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EnerSys (NYSE:ENS)

F4Q08 Earnings Call

June 12, 2008 9:00 am ET

Executives

John Craig - Chairman, President and CEO

Mike Philion - Chief Financial Officer

Analysts

Christopher Agnew – Goldman Sachs

Paul Clegg - Jefferies

Corey Tobin - William Blair

Dana Walker - Kalmar Investments

Willis Taylor – Gagnon Securities

Operator

(Operator Instructions) Welcome to the Fourth Quarter 2008 EnerSys Earnings Conference Call. I would now like to turn the presentation over to your host for today’s call Mr. John Craig, Chairman, President and CEO.

John Craig

During this call we will be discussing our fourth quarter and full year results for fiscal 2008 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 forward looking statements.

Mike Philion

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.

For a list of the factors which could affect our future results including our earnings estimates see Forward Looking Statements included in item seven, Management’s Discussion and Analysis of Financial Condition and Results of Operation Set Forth in our Annual Report on Form 10-K for the year ended March 31, 2008, which was filed last evening with the US 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 June 11, 2008, which is located on our website at www.EnerSys.com.

Now let me turn it back to you John.

John Craig

As you saw in our financial results reported last night our performance by most measurements was at record levels. We reported record sales of over $2 billion and record earnings at an adjusted $1.42 per diluted share. These results came from the great work of our employees and a solid support from our customers as we participated in strong markets around the world.

Each of our three geographic regions and both of our reporting segments contributed to our increase in revenue and earnings. These results included the continuation of our increased share of the industrial battery market. As a result of the value we bring to our customers from high quality innovative products to excellent service.

Our substantial increase in earnings came in spite of the headwind of $240 million in incremental commodity costs this year which is a negative impact equivalent to $3.43 per share. We were able to more than offset these costs through our continual cost savings programs, higher volume and increased leveraging our fixed costs and improvement in the portion of incremental commodity costs that we’ve recovered through price increases.

Although our pricing recovery improvements in fiscal 2008 we still only recovered 85% of the incremental commodity costs. We will remain focused on improvements in this area. We will continue to focus strongly on reducing costs to give our customers the best value possible while improving our profit margins to a level more appropriate for our industry.

We recently announced the sale of our plant in Manchester, England which is part of our comprehensive plan to migrate manufacturing operations to lower cost facilities. Our acquisition last year of Energia in Bulgaria was a key element of that plan, allowing for the expansion of low cost manufacturing in the future.

In addition to reducing manufacturing costs we have succeeded in holding operating expenses to a level of 13% while revenue increased 35%. With expenses as a percent of sales dropping from 14.7% in fiscal year 2007 to 12.3% in 2008. While revenue growth has been strong globally we are particularly pleased with the increase of demand for our unique thin plate pure lead products in a variety of applications including Telcom, aerospace and defense, and many specialty products.

Due to this demand we recently announced a two year $50 million capital spending program to substantially increase our capacity for thin plate pure lead batteries and this capacity will be fully online next year.

In May we began refinancing our existing US credit facility. This new structure will be advantageous to the company. It gives us a more flexible platform to finance acquisitions and grow our business. We’ve completed 12 acquisitions since EnerSys was formed in 2000 and these acquisitions now account for over two thirds of our revenue and earnings. We continue to look for good opportunities in many product areas and geographic areas.

We continue to believe strongly in the long term growth potential of our markets we serve and we believe we will continue to share favorably in that growth. Also we plan to expand on that by pursuing acquisitions and internally develop areas of opportunities which will provide long term benefits from new products and geographic expansion.

We’re already pursuing new opportunities in the solar and wind and power segments, batteries for hybrid plug in vehicles and thin plate pure lead back up power for nuclear submarines along with new products to serve the Telcom, UPS and motor power markets. We will remain highly focused on new developments in emerging technology areas in storage energy solutions that earn good returns for our shareholders.

The continued success we are experiencing in many areas is reflected in the new guidance we provided last night for the first quarter fiscal 2009. The previous EPS guidance provided in mid May was an adjusted diluted EPS of $0.40 to $0.44 per share. We now anticipate first quarter earnings to be in the range of $0.45 to $0.49 per adjusted diluted share as our business continues to perform very well. This compares to an adjusted $0.30 per share the prior year.

