EnerSys (ENS) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the EnerSys Quarter 1 Fiscal Year 2015 Earnings Conference Call. [Operator Instructions] As a reminder, this call will be recorded. I would now like to introduce your host for today's conference, Mr. John Craig, Chairman, President and CEO. Please go ahead.

Thank you very much, and good morning, everybody. Last night, we posted on our website, slides that we're going to reference during the call this morning. So if you didn't get a chance to see this information, you may want to go to our website at www.enersys.com and review the slides. Before we get into the details of our first quarter, I'm going to ask Mike Schmidtlein, our Chief Financial Officer, to cover information regarding forward-looking statements. Mike?

Thank you, John, and good morning to everyone. 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. Our forward-looking statements are based on management's current views regarding future events and operating performance and are applicable only as of the dates of such statements. For a list of factors which could affect our future results -- see -- including our earnings estimates, see forward-looking statements included in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations set forth in our quarterly report on Form 10-Q for the quarter ended June 29, 2014, which was filed with the U.S. Securities and Exchange Commission. In addition, we will 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 August 6, 2014, which is located on our website at www.enersys.com. Now, let me turn it back to you, John.

Thanks, Mike. Before I talk about our first quarter results, I'd like to start by commenting on EnerSys' first 10 years as a public company. Please refer to Slide 3. On July 30, 2014, to celebrate our 10th anniversary, EnerSys management and our Board of Directors rang the closing bell of the New York Stock Exchange. Over the past 10 years, our annual revenue has grown by 148% to $2.5 billion, but more importantly, our adjusted net earnings has grown over 400% to $207 million and our stock price has increased by approximately 415%. During the past 10 years, we have made 27 acquisitions and expanded the production capability or capacities at our 31 manufacturing facilities. As you may now, we have a target of achieving $4 billion in annual sales by 2018 and exceeding our minimum operating earnings goal of 10%. I am confident that we have the right team and resources to achieve these goals. We've had a great first 10 years, but I believe the best days of EnerSys are yet to come. Now, turning to Slide 4. You will notice that we reported record first quarter adjusted results for gross profit margins at 25.6%, operating earnings of $74 million and earnings per share of $1.02, which were at the lower end of our guidance. Our sales for the quarter were up 6% at $634 million and year-over-year, our earnings per share were up $0.19 or 23%. We anticipated higher revenue in the first quarter but a capital spending delay by a major customer did not allow this to happen. On Slide 5, we focus on the significant increase in profitability in our Europe, Middle East and Africa region. On a modest 5% year-over-year sales increase, operating earnings increased 78% to $29 million, and the operating earnings percentage was well over the 10% minimum target, at 11.8%. We're also benefiting from the cost reductions from our Europe restructuring programs, improved product mix and better pricing. Our team in this region has done an incredible job of increasing profitability. I now want to focus on the current business activities and second quarter guidance. Both our incoming order rates and order backlogs remain strong. In motive power, the 3-month electric fork truck orders for April through June are up 10% globally compared to the same period last year, and our new range of high-frequency chargers are being well received by our customers. In the reserve power area, we continued to see sizable growth for 4G in Western Europe, global orders for our premium thin plate pure lead products are strong, and we have received orders for our OptiGrid large-scale energy storage systems. Based on this information and the fact that our second quarter is usually our weakest quarter, I'm pleased with our guidance of between $1 and $1.04 earnings per share, which we released that information last night. On August 5, we announced that our Board of Directors approved a quarterly dividend of $0.175 per share payable on September 26 and the authority for an additional $60 million of stock buybacks. Thus far, in fiscal 2015, our Board of Directors has authorized total stock buybacks of $154 million, of which, $53 million has been purchased to-date. The strong earnings and cash flow performance of the company over the past several years provides EnerSys with significant capital to meet our growth plans, revenue of $4 billion as well to allow us to increase returns to investors through dividends and stock repurchases. In closing, we've achieved record results for any first quarter in the company's history, and our second quarter guidance will be a record for any second quarter in the company's history. The increase in earnings, stock repurchases and dividend payoffs are driven by our increased return -- are driving our increased return to shareholders. We thank you for your continued support of EnerSys. And with that, I'd like to turn it back to Mike to give more information on our results and our guidance.

