EnerSys: The Wall Street Analyst Forum Presentation Transcript

Nov.27.07 | About: EnerSys (ENS)

EnerSys (NYSE:ENS)

The Wall Street Analyst Forum

November 27, 2007 9:10 am ET

Executives

Michael Hastings - VP and Treasurer

Mike Philion - CFO

John Craig - Chairman, President and CEO

Moderator

(call starts abruptly)

from a consumer's perspective, not just a commercial perspective, really from a consumer's perspective. In the last three years, maybe accelerating in the last one year, people spend more and more time thinking about battery technology as we realized that we're destroying the planet and what we thought was good (inaudible) what we need to do to keep the planet sustainable.

And so battery technology obviously, is something that I think more and more people are thinking about and we are not being so presumptuous about how we get what we get to power our tools and cars and everything else we use on a day-to-day basis.

So, battery technology is now exciting for everybody. In any case, I'd like to introduce the first company as (inaudible) program, EnerSys, which is the world’s largest manufacturer of industrial batteries with a worldwide market share of approximately 30% and sales anticipated for this fiscal year to be approximately $1.9 billion.

Industrial batteries are used primarily to power electric forklift trucks and to provide backup power for the continuous operation of critical telecommunications and uninterruptible power systems during power disruptions. EnerSys has 24 plants in North America, Europe and Asia to service local and global customers and the company is in solid growth markets. Sales have increased to a total of 55% over the last three fiscal years and increased 25% for the six months of the current fiscal year.

Without further introduction, I'd like to introduce, we have two representatives from the company, John Craig, Chairman, President and CEO; and Michael Hastings, Vice President and Treasurer. I would just ask them during the Q&A session, for the benefit of the webcast attendees to repeat the questions for the webcast attendees, both the question as well as the answer in the public context.

Michael Hastings

Well, thank you very much. First of all, I would introduce not John Craig, but Mike Philion. So Mike, you wanted to have just the opening remarks?

Mike Philion

Just the introduction. Thank you for being here. Mike Hastings is our Global Treasurer and Mike has been in Investor Relations. So feel free to call Mike at any time or myself. So with that, there you go, Mike.

John Craig

Okay. Thank you very much. I think since we have such a large call today, I'm going to keep it very informal. So we will kind of keep it informal and since we have a small crowd, we can certainly, if you want to, break in and ask a question. I think we can do that. We have a breakout session later. But since we are relatively small and we don’t have 20 or 30 people always in our hands at once, feel free, if I'm not clear about something and you want to ask something.

Okay, so I'm going to get to the right button here now. I looked at this. We've got forward-looking information, of course, that you've all read very carefully so you know that disclaimer.

We are the world's largest – certainly. I see you've got our presentation. There were books out there, I don’t know if you've got a copy and if you don’t have one, you can certainly get one right outside. It may help you go through this.

We are the world's largest industrial battery company and by industrial batteries, we mean those that are used in Reserve Power, which is really backup batteries for telecommunications, UPS systems, that is backup for computer systems; specialty like aerospace and defense, which is in our Reserve Power area and Motive Power, which is primarily for forklift trucks.

Motive power also drives things like heavy-duty cleaning equipment, airport handling equipment but 95% of that is forklift trucks. So that will define the industrial battery market as opposed to automotive, which we are not in very much at all, other than some very small niches we'll talk about. And obviously, not many consumer batteries that don’t really make a lot of money unless you have millions and millions running through an automated line.

Well, in an industrial battery market, we are the largest. We've got about 28% share in 2006. We know we are picking up share this year and therefore, that’s why we talked about we think we are going to have an approximate 30% market share this year in 2007 when all is said and done and we'll have looked at the numbers in more detail. So we'll probably be at that 29%, 30% range, continuing to pick up share from our competitors as we have a little each year for the past several years.

Our worldwide presence, 24 manufacturing facilities all throughout North America, Europe, Asia, over 10,000 customers in over 100 countries. That's probably really more like 20,000 customers. I am not sure we have ever actually added most of them in total. Record fiscal '07 results, $1.5 million, which is now up another 25% for the half to $891 million. We do anticipate we are going to be obviously, somewhere around the $1.9 million mark for this year over the last year.

