EnerSys (ENS) 2015 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the EnerSys third-quarter 2015 earnings call. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to turn the call over to your host, Mr. John Craig, Chairman and Chief Executive Officer. Mr. Craig, you may begin.

Thank you, Bridget, and good morning everyone, and thank you for joining us today. Joining me on the phone this morning is Dave Shaffer, our President and Chief Operating Officer, along with Mike Schmidtlein, our Chief Financial Officer. Last night we posted on our website slides that we're 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 Investor Relations tab on our website at www.enersys.com.

Before we get into the details of our third-quarter results, I'm going to ask Mike Schmidtlein to cover information regarding forward 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, 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 fiscal quarter ended December 28, 2014, which was filed with the US Securities and Exchange Commission.

In addition, we will also 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 4, 2015, which is located on our website at www.enersys.com.

Now let me turn it back to you, John.

Thanks, Mike. Please refer to slide 3, and you'll see the reported details of our third-quarter results. Our sales for the quarter were down 5%, to $612 million, compared to the prior year, mainly due to the impact of foreign exchange rates. In spite of the lower revenue, as well as higher [leg] cost, we were able to achieve a record third-quarter adjusted earnings per share of $1.09, which exceeded our guidance of $1.04 to $1.08 per share. On a year-over-year basis, our earnings per share were up $0.02, or 2%.

I continue to be impressed with the record results from our Europe, Middle Eastern, and African business. Year-over-year, our third-quarter organic volume in EMEA was up 6%, driven by strong reserve power sales and positive pricing of 1%. EMEA's operating earnings are up 30% for the quarter, as compared to the prior-year third-quarter, to $28 million, and up 57% for the first nine months of this fiscal year at $83 million.

I now want to focus on our current business activities and fourth-quarter guidance. Our incoming order rates for motive power are up in the Americas and Asia, and are flat in the EMEA region. The three-month electric fork truck orders for October through December are up 13% globally compared to the prior year. In reserve power, we continue to see sizable telecommunications orders for replacement in 4G in our EMEA region. In the Americas, reserve power orders are down year-over-year, mainly due to reduced orders from a major telecom company.

As noted on prior investor calls, our Asian operation continued to have reduced volume versus prior year, given our exit from a large, low-margin contract we have. Also in Asia, during fiscal 2015 we have experienced additional costs as we transition from our Jiangdu facility to a new, much larger plant in Gaoyou. These added costs will subside as we complete the transition in the second quarter of fiscal 2016. Based on these trends, our earnings per share guidance for the fourth quarter is between $1.10 and $1.14, which assumes slightly higher volume and higher leg costs.

We continue to work on new product developments. Our off-the-grid large energy storage systems continues to gain traction, and we recently introduced a new family of high-efficiency chargers, which is getting great reception from the marketplace.

We recently announced that our Board of Directors approved a quarterly dividend of $0.175 per share, payable on March 27. In addition, we have purchased, fiscal year-to-date 2015, $198 million of common stock. Our strong earnings and cash flow performance over the past several years has provided EnerSys with sufficient capital to meet our plans, as well as allowing us to increase return to shareholders.

In closing, I believe our geographic in product diversification continues to be one of our strategic strengths, and should expand in the future as we review acquisition opportunities. I continue to be excited about the future opportunities available at our Company.

And with that, I'm going to ask Mike Schmidtlein to go into information regarding our results and guidance for the next quarter.

Mike?

Thanks, John. For those of you following along on our webcast, I am starting on slide 4. As John mentioned, our third-quarter net sales decreased 5% over the prior year to $612 million. This resulted from a 2% decrease in organic volume, and a 6% decrease from currency translation, less a 2% increase from acquisitions and a 1% price increase.

On a regional basis, our third-quarter net sales in the Americas were down 4% to $314 million, while Europe's decreased 4% to $242 million, and Asia decreased 15% in the third quarter to $55 million. In the Americas, 3% was from negative organic volume in our enclosures business, and 2% was from currency devaluation, while acquisitions contributed 1%. Europe had a 6% increase in organic volume due to a strong showing in reserve power and a 1% increase in pricing, overcome by 11% in currency devaluation. In Asia, organic volume was down 26%, with sales to China's telecoms remaining down and the impacts from the transition of motive power production to a new facility. Currency was also down 3% in Asia, while the new UTS acquisition contributed 14% to net sales.

