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EnerSys (NYSE:ENS)

Q3 2014 Earnings Call

February 06, 2014 9:00 am ET

Executives

John D. Craig - Chairman, Chief Executive Officer and President

Michael J. Schmidtlein - Chief Financial Officer and Senior Vice President of Finance

Analysts

John Franzreb - Sidoti & Company, LLC

William D. Bremer - Maxim Group LLC, Research Division

Michael W. Gallo - CL King & Associates, Inc., Research Division

Tim Mulrooney

Jeffrey D. Osborne - Stifel, Nicolaus & Co., Inc., Research Division

Dana Ford Walker - Kalmar Investments Inc.

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter and Fiscal Year 2014 EnerSys Earnings Conference Call. My name is Jane, 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.

John D. Craig

Thank you very much and good morning, everyone, and thanks for joining us. Last night, we posted on our website slides we're going to reference during the call this morning. So if you didn't get the chance to see this information, you may want to go to our website at www.enersys.com under the Investor Relationship tab. Before we get into the details of our third quarter results, I'm going to ask Mike Schmidtlein, our Chief Financial Officer, to cover information regarding forward-looking statements. Mike?

Michael J. Schmidtlein

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 quarter ended December 29, 2013, 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 5, 2014, which is located on our website at www.enersys.com.

Now let me turn it back to you, John.

John D. Craig

Thanks, Mike. Last night, we released our record third quarter financial results of $1.07 per share, which exceeded the guidance of $1 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 3, we reported record quarterly financial performance in all categories. I'm 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 shows 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 the increased sales of smartphones, will lead to increased reserve power demand for years to come; third, in the U.S., 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 4 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 3 significant acquisitions this year that will add approximately $200 million of 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're also pleased with our recent acquisition of Purcell cabinet enclosure business, as we believe we'll 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 out 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 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 cost by further restructuring our manufacturing capacity in Europe. I'm confident in our EMEA team in it's taking 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 0.7x.

I'm pleased with 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.

And with that, I'm going to turn it back to you, Mike, to give further information on our results and our guidance.

Michael J. Schmidtlein

Thanks, John. For those of you following along on our webcast, I am starting with Slide 6. 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 11% volume increase and 13% from acquisitions.

Please now refer to Slide 7. 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 the 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 8. 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 volumes.

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 of 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 9. As previously noted on Slide 8, 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 book 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 2 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 3 quarters of fiscal 2014, even after $67 million in additional primary working capital resulting from higher volume. Our leverage ratio remains below 1.0x, 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 events footnote to 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 9 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 of 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 remain well positioned to take advantage of future opportunities.

Now let me turn the call back to John.

John D. Craig

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of John Franzreb with Sidoti & Company.

John Franzreb - Sidoti & Company, LLC

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

John D. Craig

Both Motive Power and Reserve Power were up approximately the same percentage for the quarter, John. And when you look at the peak, to your question, if you look at total Europe, and this was looking at new industrial fork trucks, and 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'll receive the orders. In Europe in total, looking at December to December last year, it's up 17%. But if you want to get a better average on it, if you look at December compared to the trailing 3 months, it's up 3%. Now one of the issues I'm looking just at that 3%, remember December tends to be a slower quarter because of the holidays, so when you compare it to the prior 3 months, usually you would see it drop, but it's up pretty good. Another way of looking at it is looking for trailing 3 months versus trailing 3 months a year ago. Europe's up 11%. My conclusion on Motive Power, to answer your question, I think that we are seeing things starting to move higher on Motive Power than they have been in the prior months.

John Franzreb - Sidoti & Company, LLC

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

John D. Craig

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

John Franzreb - Sidoti & Company, LLC

Sure, sure. You mentioned -- you referenced the China rollout from 3G to 4G. My understanding is that's a multi-year 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?

John D. Craig

Yes, I will. I'm going to reference an article I read just a few days ago. And what it talked about were the 3 telecom companies in China: China Mobile, China Telecom and China Unicom. And 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 '13, '14 and '15. In 2013, there were 207,000 towers added. In 2014, it jumps to 400,000 added. And in 2015, it's 120,000. For a total, over that 3 year period, of 927,000 cell sites that will be added. The jump from '13 to '14 is -- really comes about by China Mobile started in '13. Telecom, China Telecom and Unicom, will start deploying in this fiscal -- this calendar year '14. So we see that there's 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 that there are over 5 million base stations around the world. They can add another 1 million to it. It's -- just with this data alone, puts you at about 6 million. And 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's growing rapidly, but the other hidden jewel to this thing is those batteries are going to need replacements sometime down the road. So I think that just filling the orders that we have right now for these new base stations, plus what's going to happen in the aftermarket side of it or replacement market, I think there's real upside. Now, John, I want to go back to your other question because I didn't have that data in front of me, and this is on Motive Power at the peak. If you look at the monthly units, the peak that I'm looking is actually back in April 2007 where it was over 28,000 units that were sold, trucks that were sold. And currently, we're running about 23,000 units. So it's down, it's not back at that level that it was, but it gives you the indication that it is increasing in Europe over where it has been in the last couple of years.