Fiscal '07 diluted earnings, as reported, were $0.95. And as adjusted and we do adjust for things which we have gone through in detail. In the back of the book, there is an appendix and we have gone through, in detail, all the things we take out. For example, we not only take out the bad things, which everybody likes to do, restructuring charges and so on. So you can see on-going operation but we also take out some beneficial items.

For example, last year, we had some settlement of some litigation and we stripped that out. But we are really trying to look at all our earnings on a year-to-year basis, on an apples-to-apples basis and strip out the things that are kind of unusual, although I think the unusual term is something SEC doesn't like so we try to avoid that term but I will talk about that.

But we have been up, going nicely in both earnings and sales for the last couple of years and our public cloud now has increased 12 million shares over the last almost a year. Last December, Metalmark, who owned over half of our shares, they are actually the advisor to Morgan Stanley Capital Partners (inaudible) in a minute. But they owned a good chunk of our stock. They sold block of six million last December. They sold another block of six million in June and are now, they and some co-investors, original co-investors in the company own about 47%. So we are now majority not owned by Metalmark.

Just very brief on the historical timeline, this industrial battery company that now makes up EnerSys around the world. The genesis of that was really the industrial battery operation in North America that was acquired by Yuasa Corporation in Japan, the worldwide battery company, acquired by Yuasa in 1991 from Exide. Exide Technology is our competitor now and that's why the name Exide is in there.

They owned the North American industrial battery business years ago. They sold us. They were in financial difficulty. They were back then. They were a number of years ago. They still are a little bit. But in 1991, they sold the North American industrial battery business to Yuasa in Japan.

When I came to the company and when Mike Philion came to the company in '94, I came in '98, John Craig, our CEO, came in 94, we were all part of Yuasa Corporation and were helping to run the North American operations. That was our baby. Our baby was very profitable and was the only really profitable operation in the Yuasa regime at the end of 1990’s.

As you recall, Japanese companies and banks were pulling back at that time. They were in the horrendous financial condition. Yuasa had to sell some assets to pay off of the debt. They decided to sell our company. At that time, John Craig and Mike Philion and a couple of others on the senior management team decided to put together an offer to buy the company from Yuasa and make it an independent company. So they obviously offered it to some other companies but they had the best bid. They found Morgan Stanley Capital Partners who agreed to come in with them and buy the company from Yuasa and that started into that management buyout in 2000. That was really the genesis now of this independent company.

The vision at the time that the senior management team had, was to grow this company very quickly into a global operation, again, with North America industrial battery had virtually nothing in Europe or Asia. And recognizing it in particular, in the Telecom business, it was going to be very important in the future to be able to supply customers like Erickson, Siemens, Nokia, around the world in their global operations. We couldn't do that from just North America. These batteries are really too big to ship around the world and they need manufacturing around the world to satisfy all these global customers.

Very shortly after the management buyout was done in 2000, we were fortunate enough to have for sale, the Energy Storage Group of Invensys. Invensys was a large conglomerate, probably about $15 billion in revenue at the time and this is in 2001. They were put up for sale, we got the business and we'll go through the long history of how we got it but then almost lost it and got it. Anyway, we were at the time, roughly $400 million in sales. They were about $600 million in sales. We were all in North America. They were predominantly in Europe, small Asian operations and small operations in the U.S. So, it is absolutely a perfect fit for us and made us the global company almost a $1 billion company at the time and made us the global company that we are today.

So, it was a perfect fit in a perfect part of that strategic vision that John and Mike and the others really were looking for at the time they bought this North American company in 2000.

So, we completed that during 2002. Since then, we had a number of other things happening and I won't go into all that. Obviously, we had a recapitalization and we went public and we've done some other acquisitions that were very successful which helped us drive our cost down and we're now at almost $1.9 billion. So, we've grown very successfully since 2002.

Three primary markets are subject to talking too long, somebody will have to keep tracking me on the time, sometimes I get going too much. So, we may go right into the breakout session here. I'm not sure.

Our end markets, again, Motive Power and that's about 57% of our business now. Primarily industrial forklift trucks and you can see by the chart, that's about 50% of our business, in total, which is actually about 95% more of the Motive Power market is forklift trucks.

The rest of it again, is airport, handling equipment and some mining equipment, big cleaning equipment but 95% over the forklift trucks.

Reserve Power, obviously the telecom industry backup power for anything in telecommunications and that's landlines, cell phones, the cell towers need backup power. Fiber-optic cables being laid all the internet communications, anything to do with telecommunications needs backup power to provide power for continuous operation in case the electricity goes down.