On a product line basis, net sales for motive power were down 3% to $305 million, while reserve power decreased 7% to $307 million. Motive power had a 1% pricing gain, and a 2% gain from acquisitions, less 6% negative currency translation. Reserve power attained 1% from acquisitions, while organic volume and currency translation were down 3% and 5%, respectively.

Please now refer to slide 5. On a sequential quarterly basis, third-quarter net sales were down 3% to the second quarter, due to 3% lower currency translation. The Americas region was down 6%, and Asia was down 13%, while Europe increased 4%. On a product line basis, reserve and motive power were both down 3%.

Now a few comments about our adjusted consolidated earnings performance. As you know, we utilize certain non-GAAP measures in analyzing our Company's operating performance, specifically excluding highlighted items. Accordingly, my following comments concerning operating earnings and my later comments concerning diluted earnings per share exclude all highlighted items. Please refer to our Company's Form 8-K, which includes our press release dated February 4, 2015, for details concerning these highlighted items.

Please now turn to slide 6. On a year-over-year quarterly basis, adjusted consolidated operating earnings decreased approximately $5.6 million, with the operating margin down 20 basis points. On a sequential basis, our third-quarter operating earnings were down $1.7 million, but margins improved 10 basis points. The decrease from the prior year reflects primarily higher commodity costs and lower volume. Europe improved both year-over-year and sequentially, while Asia and the Americas declined in both comparisons.

Adjusted operating expenses declined $4 million from the prior year to 14.0% for the third quarter compared to 13.9% in the prior year. We would expect our full-year adjusted operating expenses to remain near fiscal 2014's full-year rate of 13.7%.

Our Americas business segment achieved an operating earnings percentage of 13.3% versus 15.0% in the third quarter of last year, primarily from the dilution in our enclosure business and the impact of lower pricing in our aerospace and defense sales. On a sequential basis, third quarter improved 40 basis points again this quarter, from the 12.9% margin posted in the second quarter and the 12.5% in the first quarter.

Europe's operating earnings percentage of 11.5% remained above our 10% minimum target, and well above last year's third quarter of 8.5%, primarily from better volume, pricing, and mix, and the impact of prior restructuring efforts. The operating earnings percentage in our Asia business declined in the third quarter of this year to 4.4% from 11.1% in the third quarter of last year, and from the 7.2% in the prior quarter. Asia is still transitioning its motive power production in China, implementing new business processes for the business we took over in India, and redirecting our Chinese business away from lower-margin telecom markets.

Please move to slide 7. As previously noted on slide 6, our third-quarter adjusted consolidated operating earnings of $71.9 million was a decrease of 7% in comparison to the prior year, with the operating margin decreasing 20 basis points to 11.8%.

Excluded from our adjusted net earnings for the third quarter was approximately $2.4 million of highlighted net charges. Please see our press release issued yesterday for details of these items. Our adjusted consolidated net earnings of $51.6 million decreased 4% from the prior year, but remained at 8.4% of sales, with our book tax rate just below 24%.

EPS increased 2% to $1.09 on lower shares outstanding. The lower average diluted shares resulted primarily from recent share buybacks and less dilution from our convertible debt, which becomes diluted when our shares rise above $39.93. This convertible debt dilution added approximately 1.4 million shares, net, to this quarter's EPS calculation, and decreased EPS by $0.03 in our third quarter.

We offset this convertible debt dilution by acquiring approximately 1.2 million shares in fiscal 2014. And we have acquired 2.8 million shares in fiscal 2015 through December, and 3.2 million shares to date through January, and have nearly $16 million still authorized. We expect our fourth quarter of 2015 to have approximately 46.5 million weighted average shares outstanding, which represents another meaningful decline from the previous quarter.

Please now turn to slides 8 and 9. As usual, we have provided information on a year-to-date basis, similar to that of our third quarter on prior pages. These two pages are for your reference, and I don't intend to cover year-to-date results.

