EnerSys Q1 2009 Earnings Call Transcript

Aug. 6.08 | About: EnerSys (ENS)

EnerSys (NYSE:ENS)

Q1 2009 Earnings Call Transcript

August 6, 2008 9:00 am ET

Executives

John Craig – Chairman and President and CEO

Mike Philion – EVP of Finance and CFO

Analysts

John Franzreb – Sidoti & Company

Chris Agnew – Goldman Sachs

Paul Clegg – Jefferies & Company

Corey Tobin – William Blair & Company

Arthur Freezemen [ph] – Freezemen Asset Management [ph]

Richard Baxter – Ardour Capital

Kitty Wong – Train, Babcock Advisors

Operator

Good day, ladies and gentlemen and welcome to the Q1 fiscal 2009 Enersys conference call. My name is Nora and I'll be your coordinator for today. At this time, all participants are in a listen only mode. We will be facilitating our question-answer session towards the end of today's conference. (Operator instructions) I would now like to turn the presentation over to your host for today's call, Mr. John Craig, Chairman and President and CEO. Please proceed, sir.

John Craig

Thank you, Nora. Good morning and thank you joining us for our conference call. During this call, we will be discussing our first quarter fiscal 2009 results as well as commenting on the general state of our business. But before we start, I'd like to ask Mike Philion, our Chief Financial Officer, to cover information regarding forward-looking statements. Mike?

Mike Philion

Good morning to all and thank you, John. As a reminder, we will be presenting certain forward-looking statements on this call that are based on managements current expectations and assumptions which are subject to uncertainties and changes in circumstances. Enersys' 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 on the dates of such statements. For a list of the factors which could affect our future results including our earnings estimates, see forward-looking statements included in Item Two, Managements Discussion and Analysis of Financial Condition and Results of Operation set forth in our quarterly report on form 10-Q for the quarter ended June 29th, 2008 which was filed with the U.S. SEC.

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 yesterday, August 5th, 2008, which is located on our website at www.enersys.com. Now, let me turn the call back to you, John.

John Craig

Thanks, Mike. As reported last night, we experienced record sales and earnings for the first quarter of fiscal 2009. We also booked record orders and our backlog reached an all time high. Our revenue increased 38% compared to the first quarter of our prior fiscal year. We experienced strong revenue growth in both our Motor Power and Reserve Power businesses and across our three geographic regions. As adjusted, diluted earnings per share increased by 60% over the prior year, from $0.30 last year to $0.48 this year. We continued to experience solid growth in all of our established markets and continued to successfully penetrate emerging markets and introduced new products. In addition, we continued to experience increased demand for our thin-plate pure lead products or lithium products and our specialty nickel based batteries.

A substantial increase in earnings was largely due to selling price increases of approxibly 19% in the first quarter compared with average prices in the fourth – average prices in the prior year quarter. While we recovered the incremental commodity cost increase as we experienced in the first quarter, we still have improvements to make to recover the full cost increases we've experienced over the last couple of years. We still experienced a year-over-year decreased in our gross profit margin of 1.1%. We remain committed to the 25% gross profit target that I discussed in our last meeting.

On a sequential basis, our gross margins improved or increased from 18.2%, in the fourth quarter of fiscal 2008, to 19% this quarter. But this still remains far below our 25% target. We remain highly focused on this objective and we believe it will be achieved by continuing to close the selling price late [ph] cost timing gap along with our ongoing cost savings programs.

As previously announced, we completed the sale of our Manchester, England plant in the refinancing of our U.S. credit facilities in this quarter. Both of these actions will result in significant ongoing savings. Although, the general global economy clearly seems to be entering a period of slower activity, for the most part, we're not seeing it in our business. Even if the organic rate of growth of our base business were to slow, we believe we can offset this with higher rates of growth in certain geographic areas and with newer high growth products. Our confidence to continued growth is supported by recent consensus forecast of global GDP growth of about 4% in both 2008 and 2009.

We continue to expand in emerging markets globally. We believe that markets for our products in these areas will continue to grow rapidly and that we will continue to gain share in these markets. In the product area, we are also experience rapid growth in our thin-plate pure lead products in many applications for telecommunications, aerospace and defense, and numerous specialty areas.