And obviously that goes down from time-to-time all over the world. There is a critical need for backup power and that backup power is provided by our lead-acid batteries for the most part.

The UPS is basically backup power for big data systems and not for small computer systems but larger computer systems that drive electronics at a building like this, drive all the financial firms' computer systems. They drive our computer systems in our headquarters and we have the UPS system that provides backup power in case the electricity goes down.

Switchgear electrical control systems used in utilities and in number of specialty applications, our Aerospace and Defense business, for example, then our Reserve Power business and that's a variety of batteries used in tactical vehicles like tanks. Commercial aircraft, defense aircraft, submarines - they all require some batteries, some of them for starting but mostly for backup power.

In a nuclear sub for example, if the nuclear reactor goes down they need backup power by batteries to continue to operate, and if they happened to be well under the ocean that they are down deep in the ocean at the time they need backup power to get up safely. There are a wide, wide variety of uses that most of us frankly, don't think about very much and there are backup batteries all over the world for a variety of applications that only come into play when the electricity goes down.

Again, the applications are a rider truck, a charging room, this is in Motive Power. You see that little picture on the top there, a charging room, as a Motive Power truck drives around for six to eight hours. If the battery runs down then they have to take that battery into a charging room, hook it up to a charger and take a new battery into the truck and go for another four or six or eight hours before that has to go back to charging. So there is big charging room and we make the chargers and we setup charging stations for businesses.

Mining equipment, airport ground support equipment, narrow aisle reach trucks serves the wide variety of these applications that use very heavy batteries that are anywhere from 1,000 pounds to 5,000 pounds.

Reserve Power, on the left at the top, telecom, this is a big telecom installation for a wireline that would be, say, in the central station of the telephone company. UPS on the right at the top, this is a fairly large installation that will backup big computer systems. This is probably something like one of the major financial firms or the New York Stock Exchange or something like that that have massive computer systems that need a very substantial amount of backup power.

Wireless, wind, solar, all need backup power. Railroad crossing backup needs backup power so the railroad arms will work when the electricity goes down. So again, some of the things that people don't know (inaudible) that they require backup power.

Specialty applications, I mentioned earlier that we were not in the automotive business except for one little niche application or a couple of niches there. In the top left, you see the Sears DieHard Platinum battery, relatively new and that's in our thin-plate pure lead product which we'll talk about in a few minutes. A very high-end application, that battery for example, rated number one just recently by Consumer Report in terms of an automobile battery, has much, much better cranking power, much better power in the cold weather and much longer lasting power. It can sit for many, many months and still crank up where our traditional lead-acid battery cannot.

Same with the heavy duty commercial truck down on the lower right hand side. That's also made of our thin-plate pure lead product. Just to give you an example, normal automobile batteries probably in the $70 to $100 range, this battery is over $200. So you choose for high-end applications used for people who might have a car that they don't drive very often which sits in the garage for a while and they want to make sure it starts when they go down without having to disconnect the battery and recharge it and they found this will last much better than the normal battery, but pretty expensive.

However, security systems, specialty marine applications, specialty medical applications, critical care units and hospitals, for example, need a lot of backup power for all the machines that keep people alive in critical care units when the electricity goes down.

Aerospace and defense. I mentioned submarines, military aircrafts, armored vehicles, precision-guided ammunition, those who use our small lithium batteries were primarily light asset, but we do have also looking in the Ni-Cad batteries that we manufacture. A thin-plate, pure lead goes into most of these applications, including commercial aircraft.

So a number of specialty applications in the aerospace and defense industry and that’s a nice growing business for us. That is not a real fast growing business overall, but we think it can be a fast growing business for us as we continue to pick up market share on that business. So, although long term, military is not an explosive growth area, we think we can grow very quickly on that area by --.

Question-and-Answer Session

Unidentified Audience Member

(Question Inaudible)

John Craig

Well, actually. Without precision guided ammunition, no, I actually didn’t mean that. It’s a pun.

Unidentified Audience Member

(Question Inaudible)

John Craig

I have to remember that one. So it won’t have real fast growth but we think we can grow very fast and very profitably because these are highly specialized applications and once we get stuck into an application, you tend to stay with it for a number of years and it can be very profitable.

