Welcome to the second quarter 2009 EnerSys earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over the Mr. John Craig, Chairman, President, and CEO. Please proceed.

Good morning and thank you for joining us for our conference call. During this call, we will be discussing our second quarter and first half of fiscal 2009's results 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 forwardlooking statements, Mike.

Thank you, John, and good morning to everyone. As a reminder, we will be presenting certain forwardlooking statements on this call that are based on management's current expectations and assumptions which are subject to uncertainties and changes in circumstances. EnerSys’ actual results may differ materially from the forwardlooking statements for a number of reasons. Our forwardlooking statements are based on management's current view regarding future events and operating performance and are applicable only as of the dates of such statements. For a list of the factors which could affect our future results, including our earnings estimates, see forwardlooking statements included in item 2, management's discussion and analysis of financial condition and results of operation, set forth in our quarterly report on Form 10Q for the quarter ended September 28, 2008, which was filed last evening with the U.S. Securities and Exchange Commission. In addition, we will be also presenting certain nonGAAP financial measures. For an explanation of the differences between the comparable GAAP financial information and the nonGAAP information, please see our company's Form 8K, which includes our press release dated November 5, 2008, which is located on our website at www.enersys.com. Now let me turn the call back to you, John.

We are certainly pleased with our second quarter record earnings that we reported last night. Our adjusted earnings of $25.9 million were up 51% compared to the second quarter of the prior year. Since we continued to experience higher commodity costs in quarter, we are particularly pleased that we achieved pricing recovery, which allowed us to more than offset those higher costs. Beyond recovered costs, during the last four years have put continued pressure on our gross margins. In an effort to improve these margins, we have continued to stay focused on our pricing management. As part of that effort, we have recently reduced the portion of our revenue that is tied to automatic lead pass-through mechanisms, which now account for approximately 35% of our revenue. As I stated in our last quarterly call, we are firmly committed to achieving our 25% gross margin target. Since the low point of 17.6% in the third quarter of fiscal 2008, we have steadily increased our margins and we are now at 20.7%. We will continue our strong focus on this target, which we plan to achieve through a combination of improving pricing related to commodity costs, additional cost savings measurements, and a shift in certain segments of our business towards higher margin products. Net sales for the quarter increased 14%, which included approximately 10% in increased selling price and 5% due to translation of stronger foreign currencies. Slower global economic activity resulted in a unit volume decrease of about 1% in the quarter compared to last year's second quarter. As you know, the global economic outlook has deteriorated significantly since our last quarterly call in August. I would like to discuss in broad terms our outlook and plans at this time. We are now assuming that we will experience a period of…

Our record second quarter and first six months of fiscal 2009 earnings continue to demonstrate the strengths of our global business and industryleading position. Our second quarter net sales increased 14% over the prior year to $527 million. On a business segment basis, net sales in the reserve power business increased 24% to $246 million while our motive power business increased 7% to $281 million. The second quarter growth rate includes approximately 10% due to our pricing recovery actions, 5% from foreign currency translation, and a 1% decrease in volume as the challenging global macroeconomic conditions have impacted our business. Further, in our second quarter we also achieved sales growth in all three regions with growth of 25% in Asia, 22% in the Americas, and 7% in Europe. Net sales for our first six months of fiscal 2009 were solid and increased 26% over the prior year to over $1.1 million. On a business segment basis, net sales in the reserve power business increased 32% to $505 million while our motive power business increased 21% to $614 million. The 2009 sixmonth growth rate includes approximately 14% due to pricing actions, 8% from foreign currency translation, and 4% from base volume. We believe our base volume growth of 4% is higher than the market, accordingly, we believe we continue to increase our global market share. Now a few comments about our as adjusted consolidated earnings performance. As you know, we utilize certain nonGAAP 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 all relevant highlighted items. Please refer to our company's Form 8K, which includes our press release dated November 5, 2008, for more details concerning these items. Our second quarter as…

Even with the challenges we experience from this economic downturn, our fundamental markets continue to have a solid potential for growth. The longterm global expansion of manufacturing activities and product movement through supply chains will certainly drive increase in our motive power segment. Additionally, our reserve power segment will be driven by the world's strong demand for more telecommunications infrastructure, along with more intensive and powerful computer capabilities. These applications all require substantial backup power due to the continued concern about power quality. Newer requirements for solar and wind power applications will grow even faster in the future than our base business. So even though we may face a temporary slowdown, we are highly confident in our longterm potential prospects. This confidence is driving our actions to improve our productivity and continue our capacity expansion, as we know we're going to need that in the nottodistant future. With that, I would like to open the lines up for questions.