Our $15 million capacity expansion project for thin-plate pure lead products remains on track, and we continue to see a strong demand for this type of product. This investment, coupled with our investment in Bulgaria, our restructuring – European restructuring program, as well as our expansion into emerging markets, should result in significant earnings improvements in the future. In addition, we continue to experience growth in our batteries used and renewable energy applications. We all recognized the importance of obtaining more energy from wind turbines, and solar panels. We believe this activity will grow rapidly and we are well positioned to supply high performance, cost effective batteries for these systems. We will continue to pursue opportunities in many emerging technologies that will help drive profitable growth for our company.

Our continuing success in our base business, along with many newer opportunities that are adding to our revenue earnings, are reflected in the guidance we provided last night for the second quarter of 2009. We anticipate that adjusted diluted earnings per share will be in the range of $0.49 to $0.53 for the second quarter, which compares to adjusted earnings per share of $0.35 in the prior year quarter. Assuming the mid-point of our guidance range, this is a 46% increase year-over-year. I'm pleased with this since our second-quarter is typically the slowest quarter of our year due primarily to the summer holiday periods.

As I stated last quarter, our number one financial objective is to increase our gross profit margins to a more historically normal level of 25%. We have improved in the last two quarters, but, we still remain below our target. We believe the appropriate combination of higher selling price and lower cost will result in our achieving this objective. And with that, and now I would like to turn the discussion over to Mike Philion for additional comments on our results and our guidance. Mike?

Mike Philion

Thank you, John. Fiscal 2009 has started strong, with first-quarter sales up 38% and as adjusted diluted earnings per share up 60%, in spite of volatile commodity cost and a challenging and uncertain global macroeconomic environment. We believe these strong financial results continue to demonstrate the strengths of our industry leading business and the soundness of our business strategy. Our first-quarter net sales increased 38% over the prior year to $592 million. On a business segment basis, net sales and the reserve power increased 40% to $259 million, while our mode of power business increased 36% to $333 million. Our first quarter 38% growth rate includes approximately 19% due to our ongoing pricing recovery actions, 11% from foreign currency translation, and 8% from volume. Further, our fiscal 2009 first quarter sales growth was solid in all three regions, with growth over the prior year of 30% in the Americas, 40% in Europe, and 70% in Asia. We believe the combination of outstanding products, with superior customer service, continues to drive our strong topline performance.

Now, a few comments about our asset adjusted consolidated earnings. As you know, we utilize certain non-GAAP measures in analyzing our company's operating performance, specifically excluding highlighted items. Accordingly, my following comments concerning operating earnings and my later comments concerning diluted earnings per share exclude those relevant highlighted items. Please refer to our company's form 8-K which includes our press release dated yesterday, August 5th, 2008, for more details concerning these and other highlighted items.

Our first quarter of fiscal 2009 operating earnings were $43 million, or an increase of 47% in comparison to the prior year with the operating margin increasing 40 basis points, to 7.2%. This earnings performance was achieved in spite of higher commodity cost of approximately $70 million in the quarter when compared to the prior year. Clearly, our commodity cost earnings pressure was more than offset by the favorable impact of higher revenue, selling price increases, and gross savings.

The single most important factor combating higher commodity cost in the first quarter, was the continued progress made in our pricing recovery. We estimate the pricing actions increased first quarter revenue by approximately 19% when compared to the prior year. Further, our first quarter pricing recovery was strong in both business segments in all three regions. Our first quarter results have been significantly in – affected by the higher cost of lead, which is approximately 34% of our first quarter's cost of goods sold, up from approximately 29% in the first quarter of fiscal 2008. Lead cost increased approximately $60 million in the quarter compared to the prior year. And on a sequential quarterly basis, our lead cost increased approximately 10 million when compared to the fourth quarter of fiscal 2008.