Our global manufacturing, we are all over the world. This just gives you a rough picture of where we are in terms of our locations and some of the major customers that we work with all over the world.

The industrial battery market and this excludes aerospace and defense. That's a separate $1 billion market. And the market in 2006 was about $4.6 billion, obviously grown very quickly in 2007. So it's well over $5 billion now in 2007.

But this is the picture within 2006 with reserve of about $2.6 billion. In the Reserve Power area, it's relatively evenly split around the world in terms of the market size between the Americas, Europe, EMEA, Europe Middle East and Africa, and Asia.

The big chunk there in Asia is really the very, very fast growth that's come in places like China, particularly and other places in Asia who are expanding their infrastructure far faster than anybody else in the world. Part of that getting ready for the 2008 Olympics in Asia but they have been, for years and years expanding their telecommunications infrastructure very quickly. And that's why Asia, although industrially and economically, that's a much smaller piece of the worldwide economy, in terms of Reserve Power, has a big chunk of the market.

In terms of the split on Reserve, it's almost half telecom, UPS, about 25% and the balance of it, all sorts of specialty areas, are about 27% of that worldwide market. In Motive, about half the market is in Europe, about 40% Americas, 11% Asia.

Now, there are the smaller part in Asia is because they just don't have the infrastructure in terms of distribution centers and logistics that we have in the industrialized world that just don't move as many products as we do here. And when they do, they move it more on people's backs. So they just don't use forklift trucks as much. They got a huge population that's all in the rural areas, particularly in China and a lot of the other countries Thailand, Cambodia, on and on. There just is not as much stuff as there is here.

These tables, chairs and so on, everything moves like forklift trucks, while there is just not as much of that in Asia at this point. That's the smaller market for growing quickly as their economy grows. So, their economy is obviously growing a lot quicker than ours is here, in the States or than in Europe's.

Again, 95% of that market is industrial forklift trucks, the big chunk of it. Europe, even though their total economy is a little smaller than the U.S, they have a bigger chunk of the Motive Power market worldwide because they are, in terms of all the forklift trucks that are used in Europe, at least 75% of them are electric and only about 25% are propane or diesel or gas.

In the U.S., about 57%, 58% is electric, and the balance -- So in terms of the electric forklift trucks, Motive at Europe is actually a bigger market than the U.S. or North America.

Our market position share was 28% in 2006. Obviously, we haven't done calendar 2007 yet because it's not over and there will be a number of months before we really see what our exact share is. But, at this point, we are confident enough that what we have talked about is pretty certain of increasing our market share somewhat.

We should be in the 29%, 30% range and I think it's going to be about 30%. It could wind up being 29% but certainly we are going to pick up market share this year of some of our competitors.

In the reserve power market, this is more fragmented in Motive. In 2006, we had about 21% of the market. We had increased about 2% over the prior year. Major competitors are Exide as they are in Motive Power market. Exide incidentally, is the only global manufacturer that competes with us. All the other manufacturers are regional. So they are the only one globally.

Exide share is in Reserve Power. Where we were 21%, they were probably at the time, 19% or so, fairly close to us. Everybody else is in single digits in terms of global market share.

Motive Power, again, we increased market share again in 2006 over 2005 about 1 point. Major competitor is, again, Exide. Exide's Motive Power and they don’t any longer split out their Motive in Reserve Power sales. Well, they haven't for the last couple of years. So we are in a little fuzzier on their numbers. But we think they are more in the probably 23%, 25% range, so significantly under us in terms of global motive power.

And again, East Penn, C&D, there are a couple of North American businesses, and they are in single-digits as far as the global market share. And they don't really sell globally. They only sell in North American. So, a leading market positions in both of our markets.

What we really, really like about our business is our diversified model. When we look at, first of all, our end markets, you look at our business and you'll feel that 50% of your business is industrial forklifts trucks. How is that diversified? Well, it's diversified, because regardless of what customer we are actually selling to, we sell to distributors, we sell to OEMs, very much in Europe. So regardless of who we are actually selling to, the end user of that is an incredible wide variety of businesses, manufacturing and wholesaling, all over the world. So virtually any business that's involved in manufacturing or wholesaling and distribution is using a forklift truck. So that really covers the global economy.