(Operator Instructions) Our first question is from Paul Clegg Jefferies.

Can you comment on the visibility into demand for reserve power in your sales channel? Motive, obviously has been weak, but typically reserve moves in kind of an unrelated manner. Were you still seeing that in the month of October?

The month of October, since the credit crisis has taken place, we have seen a slowup. I think it's been a pause, if you will, and it's been a slight pause. We think it's going to come back very strong. What we're hearing from customers and what we've heard from a major customer just yesterday in a conference call, they're still projecting their business to be very strong in both telecom and the UPS area. It's really hard to tell on a fewweek basis, but if you look at our reserve power business in the quarter, the volume was up 5%. We may see a quarter here that's going to slow-up a little bit, but I think it's going to in the text three, four, to six months, I think it's going to pop right back to where it was.

Could you comment at all on the type of volume declines associated with your December quarter forecast?

As you know, we give a guidance on earnings per share only. We come out with a midpoint of $0.42. That does have included in it, I think the uncertainty with the economic environment that we're seeing today. We're comfortable with the $0.42. We think there may be some upsiding into that number, but we're going to be conservative and we're going to keep a close eye on things. There's a lot of uncertainty as you well know taking place, I think, in the global economy today.

Maybe if you could comment, then, on just kind of, I am assuming it involves both sequential declines in volumes for both motive and reserve? I was wondering if you could just talk about them relative to each other, the relative strength of the two in the December quarter.

You're right. Both of the segments we're projecting are going to be down, as reflected in our $0.42. I really think what we're seeing right now is a waitandsee attitude by a lot of companies today. Within our $0.42, we have taken it down. We think we have it well covered. But we anticipate that once the credit crisis get as little bit further behind us, that we're going to see things pop back very strong.

Our next question comes from Chris Agnew Goldman Sachs.

Just a little bit of a followup talking about the slowdown in order patterns through October. Can you give us any color on what you were seeing geographically? Any differentiation?

I think the big one actually was Europe more so than in the United States. I think Europe went into a little bit of a freeze there. We see slow-up in the United States, but not at the same level that we have in Europe.

Is there any way you can differentiate, is it end customers that are reining in spending and preferring to sit on cash and almost delaying patterns or are dealers and distributors running tighter and [inaudible]? Maybe as a followup to that, I think you've touched slightly, you had slightly extended payments, payment terms, but getting money back in. Have you had any problems with suppliers or dealers, anyone having liquidity issues?

No, not to any great extent. We have been very concerned about it. But we went through risk management and looked at every aspect of our business. That's one that we really heightened awareness in our credit department. We have kept a very close eye on it. I think the general feeling is that it's like what we did. You don't know what's going to happen. We took all of our cash and put it in U.S.Treasuries. We have taken very conservative positions on things. We've held back on certain spending. We're keeping a very close eye on it because it is so volatile, the markets are so volatile, you just don't know where it's going to go. What we're doing, if you will, is hunkering down and holding on this thing as much as we can to see what's going to break out. Now your question, do we think it's people holding back? The answer is yes. We think a pentup demand is there. We think people are being very cautious right now. And they're going to watch and see what happens.

Could that create, obviously global industrial production is slowing down, likely for 12, 18 months, but there could be a sort of shortterm bounce as people come back from a little bit of pentup demand.

What we've found over the years is exactly that. If you take a look at the motive power segment as an example, when it's down, it comes back double digits for a two to threeyear period. Batteries are wearing out. There's a shelf life on them. These batteries are wearing out, and there's going to be a pentup demand that's there. We're ready for it. We're going to be ready for it. This is a good opportunity for us right now. There's a lot of things that we can do during this slowup, as far as rationalizing our production, reducing our costs, and we're going to take advantage of this opportunity. We will come out much stronger. We have been through similar situations, not quite the same as this one, with the telecom bust that took place, with lead going up very high, there's also these bad things that happen. Every time, we have found a way to actually improve our base business and come out stronger. I see this to be the same thing. I think it's a great opportunity for us.

One final question. FX moved quite sharply during September, I know historically it's had a very limited impact on the bottom line but more the revenue line. Can you help us how to think about the next couple of quarters and maybe just confirm that you still believe it will have a limited impact on earnings?