Looking further ahead our number one financial objective is to increase our profit margins while continuing to growth our business and serve our customers. Over the last four years substantially higher commodity costs have resulted in our gross profit margins declining from 25% to under 20%. We are highly focused on our return to historically normal 25% gross profit.

We believe this is a balanced expectation and it is necessary to provide an adequate return to our shareholders while ensuring that we have the capital to continue to provide innovative and high quality products and services for our customers. We will continue to do everything we can to reduce costs. We lag in the amount of incremental pricing required to offset the unprecedented increase in commodity costs. We will therefore remain firm in our resolve to recoup the increased commodity costs to help achieve our 25% gross profit margin target.

I’ll now turn the discussion over to Mike Philion for additional information on our results, guidance and new credit facility.

Mike Philion

Our record fiscal 2008 results continue to demonstrate the strengths of our global business and industry leading position. Our fourth quarter net sales increased 41% over the prior year to $582 million. On a business segment basis net sales in the reserve power business increased 50% to $253 million while our motive power business increased 34% to $329 million.

The consolidated growth rate includes approximately 9% from base volume as demand for our products and services remain strong. Also in the fourth quarter the growth rate includes approximately 19% due to our pricing recovery actions, 11% from foreign currency translation, and 2% from acquisitions. Further, our fourth quarter sales growth was solid in all three regions with growth of 72% in Asia, 54% in Europe, and 21% in the Americas. We believe the combination of our outstanding products with superior customer service continues to drive our strong top line performance.

Net sales for our fiscal 2008 year were also strong and increased 35% over the prior year to over $2 billion. On a business segment basis net sales in the reserve power business increased 38% to roughly $900 million while our motive power business increased 33% to $1.1 billion. The 2008 year’s growth rate includes approximately 14% due to pricing actions, 11% from base volume, 8% from foreign currency translation, and 2% from acquisitions. We believe our base volume growth of 11% is higher than the markets in which we serve. Accordingly we continue to increase our global market share.

Our top line performance continues to be solid as the benefits of our global reach and highly diversified customer base and end markets are very evident. While we cannot forecast the future our current orders and backlog remains at record levels. Although some modest softening in the US motive power market has been experienced recently the remainder of our global businesses continues to be very strong.

Now a few comments about our as adjusted consolidated earnings performance, as you know we utilize certain non-GAAP measures in analyzing our company’s operating performance specifically excluding highlighted items which are primarily litigation settlement income in fiscal 2007 and the European restructuring charges in fiscal 2008.

Accordingly my following comments concerning operating earnings and my later comments concerning diluted earnings per share exclude all relevant highlighted items. Please refer to our company’s Form 8-K which includes our press release dated yesterday for more details concerning these and other highlighted items.

Our fourth quarter as adjusted consolidated operating earnings were $39 million or an increase of 74% in comparison to the prior year with the operating margin increasing 130 basis points to 6.7%. This strong earnings performance was achieved in spite of higher commodity costs of approximately $90 million in the quarter. Clearly our commodity cost pressure was more than offset by the favorable impact of higher revenue, selling price increases and costs savings.

While progress is ongoing in raising our selling prices due to increasing commodity costs, as we expected significant earnings pressure continue to be experienced in our fourth quarter as pricing recovery still lags rising costs. We estimate the price increases totaling approximately $80 million were achieved in our fourth quarter were roughly a 19% increase in revenue.

The earnings gap attributable to this cost, price, timing, and balance was approximately $10 million in our fourth quarter or $0.14 of earnings per share. As John previously mentioned we remain highly focused on this earnings pressure and are steadfast in our resolve to eliminate this gap.

Our fiscal 2008 full year as adjusted consolidated operating earnings were $133 million or an increase of 47% in comparison to the prior year with the operating margin increasing 50 basis points to 6.5%. Similar factors affected our full year results as described for our fourth quarter. Our fiscal 2008 results had been significantly affected by the higher cost of lead which is roughly 33% of our year to date cost of goods sold.