Our effective book income tax rate for the first quarter of fiscal 2009 was approximately 25% compared to 31% in the prior year. After adjusting for the highlighted tax benefits in the first quarter, or as adjusted book effective rate was roughly 29%. As I commented last quarter, further reductions in our income tax rate remains an important focus. I expect our as adjusted book income tax rate will approximate 29% for the full fiscal 2009 year. And we remain confident in meaningful additional reductions in fiscal 2010 and beyond.

Now, some brief comments concerning our diluted earnings per share. Diluted net earnings per share were $0.48 in the first quarter of fiscal 2009 compared to $0.30 in the prior year, or an increase of $0.18 per share or 60%. As we mentioned earlier, our improving pricing recovery was the main contributor to our strong first quarter earnings growth.

While we are pleased with our consistent earnings growth over the last seven quarters, a 25% gross profit target remains our steadfast goal. Our pricing recovery, commodity cost timing gap has steadily improved, but the unrecovered, cumulative price cost pressure since the beginning of fiscal 2005 exceeds $100 million, or approximately $1.50 per share of earnings, and over 200 basis points of annualized gross profit margin pressure. We remain confident in our ability to further improve earnings margins. Now a few comments about our financial position and cash flow results but in short, our performance continues to be good.

Primary working capital increased $18 million since the beginning of fiscal 2009 to $596 million primarily due to our strong sales growth and a normal inventory build in anticipation of customary second quarter summer holidays and associated plant shutdowns. As a percentage of annualized trailing three months net sales, our primary working capital ratio was 25.2% and was up a modest 40 basis points when compared to the prior year and fiscal 2008 year end. Our first quarter fiscal 2009 capital expenditure were $13 million compared to $9 million in the prior year. We expect capital spending for all of fiscal 2009 will approximate $60 million which includes the previously referenced major expansion of our thin-plate pure lead manufacturing capacity.

Net debt, as defined in our credit agreements, was approximately $424 million at the end of our first quarter of fiscal 2009, with our leverage ratio of 2.2 times. Since the end of fiscal 2008, net debt is essentially flat with our leverage ratio improving from 2.5 times at March 31st, 2008 as earnings have continued to increase. Our average interest rate was 5.4% in the first quarter compared to 6.5% in the comparable quarter last year and also 6.5% for the entire fiscal 2008 year.

As covered in our June 30th, 2008 press release, we successfully completed our $522 million debt refinancing at the end of our first quarter. We accomplished all three of our financial objectives. Namely – first, providing future capital structure flexibility; second, providing additional borrowing capacity; and third, minimizing in our long-term cost of capital. This new facility will properly support our company's future growth, whether by acquisitions, or organically, and is expected to reduce fiscal 2009 interest expense by approximately $4 million, or $0.06 per share compared to fiscal 2008. We appreciate and sincerely thank all our debt investors for their tremendous support and confidence in our future business prospects.

As John previously covered, we expect to generate, as adjusted, diluted net earnings per share of between $0.49 and $0.53 in our second quarter of fiscal 2009, which excludes the expected $0.02 per share charge from our ongoing European restructuring program. Additionally, we expect to experience the historically normal sequential quarterly decrease in our second quarter sales volume due to the impact of summer holidays in Europe and the U.S.

The current state and future direction of the world's economy remains a dominant daily news story. Certainly, we are highly focused on its impact on our business. However, based upon current order trends, customer forecast, and our record backlog, we expect our business will continue to perform well during fiscal 2009.

In closing, I remain highly confident in our company's future. We have consistently proven that with our sound strategy, steady execution, outstanding products and employees, we can successfully grow revenue and earnings. Now, John, let me turn the call back to you.

John Craig

Thanks, Mike. I'd like to now open the lines for any questions that you may have.

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from the line of John Franzreb of Sidoti & Company. Please proceed.

John Franzreb – Sidoti & Company

Good morning, guys.

Mike Philion

Hi, John.

John Craig

Good morning, John.

John Franzreb – Sidoti & Company

Could you talk a little bit about the seasonality of referencing here. Is it more on telecommunication side of the business or is it in the more on the motive side the business? Can you walk us through that?