Please now turn to slide 10. Now some brief comments about our financial position and cash flow results. Our balance sheet remains very strong. We have $280 million on hand in cash and short-term investments as of December 28, 2014, with nearly $320 million undrawn from our committed credit lines around the world.

We generated $173 million in adjusted cash from operations year-to-date in fiscal 2015. Our leverage ratio increased by 0.1 to 1.2 times, due mainly to spending over $200 million on share buybacks and dividends through the first three fiscal quarters.

Capital expenditures year-to-date are $47 million in fiscal 2015 compared to $49 million in fiscal 2014. Our full-year spending should be comparable to last year.

We expect to generate adjusted diluted net earnings per share of between $1.10 and $1.14 in our fourth quarter of fiscal 2015, which excludes an expected net charge of $0.12 per share from our restructuring programs and acquisition activities.

We anticipate our gross profit rate in our fourth fiscal quarter to be between 25% and 26%. We believe our tax rate for the fourth quarter of fiscal 2015 will be between 24% and 26%. And for the full year, we expect a 25% to 26% tax rate on our as-adjusted earnings.

In conclusion, we believe we remain well positioned to take advantage of future opportunities.

Now let me turn the call back to John.

Thank you, Mike. And with that, I'd like to go ahead and open up the lines for question.

(Operator Instructions). William Bremer, Maxim Group.

Let's go right into China, if I may. You voiced the fact that telecom there, volume is down. What's the strategy there? And how are the new products that you voiced, last conference call, where are they in terms of being rolled out?

Yes, I'm going to ask Dave Shaffer to pick up on that question.

Thanks for the question, Bill. We've got two new products that are in final approval stages with some key customers, and we expect to see incremental revenue from these products coming in the coming quarters.

Okay. So you're saying maybe the first half of 2016?

Yes, that's when -- we should ramp from there.

Okay, great. John, can you give us a little bit more granularity on these new products? What type of -- and I know that your operating margin target is approximately 10%. Will these get you there?

I believe they will, eventually. Let me go into a little bit more detail on the whole Asia market, and I'll start with China. The [setter-uppers] that went out last year where so low that we were going to lose money on them. And we had a very tough decision to make on this thing. And what we decided was, walk away from that business; you can't stay in business and lose money. It's a very tough and competitive market. We've then benchmarked our products against our competitors and, as I mentioned on the last conference call, we are looking at major cost reductions, or cost reductions on the products, to become more competitive. We have two products right now that are in testing with two very large customers.

We also have a change that's taken place in the China market, where the three telecom companies have formed a joint venture to really put up the towers and buy batteries. We are putting a lot of emphasis on going to the joint venture and working with the people, and establishing relationships there. And what we're hoping for -- and there's no guarantees -- is that these products will take off and put us in a better position than we have been in the past. It's a very tough environment that we have there.

I think the second point to take a look at is our India business, is one where we continue to invest in and get it up and running at a level we want. Some of the products that have been there from the prior ownership were not to the standards that we want. We have redesigned the products or put our designs in there, and we're hoping that one picks up also.

Long-term, and these are long-term decisions we've made, that we can't stay in businesses that are very, very low gross margins, and ultimately not make money with them.

I do believe very strongly that we will be back above 10%, hopefully sometime in the coming quarters; hopefully, second or third or fourth quarter of next year.

Okay, great. Let's go right to Europe. Very nice margins there in Europe. And given what you've gone through there in the past, I take my hat off to you in terms of the restructuring initiatives that your company has done there. Can you sustain this type of margin in Europe? Or what are you seeing? Break it down between East and West for us in terms of -- as well as, if you could, between motive and reserve. Where are you getting the demand?

Well, as you know, recently we promoted David Shaffer to President and Chief Operating Officer.

His prior job was President of the European operations, so I'm going to toss that one to Dave.

Well, thanks, John. In terms of the outlook, the motive power business appears to be very stable in the Western markets. The business in Russia obviously is a bit questionable going forward, but it's not a substantial part of our business, so it shouldn't present too much difficulty.