We estimate that our fourth quarter lead costs alone have increased approximately $80 million or over 125% compared to the fourth quarter of the prior year. Additionally we estimate our full year lead costs have increased approximately $220 million or 75%. Further, we expect our first quarter of fiscal 2009 lead costs to increase by over $70 million or over 75% compared to the prior year. These higher costs clearly illustrate why improved pricing recovery is still needed.

Now several comments concerning our diluted EPS, as adjusted diluted net earnings per share were $0.42 in the fourth quarter versus $0.22 in the prior year or an increase of 91%. Compared to the prior year’s fourth quarter and expressed on an EPS equivalent basis improved pricing recovery was equal to approximately $1.14 per share while higher commodity costs negatively affected our earnings by approximately $1.28 per share. This would have reduced our EPS by $0.14 were it not for the equivalent of $0.34 of additional earnings primarily from our sales growth and ongoing cost saving actions.

As adjusted, diluted net earnings per share were $1.42 for the full fiscal 2008 year compared to $0.87 in the prior year for an increase of 63%. Similar factors affected our full year results as described for our fourth quarter.

Now some brief comments about our financial position and cash flow results. In short our performance continues to be good with adequate liquidity to both operate and grow our global business. Primary working capital increased $192 million since the beginning of fiscal 2008 to $578 million principally due to our sales growth and the increasing cost of commodities. As a percentage of annualized trailing three month net sales our primary working capital ratio at March 31, 2008, was 24.8% compared to 23.3% at March 31, 2007.

This modest increase in our primary working capital ratio was primarily caused by the increasing percentage of our total business outside of the United States. Our capital expenditures were $45 million in fiscal 2008 compared to $42 million in fiscal 2007. We continue to expect capital expenditures will approximate $60 million in fiscal 2009 as we continue to believe in the future growth prospects for our business.

Net debt as defined in our senior credit agreement was $423 million at the end of our fiscal 2008 year with the leverage ratio of 2.5 times. Our average interest rate was 6.5% in fiscal 2008 compared to 6.6% in the prior year. We remain in full compliance with all our credit agreements and have well over $100 million of available but unused credit under existing facilities at March 31, 2008.

Let me take a minute and update you on our recent refinancing activities. We are very pleased with our progress to date and expect to be completed later this month. Our objectives for this refinancing were three fold. First, refinance our existing $450 million senior secured credit facility well in advance of its expiration in March 2009.

Second, provide future capital structure flexibility and add appropriate additional borrowing capacity to support our company’s future growth strategy whether it be organic or from acquisitions. Third, access the most attractive and complementary debt markets today to minimize our long term cost of capital. As you may know we successfully issued $172.5 million of convertible senior unsecured notes in late May as part of this plan.

This issuance was very well received by our investors. The final element of our plan is in a new $350 million senior secured facility with an un-drawn $125 million revolver that is expected to close in late June. For fiscal 2009 we expect this refinancing will result in interest savings of approximately $4 million or roughly $0.06 of EPS when compared to fiscal 2008.

One other noteworthy item is the investment grade credit rating for our new senior secured debt of BBB Minus from Standard & Poor’s. We appreciate their confidence in our company. As John mentioned previously we expect to generate diluted net earnings per share of between $0.45 and $0.49 in our first quarter of fiscal 2009 which excludes the expected $0.04 per share charge from our ongoing European restructuring program, the expected $0.09 per share charge from our refinancing activities and a $0.16 credit from the sale of our Manchester manufacturing facility.

Historically we have experienced a sequential quarterly reduction in both revenue and earnings during our first fiscal quarter of each year. We do not expect this pattern will occur in the first quarter this year. Demand for our products and services is expected to be substantially similar to that experienced in our fourth quarter and we expect sequential quarterly earnings to increase.

Our anticipated earnings increase will be driven by three factors. First, stable quarterly revenue as referenced above. Second, a modest sequential increase in total commodity costs of $6 million and third, the ongoing benefits from cost reduction activities and improving pricing recovery.

