EnerSys Earnings Call Insights: Margins, China

On Wednesday, EnerSys, Inc. (NYSE:ENS) reported its fourth quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives shared with analysts and investors.

Margins

Zach Larkin – Stephens, Inc.: First off, I wondered if you guys could touch on margins and what your expectations are as we move through the year. Obviously, the most recent quarter we just saw some stellar margins. Do you expect both on kind of the gross and operating line to see those hold steady or what type of color could you provide us as we think about going…?

John D. Craig – Chairman, President and CEO: Well, I think you have to look at the factors that are going to drive that. I think it’s going to be commodity cost in total. If you look at lead this morning, spot prices I saw this morning it was $0.0875 a pound, which is down to where it was running. Obviously when you look at the metrics that the cost is down, just mathematically it’s going to drive a higher percentage of gross profit, but I think that right now with lead going down and staying down where it is and our ability to hold pricing on it, we should see some very nice margins going forward. However, if lead goes up, if it spikes back up again, that volatility that we’ve talked about for so many years on the lead market, it could switch the other way.

Zach Larkin – Stephens, Inc.: I wondered if you could talk about with some of the new movements in the nickel-zinc. What types of applications are you specifically targeting? Is there any type of competition out there and how is that progressing with the recent acquisitions?

John D. Craig – Chairman, President and CEO: When you look at the nickel-zinc and you think about nickel-cadmium and cadmiums, the problems associated with not only from a battery performance standpoint but some of the environmental things, it would start out by looking at displacing some of the nickel-cadmium businesses out there. Second, we think we will get superior performance (out of the areas) specifically that use it as a lot of railroad applications in Europe, some UPS where temperature extremes are in place, we would be using in those markets also.

China

Brian Drab – William Blair & Company: First question is from the forklift market. Another company in the industry recently said that the outlook from their perspective was for the forklift market Americas okay, maybe modest growth; Europe stable, that might be surprising to some and I think the comment was still given with relative caution but stable in Europe; and then China down modestly. Is that similar to your expectation for the next 12 months?

John D. Craig – Chairman, President and CEO: I would agree with all except on China. I think China is going to continue to grow and we’re seeing it in our orders.

Brian Drab – William Blair & Company: With respect to China then do you feel like we’re past the disruption related to the regulatory shutdowns in general in China? Is that kind of a thing of the past for the most part?

John D. Craig – Chairman, President and CEO: I don’t think it’s totally absorbed yet, but I think that most of it is. But I think there are some other problems that have developed with China product outside of China that are relatively new and let me explain what I mean by that. If you look at the cost of lead, as I mentioned earlier, the spot market LME this morning was at $0.875 per pound and the Shanghai Exchange were (indiscernible) China is at $1.09 a pound. So, you got about $0.22 per pound spread between that. Or in other words, it costs more to build the batteries from a lead standpoint in China than does in Europe or the Americas. Second point is the euro this morning below $1.25. The net effect of that is with when you look at VAT taxes added on batteries is coming out of China, you look at the spread or the increase in cost you have to pay for lead and you look at the currency difference, what it says is, it’s going to be more difficult for Chinese manufacturers to build and ship batteries to other parts of the world. It’s going to be more costly for them to do it. If you look at our European market, about a third of the reserve power batteries that are used come from China. So what we think is going to happen is, you’re going to see the costs go up on batteries from China going into Europe, which is going to make them – it’s going to put our position more competitive than it has been in the past by building our products in Europe and shipping to European customers.

Brian Drab – William Blair & Company: Then that dynamic is clearly, I guess, what is affecting your pricing in Asia. Mike mentioned the improved pricing environment in Asia, is that the main factors that’s driving that?

John D. Craig – Chairman, President and CEO: I think that if you look at costs that I referred to earlier on the batteries from a lead perspective, you look at the factories that have been shut down in China because of environmental reasons, the net effect is that our competitors have increased their pricing to the customers in China. When pricing went way down, we walked from a lot of business. We held our pricing. Now that pricing has come back up, we’re starting to see our business pick back up again on certain products.