of valuation reserves on deferred tax assets created by German net operating losses accumulated in the past. We had referenced this release in our last call.

As usual, we have provided information on slides 10 and 11 that are similar on a year-to-date basis similar to that of the third quarter that we provided on prior pages. These two pages are for your reference, and I don't intend to cover the year-to-date results.

Please now turn to slide 12. Now some brief comments about our financial position and our cash flow results. Our balance sheet remains very strong. We now have $212 million on hand in cash and short-term investments as of December 29, 2013, with nearly $350 million undrawn from our credit lines around the world. We generated over $99 million in cash from operations in our first three quarters of fiscal 2014, even after $67 million of additional primary working capital resulting from higher volume. Our leverage ratio remains below 1.0 times, despite spending $67 million on share buybacks and dividends through the third quarter and $157 million spent on acquisitions.

As John mentioned and as noted in our subsequent investment notes in the 10-Q and on our press release, we recently announced the acquisition of an Asian distributor of Motive and Reserve Power products for a price of approximately $30 million. Capital expenditures were $49 million in the first nine months of fiscal 2014 compared to $38 million in fiscal 2013. Our increase in spending is attributable to our new plant in Gaoyou, China. We expect to generate adjusted diluted net earnings per share between $1.08 and $1.12 in our fourth quarter of fiscal 2014, which excludes an expected net charge of $0.15 per share from our restructuring programs and acquisition activities.

This guidance reflects slightly over $0.04 dilution caused by our convertible debts conversion premium, which I previously mentioned becomes dilutive when our shares exceed $40.60. At current share prices, this will continue to add up to 1.6 million shares to our diluted shares outstanding, making our expected average diluted shares outstanding for our final fiscal quarter to be approximately 50 million shares net of our expected share buybacks.

We anticipate our gross profit rate in our fourth fiscal quarter to remain similar to last quarter.

In conclusion, we believe we may remain well-positioned to take advantage of future opportunities. Now let me turn the call back to John.

Thanks, Mike. Now I would like to open the lines up for questions.

John Franzreb, Sidoti & Company.

Europe is up about 9% for the Company in the quarter, but I am actually more curious how Motive was in the quarter. Could give us a sense of what the demand profile is like and put it in context relative to maybe the peak where we are sitting as far as the cycle on Motive Europe?

Both Motive Power and Reserve Power were up approximately the same percentage for the quarter, John. When you look at the peak -- to your question, if you look at total Europe -- and this is looking at new industrial fork trucks -- what that really means is that once the order goes in for the fork truck, we have a delay somewhere between 4 to 16 weeks depending on the lead time of the fork truck manufacturer. We will receive the orders.

In Europe in total, looking at December to December last year, it is up 17%. But if you want to get a better average on it, if you look at December compared to the trailing three months, it is up 3%.

Now, one of the issues of looking just at that 3%, remember, December tends to be a slower quarter because of the holidays. So when we compare it to the prior three months, usually you would see it drop, but it is up pretty good.

Another way of looking at it is looking at the trailing three months versus trailing three months a year ago. Europe is up 11%. My conclusion on Motive Power, to answer your question, I think we are seeing things starting to move higher at Motive Power than they have been in the prior months.

And relative to the previous peak, how far below do you think we are at, John?

Good question. We are not back to levels in Europe of 2008. The actual percentage -- I don't know what it is, John. I would have to take a close look at the data, but I do believe we are running lower than that level. Let me look at some quick numbers here. We will move on to the next question, and then I will come back to you.

Sure. You mentioned -- you referenced the China rollout from 3G to 4G. My understanding is that is a multiyear process that just started recently. Could you talk a little bit about the battery opportunity of that rollout? When do you expect to capture the most meaningful chunk of that opportunity? Can you kind of timeline it for us?

Yes, I will. I am going to reference an article I read just a few days ago. What I talked about was the three telecom companies in China: China Mobile, China Telecom, and China Unicom. What the data said on this was that this was a number of cell sites, base stations that will be added in China, looking at 2013, 2014, and 2015.

