Enersys (ENS)

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EnerSys, Inc. (ENS)

F3Q10 (Qtr End 12/27/09) Earnings Call

February 04, 2010 9:00 am ET

Executives

John D. Craig – Chairman, President & Chief Executive Officer

Michael J. Schmidtlein – Interim Chief Financial Officer

Analysts

Corey Tobin – William Blair & Co.

Steve Sanders – Stephens Inc.

Elaine Kwei – Piper Jaffray & Co.

Shawn Lockman – Ardour Capital Investments

Michael Gallo - CL King & Associates

William Bremer – Maxim Group

John Franzreb – Sidoti & Co.

Dana Walker – Kalmar Investments

David Pack – Jefferies & Co.

Presentation

Operator

Great day, ladies and gentlemen, and welcome to the third quarter 2010 EnerSys earnings conference call. My name is [Yvette] and I'll be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions) I would now like to turn the call over to Mr. John Craig, Chairman, President, and Chief Executive Officer. Please proceed sir.

John D. Craig

Thank you, [Yvette]. Good morning and thank you for joining us for our conference call this morning. During this call, we will be discussing our third quarter of fiscal 2010 results and will comment on the general state of our business. Joining me on the call this morning is Mike Schmidtlein, our Interim Chief Financial Officer. And before we get started here, I will ask Mike to cover information regarding forward-looking statements. Mike?

Michael G. Hastings

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 the factors, which could affect our future results, including our earnings estimates, see forward-looking statements included in Item 2, Managements' 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 27, 2009, which was filed with the U.S. 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 3, 2010, which is located on our website at www.enersys.com.

Now let me turn it back to you, John.

John D. Craig

Thanks Mike. As we reported last night, our sales for the third quarter were $421 million with adjusted diluted earnings per share of $0.44. Both our sales and earnings were up significantly on a sequential basis from this year's second quarter, and the earnings exceeded the $0.37 midpoint guidance we gave during our last conference call.

During our October conference call, I said we firmly believe we have turned the corner on the recession. And with another good quarter reported, we believe we will continue to see improvement in our worldwide markets. In the quarter, revenue increased 15% sequentially over the second quarter, while adjusted diluted earnings per share increased 38%. That revenue increase was due primarily to higher organic volume, and the earnings increase was due primarily to the higher volume and the good results in our continuing cost savings programs.

Although, earnings improved significantly, we are not able to maintain the 21.4% gross profit margin reported in the second quarter. The timing of pricing continues to lag increase in commodity costs and this temporary lag was a contributor to the gross margin reduction to 23.3% in the third quarter.

In addition, even if 100% price recovery were achieved, mathematically, the margins would decrease, although the net impact on gross profit dollars would remain unchanged. We are maintaining our strong focus on achieving our target of a minimum of 25% gross profit.

However, as I just discussed, this is more difficult in an environment of increasing commodity costs, such as we've experienced over the last few quarters. We are not and will not take our eye off the target. Stabilization of commodity costs along with higher volume and cost savings will help us achieve the 25% gross margin target.

We believe we are in good position to take advantage of the projected growth in the worldwide economy. Our strong competitive and financial positions are largely the result, our strategies we began to implement in the summer of 2008, when we saw the beginning of the economic downturn. We invested capital due substantially reduce our costs, while continuing to expand or the expansion of our thin plate pure lead capacity, conserve cash and increase our focus on acquisitions.

As you know, the downturn in Europe was substantially worse than the rest of the world. However, we remain confident that our reduced cost base in Europe will pay off in higher future earnings as their economy recovers. Revenue in the Americas, in Asia have also been down significantly this year.

However, we have been able to improve operating earnings in both regions. We remain very active in pursuing acquisitions, and have completed investments in Oerlikon, Altergy, and Douglas Battery since our last conference call. These investments will result in combined revenue in fiscal 2011, in excess of $100 million, and will be accretive to our earnings this next year.

We had over $200 million of cash in short-term investments at the end of December. So we remain confident in our ability to finance additional acquisitions and organic growth. Order trends have continued to build, and as a result, we are anticipating higher sequential sales for the fourth quarter. Recent data from the Industrial Truck Association show increased orders for four trucks. And on the Reserve product side, in addition to improved order, we continue to experience increased quote activity.

Despite of the revenue increase, we are expecting, as reported last night, that adjusted diluted earnings per share in the fourth quarter will be in the range of $0.39 to $0.43. Our commodity costs will increase sequentially by approximately $20 million from the fourth quarter. That is equivalent to a $0.29 per share of headwind. And we may not be able to offset all this increase in the fourth quarter, but we full expect to offset them in the next quarter or two.

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