You are right that it's unprecedented, the strengthening of the dollar and the weakening of all the foreign currencies. The obvious impact on translation, everyone can get their arms around. Just for reference, in our second quarter, the dollar-Euro averaged about 1.5. Obviously, we're 1.25, 1.30. We know the translation effect will be felt. The longterm, we also are relatively naturally business hedged. We know over long time periods these things tend to net out, and they don't have an appreciable effect. Clearly, Q2 was a quarter that the tail end of it had some measured influence. Our best guess would be it hurt earnings per share in the range of a nickel. Certainly, we are very focused on it and the influences of currency are very appropriately evaluated in our guidance. In short, over long time periods, not a particularly big deal. But when there's any sudden huge movement, whether it is up or down, you will feel a little bit of effect until things stabilize again.

Our next question comes from John Franzreb Sidoti and Company.

I was pretty impressed to see that you had pulled the number down of lead pass-through contracts to 35%. Could you talk to that, and was it more in the motive or the reserve side? Just comment on what you're doing there.

It's really on the reserve side. With large reserve power customers with contracts that have pass-throughs in place, we have not touched those at all. These are more of pricing that is set at point of sale type thing. So it's in the reserve power segments.

Given the numbers you put through the third quarter guidance, two things, one sequentially revenues are down, cost savings, and lead inputs, does that imply that you're looking for sequential improvements in gross margin? Should I infer that from those reference points you gave us before?

That's a fair assumption.

Mike, you said that $0.05 impact on currency hurts you. Was that in the quarter or forecasted for the December quarter? I didn't quite understand that.

That was in Q2 and we certainly factored in our guidance what I would characterize as relatively unusual movement in currency, roughly a nickel in Q2 pressure and we fully factored currencies into our Q3 guidance.

Currency would be a headwind, right?

Currency will continue to be a translation headwind, you're correct. We don't think it will quite have the same negative influence on the bottom line, but yes, it will pressure the bottom line in Q3 as well modestly.

Mike, while I got you, APB of 14.1 referenced in the 10Q. It looks like it's a $0.02 per share impact. Could you walk us through what's going on there?

That's the pronouncement that will affect us in fiscal '10. That's dealing with the convertible debt as you well know. The accounting profession will, in fact, require everybody with convertible debt to restate and go to the new standard. It will increase our fiscal '09 interest expense in the ballpark of $5 million. You restate fiscal '08, so there's an apple to an apple comparison.

One last question. You did a stock repurchase lately. How much is left in your authorization? Can you walk us through your appetite for share repurchases maybe versus what you're saying is an opportunity to be a consolidator in a weak marketplace? Kind of balance those two positions, please.

Obviously what we're looking for is the best return for our shareholders. Liquidity today is very important to any company. Since we have a very strong balance sheet which we have covered, we felt that $20 million wasn't a lot of money to buy back. We thought it was a very good investment for our shareholders. We will continue to evaluate and weigh the balance between the need for liquidity versus where we can invest in money, whether it's in acquisitions or buying stock back. We will assess it at the time and make decisions that we think will be in the best interest of our shareholders.

How much do you have cash on the books right now? Did you use cash to buy back the stock?

We have approximately $55 million cash right now.

Our next question comes from Corey Tobin William Blair and Company.

Couple of things. First, let me clarify, or if you could clarify I should say, your comments on demand specifically. Are we to take from your comments that you see an additional slowdown in October post the September period? And I guess the followup question and that would be has that changed dramatically to the positive or the negative in the last week or so?

Actually, if you take a look at our last analyst call, I brought up that we saw a slowdown take place and we were concerned about it. We didn't know if it was the summer months or holidays in Europe, or exactly what it was. When you take a look at our orders today, compared to what they were back then, our orders are actually higher today than they were back then. But they didn't come out at the same strength that we saw in prior years. I don't think that it's anything in the last week or month. It's been fairly consistent. It just did not go up, jump up as high as what we have seen in prior years during this period of time. I think a lot of it right now is we're being very cautious, very cautious from the standpoint of, as I mentioned earlier, we moved everything, all of our cash into U.S. Treasuries. We've checked with our banks repeatedly that our ability to tap that $200 million is solid. It's there. We have just looked at this from a risk management standpoint. We think that we're being very prudent and conservative with our numbers. And we are very confident in the guidance we give.

Then shifting gears for a second to look at the cost side of things. I am very pleased, obviously, to hear you reiterate your targets for the gross margin improvement. If my notes are correct, a large portion of that gross margin improvement was expected to come through in the next 12 to 18 months. The question is, is there any change in the timing of that improvement given the volume slowdown in the last month or so?