With regards to the reserve power, John touched on this in his script, that the -- we still see a lot of upside in the 4G markets. We're still in early innings there. The subscriber and rollout rates are still in the very early stages, so we look for growth in those markets as well.

The focus has to continue to be on aggressive price leadership in the market. And we're not going to stop. If there's accretive restructuring opportunities, we're going to look at them. That's going to continue to be part of our activities there. But I have a lot of confidence, and I'm very proud of the team over there, and our new leadership will take us to new levels.

Bill, the thing that I personally get really excited about over there -- and you've heard me talk about this in the past -- that if, someday, 4G will take and kick in. Europe cannot continue to run with 3G. And for those on the call that have been over to Europe and use their cell phones or try to get on the Internet, it's terrible compared to what we have here in the US.

We are starting to see that take hold. We are starting to see shipments going into 4G. And as Dave alluded to, we're in the early innings of this thing. And I said on the last conference call, I think we've got a couple of good years here with telecom buildout in the European market. And you're starting to see it in our third quarter.

My final question is on the lead hedge forward contracts; saw that tick up a little bit. Lead is approximately $0.84 now. Where are you hedged, price-wise?

Well, I think it's in our Q. If I can remember the numbers correctly, we have 23% of our trailing 12 months -- and, guys, correct me if I'm wrong on this -- 23% of our trailing 12 months, and I think it's a $0.92 a pound that we have right now. And as you recall that we hedge out usually 3 to 4 months, and that -- so all of that 23% I'm referring to, it really takes it to about 50% of the lead requirements in the next 3 to 4 months (multiple speakers).

When you really look at the total flow-through with FIFO and the hedges and everything, it's going to take 4 to 6 months before you flush all that through. In the fourth quarter, we're going to have a slight headwind because of lead, versus the third quarter. Our lead is going to go up for fourth quarter versus third, and for lot of reasons. And I'll [come in] a little bit more detail on that in a second. But when you look at how it flows through, we believe that we'll start to see the real benefits of this hit our first quarter.

Now, the other thing to keep in mind is in Europe, with lead going down, we're really not getting any advantage because of what's happened to the euro. The stronger the dollar gets, the more euros it takes to buy a pound of lead. So the effects of lead going down, the LME going down, with half of our business approximately in Europe, we're not going to get any benefit from that. The only way we're going to get that benefit is if lead stays constant and the euro get stronger. Then we would pick it up.

Good color, gentlemen. Thank you.

John Franzreb, Sidoti & Company.

Reserve North America -- we had the issue with the large telecom supplier. Have you gotten any indication on when that situation may change?

John, we've seen a little bit of activity. And I'm going to emphasize, it has been very little bit of activity. It's been a very big disappointment, not only for EnerSys but for many companies that supply that particular company.

I will tell you right now, just to jump to the bottom line, if we had the volume this year with that one customer compared to what we had last year -- if we had last year's volume this year -- we would be looking, on an annual basis for fiscal year 2015, that our EPS would be somewhere between $0.20 to $0.30 per share. It's that big. It's that big. And one of the reasons that it's so large for us is the acquisition of Purcell. A large portion of Purcell's business was tied to that one particular telecom company.

Now, to your question, when is it going to come back? We don't know. I think that each of you probably have read some of the things in the press as to what's going on with that company, and we're going to have to see how it shakes out. But as far as getting inside information, I know it's one thing I push very hard on our sales organization, is find out what's going on. It's very close-lipped.

Okay. And you mentioned lower pricing in the aerospace and defense part of the business. Can you just provide some color on what's going on there?

Well, what's happened is that -- if you back up, and you look at our Thin Plate Pure Lead product, and the military absolutely fell in love with it because it way outperforms everything else. And when you're in battle with boots on the ground and you have tanks, you want the very best you can get in there.

Now, on the other side of the fence, if you've got tactical vehicles that are in the United States and they're not in a war zone, they can put a cheaper battery in there. So what's happened with it is there are two sources now. We used to be just about sole-sourced on it. Today there are two sources.

Because of that, we had to take and come down on our pricing. So we're not getting the margins that we used to get on that business. Still a very good business, but it's not near where it was.

But John, as a result of that price change, we are seeing more volume.