Operator

Your next question comes from the line of William Bremer with Maxim Group.

William D. Bremer - Maxim Group LLC, Research Division

All right, going back to that first question. Let's go into the base stations and towers, 3G versus 4G. Can you give us sort of a -- 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?

John D. Craig

Bill, I don't have any answer to that question. I'll tell you why, there are a lot of competitors in the China market. And what percentage that we get on 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, that -- I remember there was a bid that came in, and a tender is what I mean, and what happened out of 30 battery companies that quoted this, we were #29 in price. We were the high-priced one. We stuck with our pricing, and the year later come out, we were #2 or #3, and 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. And when they had to spend the capital and they had the 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 cost went down, our price stayed about the same, our margins have improved. So I feel we're in very good shape and what we've done in the past has really helped us. Mike, do you want to add to it?

Michael J. Schmidtlein

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. So that helps us as well.

John D. Craig

Good point.

William D. Bremer - Maxim Group LLC, Research Division

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

John D. Craig

Yes, let me give you a little bit of background on it first. As we said, the prime objective here, what's driving this whole thing is 10% operating earnings minimum and Europe going forward. And when we looked at it, we said what we need to do is, number one, go after pricing, which we've done. We've announced the price increases. You won't see the full effect of the price increases really taken in place until, really, the first quarter of fiscal '15. You will see some of it in the latter part of this quarter, but most of it is going to come in the next quarter. That's one side of the equation, to get to 10%. The other side of the equation is reduce your cost. And when we look at the capacity we have 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're doing is we're removing 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'll see a little bit of a benefit in fourth quarter, but most of it really will pop in to the first quarter of fiscal '15.

William D. Bremer - Maxim Group LLC, Research Division

Okay. So the majority of the restructuring has taken place this quarter?

John D. Craig

Is taking place in this quarter. And I believe, and Mike correct me if I'm wrong, I think we have $15 million in restructuring taking place in the fourth quarter.

Michael J. Schmidtlein

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

John D. Craig

$0.15?

Michael J. Schmidtlein

Yes.

John D. Craig

Okay, great. So we'll see most of the cost that will hit us in the -- and you're right, that's $0.15. It will hit us in the fourth quarter. But we'll 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.

Operator

Your next question comes from the line of Michael Gallo with CL King.

Michael W. Gallo - CL King & Associates, Inc., Research Division

I just want to drill in a little bit on Europe, John. I mean, I know you've been talking about seeing in the tea leaves for some time, that it was starting to stabilize. But in the first quarter, it seemed like it's really starting to see the volumes move up in a meaningful fashion. You're 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 at the point where they actually want to make money as opposed to volume? I mean, you guys have always been disciplined. So I was wondering as you take some costs out, get some pricing and get a better volume and that -- why, given the size of that market, assuming pricing rationality holds, you may not be able to take that operating margin well more than 10%?

John D. Craig

Well, I'd be happy to hit 10% on a consistent basis to start with. And keep in mind, our 10% is a minimum, and we hope to hit higher on it. But the fact is there's a lot of capacity for motive power and reserve power batteries in Europe. The capacity was put in place at the time when we look back at 2006, 2007, when things were looking much higher. And as a previous question was asked, if you just take a look at the 28,000 units of fork trucks per month back in 2007, down to about 23,000 today, we're not back to that level. There's still capacity that is not fully utilized. That's one of the reasons for Bulgaria that we took it back. I said we're going to take that capacity out. Our competitors, in some cases, don't have the money to do that, that restructuring. And so it puts them at a little bit of a disadvantage to do it. The other thing is you mentioned that we've been disciplined in price, and we have been, but not at the level we are today. The discipline is much stronger today. And we've said we'll walk away from the lower-margin business. We don't want it. And I got to give our guys some credit, the management team in Europe, they've 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's about time it happens because you can't continue to run businesses and not make money. And I think that our competitors are waking up to that. I know they've been woke up, too, for a long time, but it's just been a tough market in total. But it's starting to turn.

Operator

Your next question comes from the line of Tim Mulrooney with William Blair.

Tim Mulrooney

Hey, John, you gave us industrial fork truck orders for Europe. You said up 11%, trailing 3 months versus trailing 3 months. Could you give us that data for your other 2 regions, North America and Asia, as well, please?

John D. Craig

Okay, on a trailing 3 months -- and just for clarity on it, you're looking at trailing 3 months this year versus trailing 3 months last year. That's your question?