In 2013 there was 207,000 towers added. In 2014 it jumps to 400,000 added. And in 2015 it is 120,000 for a total over that three-year period of 927,000 cell sites that will be added.

The jump from 2013 to 2014 really comes about by China Mobile started in 2013. China Telecom and Unicom will start deploying in this calendar year, 2014. So we see that there is big upside to take place on.

The other thing to keep in mind -- and this is really back to a global thing -- back in 2012, there was an article that came out about there were over 5 million base stations around the world. They can add another million to what, it is just with this data alone, which is about 6 million. I don't know how many have been added since 2012, but the point of it is there are a lot of cell site towers out there that didn't exist in the past. It is growing rapidly.

But the other hidden jewel of this thing is that those batteries are going to need replacement some time down the road. So I think that just filling the orders that we have right now for these new base stations, plus what is going to happen in the aftermarket side of it or replacement market, I think there is real upside.

Now, John, I want to go back to your other question because I didn't have that data in front of me. This is on Motive Power. If you look at the monthly units, the peak that I am looking at is actually back in April of 2007 where it was over 28,000 units that were sold -- trucks that were sold, and currently we are running about 23,000 units. It's down, it's not back at that level that it was, but it gives you an indication that it is increasing in Europe over where it has been in the last couple of years.

Excellent. Thank you very much, John. I will get back into queue.

William Bremer, Maxim Group.

Fantastic quarter. Going back to that first question, let's go into the base stations and towers. 3G versus 4G, could you give us an idea of per station or per tower, what type of revenue exposure does that lead to given some of the numbers you just threw at us?

Bill, I don't have an answer to that question, and I will tell you why. There are a lot of competitors in the China market, and what percentage that we get out of this business versus our competitors is really at the heart of your question. I will tell you this, though. If you go back a number of years ago, I remember that there was a bid that came in, and what happened, on the 30 battery companies that quoted this, we were number 29 in price. We were the high-priced one. We stuck with our pricing, and a year later came out and we were number two or number three. We held our pricing the same. The point is, the competitors all went up in their pricing.

Why did they go up? The reason -- we were operating at a competitive disadvantage because we followed the environmental rules in China where many of our competitors didn't. When they had to spend the capital and the added expense to follow the environmental rules, their costs went up, thus their pricing went up.

Now, during that period of time, another thing happened. We moved our manufacturing to a state-of-the-art, world-class manufacturing plant in Chongqing, China. Our costs went down. Our price stayed about the same. Our margins have improved. So I feel we are in very good shape, and what we've done in the past really helped us.

Mike, do you want to add to it?

Yes. I was just going to say, Bill, the other thing that Chongqing provided us was a much broader range of SKUs that we could bid on. When we were originally doing tenders, we might have had 3 or 4 out of 30 or 40 batteries that were put up for tender. And now we can participate in a much broader range. That helps us, as well.

Good point.

Can you give us an update on Bulgaria? Where are you with that? I definitely saw in the queue the restructuring, quite significant, and just give us an update there.

Yes. Let me give you a little bit of background on it first. As we said, the prime objective here, what is driving this whole thing is 10% operating earnings minimum and Europe going forward. When we look at it, we said what we need to do is, number one, go after pricing, which we have done. We announced the price increases. You won't see the full effect of the price increases really in place until really the first quarter of fiscal 2015. We will see some of it the latter part of this quarter, but most of it is going to come in the next quarter.

That is one side to the equation, you get to 10%. The other side of the equation is, reduce your costs. And when we look at the capacity we had in place, we said we need to reduce capacity. Our Bulgarian operation, which makes submarine batteries, Motive Power batteries and Reserve Power batteries, what we did or what we are doing is we are moving the manufacturing of the Motive Power and the Reserve Power to other locations in Europe to reduce overall costs. It was the most cost-effective way for us to reduce the capacity for Motive Power and Reserve Power in Europe.