Lastly, LME lead costs have dropped by over $0.35 per pound over the past 45 days and are currently in the $0.90 per pound range. We certainly welcome this recent drop in lead costs but it remains uncertain to us as whether this is a temporary or a sustained market correction. Assuming LME lead costs averaged in the $0.90 per pound range for the next three months we would experience a significant decrease in our lead costs by the third fiscal quarter 2009.

In closing, I remain highly confident in our company’s future. We have consistently demonstrated our global organizations ability to adapt quickly to rapidly changing market conditions and successfully grow both revenue and earnings. Now let me turn the call back to you John.

John Craig

With that I’d like to open the line up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Christopher Agnew – Goldman Sachs.

Christopher Agnew – Goldman Sachs

How should we think about the margin improvement going forward by division, by geographic region? Where do you expect to take out more costs and where should you be able to get more pricing.

John Craig

Let me address the pricing side first. When you take a look at lead when it went to a high of $1.82 a pound back last October our pricing was going up as lead was going up. In other words, lead would go up, we would increase prices, three to six months later we would see that price increase come through and hit our P&L. We’ve constantly been playing catch up.

How what’s happened is lead has gone from that peak of $1.82 to under $0.90 a pound. Our objective now is to hold as much of that pricing as we possibly can. We spent a lot of time with our sales force recently, we’ve talked this through, we feel we led the industry when we needed to take price up and we feel we need to lead the industry now on holding pricing as much as we can. That being said, however, about 40% to 50% of our business is on automatic pass through. We will see price reductions on that particular portion of it.

The second part of your question was really around costs and where we see costs going. As you know from the restructuring that we have in Europe there is still a long ways for us to go. We’re making major investments in the Bulgaria operations. As we mentioned we shut down our Manchester UK plant. We are moving production from high cost factories to low cost factories. I think our reserve power business we think we’re going to see substantial pick up in margins in the next 12 months or so.

Christopher Agnew – Goldman Sachs

On the Bulgaria plan where is utilization currently and what’s your ability to expand into and maybe move manufacturing into that facility?

John Craig

One of the reasons we bought that plant is the facility itself is approximately 450,000 square feet. It was only generating about $19 million in revenue at the time. It required a capital investment of somewhere in the vicinity of $15 million to take and upgrade the equipment and facility and to move production from the high cost plants to low costs. It’s got a lot of opportunity.

Christopher Agnew – Goldman Sachs

If lead prices continue to fall at what point do you think you need to give price back to customers. Where would you get negative pricing pressure?

John Craig

I don’t know the answer to that. All I can say is we’re going to do whatever we can to hold it in the market and our competitors are going to help determine that. If our competitors have the resolve to hold pricing like we do I think we’re going to see a very good situation. I can’t project what our competitors are going to do. All I can is internally that we are steadfast that we’re going to do everything we can to hold pricing on that portion that does not have automatic pass throughs.

Operator

Your next question comes from Paul Clegg – Jefferies.

Paul Clegg - Jefferies

There have been some questions about the way you guys account for lead hedges, can you just confirm for us that the hedge costs does not actually hit your P&L until the lead in question is sold. Maybe we can just walk through that dynamic because I think there was some concern that you would see margins get pressured as lead costs came down.

Mike Philion

Our lead hedge accounting is absolutely correct under US GAAP and International GAAP. Its plain vanilla, it is about as straightforward as it comes. To your point, there is no question there is matching between when a hedge is physically taken and when ultimately it hits the P&L. As part of any strategy, ours is no different, we hedge to mitigate volatility. Certainly with rear view mirrors none of us could have anticipated lead falling.

You see this in our 10-K we disclose is all the time. Certainly we do have some modest lead positions that will still need to run through our P&L from our hedges. As I recall there was roughly 60 million pounds at fiscal year end that will take three months or so till it fully flushes through our P&L. As you know we do have FIFO timing, etc. We would expect essentially all of the lead hedges to be completely through our P&L by the third quarter.

Paul Clegg - Jefferies

Was there some specific contributor in your decision to raise guidance so quickly after you gave your first guidance about three weeks ago?

John Craig

Yes, what it was, three weeks ago when we gave our guidance we didn’t have the luxury of looking through May, our actual results. Our April and May came in significantly stronger than we anticipated and what it was it’s not the pricing or lead, its pure demand for our products. Our volumes are much higher than we anticipated three weeks ago. We’re at record backlog and record orders again at the end of this quarter.