Tim Mulrooney

Yes.

John D. Craig

Okay. In the Americas, it's up a total of 12% -- sorry, 10%; in Europe, as I said, it's up 11%; in Middle East and Africa, it's up 12%; Asia is up 15%; total global, it's up 12%. And again, that's looking at December, November, October of this last calendar year versus the same period 1 year prior.

Tim Mulrooney

Okay, that looks promising. And my other question is looking at your acquisitions, it looks like they contributed around $33 million, $34 million to the top line in the quarter. Did you ever quantify or could you quantify for us the EPS accretion or the impact to the fourth quarter from these acquisitions?

Michael J. Schmidtlein

Well, Tim, on the -- 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'm going to say that you're still going to be roughly in that same ballpark.

John D. Craig

If you look at the press release that we come out with when did Quallion -- or I'm sorry, 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.

Operator

Your next question comes from the line of Jeff Osborne with Stifel.

Jeffrey D. Osborne - Stifel, Nicolaus & Co., Inc., Research Division

Just a couple of quick ones. On the -- can you talk on the thin plate pure lead success that you've seen in North America, what that was up sequentially or since -- how impactful that is on the revenue basis, and more importantly, what the plan is of further penetrating Europe with that product line?

John D. Craig

Well, it's up -- we said in the past, it's running very similar to what it has been in the last quarter. It's about 20% ballpark of our business. I don't think you're 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 a thin plate pure lead, and 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's not going to happen. We want to keep the product differentiation in place and keep the proper mix to maximize returns to shareholders.

Jeffrey D. Osborne - Stifel, Nicolaus & Co., Inc., Research Division

On the competitive front, even though you're raising pricing in Europe, is the competitive situation just not enough to justify to penetrate thin plate pure lead into that region at this point?

John D. Craig

No, thin plate pure lead in Europe is a large portion of the business over there. It's penetrated, it's in there. It's doing well right now. Europe -- most of the products they're selling in Reserve Power right now is the thin plate pure lead, in our Reserve Power business over there, so it is a big percentage.

Jeffrey D. Osborne - Stifel, Nicolaus & Co., Inc., Research Division

And then you alluded, John, to the 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 kind of TBD on that front?

John D. Craig

Well, I think it's not only we're 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 revenues are up 29%, but if you look at it on a unit volume basis, unit volume in Asia business is up 34%. And when you take a look at the first 9 months of the year, it's only up 1%, which means the first 2 quarters, it was fairly low, and the third quarter, it's jumped way up again. 9 months, up only 1%; third quarter, which, obviously, is included in the 9 months, was up 34%. And what's the reason for that? That is the 4G buildout kicking in, in China that we're seeing major orders come through.

Jeffrey D. Osborne - Stifel, Nicolaus & Co., Inc., Research Division

Excellent. And last question is just on the price increases that you've announced. Can you just put in perspective what the scope of that is, so where you are on a per kilowatt hour versus where you were at the peak of the market in '07? I'm just trying to get a sense of what the incremental increase was from where you were a few months ago, but...

John D. Craig

Yes, I don't have the hard data. And I have to go back and compare the '07. We can dig that up, but I don't have that data in the room here. What I will tell you is that when we went to the market with this, it was about a 3% to a 5% increase, depending on the region, depending on the customer. But as you know, when you go to the market with the what you get, what you ask for and what you get, is a negotiated point. So how to factor that in, we're going to have to wait and see how the market totally reacts to it. But I do expect we'll see price increases.

Michael J. Schmidtlein

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've been trending closer in the $1 range more recently, and it's been fairly stable between $0.90 to $1.10 on the high side. So you kind of need to know where the commodities were when you look at your pricing.

John D. Craig

Excellent point. In fact, the number I remember, if you go back to October 2007, lead hit an inter day high of $1.82 per pound, whereas this morning, the report I saw was $0.953 a pound. So it's -- and Mike's 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 -- to answer the question because you've got trade offs there.

Jeffrey D. Osborne - Stifel, Nicolaus & Co., Inc., Research Division

Understand. And just 2 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 the China facility? Just if you can give us a sense of scope on where we are in completion with that?

Michael J. Schmidtlein

Well, I think the encouragement we're 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've 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're still formulating that. As you know, our fiscal year begins April 1. But I would expect it to be slightly higher than average year.

John D. Craig

Yes, I think the other thing to add to that, we are evaluating -- updating our computer system in the U.S. market like we've done in Europe. And the revision will come with maybe some additional CapEx in fiscal '15 for updating our IT systems.

Operator

Your next question comes from the line of Dana Walker with Kalmar Investments.

Dana Ford Walker - Kalmar Investments Inc.

Once upon a time, I recall when we first became an investor back in the '07, '08 time frame, I believe Bulgaria was a proactive step that you took, believing that, that was a low-cost manufacturing location. What's changed?