The submarine battery business will remain in Bulgaria -- the manufacturing will. This will be completed this quarter, the end of this quarter. We will see a little bit of a benefit in the fourth quarter, but most of it really will pop into the first quarter of fiscal 2015.

Okay. So the majority of the restructuring has taken place in the third quarter.

I believe -- Mike, correct me if I am wrong -- I think we had $15 million in restructuring taking place in the fourth quarter?

We do. Not all of it pertaining specifically to Bulgaria. I think it was the $0.15 was the -- $0.15, yes.

So we will see most of the cost that will hit us -- you are right, that's $0.15. It will hit us in the fourth quarter, but we will be start to see the benefits really coming through, like I said, late fourth quarter, but really the bulk of it will hit first quarter of next fiscal year.

Michael Gallo, CL King.

I just want to drill down a little bit on Europe, John. I know you have been talking about seeing the tea leaves for some time and that it was starting to stabilize. But this is the first quarter it seemed like we are really starting to see the volumes move up in a meaningful fashion. You are starting to move price up. Are you starting to see rationality come into that market where you think the pricing will stick and your competitors are at the point where they actually want to make money as opposed to volume? You guys have always been disciplined. I was wondering as you take some costs out, get some pricing and a get better volume, why given the size of that market, assuming pricing rationality holds, you might not be able to take that operating margin well more than 10%? Thank you.

I would be happy to hit 10% on a consistent basis to start with. Keep in mind, our 10% is a minimum, and we hope to hit higher on it. But the fact is there is a lot of capacity for Motive Power and Reserve Power batteries in Europe. The capacity was put in place at the time when you look back at 2006, 2007, things were looking much higher.

As a previous question was asked, just take a look at the 28,000 units in fork trucks per month back in 2007, down to about 23,000 today. We are not back to that level. There is still capacity that is not fully utilized. That is one of the reasons for Bulgaria that we took it back and said, we are going to take that capacity out. Our competitors in some cases don't have the money to do that -- that restructuring. So it puts them at a little bit of a disadvantage to do it.

The other thing is you mentioned we have been disciplined in price, and we had been, but not at the level we are today. The discipline is much stronger today. And we've said we will walk away from the lower margin business. We don't want it. I've got to give our guys credit -- the management team in Europe -- they have done an incredible job with it. I figured they would lose a lot more market share than they did, and they didn't lose that much. They lost a little, but not much. And the reason for that is, when we walked away from it, our competitors started to look at raising their prices, also.

So we are seeing price increases take place in Europe. And I think it is about time it happens because you can't continue to run businesses and not make money. I think our competitors are waking up to that. I know they had been woke up to it for a long time, but it has just been a tough market in total. But it is starting to turn.

Great to hear. Thanks.

Tim Mulrooney, William Blair.

John, you gave us industrial fork truck orders for Europe. You said up 11% trailing three months versus trailing three months. Could you give us that data for your other two regions -- North America and Asia, as well, please.

Okay. On the trailing three months, just for clarity on it, you are looking at trailing three months this year versus three months last year?

Yes.

That is your question?

Yes.

In the Americas, it is up a total of 10%. In Europe, as I said, it is up 11%. In Middle East and Africa, it is up 12%. Asia is up 15%. Total, global, it is up 12%. Again, that is looking at December, November, October of this last calendar year versus the same period one year prior.

Okay. Thank you. That looks promising. My other question is looking at your acquisitions, it looks like they contributed around $33 millin, $34 million to the topline in the quarter. Did you ever quantify or could you quantify for us the EPS secretion or the impact to the fourth quarter from these acquisitions?

Well, Tim, we had said earlier, particularly with regard to Purcell and Quallion, that those would probably be about $0.04 of accretion in the third quarter. In the fourth quarter, I am going to say that you are still going be roughly in that same ballpark.