Okay. And I guess one last question. It gets back to the commodity cost issue, John. Is it entirely lead that's the headwind in the quarter? And, secondly to that, you mentioned that you should recapture some benefits in the first quarter. Even at the current euro level, would it be a significant recapture? Can you just walk us through what your expectations are?

Go ahead, Mike.

John, we would expect those hedges are going to roll out in 4 to 6 months. Most of the hedges that were out in place in, say, the end of the second quarter, what's hitting our P&L now in the third quarter. So we'll see a little more headwind in the fourth quarter.

With regard to the euro, and as John mentioned, even though lead, which is traded in US dollars, is down, it's about the same number of euros to buy. So you don't get the benefit so much out of our European operations. We will see it out of our Americas business. Not quite certain yet on how big that reduction will be. But I think it's safe to say that it will probably be $0.03 to $0.04 less than where it was; which would mean, instead of maybe -- you'd probably see a 40 or 50 basis point improvement in gross profit margins.

Yes, and John, the big hit is definitely lead. So the other commodities, we're offsetting that, but it's really a lead story. And just to summarize it, three things: not getting the benefit in Europe because of the FX effect. The second thing is, whenever lead is coming down and you are in a hedging program, our hedges right now are higher than what the LME is. That's hitting us, and that will flush through. On the other side of the fence, when lead goes up, by the way, we will -- those hedges will be in the money.

And the third thing is that in the US -- and I've touched on this in the past -- that junk batteries, which scrap or recycling batteries, it usually is cheaper to buy those than it is to price on the LME. That's not the case anymore. Junk batteries have gone way up.

So there's a new way of pricing lead in the US market, which is not tied just directly to the LME; it's tied to the price of junk batteries. We have a percentage of our business in the US, our lead in the US, that we have to buy on the junk battery price. Junk battery price is higher than LME.

Now, that being said, we also take that into customers that our lead cost has gone up versus the LME. And they understand that now. So, the offset to what I'm talking about, junk batteries going up, we get that back in pricing; so it offsets.

So John, how much of your lead purchases are recycled batteries? Give us a sense of magnitude here.

You're looking about 20%.

Wow, okay. Thank you, guys. I'll get back into queue.

Michael Gallo, CL King.

Congratulations on a very strong quarter in Europe.

Thank you, Mike.

Couple questions. First of all, an easy one for Mike. The convert, I think, is callable in June. Should we assume you'll probably call out at this point, obviously given the strong cash balances you have?

Well, Mike, we have really three choices on that. The holders may convert. There's also a put option. And as you noted, we have a call right. It's unlikely, but possible, that that convert may continue on. It's a 40-year note. But let's assume that for this example that it is by June of next year, it is converted or called.

We have two other options. One is the high-yield debt market, and that market is open and very attractive in terms of rates right now. The other option that we have is with our existing bank credit facility. We have a $300 million accordion feature that we could expand out.

So if we want to take this convertible debt out, we would either issue high-yield debt or we would expand on our current credit facility. We haven't made that decision yet. We will probably be making that decision the next 60 days. But as of yet, we do not know, but we kind of like the alternatives and options that we have.

And obviously nice to be able to really get away from the dilution. Second question is for John. You mentioned you're starting to see 4G perk up in Europe. I was wondering if we could put some more commentary on that, in terms of what you're seeing in order trends. Is it just a couple countries? Are you seeing it broaden out? And how should we think about how that might ramp over the next couple of years?

Well, what you're seeing is happening in the cities in Europe right now: Paris, London. You're seeing it in the large cities. You're not seeing it -- it's just at the early stages, very early stages. But I can't break out exactly how much in the quarter was there. But I'll tell you that when you look at our European business up, the star this quarter, the star was reserve power business in our European operations. It's up; the earnings are up. As I said earlier, the turnaround over there has been a tremendous thing for us.

You go back in time, and one of the things that we talked about in the past, when the Americas -- we were running up 15% operating earnings. And I said way back when, it's going to be very tough for us to maintain that level. What we've got to do is we've got to get Europe from the 6% to 8% operating earnings up north of 10%. Because the Americas, to hold that level at 15% is going to be tough to do, because we're going to price ourselves right out.