I think it's going to be tougher to hit with the volumes that we currently are looking at. But I still am optimistic that we've got a lot of things that are going very good. Let's break it down by segment. When you take a look at the volume portion of it, I am not as confident in it today as I was three months ago. When you look at the pricing of our products versus cost of commodities, I am still very confident that we will pick that up. By the way, each of these three items I am covering are roughly 200 basis points. So the volume, the pricing side of it, was 200 basis points that we're looking to bring up. The cost savings initiatives that we have going on, I am very confident in those. Our move from our western Europe facility to our facility in Bulgaria is well on target. It's moving very well. In fact, the return on investment for that particular project is significantly better than what we thought it would be even with lower volumes. I am very confident in that particular portion of it. And our thin plate pure lead products. I mentioned earlier, we're keeping that $50 million investment on track. We're moving forward with it because the demand for that product continues to be high. This is a situation today that we're going to see a slowup we believe because people are afraid today to go out and spend money. There's too much uncertainty. But I strongly believe that when this credit market frees up and all of a sudden we see business start to get back to normal, you are going to see the telecoms continue to spend and expand. You're going to see UPS providers because of poor quality of power, they're going to continue to invest. The motive power market, when it comes back, and I can't tell you when that is, I don't know, but when it comes back, my prediction is you will see doubledigit growth in that particular segment. Whether that's six weeks or six months or a year or two, I don't know the timing on it. But during this period of time, we're very comfortable of where our businesses are. We will continue to generate positive earnings; we will continue to invest; we will continue to cost reduce our operations. When we come out in the end, I am very convinced that we will be a better and stronger company than we are today.

Last one, if I could, I guess just, to that final comment, given a lot of the volatility on the volume side, but looking at earnings over the next 12 months or so, the question would be your confidence level that earnings will be positive as you look out over the next four quarters.

I am fairly confident. The uncertainty, how bad could things get? If we get into a world depression would I feel that way? No, I wouldn't. It could be possible to see something be very negative here, but I don't believe that we're headed into a global depression, either. I think we're going to see some significant slowups in the market globally. I think GDP globally is going to be down. I think our business is going to be somewhat impacted by it. I don't believe our business is going to feel the full brunt of what we're seeing in the credit markets or the downturns that the global economy is seeing. We're stronger, we're going to perform better I think than the general economy because of the nature of our business.

Our next question comes from Dan Whang B. Riley and Company.

This may not be an easy exercise, but I think something we're all trying to get our hands around. I was wondering if you could perhaps compare and contrast what you're hearing and seeing from your customers and kind of compare that to the '01 downturn. Obviously back then you had the whole telecom buildup and the dotcom buildup, but to the extent that you can, some of the actions that you're taking in costs and so forth, could you perhaps discuss that?

I think if you go back and look at the '01 compared to today, and let's talk about telecommunications. At that point in time, roughly 30% of our business was in telecom. It's now closer to 21%, I believe. What took place in telecom was frankly the industry was out of control. They were buying products, putting it in warehouses, and storing them. I don't even think the upper management even knew it. It was out of control. They were spending money like crazy. At the time, WorldCom, as I recall, was spending something like 51% of their revenue in CapEx. That goes back to December of 2001, I believe. But you got an industry today that's much more rational. They're monitoring things a lot closer. We're not seeing a major slowup to take place in telecom, it's a little slower, but it's rational. UPS, from the large UPS providers that we've talked to, they're not really seeing a big slowup take place. They're projecting they're moving along pretty well with things. The fork truck side, though, is a different story. In the industrial fork truck side, if you look at ITA, which is Industrial Truck Association, if you look at the data of new fork trucks coming out right now, it's down in double digits. It's down 15% roughly globally. That is where you're going to see some pentup demand take place with it, come through with it. Our business in motive power is not down to the same level. We have a replacement market there. So new trucks being down, we're not feeling the full 15% down. As I mentioned earlier, our motive power segment was down in unit volume by 5% this last quarter, not 15% or 20% where you see like in Europe was down closer to 20% today. We didn't see that slowdown take place in motive power back in the 2000 time frame, the big slowup back in 20002001 was clearly the burst of the bubble in the telecom and the dotcoms. It's a different situation. I think today, though, that people are scared. I think is the best way of putting it. They're fearful that of where this thing is going. There's a lot of uncertainty. I think people are just pausing right now on some investments.

Your comments about UPS not really seeing the big slowup, is that because of the longerterm project nature of the demand there or what's really driving that?