Paul Clegg - Jefferies

The European restructuring looks like its winding down. Do you think that we’ll see any more charges past the September quarter?

John Craig

We will. The tail of the program is approaching as you’ve referenced but one of the tricky parts is as you know GAAP accounting on severance has become what I characterize as more cash basis oriented. The little trickiness is anticipating with precision how the final elements of the redundant employment actions will play out. Most of it is behind us and we would anticipate by certainly our fourth quarter this year it will essentially be wrapped up.

Operator

Your next question comes from Corey Tobin - William Blair.

Corey Tobin - William Blair

Let me follow up quickly on Paul’s question. Given what you’ve seen here through April and May looking at volumes for the second quarter is it safe to assume that we’ll see a bit of acceleration in volume growth versus the 9% that you recorded in the March quarter. Is that at this point on trajectory to be achieved?

John Craig

I can’t say that it’s going to be that much higher; I don’t have the numbers right here in front of me specifically. I can say that when we look at our business, this has happened the last several quarters, we keep reading in the newspapers about how bad things are in the US economy and other areas of the world being bad. What we find is just the opposite in our business. The telecommunication industry is strong, UPS industry is strong, motor power is strong with the exception of the US market.

We watch this thing hour by hour where we think the economy is going to go and are we missing something with it. We get pleasantly surprised it seems like every quarter that the demand for our products and services just continues to get record levels.

Mike Philion

One of the things to complement John, it’s tough to read but historically we would always expect our second fiscal quarter to be slightly down on a sequential basis and its really the influence of summer holidays principally in Europe and some in the US. Will that historical pattern develop in the coming year; it’s hard for us to say. We generally would expect that influence of summers to have some downward pressure on top line.

John Craig

One of the other things our first quarter is going to be higher than our fourth quarter. Historically fourth quarter has always been our strongest quarter. The dynamics right now it’s really changed when you look at historic patterns.

Corey Tobin - William Blair

To clarify, when you say Q1 and June quarter here is going to be higher than the March quarter you’re speaking with respect to total revenue but I guess what I was driving toward in the question was that applies as volume. What I’m hearing is the absolute revenue will be up but not necessarily volume growth although it’s not excluded it could potentially happen.

Mike Philion

Are you talking year over year or sequentially more in that question?

Corey Tobin - William Blair

I’m basically asking in the June quarter could the volume growth be higher than the 9% booked in the March quarter.

Mike Philion

It’s possible but as I commented we see a substantially similar quarter to the Q4. I’d call it about the same kind of unit volume.

Corey Tobin - William Blair

You mentioned some initiatives with respect to solar, wind, and hybrid plug in vehicles. To what extent are those contributing to the P&L today? Another way to look at it would be what percentage of revenue today would you ascribe to those types of applications. Assuming its relatively small today when do you really see that starting to kick in?

John Craig

I think in both those areas it’s relatively small. In the solar and wind it’s in the $25 to $30 million range total. In the hybrid vehicle it’s a development program. There’s no revenue generated in that. The point there is this, if these markets take off the way many of us think they will, EnerSys will be in a position to service those markets. We have a complete line of batteries for wind and solar today. The industry is not developed to a point that it’s ready to go.

With oil being up as high as it is there’s a lot more emphasis and a lot more questions being asked of us about where we stand on that. We’re ready to go right now. We can sell the batteries for those applications. We have to wait for wind and solar industry to really be in gear to have the demand.

Operator

Your next question comes from Dana Walker - Kalmar Investments.

Dana Walker - Kalmar Investments

Could you talk about segment activity if you’re in a position to describe the unit experience in reserve as well as in motive in the quarter and the year and perhaps talk also geographically in the same manner?

John Craig

On a unit basis all of our areas are up with the exception of North America motive power business that we are seeing down. Our revenue though in motive power in the Americas is up some $30 million. The reason for that is strictly pricing. If you look strictly at units every segment of our business with the exception of motive power in the Americas is up.

Dana Walker - Kalmar Investments

That comment is focused on the fourth quarter?