John D. Craig

Well, what's changed is what happened in Europe with the recession and things going down. Remember, there were 2 reasons we bought that particular facility. That facility, at that 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. And you're right, it was a low-cost operation. Now what we thought would happen back in 2007 with the volumes that would be significantly higher than they are today. Remember, the number I quoted with the 28,000 trucks per month down to 23,000, we're not even back to that level. And what's changed is we said to get to 10% operating earnings, we need to get the manufacturing cost down, and the way to do that is consolidate operations. And we started looking at the different options, whether it'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 and what's 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're looking at is sizing the business to a capacity, sizing that capacity to what the markets are actually going to do. So the bottom line to the question, in 2007, when we looked at the projections that 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, I say it may open back up, it's still open, it's still running product there. But it's not running the Motive Power and Reserve Power product lines.

Dana Ford Walker - Kalmar Investments Inc.

That's helpful. If the 2 acquisitions most recently announced that would have had 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 would not have been any margin dilution, is that about right?

Michael J. Schmidtlein

Yes, I think that, that's a fair assumption, Dana, that you would -- the Purcell acquisition, those margins typically are fairly strong. And as you know, our Americas business is very robust at the moment as well, so the answer is, yes.

John D. Craig

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

Dana Ford Walker - Kalmar Investments Inc.

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

John D. Craig

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's very hard to predict where it's going to go. I just know that every time that 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's going to go. The second point I want to make, if you go back 1 year, 1.5 years ago, on calls here, I said at that time that the Americas is going to be good if we could just maintain those margins and hold ourselves there. I think I said it in that call, in fact, if we were looking at operating earnings of 20%, 25%, what that would mean is that we're going to lose a lot of volume. You got to find the sweet spot, the optimum point. And I think the Americas have done a great job with that. I think the value that we add to our customers in getting the premiums that we're getting, it's justified. Our customers support that from a standpoint of orders they place with us. But again, if we raise the prices way up higher, that justification -- if the spread is too great, we wouldn't be getting it. Now so I don't think it's on a pricing side. I do think, though, we have opportunities on further cost reductions and opportunities there. So I think that to hold those margins or increase the margins of the Americas is going to come about by the manufacturing costs and other costs that we can reduce. Not that we're not going to try and get pricing, but I think the opportunity's really in cost.

Dana Ford Walker - Kalmar Investments Inc.

Two last questions on Asia. You made up 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?

John D. Craig

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 and has demonstrated over years, over the last 20 years, that, that is going to help us stabilize our business in regions -- in a region that's outside of China.

Dana Ford Walker - Kalmar Investments Inc.

Second question on Asia would be this: You've described how when we've gone through generational upgrades in cell tower technology that's 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 3-year time frame, are the towers, though, that are already expensed, are they being upgraded in the same way so that you have that double whammy effect?

John D. Craig

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

Operator

[Operator Instructions] And your next question is a follow-up from the line of William Bremer with Maxim Group.

William D. Bremer - Maxim Group LLC, Research Division

Gentlemen, can we just go through the convert a little bit? And stock is up very significantly here. Can you just walk us through the depreciation of the underlying 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 principal in cash. Just want to get some comments on that.

John D. Craig

Okay. But let me start, then I'm going to turn it over to Mike. If you look at the total dilution which should -- it kicks in at $40.60. The total dilution is approximately 1.6 million shares, okay? If you look at our stock buyback program in total, we're looking at about 1.4 million shares. The net difference on it would be an increase -- an added share of about -- a balance of about 700,000 shares. Now Mike, why don't you go further into the details on that?

Michael J. Schmidtlein

Okay. So as many of you know, our convertible debt is currently trading on a market value of about -- at least at December 29 because we report this in our Q that, that value is approximately $304 million. If the shares were convertible today, that conversion probably would've yielded somewhere around $297 million to $300 million. So the market price of the convert has a premium built in for a 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've 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, where you can think of it as prepaying or prebuying the premium portion of this convertible back. And we will probably continue to look at this as an opportunity as we move into fiscal '15 to say should we continue to buy shares so that in the case that we may want to deliver shares because we've 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.

John D. Craig

One thing to keep in mind on this when you look at stock buybacks. And the 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? And I can tell you ours is significantly less on a total amount. There are companies that would go out there and do stock buybacks, and the reason I'm saying it, what happens is they pay a high price for it and the stock drops off. That -- we're not doing stock buybacks for the sake of just offsetting of -- offsetting the dilution. Yes, it's 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 in the future, the stock price will be higher.

Operator

And 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.

John D. Craig

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. And keep in mind that our management team, they're all shareholders also, so we are all tied shoulder-to-shoulder in 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.

Operator

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

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