I am surprised that it hasn't slowed up given that a lot of it is from data centers, for banks and stuff. That portion, that clearly has slowed up in the UPS area. There are other projects that are going on right now that many of the large UPS providers are working on, and our order flow coming in from them is fair. It's decent.

How about demand for your thin plate pure lead? I mean I know you're moving ahead with the capacity expansion there. How has the relative demand for thin plate pure lead held up versus the nonproduct.

I think the best way to answer that question is we're still running seven days a week at our Warrensburg, Missouri, plant today. We're running allout on the capacity.

In terms of the environment out there, obviously there's an industrywide sort of slowdown that we're seeing. How are some of your competitors behaving in terms of pricing and traction? In that regard, how should the third quarter develop in terms of the pricing. I guess you still have some catch-up that we'll see on the benefit side?

I was recently in Europe. We had a sales meeting for approximately 150 to 200 sales people. I gave a speech to the group there. I did the same thing to the Americas. I said we're the world's largest industrial battery company; we're the most profitable. Many of our competitors are losing money. We're the 800pound gorilla in this segment of the business. We have been leaders and we need to continue to act as leaders in the pricing arena. We are highly committed to holding the pricing. Our sales people are incentivized on earnings. So pricing is extremely important to them personally. We are going to do everything that we possibly can to hold pricing. That being said, many of our competitors are in a weaker position than we are. We don't know what our competitors are going to do. I would think it would be in their best interest to try to keep pricing up also. That will keep them out of the red, so to speak. Today, we're seeing very little on pricing reduction take place. Our industry has been pretty good at holding. I think the reason for that is, what I stated earlier, that many of our competitors are in a different financial situation than we're in.

A final question. Obviously, you have strong liquidity, expect $50 million in free cash in the second half. You talked about perhaps different ways you can allocate that, buybacks, acquisitions. I think historically you've made some good purchases on the acquisition of Energia, [inaudible] and so forth. Are there certain geographies or product segments that you may focus on in terms of acquisitions?

If you notice, our acquisitions, a lot of them took place, and recently we haven't had many large acquisitions take place. The big reason for that has been valuations, the price. We think, we have looked at a number of things, and we walked away from them. The reason for it is because we couldn't negotiate a price that we thought was where we wanted to be. We want to take advantage of the opportunities that are out there. Today, with this environment, it's my prediction, maybe it's my hope, that we're going to see valuations come down. And we're going to have other opportunities. I have always said, it's real simple, our philosophy, we're in stored energy solutions to make money. Whether it's a lithium IM battery or lead acid battery or nickel cadmium batteries, we're in stored energy solutions that make money. Now specific to your question, there are regions in the world that we're not strong in today. India being one of them. Eastern Europe, we made some improvements there, but I still think we have a ways to go. Africa, we just started a joint venture in Africa. I think we need to expand further there. We're going to look for regions of the world where we think that we can invest money and get a good return to our shareholders. We think right now is the time to really keep our eyes open with it because valuations are going to come down.

In that regard, back in the early '02, we probably made one of the most pivotal moves with ESG. I guess we'll have to see what this market provides.

To talk about that particular one for a second, it was a situation at that time that the credit markets dried up. There was no credit available. Fortunately, we had a financial sponsor that had the ability to write a very, very large equity check. We did not finance that deal with banks. We did a recap, I think about 18 months later, so their equity to pull out. The point is, we took advantage of the opportunity that presented itself at the time. We had the ability to do that. I see today to be the same situation. We have the capital to do it. We have the resources to do it. And we have the people on the ground in different regions of the world that know how to do acquisitions and acquire companies and integrate them into EnerSys. I think it's an exciting time for the M and A standpoint for us.

Our next question comes from Dana Walker Kalmar Investments. Dana Walker – Kalmar Investments: Could you talk about where you stand with your European restructuring?

The big restructuring project that we had this year is the move of manufacturing operations in western Europe to our Bulgaria operations. As I mentioned earlier, our return on investment on that particular project has come out significantly better than we anticipated. Part of the reason for that is that we had a plant in Manchester, the U.K., and we exited that facility. That was part of the plan. But what we didn't contemplate or didn't think would happen or didn't know it would happen is we could actually sell that building. I think it was something like $8 million that we sold that property for. That did help quite a bit. Our Bulgarian operation was a struggle to get it running. It was a bigger challenge than we thought. But it is working along very well right now. Quality coming out of that plant is excellent. The productivity has improved. It's still not exactly where we want it to be, but it has improved considerably. We still have additional moves in product lines that we will be moving further into Bulgaria, the lower cost operations. It's on track with it. Mike, you want to comment?