If you look at the first press release that came out when we did Purcell, we said on an annualized basis it would be accretive between $0.15 to $0.20. We didn't really state it in our Quallion or UTS, but I will tell you they will both be accretive.

Thank you, guys.

Jeff Osborne, Stifel.

Just a couple of quick ones. Can you talk on the Thin Plate Pure Lead success that you have seen in North America? What that was up sequentially or a sense of how impactful that is on a revenue basis, and more importantly, what the plan is of further penetrating Europe with that product line?

We said in the past it is running very similar to what it has been the last quarter. It is about 20% ballpark of our business. I don't think you are going to see major increases in that percentage. And the reason for that is the price difference between it. There are certain applications where it justifies the premium for Thin Plate Pure Lead. There are other applications or customers that don't want to pay that premium.

Now we can make that percentage go up by lowering the price. That is not going to happen. We want to keep the product differentiation in place and keep the proper mix to maximize returns to shareholders.

On the competitive front, even though you are raising pricing in Europe, is the competitive situation just not enough to justify the -- to penetrate Thin Plate Pure Lead into that region at this point?

No. Thin Plate Pure Lead in Europe, it's a large portion of the business over there. It has penetrated -- it's in there. It's doing well right now. In Europe, most of the products they are selling in Reserve Power right now is the Thin Plate Pure Lead. So it is a big percentage.

And you alluded, John, to China Telecom starting their buildout last year and Unicom and Mobile ramping up. Have you started seeing the request proposals for that, or is that still TBD on that front?

Well, I think it's, not only are we seeing it, but if you take a look at -- it's interesting to look at our Asia business in total. If you look at Q3 versus Q3 a year ago, the revenue is up 29%. But if you look at it on a unit volume basis, unit volume in the Asian business is up 34%. When you take a look at the first nine months of the year, it's only up 1%, which means the first two quarters, it was fairly low; in the third quarter, it has jumped way up. Again, nine months up only 1% -- third quarter, which obviously is included in the nine months, is up 34%. What is the reason for that? That is the 4G buildout kicking into China that we are seeing major orders come through.

Excellent. Last question, just on the pricing increases that you have announced. Can you just put it in perspective what the scope of that is? Where you are on a per kilowatt hour versus where you were at the peak of the market in 2007? I am just trying to get a sense of what the incremental increase was from where you were a few months ago.

I don't have hard data on that to go back and compare it to 2007. We can dig that up, but I don't have that data in the room here.

What I will tell you is what we went to the market with is about a 3% to 5% increase depending on the region, depending on the customer. But, as you know, what you go to the market with or what you get -- what you ask for and what you get is a negotiated point. So how to factor that in, we are going to have to wait and see how the market totally reacts to it. But I do expect we will see price increases.

Jeff, one further point on that. You might recall at the peak of the pre-recession, lead was up to $1.80 at its high point. So pricing was based on a different commodity input, and then after the recession, commodities broke down. They have been trending closer in the $1.00 range more recently, and it is been fairly stable between $0.98 to $1.10 on the high side. You kind of need to know where the commodities were when you look at your pricing.

Excellent point. In fact, the number I remember, if you go back to October 2007, lead hit an intraday high of $1.82 per pound, whereas this morning, the report I saw was $0.953 a pound. And Mike is right. The price is going to be adjusted. The price is not the thing to look at. You have to look at the gross profit to really answer the question because you got trade-offs there.

I understand. Just two quick ones for Mike. I know you're not giving guidance for the upcoming fiscal year, but just how do we think about tax rate and CapEx with that China facility? Just if you can give us a sense of scope on where we are in completion with that?

Well, I think the encouragement we are seeing out of Europe will be helpful for our tax rate because our European, particularly our Swiss company strategy, allows us to drop our rates. So one of the reasons you have seen our rate decline to 25% effective tax rate on as adjusted earnings this quarter is because Europe had a good quarter. So, as Europe improves, our tax rate should decline.