Mike Philion

It's really on both, John. And it's primarily in Europe to an extended – it's larger in Europe than it is in the United States. But, in Europe, with holidays and things, historically, we've seen just a slower period. The second thing is, even in the United States with plants said that are take shutdown, as example in the auto industry, a two-week shutdown is typical. And many plants, for maintenance, take shutdown during this period. So, historically, we've seen this as being slightly slower quarter than some of our other quarters.

John Franzreb – Sidoti & Company

And you touched on Europe. What about on the motor side of the business? There's someone – been some talk going on that Europe is weakening, that business would be really exposed to any kind of pull-back in Europe. What are you hearing from the customers about the bad profile in Europe right now?

John Craig

Well, as we mentioned, our backlog is at record levels. Our orders, to the end of the quarter, record levels and, if you look at our guidance, even our lower volumes second-quarter we're coming in guidance, at mid-point, of $0.51. So, we do think things remain pretty strong. That being said, looking at current months, there is a slow up on orders that are coming in. How much of that is actually due to the holiday season or is there something that's slowing there we are not seeing, it's hard to tell, but its not a situation that we're running a red flag up at all at this stage.

John Franzreb – Sidoti & Company

So, when we think about the current quarter coming up, we should be thinking about lower volumes but higher margins? Is that a right take away there, John?

John Craig

Yes, it is.

John Franzreb – Sidoti & Company

Okay, good. I'll get back in queue. Thank you.

Operator

And your next question comes from the line of Chris Agnew of Goldman Sachs. Please proceed.

Chris Agnew – Goldman Sachs

Thank you. Good morning, gentlemen.

John Craig

Hi, Chris.

Mike Philion

Hi, Chris.

Chris Agnew – Goldman Sachs

First question. I'm thinking about reserve power. How would you describe the different markets you address there – UPS, Telecom, (inaudible), aerospace? Any notable differences – differentiation in the quarter or as you look forward?

John Craig

Looking back over the last year, looking at the quarter and looking forward, all three are getting very strong right now. With having the product diversification that we have and the geographic diversification we have, as one area slows up, we seem to find another area that just picks up with tremendous growth force. At this stage, with our thin-plate pure lead, which is used primarily in telecomm, in military applications, I just wish we had more capacity right now. We could easily sell, 20%, 30% more volume if we had the capacity to produce it.

Chris Agnew – Goldman Sachs

And you said you are on track with your expansion plans. When do you think in– when do you plan in 2009 to bring on additional production?

John Craig

It ramps up. The first part will see should be within the next three to four months, but it's a relatively small portion. The biggest portion of it really kicks in about 12 months.

Chris Agnew – Goldman Sachs

Okay. And on the competitive front, is anyone else out there, obviously, with the strength in that product attempting to do something similar?

John Craig

There's one company that has a sim – excuse me, that has a similar product, but it is not the same product as ours, and they are selling it primarily in Europe today. They are not in aerospace and defense. They do a little bit in Telecommunications.

Chris Agnew – Goldman Sachs

What's the – can you name the company?

John Craig

No.

Chris Agnew – Goldman Sachs

Fine enough. And giving to your 25% margins, through your cost saving and price action, can you split out of the, sort of, 6% margin you want to make up?

John Craig

Sure.

Chris Agnew – Goldman Sachs

How much would be priced, how much cost?

John Craig

Yes. When we take a look at it and you get to the 25%, and where are the action plans, and when we put a statement out like that, we want to be sure we back it up with facts and that we've got the action plans in place. When you look at what we have left on the table if you will, between price in commodity cost increase, is roughly 200 basis points. So, if we figured– we figured to finish this quarter at 19% gross profit, put 200 basis points on it, your 21%. The other 400 basis points are really picked up through the cost savings initiative we have going on right now in restructuring. And let me be specific about that. We're spending north of $100 million to pick up at least that 4%. $50 million of it goes to thin-plate pure lead expansion that we've talked about which is higher margins and then the 25% that we have. As you see, for the last couple of quarters, we've had a charge – a one-off because of the European restructuring. That program was going too well– are going very well right now. We had a $0.02 one time hit in this last quarter. We are moving production from our high cost plants in Western Europe to Bulgaria, which that will help improve the margins, and we are expanding into developing parts of the world where the margins are pretty good.