Just to add to John, as you recall, this was a twoyear program where our spending was going to be roughly $18 million, $15 million last year and a little over $3 million this year. That's all on schedule as John said. But the savings are downstream. The majority of the savings, sure we've felt some of them, but the big savings are coming. On schedule, very excited about it, but that's the key point I wanted to amplify.

Mike makes an excellent point there. From an operating end, we're getting things in line with it, when you look at this next fiscal year, that's when we are really going to see the kick in take place on this.

We should therefore be focused on next summer for the more visible savings to start to stream?

Start, yes, to start. I think if you look from next summer to beyond, you're going to have two major events that's going to kick in place. We're going to see the start of the capacity expansion on thin plate pure lead. We're going to see Bulgaria kick in. I can't go into any details, but we have a couple other major projects that will be coming up here that we think is going to have further savings opportunities for us. Europe is an example. Eightten years ago, we were one of the highcost producers of motive power batteries. Today, we believe we're the lowcost producer. The reason for that is we bought a plant in Bielsko-Biala, Poland that came with the Hawker group. That was really a very, almost a startup if you will, very small company. Today, that's our largest motive power plant. We have made substantial investments in that operation. It's really put us in a lowcost position. We didn't do that with the reserve power business. We focused on the motive power business back then. Today, the focus is more on the reserve power business to take the cost down even further.

I think you've described there's about $100 million of revenue production opportunity in Bulgaria as you sketched it out. Is that an accurate recollection and where would you be in filling that location now?

I don't recall the number $100 million exactly. It's in the ballpark. Today we're running roughly $45 million under that operation. When we bought it, I think it was $19 million. You're right, as I recall, it was $90 million to $100 million, that is a correct number. We're probably about halfway there.

How about a discussion about Asia? I believe a year or so ago, maybe earlier this calendar year, you were less than keen on how your profit margins in Asia, which seems to have picked up nicely.

They have. They have picked up very nicely. We made some changes over there. We're pleased with the results. I think there's a lot more opportunity. I am going to be over there next week. I am excited about meeting with the management team, actually in Singapore. I think the group has done a great job over there. They are moving it forward. They have some other projects that are going on, further cost reduction activities that we're looking at. I won't get too technical, but there's a twovolt cell that we have, that the demand for that particular product is very high right now. And we're going to have to add some added capacity in China, one of our factories, to meet the demand for that product, good margin selling to telecoms.

A final thought, Mike, you mentioned how currency, you thought, would be minor, and we've had a discussion about that in the past. If the effect was a nickel in the quarter just reported and the Euro-dollar relationship went much more in favor of the dollar, at least to date in this quarter, will likely percolate through your numbers. Why wouldn't the effect be larger than that nickel in the December quarter, everything else being equal.

Certainly a good question. It was essentially the dollar strength, even though the average is a little misleading, it really strengthened meaningfully in September. So it's more of a spot rate influence than it is an average when you sort of work through the mechanics. Believe me, we're not currency prognosticators, but we believe that the majority of that unusual dislocation happened in September. As I referenced, we think it was about a nickel, give or take. Assuming that the dollar stays relative to the Euro, but all the relationships are about the same, a 1.25 to 1.30. We don't expect to see another major influence. In short, that's why. Most of it was felt in September. There will be a little noise in Q3, but it is of a lesser degree.

One last thought about the price passthrough proportionate change that you've talked about. How will that affect you presently and what are the implications for that over a longer period of time?

I think what's going to happen with it is going to allow us to, with lead coming down, obviously, if you have the automatic passthroughs in place, with lead coming down, your pricing is going to come down. On this portion of the business I referred to earlier, that we've taken the automatic passthrough away. What we're going to attempt to do is we're going to attempt to hold the price up as commodity cost comes down which should improve margins.

So this would not be a, sounds like an obtuse question, but this isn't after the horse has left the barn, making these changes. The horse, the price cost break continues to be attractive; and you're going to try to defend its attractiveness.

That's correct. Stated a different way, with an automatic passthrough in place, the price is going to come down. With that automatic passthrough eliminated, we're going to do everything we can to try to hold the price as the commodity comes down thus increasing our margins. But a lot of that depends on what our competitors do. As I stated earlier, competitors are being rational today, they're holding. If they continue to hold and the commodities go down, we think it's going to improve our margins. That's what the game plan is. Dana Walker – Kalmar Investments: Are some of the initiatives that your customers are undertaking that would involve a thin plate pure lead product, are they waiting for that product before they go forward or are they using something else presently?