In fact, unfortunately it's happened. The Americas have come down; Europe has offset it. But what's really offset it in Europe? It's been the reserve power business. And the beauty of it is we're just at the start of 4G, and I think this thing's going to spread.

Dave, you want to add to it?

Yes, Michael, certainly John's right. The initiative began in the cities, but we are seeing it now broad-based. I think almost all of the major carriers today have announced their LTE programs. And we hope to see continued growth in all parts of Europe, especially in the rural areas.

That's great. And then just one more for Mike. I was wondering what the year-over-year impact on operating earnings was in the third quarter from currency, and where you expect that will be, or what you have embedded in the guidance for Q4. Should we assume currency rates where they were as of yesterday or a week ago, or do you have some embedded forecast for any changes there? Thanks.

So I believe the impacts for the third quarter, compared to the prior third quarter, are broadly neutral. We did receive -- while we had headwinds above the operating earnings line, as we noted that year-over-year currency had a negative 6% impact on sales, and that lower translation obviously filters through all elements of the profit and loss statement. And in the end, your operating earnings decline, in this case, theoretically, by 6%.

Fortunately for us, typically when we see pressure above the op earnings line from currency, we tend to get benefits below the op earnings lines in foreign currency gains from our inter-Company balances.

So for the third quarter, we assume that we were broadly neutral. For the fourth quarter, I'm assuming, as we have normally said, in any given quarter we can get a $0.02 to $0.03 benefit or headwind. And our thoughts for the fourth quarter is we're going to assume it's a headwind.

Okay, great. Thanks.

Tim Mulrooney, William Blair.

John, you gave the fork truck orders were up 13% globally. Could you break that down by your three major regions?

Yes. And let me qualify the 13% that we're up. That 13% is really, once again, looking at back three months and looking at the same period last year, three-month trailing. And it's up 13%. In the European region, it is up 7%; in the Americas, it's up 22%; in Asia, it's up 16%; Middle East and Africa up 14%, for a total of 13% increase.

Got it. Thank you for the detail. Most of my questions have been answered, but can you maybe just touch on the traction that you're getting with some of your new products, or your new product development -- how that's coming along? Just talk about maybe nickel-zinc and OptiGrid and those products.

Okay, yes. Let me start out with our new charger line. We did a complete redesign of our chargers. And that features and benefits on them are significantly better than what we've had in the past. They are very good margins on these products. The reception in the field has just been fantastic with it. So we're very excited about the new charger line. And that's for motive power products.

On our nickel-zinc product, that's a development product. I've said over the years that we're not really an R&D company. And we went out on a little bit out on a limb with this one, from a standpoint that it's the designs that we have to that we're working on with another company. It wasn't ready for production. It needed a lot of work on it. We've done development on it. But we've invested $3 million in a small facility to do prototype cells, or really cells to get to customers. The acceptance of it so far has been extremely well. The performance of it has been good. We are very pleased with what we're seeing.

We think that's potentially -- if it works out the way this could be one that would be a game-changer for us, that we'd be into something that's totally new that no one else in the marketplace has. It would be something that, to make it simple in layman's terms, it's better than lead acid, but it's not as good as lithium-ion, but it doesn't cost near as much as lithium-ion. It's in between. So it's something that we think that customers are going to be very interested in because it's got a good price on it.

You want to add to it, Dave?

Yes, and I think the other product that we're really excited about, and the quote activity is really improving, is on the OptiGrid systems. And specifically in the markets, in the urban markets where electricity demand charges are very high, we see some tremendous opportunities and realistic business cases for our customers, with hard payback. So, that's on the uptick as well. Nothing ever happens as fast as you want it to, in terms of new product development, but all trends are positive on that particular project.

Great. Thank you, guys.

(Operator Instructions). Sven Eenmaa, Stifel.

A couple of quick one here. Just regarding the next quarter here, and then there's obviously number of moving parts in the guidance across the lead price and currency, what are your organic growth expectations in terms of motive power versus reserve power?