John Craig

Fourth quarter and full year both.

Dana Walker - Kalmar Investments

The reserve numbers which were up 50% in the quarter would your price realization have been meaningfully different in reserve than it would be in motive?

John Craig

No, it’s approximately the same in fourth quarter.

Dana Walker - Kalmar Investments

Therefore your unit growth in the fourth quarter was quite a bit higher in reserve.

John Craig

That’s correct.

Dana Walker - Kalmar Investments

Is that a TPPL phenomenon or is there something else going on there?

John Craig

I think it’s across the board. It’s not only simply pure lead but also our calcium products. We’ve seen major growth take place in the US market. I think a lot of this is attributed to Telcom’s are competing with each other and they’re also competing with the cable industry. My personal belief is that the Telcom industry and cable industry does not reinvent themselves and keep going in investing money that they will cease to exist. There’s a very competitive market out there right now and I think that we’re seeing that in our results.

Dana Walker - Kalmar Investments

Do you believe that strength you saw in reserve in Q4 was a relative anomaly or do you believe that type of firmness in its relationship to your motive business is sustainable?

John Craig

It’s hard to tell but I don’t see a slow up taking place in the reserve power market. We said that we think we’re going to see high single digit growth in a unit basis going forward. I still believe that and our backlog and order patterns support that.

Dana Walker - Kalmar Investments

The automatic pass through you described are they more oriented towards motive or reserve?

John Craig

In Europe they’re about equal to both. In the US market its primarily reserve with very little motive.

Dana Walker - Kalmar Investments

Your fourth quarter reserve margin was slightly down compared to where it was in the third quarter. Aside from the restructuring that you’re undertaking in Europe what would you expect to have the greatest influence on your reserve margin?

Mike Philion

As John referenced, as we look forward we’re highly focused on taking cost out of reserve. We do continue to believe our thin plate and other unique high margin reserve products will grow at a faster rate than the base business. We’re pretty darn optimistic that we will see margin expansion continue to be evident. Clearly I’ll give you the obvious caveat, lead needs to be cooperative in a sense not highly volatile. Assuming we have stability in lead we’re very confident we’ll see meaningful improvements in the next 12 to 18 months in reserve margins.

John Craig

Let’s go back a little bit in history here at EnerSys. If you go back five or six years ago our motive power business was not performing at the same level our reserve power business was. We made substantial capital investments in the motive power business both in the Americas, Asia and in Europe to really improve margins in that area. What’s happened is with consolidation taking place in Telcom and UPS industry getting pricing reserve power became tougher.

We needed to make additional investments in the reserve power business to get our costs down. That has been our focus. When you look at the restructuring costs taking place in Europe that is primarily all going to the reserve power business, thin plate pure lead reserve power business. I would say that most of our CapEx that’s related to cost savings initiatives is really going to our reserve power business.

The second part though is the new product introductions that we’ve come up with. We have a number of unique products that we’ve taken to the market to the Telcom’s and UPS industry and we’re seeing market share pick up with that and we’re getting premiums on those products.

Mike Philion

One of the things that we all sort of lose track of this lead cost pressure that we’ve been under it’s been four years. It’s been over $400 million of pressure. Certainly as John referenced the pricing improvement in reserve is appreciated and it’s certainly on par with motive this year. That wasn’t the case as this four year journey. We were certainly under more price related pressures in our reserve business in prior year. There’s a bit of a catch up phenomenon still embedded in the reserve markets that we’re very confident ultimately you will see meaningful improvement.

Dana Walker - Kalmar Investments

One last comment if you would offer on TPPL, with your running close to full out or at full out maybe you could describe your unit experience in TPPL in Q4 as you see in fiscal ’09 before you get the incremental capacity.

John Craig

We’re running both of our factories seven days a week, 24 hours a day. We’re doing everything we can to keep and satisfy customer demand for it. We basically shut our marketing organization down for future customers in that area until we get the new capacity online.

Dana Walker - Kalmar Investments

As we compare those numbers though to year over year are you in a position to sell more units for the foreseeable future or are you truly selling comparable amount of units at higher prices.