On your CapEx question, certainly as we continue with the Gaoyou plant buildout, you will see that go through. Normally we would see $40 million to $50 million of CapEx in a normal year. Next year maybe $50 million to $60 million. We are still formulating that. As you know, our fiscal year begins April 1. But I would expect it to be slightly higher than an average year.

Yes. I think the other thing to add to that, we are evaluating updating our computer system in the US market like we have done in Europe. There may be some additional CapEx in fiscal 2015 for updating our IT systems.

Dana Walker, Kalmar Investments.

Once upon a time I recall when we first became an investor back in the 2007/2008 timeframe, I believe Bulgaria was a proactive step that you took believing that that was a low-cost manufacturing location. What has changed?

What has changed is what happened in Europe with the recession and things going down. You remember, there were two reasons we bought that particular facility. That facility at the time did about $19.5 million in revenue when we acquired it. It also was in the Russian market, which we were afraid to make investments in Russia direct, and this would help us get into that market. You are right -- it was a low-cost operation.

Now what we thought would happen back in 2007 with the volumes, they would be significantly higher than they are today. Remember the number I quoted was the 28,000 trucks per month down to 23,000 -- we are not even back to that level. What has changed is we said to get to 10% operating earnings we need to get the manufacturing costs down, and the way to do that is consolidate operations. And when you start looking at the different options -- whether that's a plant in France or in Poland or in Germany or wherever -- and you look at all the plants, you say to take the capacity down, where is the best place to take it down at, and what is the most cost-effective?

Now when these volumes come back, if they come back and hit a level that we need that capacity, we can always turn that plant back on again. But what we are looking at is sizing the business to the capacity. Sizing that capacity to what the markets are actually going to do.

So bottom line to your question, in 2007 when we looked at the projections of where we thought things were going to go, they didn't materialize at the same level because of the recession. If it comes back and hits higher levels, you may see that plant open back up again. In fact, they say it may open back up. It is still open. It still running product there, but it is not running the Motive Power and Reserve Power product lines.

That is helpful. If the two acquisitions most recently announced that would have some effect on the December quarter did contribute $0.04 a share, that would appear to suggest that the operating margins would have been fairly similar to the Americas margin that you reported. So there wouldn't have been any margin dilution. Is that about right?

Yes, I think that is a fair assumption, Dana. The Purcell acquisition, those margins typically are fairly strong. As you know, our Americas business is very robust at the moment, as well. So the answer is yes.

I think the other thing to keep in mind on this thing is with the convert and what Mike alluded to earlier, it is hitting us at about $0.04 a share. If you take that $1.07 and add the $0.04 to it, we would have been at $1.11. But the dilution have hit us, and thus, the reason for continued stock buyback, in part, to try to offset that with a buyback. But the other reason -- it's not just that -- we think it is a good buy as a company.

Given that the Americas margin has been as elevated as it's been for some time, you cited that the year-over-year decline in margin in the Americas was a function of commodity pricing. Where might that go based on your sense for price costs over the next whatever your window of visibility might be?

Well, I don't know where the commodity costs are going to go. Even when you look at the experts that follow it, many of them are wrong, also. It is very hard to predict where it is going to go. I just know that every time lead goes up, we have the ability to get it in pricing, and lead goes down, that we have to give some of it back. So I can't predict where it is going to go.

The second point I want to make is, if you go back a year or a year and a half ago on calls here, I said at the time that the Americas is going to be good if we can just maintain those margins and hold ourselves there. I think I said in that call, in fact, if we were looking at operating earnings of 20%, 25%, what that would mean is they are going to lose a lot of volume. You've got to find the sweet spot, the optimum point. I think the Americas have done a great job with it. I think the value that we add to our customers and getting the premiums that we are getting, it is justified. Our customers support that from the standpoint of orders they place with us.

But, again, if we raise the prices way up higher, that justification that the spread is too great, we wouldn't be getting it.