Chris Agnew – Goldman Sachs

And just – and then final follow-up to that. What percentage of your production is in– would you describe low cost – lower cost centers–-

John Craig

It's currently in about the 30% range and growing.

Chris Agnew – Goldman Sachs

Great. Thank you very much.

Operator

And your next question comes from the line of Paul Clegg of Jefferies. Please proceed.

Paul Clegg – Jefferies & Company

Hi guys. Thanks for taking my question.

John Craig

Hi, Paul.

Mike Philion

Hi, Paul.

Paul Clegg – Jefferies & Company

The FTA was up a little more than 20% year-over-year and I think about 5% quarter-over-quarter. Could you give us a sense of what drove the higher expense there in the quarter and what could we expect to see play out throughout the year.

John Craig

Yes. I believe a – when we look at a percentage basis, we were actually down. But, Mike, you want to pick up on the details on that?

Mike Philion

Sure. Paul, I mean clearly, one of the big influence is translation. As we commented, top-line was up 11%. So, clearly, you got to, sort of, parse through the FX in impact and that was notable.

Paul Clegg – Jefferies & Company

Okay. That makes sense. And the segment operating margins from Remus correctly [ph], you show a big year-over-year step up – step down, rather, in motive, and year-over-year step up in reserve. Can you just help us understand what's driving that movement and how those dynamics play out in future quarters?

John Craig

Yes. That's a very complicated one but basically what it falls down to or comes down to is the timing between commodity cost increase, specifically lead, and the timing of pricing. And just a little bit of background on it. We talked about FIFO-ing our inventory. With United States, we FIFO that in three-month period, in Europe, it was on a two-month period. There is more automatic pass use on the reserve power side of the business than on the motor power side. So we got behind the numbers and analyzed it, what we found is that the leg cost and reserve power is down compared to prior year while pricing is up. On the motor power side, it's just the opposite. And Mike, you want to answer that?

Mike Philion

Sure, John. Thanks. Paul, in a couple of other things that John's covered influences, as you know, we've had a lot of exciting new product introductions, many in reserve. Thin-plate pure lead is continuing to grow at a substantial rate which certainly has a positive influence on margins. And lastly, the cost savings initiatives in Europe have clearly been very meaningful and helpful, and they have been more skewed over the last 12 months to reserve. So I think, as John said, it's a combination of those factors. Now to your question, where do we think margins are going? We continue to believe that in both segments they will continue to improve. I mean, John referenced the timing issue but certainly we don't want to suggest for a minute our motive business is not well positioned or do we not expect margin enhancement in motive as we look into the future as well.

Paul Clegg – Jefferies & Company

Okay. And if I may, just one follow-up. The percentage of your current contracts that are actually passed through, (inaudible) has that change in the last quarter?

Mike Philion

No, it really hasn't. We remain in the ballpark 40 to 50%.

Paul Clegg – Jefferies & Company

Okay. Thanks. I'll jump back in the queue.

Operator

And your next question comes from the line of Corey Tobin of William Blair & Company. Please proceed.

Corey Tobin – William Blair & Company

Hi, guys. Congrats on the nice quarter.

Mike Philion

Thanks, Corey.

John Craig

Thanks, Corey.

Corey Tobin – William Blair & Company

Quick question, John. You mentioned the opportunity in the renewable space. Can you give us a little bit more color on exactly the role that you'd play there and the type of functionality there? And also, what the potential revenue from that segment could be as you look out over the next 3 to 5 years or so?

John Craig

Yes. A couple of things. Without getting too specific, and I can give you – tell you so far, we're currently doing about $30 million in that area. And we – I guess, we were hoping it grows, that's probably a better way of putting it, because of everything that we see going on with renewable energy today. We are working with a couple of very large firms about supplying batteries to them right now. It looks very encouraging. But, I think, that the point of it is is this, Corey, that if those market really take off, we're in a good position – excellent position because the batteries are already designed and they're ready to go and we can deploy those things immediately. So, it's really not within our control. It's really within those industries. And if oil prices stay where they are – if they stay this high, I happen to believe that we're going to see more emphasis put on wind and solar. If it does take off, that's going to be very good for us.