John Craig

We’re seeing comparable amount of units at currently because of capacity but the demand for the product is significantly higher. In other words, we could sell a lot more of the product if we had the ability to build it.

Dana Walker - Kalmar Investments

To clarify something you said earlier, you said that you expected your reserve margins to improve appreciably in a 12 to 18 month timeframe absent the pass through phenomenon of lower lead prices. Are we likely to see structural benefit in your reserve margin fiscal ’09 before some of those restructuring benefits take hold?

Mike Philion

Could you be a little more specific as to the essence of your question?

Dana Walker - Kalmar Investments

You are very confident that your reserve margins are going to expand; you talked about that visibility taking place over the next 12 to 18 months. Are we only likely to see that in 12 to 18 months time or are we going to see that iteratively as we work our way through fiscal ’09?

John Craig

My comments on improving margins on that I’m assuming everything else is going to stay constant. I’m really focusing on the cost element of it. Moving production from high cost plants to low cost plants. If everything else were constant, our pricing and cost of lead and everything else we will see some fairly nice margin enhancement take place in our reserve power business. I think that you’re going to see that as it comes online it’s going to spread over this year. We’ll see some of it this year but I think the bulk of it the full implementation is next year.

Operator

Your next question comes from Willis Taylor – Gagnon Securities.

Willis Taylor – Gagnon Securities

I wanted to follow up on the hedging questions. Could you tell us how large the hedging gains were that were booked during the year?

Mike Philion

Yes, I can give you some directional and I’ll caution you, you have to put whether it’s a hedging gain or loss into the context of a lot of other moving parts. Where was pricing and where was some of the competitive environment. Yes, in our quarter our fourth fiscal quarter the one that just ended we had approximately a hedging gain in the $5 to $10 million range.

In our fiscal ’09 first quarter, the one that we’ve just given guidance to we will have a hedging loss in the $10 to $15 million range. We would go from a gain to a loss which is not surprising because of the tremendous drop in lead that we’ve experienced over the last 60 days. Now we remain short in our hedged position, we have approximately 15% of our requirement hedged at any given point.

We believe we’re remained balanced short and prudent. With the benefit if hindsight we would have done things different but that’s not why you hedge. You try to create predictable cost structures and you try to match it within reasonable periods of what I characterize revenue it is largely based on the same general lead costs.

John Craig

I think the thing you have to be careful on on this is when you take a look at this loss as compared to what the market was at at that point in time compared to our hedge. The other side of the coin is that with lead going down that other 50% that’s not hedged we’re getting a big pick upon it. To be specific, I’ll just pick a month. The month of January we had some lead hedges out there was $1.58 a pound. The actual market was $1.18 a pound. That is equivalent to a $10 million loss in that particular month.

However, what it doesn’t reflect is the other portion of lead that we didn’t have hedged that difference of $1.58 to $1.18. It’s a big different in it. We look at it from the standpoint of compared to market and that portion that we had that’s lost it doesn’t necessarily all drop to the P&L bottom line because if we’re holding pricing and we’re getting the benefit of lead on that other portion that we referred to it’s a pretty good situation.

Mike Philion

There’s no question we’re going to continue to be short in our hedging but we’re going to continue to hedge. When we took that forward position in January at $1.58 lead was still skyrocketing to the moon. You can never know with certainty with this volatility whether that was going to be a prudent position or not. Our pricing in that period was in that range or higher so we don’t generally get big imbalances when you compare the revenue that’s going through a quarter with what I would call the balanced hedges in that same period.

John Craig

To summarize what we’re talking about here when the lead was at $1.58 we had that hedge. Our pricing was higher on our products. A large portion of our lead in that given month was at market price but we are saying this morning that we did compare it to fair market at that point there is a loss on that particular portion of the lead that we hedged.

Willis Taylor – Gagnon Securities

To be clear, your guidance is taking into account this loss.

Mike Philion

Of course.

Operator

At this time there are no further questions, I would now like to turn the conference back over to John Craig for closing remarks.

John Craig

I’d like to thank everybody for their interest in EnerSys and I wish you the best of days. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes your presentation you may now disconnect.

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Source: EnerSys F4Q08 (Qtr End 3/31/08) Earnings Call Transcript

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