Now so I don't think it is on the pricing side. I do think, though, we have opportunities on further cost reductions. There are opportunities there. So I think that to hold those margins or increase the margins to the Americas is going to come about by the manufacturing costs and other costs that we can reduce. Not that we are not going to try to get pricing, but I think the opportunity is really the cost.

Two last questions on Asia. You made a point, John, of describing the volatility in orders and how it was up so strongly in the most recent quarter. Would you expect there to continue to be a fair amount of volatility from here, even though the direction is up?

I would hope not. If the data that I referenced earlier about the cell phone tower buildout taking place, I would hope not.

The second thing is that I think with the acquisition of UTS and the stability that organization has as demonstrated over years -- over the last 20 years -- that is going to help us stabilize our business in a region that is outside of China.

The second question on Asia would be this. You have described how when we have gone through generational upgrades in cell tower technology that is quite often they will update all the electronics and the battery when they update the electronics. Are they pursuing the same path in Asia so that when you described how there is an incremental 900,000 towers going in over a three-year timeframe, are the towers, though, that are already in stance, are they being upgraded in the same way so that you have that double whammy affect?

It depends on the technology. It depends on the particular site that is in place. In some cases, they are going to update it. But typically on 4G, you are going to have smaller stations but many more. Roughly you are going to have double the units to cover the same area in ballpark ranges. So there are going to be a lot more units, but they are going to be smaller.

William Bremer, Maxim Group.

If we can get just go over the convert a little bit, and the stock is up very significantly here. Can you just walk us through the appreciation of the underlined shares based upon the stock price and as we forecast more into the following year and then some? The intention of management has always been to pay down this principle in cash. I just wanted to get some comments on that.

Let me start and then I am going to turn it over to Mike. If you look at the total dilution, which at 40 -- it kicks in at $40.60. Total dilution is approximately 1.6 million shares. Okay? If you look at our stock buyback program in total, we are looking at about 1.4 million shares. The net difference on it would be an average share balance of about 700,000 shares.

Mike, why don't you go further into the details on that?

As many of you know, our convertible debt is currently trading on a market value of about at least at December 29 because we reported this in our Q that that value was approximately $304 million. If the shares were convertible today, that conversion probably would have yielded somewhere around $297 million to $300 million. So the market price of the convert has a premium built-in for future share price appreciation.

So we have the option -- we will pay the principal of $172.5 million in cash. On that premium piece, which right now represents, call it, $125 million or so, we have the option. We can either pay cash or we can deliver shares.

Now, our thought and one of the reasons we have been buying shares is to offset the dilution and to give us the flexibility because our EPS is already being impacted by this. If we buy the shares back, you can think of it as prepaying or pre-buying the premium portion of this convertible back. And we will probably continue to look at this as an opportunity as we move into fiscal 2015 to say, should we continue to buy shares so that in the case that we may want to deliver shares because we have already bought them, or if our cash situation allows for it, we may still pay cash for that premium component. So that part we haven't determined yet.

One thing to keep in mind on this, when you look at stock buybacks, in a stock buyback, in our opinion, the success of it is, when you look at your stock price today and you look at your buybacks, was the price you bought it back less than what the stock price is today? I can tell you ours is significantly less on a total amount. There are companies that will go out there and do stock buybacks -- this is the reason I am saying it -- what happens is they paid a high price for it and the stock drops off. We are not doing stock buybacks for the sake of offsetting the dilution. That is part of it, but the real answer to it is we think the value of the stock at the time we buy it is a good buy for our shareholders and the future of the stock price will be higher.

Okay. Thank you.

At this time, we have no further questions. I would now like to turn the call back over to Mr. John Craig for any closing remarks.

Yes. My closing remarks are real simple. Thank you for joining us today and your interest in our Company. I can tell you the management team is highly committed to maximizing the return to shareholders. Keep in mind that our management team, they are all shareholders, also. So we are all tied shoulder to shoulder and trying to work this thing to get the best returns we possibly can.

Again, thanks 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.