Well, let me break it by region. I think I've touched on it already in Europe, that we're going to continue to see the growth take place in reserve power in Europe. I'm very pleased with that. I think in the Americas, it's going to be flat. And the reason it's going to be flat is because of that one major telecom company.

Now, when you take that one major telecom company out of our business, and you look at it -- and we're going to be flat, that implies that the other telecom companies are spending at a higher level to offset what we've lost with that one major company. So, I think that's a good, new story, because I too believe that one major telecom company will come back sometime. I just don't know when. So I think it's going to be flat, with some potential upside whenever the customer comes back.

The Asia market, I think we're going to continue to be down. And the reason we're going to be down until we get those new products in and win some of these contracts back, we're going to be at a lower level. But I do believe it will come back. As Dave alluded to earlier, we've got the new products in for test right now. The feedback we're getting from the customers is very good on it. And I think eventually it's going to come back. But it's going to take a couple of quarters for that to happen.

Got it. Staying on the theme of the telecom spending, there obviously has been now completed a very sizable wireless spectrum auction in the United States. And obviously we're early in the process here, both those results. When you think about the market opportunity in North America, what would spectrum auction like this present, in terms of reserve power opportunity?

Sven, this is Dave again. More spectrum means more data, and more data means more power. We can't tell you when it's going to happen. But we're optimistic that that spectrum is going to require additional antenna cell sites and power to -- backup power to sustain that network. So it should just -- it can only help.

The game doesn't end at 4G. It will continue. We will see a 5, a 6, a 7G; it's going to continue, we believe. And as Dave alluded to, it doesn't matter what the technology is, they all need backup power. And that's where we come in.

Got it. Thanks for the commentary here. And finally just on the Asia side, there was obviously the organic growth decline year-over-year basis here, 26%. How much of that was driven by just you guys having a 4G business last year, versus just not being able to ship some of the products because of plant migration?

Sven, this is Dave again. All of the drop is associated with the telecom business we've discussed prior, not any particular one account. But the overall organic growth rates in Asia continue to be positive.

Yes, just to add a little bit to that. On the reserve power side -- I'm sorry, the motive power side, by moving from one plant to another plant, we've had some disruption; disruptions in terms of not being able to get product to customers when they want it. So we have seen a dip there. The motive power business in China is a very good business for us. If you go back in time, you go back about 2003, 2004, we were about -- over the first year we got into it, we were at $4 million in motive power batteries. This year, we should be in the $100 million range in motive power batteries in China. It's a very good growth business for us.

Unfortunately, this is the year we had the transition moving from one plan to the other, and it has caused us some disruption there. But I will say that we're back on track now with it. The problems that we've had, they are behind us, but they did impact the prior quarters.

Got it. So that -- expect to assume that the motive power growth is improving in China in the coming quarter. And in terms of the margin cost on the China side, is that behind as well? Or do you expect the next quarter to see still some more headwinds on (multiple speakers).

Margins on motive power are good. Margins on reserve power are not as good.

Got. Thanks very much.

JinMing Liu, Ardour Capital.

This is Yuzhu stepping in for JinMing. So basically I have two questions. I'll just start off with the first one, which is -- so I've heard that China is starting to announce the plan to collect consumption tax on lead acid battery, starting from January next year. So, can you give us some color on the price effect, and how would it affect your strategy in China? And about your new product promotion in China?

It's good news and bad news for us. The good news is by adding that added tax on it means that the export it out of China is going to cost more. And it's going to keep the Chinese products batteries out of -- or it's going to tend to keep them out of Europe and the Americas. It's going to make them more expensive in those areas. That's the good news.

The bad news is that we're exporting product out of China, like to Australia. That's going to increase our costs. So one thing we're going to have to evaluate is when we manufacture batteries, motive power batteries or reserve power batteries in China, and we ship them to places like Australia or Japan or wherever, we're going to have to reevaluate and look at where the most cost-effective place to manufacture them.

In other words, we might be making batteries in Poland and shipping them to Australia, instead of making batteries in China and shipping to Australia. We'll have to sort that out. But that's the beauty of our Company; by having the diversification, we can take the most cost-effective way of doing it.

Want to add to it, Dave? Go ahead.