The diversity is that these forklift trucks are being used all throughout the world, all throughout any kind of industry, all throughout the economy. So as the economy moves reasonably well, that business is going to continue to move reasonably well. If we have a global recession, obviously that's going to go down somewhat. But it would take a global recession for that business to really go down much.

So it really covers the gamut in terms of end users, virtually all kinds of businesses all over the world. Then we have Telecom, which is about 18% of our business, obviously widely diversified around the world. UPS, data back up for computer systems and our other includes the wide variety of Specialty Applications and Reserve Power and our Aerospace and Defense business is part of that 19%. That's less than 10% of our business. So, we don't break it out as a separate segment.

Geographic diversification, we really cover the globe and we cover basically, the economies around the world. So it's an extraordinarily diversified business in many respects in terms of the end users who all require it. When you think about backup power, no matter what happens in the economy people still require backup power. That's something they can't do without, whether it's in a building here or financial firms' computer systems, telecommunications have to have the backup power. If the economy goes down a little bit, there is still a tremendous amount of economic activity which requires forklift trucks. Then those batteries need replacing on a fairly regular basis. So it's not a new inter-recession, but it's consistently going to be a very solid business because of that diversity throughout the world, throughout the globe and throughout all economies.

Okay. I'll try and speed up a little bit here. We can talk about some of these things later in the breakout session if you like. We have over 20% of our business from what we consider in our business in the industrial battery business unique premium products.

One is thin-plate pure lead, which I mentioned briefly, and I'll just take a second on that. That basically means you can have a very thin plate of lead, much thinner than anybody else can make it, much thinner than anybody else is making it in the lead-acid battery today. And if we get more plates in the same footprint in a battery, so if you got the same size battery with more plates in it, you get more electricity out of it, as simple as that.

In addition, the fact that it's pure lead makes it difficult to handle when we charge a premium for that, but the pure lead also makes it last longer. The normal lead-calcium battery or lead aisle battery has some aisles and it’s not like calcium which makes it stiff and makes the manufacturing process little easier.

We make these batteries out of pure lead, which means they don't degrade as fast as the lead-calcium battery does. So, we have got much better performance, more power, longer life in those batteries.

The square tube design in Motive Power, now that's primarily used in Reserve Power, although we're looking at, as a possibility in Motive Power. The square tube design is a motive power battery and if you look at those three plates, standard battery has a series of flat plates in it, just like an automotive battery.

The round tube is the design that's kind of an upgrade from a flat plate. That's used primarily in Europe. The square tube design, we make in the United States and that's the premium of all products in terms of Motive Power because of that surface area. That has a larger surface area and the more surface area there is, the more electricity you can get out of the battery and the fact that that has more surface area to it gives it a longer life.

So, a Motive Power battery operating in a very heavy duty warehouse environment, that's going to run hard for eight hours, need that battery. With almost any another battery, you won't run a full eight hours before it has to be recharged. So if they want to run it eight hours and make sure that they don't have an operator though that has to waste time going to get it charged in the middle of the shift, they need that battery and probably as later the premium price on that.

So between these two kinds of products, the square tube design in Motive Power and the thin-plate pure lead that we sell in a variety of batteries all over the world, they comprise over 20% of our revenue and these are premium products that nobody else has in the world.

Our basic industry fundamentals, Motive Power, as I mentioned, is something that's used in forklift trucks all over the world, in all kinds of industries, all kinds of distribution. So we basically will follow the long-term trends of GDP and short-term trends of industrial production and capital spending. As industrial production moves up and down so is our sale of forklift truck batteries.

In the long run, just about a 5% to 6% a year growth. Now it will move up and down somewhat but in the long run, good, steady, solid growth and we can make good money on that with good, solid, steady, growth not real fast and which will continue this cost cutting, we can then continue to improve earnings in that area.

Reserve Power, again, the lack of power quality all over the globe really drives this because no matter what operation is run anywhere, whether it's the emergency lights in a building or backup for computers, hospital systems, the FAA air traffic control, telecommunications, they all need backup power in case the electricity goes down. That is something because of our just absolutely insatiable demand in the world for more computer systems, more telecommunications, more things like now as my kids do, where we try to send pictures by cell phones and that sort of thing. That just requires a lot more systems from the telecommunications companies which requires more backup power, and we an insatiable demand for that stuff in the world that certainly isn't going to slow down. So we think that that growth in the 7% to 8% to 10% range over a long period of time is perfectly reasonable in that area and then good growth in our Asia area and our Aerospace and Defense markets will drive Reserve Power.