Corey Tobin – William Blair & Company

Do you anticipate your solution be used more in sort of residential capacity or you actually thinking on utility scale as well?

John Craig

Both. And I think it's less on residential. It would be more on utility.

Corey Tobin – William Blair & Company

Okay, great. Thanks.

John Craig

One point on that though. I know some are looking at that every thing's being applied directly to the grid, and there's no backup storage. If you take a wind turbine, as example, that is going directly to the grid, it still requires batteries as a backup for a breaky. Now, I won't get too technical on it, but for every wind turbine out there it has batteries in it, even if it's supplying directly to the grid.

Corey Tobin – William Blair & Company

Okay, thanks.

Operator

Your next question comes from the line of Arthur Freezemen [ph] of Freezemen Asset Management [ph]. Please proceed.

Arthur Freezemen – Freezemen Asset Management

Yes, good morning. Congratulations on the quarter. If I'm reading it right, you hit the upper end of your raised guidance of June 12th. I have two questions – one, can you provide any color into the cost of lead pricing in the – going into '09? And, second of all, I wanted to ask about where you see your company in terms of the emerging market, in terms of wind energy?

John Craig

Well, let's take the wind energy first. As I said that, in the last – in Corey's question that we're in a good position if wind turbines take off, and obviously, wind turbine's taking off. It's really out of our control, that we're – would be a supplier to that. So, your guess is probably as good as mine on that. We follow it very closely. I happen to believe with utility cost being up high, there is much higher probability that we're going to see further investments in those areas, but time will tell on it.

Mike Philion

Yeah, and (inaudible) you that.. John said it well. We just aren't going to control will the demand explode. Just some facts that are, I think, interesting then show the potential. Even today, there is estimated to be $0.5 million wind turbines in the world and if you believe in some of the growth prospects team boom – T. Boone Pickens of certainly has made a bold commitment and others. As John had said, it's relatively small today. It could grow nicely and we're positioned if it takes off, we'll be there to support that segment of the demand.

John Craig

Now, your first question about lead and where lead is going, that's one that, I guess, I kind of gave up trying to forecast it. They went from a high of a $1.82 last October, down to a low of $0.70 a pound the fourth of July. Today it's about $0.95. What we do is we have structured and put a program in place that includes everything from lead hedging, to tolling, to automatic pass throughs, and come up with a rather sophisticated model that we think we positioned ourselves to handle the flexibility, or variability, in lead. Some have said that we had– they look at the supply and demand curves on lead and they said, “Gee, lead is way up in inventory right now”, and we said [ph] the point of about 100,000 metric ton, and when you do the calculation, that's about 2.5 days supply, globally. So, it's nothing on the inventory side. Second thing, is we have 23 plants around the world. I've been in the industry for 15 years and I never once see a shortage of lead. So, it's not driven by supply and demand as much as it's driven by investor's settlement.

Arthur Freezemen – Freezemen Asset Management

Great. Thank you very much.

Operator

And your next question comes from the line of Richard Baxter of Ardour. Please proceed.

Richard Baxter – Ardour Capital

Thank you. Question on the thin-plate capacity expansion. For the full expansion, what was the percentage capacity growth and any changes in the capability?

John Craig

We're literally doubling the capacity, globally.

Richard Baxter – Ardour Capital

Okay. And I guess, separate is can you describe a little more about the MOU you signed with the Lithium Technology Corp?

John Craig

Sure. Lithium Technology Corp is large format lithium battery and there is a niche market for that. And what I believe that we have that really differentiate ourselves from many other companies is we have the strongest marketing and distribution network globally. And, when our customers are looking at a different technology, even if it's a niche market, we want to be sure that our sales people are well equipped, well versed, and have the products there that we can satisfy the customer demand. As an example, a customer may buy, just to pick arbitrary numbers, 95% of the business is in, lead asset, 10% is in nickel cadmium, and 1% in lithium ion. We want to have the ability to supply everything.