Yes, we make those decisions every day, based on the arbitrage between the LME and the SMM. So yes, that's one of the things John touched on in the final paragraph of his script, that by being a global company that's diversified across these regions, we have a little bit of flexibility in our supply chain that others might not.

Now, in our China market where we manufacture the products, it's really kind of a non-issue for us because what's going to happen, theoretically, is our competitors are going to have the same increase that we're going to have. So it's going to be the same competitive market.

And, of course, the additional factor is the exchange rate.

Okay, I see. Okay, so the second question I have is that -- so I see there's a few firms starting to produce gigawatt hour [leasing] battery, so I suppose that's going to put some price pressure on the overall battery market. And can you give us some idea about the potential influence on your products, or on your lead acid market of products?

Yes, I think what you have to take a look at is lithium ion costs versus lead acid costs. And just in rough numbers, you're looking at anywhere between $6 to $1000 per kilowatt hour for a lithium ion, because of the battery management system that has to be put on it, the casing, and everything else. Versus the lead acid battery, where you're looking at about $150 per kilowatt hour. And we've done studies on this. If you take the cost of a lithium ion battery and you cut it in half, you cut it in half, we still believe that the customers will go with the lead acid application for a couple of reasons.

First off, if you're into a data center or you're into a telecommunications or a standby battery, you don't cycle the battery. In other words, what's happening is the only time that battery is ever used is when the electricity goes out. So, by cycling a battery, what I mean by that is: you charge it, you discharge it; you charge it, you discharge it. On a battery that's what's called a float, you hardly ever discharge it. So you really don't get the advantages of cyclability that lithium ion offer. And customers aren't willing to pay for it.

So when you look at our base business, to make it easy, I don't see a major threat with lithium ion on our reserve power. I don't see it on our motive power. The reason I don't see it on motive power is because weight is good. Lead acid batteries are heavy, and you want that counterbalance. But where I do see it as a threat is in our OptiGrid.

And the reason I say that is because if you're going to buy electricity, or store electricity when it's cheap, at nighttime, at the low areas -- let's say, you're buying it for $0.25 a kilowatt hour. And then when it jumps up during the peak period to $1 a kilowatt hour, you're dumping it back, what that means is you're going to cycle those batteries a lot -- 365 days of the year, if you cycle it every day. On a lead acid battery, you've got 4 to 5 years. On a lithium ion battery, you've probably got 10 to 15 years. So lithium ion is one that could possibly impact our OptiGrid.

Now, that being said, we are working on a lithium ion solution.

Okay. So you're actually working on that direction, about with your new products?

Yes. In fact, our OptiGrid solution is capable of handling any one of the technologies. If a customer come in, and they wanted our OptiGrid, and they wanted it with lithium ion, what we would do is we would buy from a lithium ion company -- the cells. And then we would manufacture the battery, and put it in our OptiGrid system.

Okay. Okay, that sounds good. Yes, I think that's end of my questions. Thanks.

(Operator Instructions). John Franzreb, Sidoti & Company.

Could you just go over the restructuring actions you plan on taking in the fourth quarter?

Sure, John. What you would see would be charges that you have seen in the past. You could see due diligence, or we expect to have some due diligence costs for some M&A activity that's ongoing. Restructuring charges pertaining to primarily our European operation; a little bit with regard to the transition that we were doing in China that we've talked about.

The one item that I didn't identify, and I should -- and I'm thankful that you asked this question -- we do expect to sell a facility in China in our fourth fiscal quarter. And that is probably the biggest reason for the increase that you are seeing from what would be perhaps a bigger one. And I'm going to correct myself. It's not in China; it's in Europe. And it could be about as much as $0.06 of the $0.12 we referenced.

Okay. Thank you very much, Mike.

Thank you. I'm not showing any further questions at this time.

Mr. Craig, please proceed with any closing remarks.

Sure. Thank you very much, Bridget. Again, thank you, everyone, for calling in. We really do appreciate your interest in our Company. And any follow-up questions you have, please feel free to call Tom O'Neill. He'll be more than happy to dig down further on the details of things for you. So again, have a great day, everybody.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.