Enersys (ENS)

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EnerSys Inc. (ENS)

F2Q09 Earnings Call

November 6, 2008 9:00 am ET


John Craig – Chairman, President, and Chief Executive Officer

Mike Philion – Executive Vice President and Chief Financial Officer


Paul Clegg – Jefferies

Chris Agnew – Goldman Sachs

John Franzreb – Sidoti and Company

Corey Tobin – William Blair and Company

Dan Whang – B. Riley and Company

Dana Walker – Kalmar Investments

Arthur Friedman – Friedman Asset Management

Todd Cooper – Stephens Inc.

Richard Baxter – Ardour Capital



Welcome to the second quarter 2009 EnerSys earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over the Mr. John Craig, Chairman, President, and CEO. Please proceed.

John Craig

Good morning and thank you for joining us for our conference call. During this call, we will be discussing our second quarter and first half of fiscal 2009's results as well as commenting on the general state of our business. Before we start, I will ask Mike Philion, our Chief Financial Officer, to cover information regarding forwardlooking statements, Mike.

Mike Philion

Thank you, John, and good morning to everyone. As a reminder, we will be presenting certain forwardlooking statements on this call that are based on management's current expectations and assumptions which are subject to uncertainties and changes in circumstances. EnerSys’ actual results may differ materially from the forwardlooking statements for a number of reasons.

Our forwardlooking statements are based on management's current view regarding future events and operating performance and are applicable only as of the dates of such statements. For a list of the factors which could affect our future results, including our earnings estimates, see forwardlooking statements included in item 2, management's discussion and analysis of financial condition and results of operation, set forth in our quarterly report on Form 10Q for the quarter ended September 28, 2008, which was filed last evening with the U.S. Securities and Exchange Commission.

In addition, we will be also presenting certain nonGAAP financial measures. For an explanation of the differences between the comparable GAAP financial information and the nonGAAP information, please see our company's Form 8K, which includes our press release dated November 5, 2008, which is located on our website at www.enersys.com. Now let me turn the call back to you, John.

John Craig

We are certainly pleased with our second quarter record earnings that we reported last night. Our adjusted earnings of $25.9 million were up 51% compared to the second quarter of the prior year. Since we continued to experience higher commodity costs in quarter, we are particularly pleased that we achieved pricing recovery, which allowed us to more than offset those higher costs.

Beyond recovered costs, during the last four years have put continued pressure on our gross margins. In an effort to improve these margins, we have continued to stay focused on our pricing management. As part of that effort, we have recently reduced the portion of our revenue that is tied to automatic lead pass-through mechanisms, which now account for approximately 35% of our revenue.

As I stated in our last quarterly call, we are firmly committed to achieving our 25% gross margin target. Since the low point of 17.6% in the third quarter of fiscal 2008, we have steadily increased our margins and we are now at 20.7%.

We will continue our strong focus on this target, which we plan to achieve through a combination of improving pricing related to commodity costs, additional cost savings measurements, and a shift in certain segments of our business towards higher margin products.

Net sales for the quarter increased 14%, which included approximately 10% in increased selling price and 5% due to translation of stronger foreign currencies. Slower global economic activity resulted in a unit volume decrease of about 1% in the quarter compared to last year's second quarter.

As you know, the global economic outlook has deteriorated significantly since our last quarterly call in August. I would like to discuss in broad terms our outlook and plans at this time. We are now assuming that we will experience a period of slower global economics. Our recent order flow has slowed, and we recognize that we cannot predict future demand with great certainty. Economic activity around the world has slowed and most businesses, along with many economists, are struggling to predict the depth and length of this economic downturn.

As we enter the slower period, we have developed plans for a variety of circumstances. Clearly, the potential of reduced volume will not be the same in all regions and in all product lines. Therefore, these plans are tailored specifically to regions and product lines that will vary based on our outlook for each of these areas.

Our plans already include reductions in our temporary labor force and in other costs in expense areas. We will continue to adjust our staffing and spending based on our future order patterns. For obvious reasons, we are not going to discuss any of the details of these plans. You can rest assured that we intend to react quickly in order to minimize the nearterm pressure on earnings.

Last night we stated our guidance for the third fiscal quarter of 2009 with forecasted adjusted diluted earnings per share between $0.40 and $0.44. Using the $0.42 midpoint of this guidance, it would be a 20% increase over the comparable quarterly earnings per share in the prior year of $0.35. Given the global economic environment, I am quite pleased with these anticipated earnings.

We are fortunate to have completed our refinancing earlier this year and currently have significant liquidity, with approximately $55 million in shortterm investments at the end of our second quarter and over $200 million in available lines of credit. Our current all-in interest expense on debt is a favorable 5%. If revenue growth does slow, we will experience an increasing cash flow generated from the reduction of primary working capital.

During the last four months, we have generated over $45 million in total cash flow, of which we used $19.8 million for the stock buyback program we completed on October 30. As you know, we acquired 1.8 million shares at $11 per share; and we believe that will prove to be a very sound financial decision.

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