Our basic growth strategy, first take care of our customers and we think that's why over the last few years, we have continued to pick up a little bit of share each year in the face of our competitors, obviously, not wanting to give up that share. But we think we've gained it because of our overall good quality products, the premium products that we have that nobody else has and the service that we give to them. That’s something we work on all time and it's certainly very simple, motherhood and apple pie we'd like to say. But it's not easy and not everybody can do it and you can't always keep your customer happy while we'll go overboard to try and keep our customers very happy with our products and our services. We'll optimize our technologies, the unique ones I just talked about, thin-plate pure lead and our Ironclad product which is our square tube design, our OEM relationships around the world

Just recently, for example. Well, you can read the rest of it. More goals are later. But the things we are doing to take care of our customers continue to reduce costs with a very substantial cost savings every year for a number of years and target high growth opportunities, expansion in new areas, pursue acquisitions and grow our aerospace and defense business.

In cost savings, we are highly focused on our low cost manufacturing base. We just made another acquisition recently in Bulgaria, which is going to expand that low cost manufacturing base. We’d like to get that 50%. We are at about 30% now, and we will keep focusing on that to reduce costs.

Acquisitions, we are very, very acquisitive, looking at companies all over the world in our space, in our core lead-acid battery business, geographic expansion, acquisitions that will give us primarily cost reductions. There are examples of that there and down lead-acid technology. GAZ, Modular Energy and ATK are non lead-acid. GAZ was Ni-Cad. Modular Energy and ATK was lithium.

The number of acquisitions completed since the management buyout in 2000, has been 12 of them. And roughly $1.5 of our fiscal '07 revenue, about a $1 billion of that came from these acquisitions that were made since 2000 and we will continue to be acquisitive in trying to grow our business. We'll look for good opportunities, but we'll look for them relatively cheaply. We want to get good value out of them and not overpay just for the sake of growing. We're going to look for very, very good value.

So you are about to tell me I am about done too. That's what he is telling me. He gave me two minutes. You gave me five, okay. The aerospace and defense market, that's only about 25% lead-acid. We are a major player in the lead-acid business. We are a very minor player right now in the rest of those technologies. 75% of this, roughly $1 billion market, is lithium, silver, zinc and Ni-Cad.

We're a small player in it with our GAZ acquisition, the ATK acquisition and the Modular Energy acquisition, but we will certainly expand that. And that's one way we can grow in aerospace and defense market.

Very strong topline growth, I assume you have probably looked at some of our numbers before. You can go through those later. We've got good topline growth. We give you the numbers down here, excluding FX and acquisitions, because obviously the euro, more than half our business in Europe, the euro has contributed to that. And so, stripping that out and striping out acquisitions, you can see the growth of our business down there has been very strong in the last few years.

Earning is starting to grow a little bit, but not nearly as much as they should with the growth in sales, and that's been the headwind on commodities. You are all familiar with how massively commodities have gone over the past years. We'll talk about that in a minute. There is very strong topline growth in all our segments, all regions, for the past number of years.

Commodity cost pressures. We can go through this more in detail later. You can call me later to go through the details of this chart. But basically, incremental commodity cost, over the past few years, has cost us $264 million in incremental commodity cost, primarily lead. And you can see the breakout there between lead in the blue part of that chart and all the commodities in the gold.

How have we offset it? We have offset it with obviously, our selling price recovery but our selling price recovery over the past three years in roughly 60% range is not nearly enough. We've made up a lot through cost savings. We've made up a lot through the incremental benefits of topline volume. We are still driving hard for more price recovery as commodities continue to go up.

Our selling price recovery, a little chart on this, you can see that line improving. We go back to fiscal '05, fiscal '06, very poor recovery on increased commodity cost and our industry just wasn't prepared for the massive growth and increases in commodities. And our salespeople really weren't used to asking for price increases. They haven't had to do this for a few decades. It was something that we had to learn to do.

We had to get much firmer in our resolve with customers to get pricing and we are getting better and better at it. We are recovering more and we hopefully will catch up soon.

What's supply and demand? I won't spend any time on this. I assume we have all had some exposure to commodities around the world the past two or three years. It's been massive. We are still looking at probably, sometime very soon the supply demand to shift a little bit, to where there will be a little bit more supply than demand.