Richard Baxter – Ardour Capital

Thank you.

Operator

(Operator instructions) And your next question comes from the line of Kitty Wong of Train, Babcock. Please proceed.

Kitty Wong – Train, Babcock Advisors

Good morning. Can you talk about in your guidance what is your assumption for the Euro-dollar exchange rate? And, if the dollar continue to strengthen, do you see any impact on the guidance? Thank you.

John Craig

Kitty, we don't see any measure that change from, let's call it, the 155 level that we're experiencing. But certainly, as John said, the lead, we don't spend a lot of time trying to prognosticate currency because in reality, although it will have translation influences and there will be some impact on dollar-based commodities, lead, etc. In short, it really doesn't have a meaningful impact on our business when we look at any extended period, six months, quarter. So, to answer your question, we think its going to remain pretty constant to where its been in the last three months.

Mike Philion

When you take a look at – is the dollar strengthen, the top line, net sales would go down. But since in most countries were naturally hedged, meaning we're buying the material in currency – their currency, the cost would go down also. So, net-net bottom line, it has very little effect on the earnings. However on a percentage basis, it does help. So the currency, it does not have big impact on us on the bottom line.

Kitty Wong – Train, Babcock Advisors

Thank you.

Operator

And your next question is a follow-up question on the line of Paul Clegg. Please proceed.

Paul Clegg – Jefferies & Company

Hi guys. Thanks. I'm not sure if you'll go with me or not, but I wanted to talk about kind of time frames for getting to 25%. If you have some sort of time frame in mind. There are a lot of things that you guys are trying to do. I don't know if you're talking about trying to get there in sort of 21 four-month period or whether you could get there by the end of the year?

John Craig

Our major projects that I referred to earlier with thin-plate pure-lead in restructure in Europe, our 12 months – let's assume that it takes a long time to get everything up and get it running, and get it running well, so you're probably looking in the 18 month period on those. On the – 12 to 18 months on the major projects. The emerging markets, we're successful at it right now. How well we continue to be successful on that, time will tell. I can't really predict that. I'll just tell you that we're putting a major emphasis on increasing in Eastern Europe. You saw the joint venture that we're doing in Africa. There are other activities we have going on right now, which I cannot disclose but we are pushing very heavy on growing in the emerging markets. How successful we will be, time will tell. What's going to go on with the lead market? Our recovery on pricing versus cost, we've seen success the last few quarters, our margin's improvement – improving. We're going to continue to push on it and time's going to tell on that one also. So to summarize it, the major capital projects, I'm highly confident, we'll get those implemented to be successful 12 to 18 months. The other ones were pushing on, our success rate on it, we'll have to see.

Paul Clegg – Jefferies & Company

Okay. And if I may, just one follow-up. The – you guys have obviously done some major overhauls on your balance sheet here. Looking at – you've also been an acquisitive in the past, looking at opportunities out there today for M&A, is there any particular segment of your business where you feel you need to may be fill in a gap or add a tool to the belt?

John Craig

Well, I think you may place, I would say, there's a gap would be in certain geographic locations which I don't want to disclose that I think that we have sales in those areas today, but I think that our market share is not where it needs to be and we need to look at how we increase our market share. I use as an example a number of years ago when 98% of our business was in the United States – or 95% of our business, and we look at the map and we said, “There's a big opportunities everywhere.” Well, Europe, the opportunity is not as big in Western Europe as it was but there are other regions in the world where I think that our market share is not where it needs to be. So, that's the area I would describe as a gap. Now, more general to your question, we will continue to look for investments and the strategy that we've talked about in the past, where there's vertical integration for cost savings, geographic expansion which I've covered, different technologies, whether we actually – we acquire the company or do what we did with Lithium, the large lithium format batteries, to bring in on a distribution network. We'll continue to look for those opportunities.

Paul Clegg – Jefferies & Company

Thank you very much.

Operator

You have no questions at this time.

John Craig

Okay. Well again, thank you very much for your interest in our company and everyone, have a great day.

Operator

Ladies and gentleman, thank you for your participation to this conference. This concludes your call and may now disconnect. Good day.

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