They're using something else.

So you would expect to have incremental volumes of TPPL in what time frame?

The project is next summer that we'll start to see, early next summer we will start to see the capacity kick in. Hopefully, if the demand for the product stays where it is, we will see the revenue on thin plate pure lead pick up.

Weren't there, once again, this is a recollection thing. Wasn't there a couple of waves of this project where you were expecting to see some incremental volume late this fall?

You're correct. There was a little bit that we picked up on it, and we have used that capacity. You are correct on that.

Our next question comes from Arthur Friedman Friedman Asset Management.

The first question I wanted to ask is do you feel, in terms of your foreign income, revenue income, do you feel you've limited the exposure of your net income to currency fluctuations? This is for income outside the U.S.

I think the simple answer is yes, because absent extreme movements of currency, which happened in Q2, we are fundamentally naturally business hedged. In short, we think of the model as very effective. As I mentioned earlier, over any longer time period, these ups and downs have a tendency to net out. When you have extraordinarily volatile currencies, and, heck, we aren't smart enough to predict where currencies are going to be in 12 months. You could still have some waves of pluses or minuses if you see extreme movements in very short time periods.

The second question I have, I am just trying to get some color going forward, for the two areas, reserve power and motive power, would you say over the next six months, what percentage of your existing contracts will continue for each category in the next six months? In other words, your business that you have today, what percentage do you have like booked through the next six months?

Well the way the contracts work, it's a general contract that lays out conditions and terms. I don't think we're going to see anything that's going to expire at all. But the fact is that under most of those contracts, the OEM is not required to buy minimum volume. It's not a take or pay type contract. So, I don't see any fundamental changes taking place. The only exception that I think there's a couple of contracts for two customers we're working on right now. Hopefully, we will pick them up. If anything, I think that we will probably see some increase, hopefully see some increase in contracts. I don't think we're going to see any fundamental change here.

What I was trying to get at, it seems the strength of your business, the way I am looking at it is quite strong. Even though there's a slowdown, it's more of a hiccup as opposed to a trend is what I am getting at.

I can't predict that, but I happen to believe that. I am going to be careful not to say. I will go back, again, I don't believe that the world is going to all of a sudden walk away from telecommunications and cell phones. I have to believe we're going to continue to see expansion there. I also happen to believe that the need for power quality and UPS systems is not going to go away. It's a hiccup, it's a slowup. I happen to believe that manufacturing and distribution in the world is going to continue. And there's a pentup demand taking place. I agree with your point. I think it's more of a hiccup. There is not another technology that's going to displace us here. I think that we're in a cycle. It's not a surprise. A year ago I was asked a question, it's not will we see a slowdown, it's when will we see a slowdown. I will say the same thing right now. We will see a pickup. I just don't know when.

The last question I have is, I was a bit late on the call, so I might have missed this. Where do you see the lead costs? That's a key factor. Where do you see those going let's say in the next three months? About the same or a little lower or higher or?

It's hard to predict. Let me just give you the fundamentals on it. There is not a supply shortage of lead in the world. We have 23 plants across the globe. I have never once in 15 years in this business ever seen a shortage of lead. So what drove lead from $0.20 to a high a year ago at $1.80? It was speculation. It was investors. And the same thing happened with copper. Same thing happened with oil. You saw investors into it. Now, where are investors going to go. I think is the real question here. I don't know the answer to that question. Now, where do I think the fair market price of lead is? On a fair return? In the $0.50 to $0.60 range. Today it's in the $0.60 to $0.70 range. I am hoping it stays there. But we can't predict it. But we have had the ability as lead goes up to pass that price along. We have demonstrated that. Today, our recovery on lead is over 100%. Meaning that if lead prices go up in the quarter, we're recovering it. Mike, you want to add to that?

Yes. As I commented, Arthur, you might not have been on. Clearly we see Q3 lead costs going down. As John indicated, if markets stay, let's call it, and I will give you a broad bandwidth here, $0.60 to $0.80, as you may recall, we forward buy, we have a certain amount of lead in inventory. I am just going to use the hypothetical lead is around $0.70 today. If it would maintain at that level for let's say three plus months, we could finally start to feel that in approximately three to six months. In short, absent lead exploding higher, and it may, don't expect it, but it may, we would continue to see for several quarters meaningful sequential reductions in lead costs.

That's what I was looking for. The last question I have is, is there any news in terms of the batteries in the wind area, wind business?