We have been in the past couple of years, on a pretty even key in front of a relatively tight market. We have no problem in getting led, but the inventory levels have been very low and that's driven absolutely, the price in addition to massive amounts of investment in commodity baskets, and lead is one of those. And that's helped drive the price.

We know we are in a bubble fundamentally that the price of lead ought to be fairly in the $0.40, $0.50, $0.60 million. And at a $1.30 or $1.40 today, I think it costs about $0.40 today. We know that's much higher than the fundamentals would call for. Well, my basic high school economic says that the fundamental will eventually come into play and drive that down. We just don't know when.

Unidentified Audience Member

(Question Inaudible)

John Craig

There are little bits and pieces all over the world. Lead was $0.20, $0.25 a pound for years and there was very little investment in new mining and new smelting capacity. And now, there is somewhat confidence in lead getting a reasonable return that there is more production coming on. But there is no big mine that's suddenly going to come on, it's a lot of little bits and pieces all over the world and that's what refining capacity and the mine production as well.

Unidentified Audience Member

This is why the mining equation is okay, close, why I mean rate increase in price?

Michael Hastings

Can you repeat the question that --?

John Craig

I am sorry. Yeah, you are asking why if it's fairly close if we are not in any trouble why the big increase in it? Much of it has been driven by -- in the last few years, there has been tremendous investments in commodities and these are people like Jim Rogers and others who have been proponents of commodity shortages and we have seen massive investments in commodities, hundreds of billions of dollars in commodity baskets, lead and many other things. So lead has gone up just like copper and a number of other, zinc and nickel, they have all gone up past few years. So, most of it is driven by massive increases in investments and one is more buyers and sellers are going to drive up price quite a bit. There has also been inventory…

Unidentified Audience Member

Yeah.

John Craig

This is a question, that's an important question. 85% of the lead consumed in the world goes in batteries. The other applications are relatively insignificant. There are only approximately 20 major battery companies in the world. Obviously, we are one of the largest. Last time, I checked there are almost 80,000 forward contracts on lead with 20 manufacturers. So to Mike's point, the amount of speculation that has superheated this is the substantial force that's taken it up. We are going to try to predict when those things sort of come back to Mike's point more fundamental, it's hard to predict, but we clearly know that the superheating from speculation is a big reason.

Unidentified Audience Member

Is that mostly from hedged funds?

Michael Hastings

The simple answer is certainly hedged funds has played a role, but I don't want to characterize that it's just one dimensional, it's not, it's everywhere you work. There are big players that have been consistent in commodities.

John Craig

And a lot of small ones too, in our company, there is one exactly that is what we have said, couple of years ago my financial advisor whoever he is working with could be somebody at who knows Merrill or Goldman or somebody else. His financial advisor is telling him to put maybe 5% of those assets in the commodity and that's happening all over the world. Now, we have all seen those numbers. You have probably all seen those statistics about the movement of people's portfolios, whether it's endowment funds, individuals, hedge funds, people putting more and more money into commodities and they still might only have 5% of their total investments in commodities. But if they want from 2% to 5%, that's a massive increase, that's hundreds of billions of dollars going into it.

So that's been really the big driver and why is that, because there have been some shortages here and there in various commodities. The explosive [development] growth in China and other places in the world have driven that up. So they're all overpriced in terms of the basic fundamentals of what it cost to mine it and get it out and get it to a consumer, and when do they come down? I don't know. Lot of people think we're near the top now and may be it will start coming down one of these days.

One quick comment before you kick me out of here now. Since we went public in July of 2004 and we only have two public competitors Exide and C&D and this is how we performed since July of 2004. When we went public, we started out at $12.50 a share, we're now up to about $23, so in that time, in the last three years we've grown about 79% in terms of our stock price, where they have come down 63% and 70%. So when I say we're taking a little share from them, we're not just taking share them, we're obviously managing our company a hell lot better than they are because we're making money and they are not and this chart kind of shows that.

Unidentified Audience Member

(Question Inaudible)

John Craig

Pardon.

Unidentified Audience Member

(Question Inaudible)

John Craig

Over the three years, yeah, they've improved. They're still losing money. It's still low for the size of their business but still losing money and seeing they are still losing money.

Unidentified Audience Member

Okay, breakout.

John Craig

All right. Thank you. Okay.

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