Probably where we introduced a new product line, the ecosafe product lines here about a month or so ago, we are working with a couple of very large OEMs in the wind portion of the business. It's looking pretty good as far as picking up some contracts. We are not quite there yet. But this last year in renewable energy, wind and solar, we did approximately $30 million in business. If that industry takes off, we are ready for it. We have the product lines and the service and everything in place.

Our next question comes from Todd Cooper Stephens Incorporated.

In the part of your business where you do have lead price surcharge mechanisms, what's the average lag that you see that works through your financials when lead prices are dropping?

I think it's generally a quarter. You have a few outliers, but keeping it sort of simple, it's generally about a quarter of mechanism.

And those mechanisms are primarily in your reserve segment?

If you look at it globally, it's a little bit more in reserve than motive, that is correct.

In motive power in Europe, though, it is a much bigger portion.

Speaking globally, you're absolutely right, John. When you look at the regions, just to finish John's thought, Europe and Asia have a marginally higher percentage and Americas has the lowest. When you look at the total region.

What percentage of revenue in the reserve segment do you see to be replacement sales that really can't be delayed?

It's tough for us to really tell just by how we go to market with it. We sell a battery to an OEM as an example that has, and most all of them have, the service group. They're buying the battery whether they're putting it in a new application or replacement application, it's hard for us to tell. Historically, what we've believed it to be is about 50/50.

One last, if I may. Was there anything unusual in the first quarter operating expenses that caused them to jump like they did?

First quarter operating expenses, that's where you have to parse through some of the highlighted items. I will come back to you. I just have to get my notes. I don't have them handy.

My main question, the gist of that question is, as you talk about pulling in your horns during this downturn, is that primarily where we'll see a reduction on the line in the income statement?

Your biggest cost reduction is always going to be in cost of sales. Certainly we're focused on all the line items, but there's no question the vast majority of the cost savings activities are always going to be up there.

We look at our SG&A expenses, and the biggest portion of that is the selling expenses. One of the things that we are not going to do is make major reductions in taking care of our customers. We're going to keep the high quality and high standards of service that we have had. That's why we're not the low price provider in the industry. We are higher priced. We get a higher price, but we think we're best value. We're the best value because of our service and taking care of the customers. That's an area that we're going to continue to stay highly focused on.

Our next question comes from Richard Baxter Ardour Capital.

Can you talk a little bit about your replacement versus new buildout sales? Not counting any of the new technology replacement sales, just maybe your thin plate pure lead for one of your existing products, but the replacement versus new infrastructure sales that you have for your customers in both motive and reserve power segments.

It's hard for us to tell exactly, because of how we go to market, whether it's motive power or reserve power, it's the same thing. Our best estimate is about 50/50. That number does change, however, when you see a downturn like this. Like new truck sales as an example being down, I mentioned earlier 15%. We're not down near that. The percentage of batteries going into the replacement market today is greater on a percentage basis than it was a year ago.

You had talked about your relative enthusiasm for reserve power business. Does that change on a geographic basis? Are some geographies better in reserve than others? Can you talk to us about that?

Right now, the Asian market is strong for us. The Americas has been very strong for us. I think in the Americas, frankly, our sales team has just done an outstanding job of driving that business. In Europe, it's done a great job also, but I think if you had to pick the one that's really performed, that's had the biggest impact this last year, or last few months, has been the reserve power business in the Americas. That's picking up new customers. Again, the fact of the things I've referred to about being best value and then really taking care of the customers.

Is that at that expense of competitors or is it new development going on out there? Fill in that blank.

It's a little of both.

You've always been very prudent about expanding capacity. You have always run extra shifts and didn't want to put much brick and mortar in place. Any thoughts now that, I know you're expanding the thin plate product, but that maybe positioning as far as capacity right now versus what your expectations are for the sell to in the year ahead?

I don't understand the question.

I am just wondering what you think as far as realignment of capacity based on the current environment. Where do you stand right now?

I think there's two things. When you take a look at the product line like the thin plate pure lead, obviously we're expanding in that area. We are going to expand, as I mentioned earlier, in China in our twovolt cells. Demand is there. Because we don't have the capacity. The other side of the fact, where we are seeing slowups taking place, we're looking how we can consolidate operations and actually take some capacity out. By taking that capacity out, what we are really looking at, if you have one area that's a very, very high cost and another area that's a low cost, you can combine those two, increase volume and even automate it further to get your cost structure even lower. Those are some areas that are under review right now.

Thank you very much for joining us today. Have a great day.

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