Thanks, John. For those of you following along on our webcast, I'm starting with Slide 6. Our first quarter net sales increased 6% over the prior year to $634 million from a 6% increase from acquisitions and 1% from currency translation, less a 1% decline in organic volume. On a regional basis, our first quarter net sales in the Americas were up 5% to $331 million while Europe's increased 5% to $242 million, and Asia increased 21% in the first quarter to $61 million. In the Americas, 9% was from acquisitions while volume, pricing and currency translation declined by 4% in aggregate. Europe had 1% increase in pricing and 5% in currency translation, less 1% in volume decline. In Asia, organic volume was flat while our recent acquisition contributed 21%, with pricing adding 2% net of an unfavorable currency impact of 2%. On a product line basis, net sales for motive power were up 6% to $323 million while reserve power increased 6% to $311 million. Motive power had 1% volume, currency and pricing gains and a 3% gain from acquisitions while reserve power attained 10% from acquisitions and 1% from currency translation net of 1% negative pricing and 4% lower volume. Please now refer to Slide 7. On a sequential quarterly basis, first quarter net sales were down 5% to the fourth quarter due primarily to 5% lower organic volume. The Americas region was down 2% while Europe and Asia decreased 7% and 9% respectively. On a product line basis, motive power was down 3% driven primarily by Europe, and reserve power was down 7% with declines in all regions. Since our fourth quarter is usually our strongest sales quarter, it is not unusual for our first quarter sales to be down sequentially. Now a few comments about our adjusted consolidated earnings performance. As you know, we utilize certain non-GAAP measures in analyzing our company's operating performance, specifically excluding the highlighted items. Accordingly, my following comments concerning operating earnings, my later comments concerning diluted earnings per share exclude all highlighted items. Please refer to our company's Form 8-K, which -- press release dated August 06, 2014, for details concerning these highlighted items. Please now turn to Slide 8. On a year-over-year quarterly basis, adjusted consolidated operating earnings increased approximately $10.7 million, with the operating margin up 100 basis points. On a sequential basis, our first quarter operating earnings were down $9.7 million and margins declined 90 bps on lower volume. From a historical perspective, operating earnings reached a first quarter record of 11.6% of sales. The increase from the prior year reflects primarily lower commodity costs, better pricing and recent acquisitions. Europe was a contributor to the improvement in the year-over-year while sequentially, all regions declined from our traditional fourth quarter high point. Operating expenses, when excluding restructuring, legal settlements and due diligence costs were at 14% over the first quarter compared to 12.9% in the prior year. We would expect our full year operating expenses to remain near fiscal 2014's full year rate of 13.7%. Our Americas business segment achieved an operating earnings percentage of 12.5% versus 13.2% in the first quarter of last year, primarily from the impact of lower organic volume and pricing. On a sequential basis, America's first quarter decreased 120 basis points from the 13.7% margin posted in the fourth quarter due to lower pricing and volume, primarily in aerospace and defense. Europe's operating earnings percentage of 11.8% remained near last quarter's all-time record of 12.4% and well above last year's first quarter of 7.0%, primarily from better pricing and mix and the impact of prior restructuring efforts. The operating earnings percentage in our Asia business declined in the first quarter this year to 5.9% from 10.3% in the first quarter of last year and from 7.6% in the prior quarter. Asia's operating earnings were $3.6 million for the first quarter, reflecting flat volume in Q1 versus prior year. The incremental volume from the January 2014 acquisition of UTS, did not yet contribute significantly, and our Indian operation remained a drag on earnings through May. Asia, due to its smaller size, remains our most sensitive region to operating inputs. Please now move to Slide 9. As previously noted on Slide 8, our first quarter adjusted consolidated operating earnings of $73.7 million was an increase of 17% in comparison to the prior year, with the operating margin increasing 100 basis points to 11.6%. Excluded from our adjusted net earnings for the first quarter was approximately $1.5 million of highlighted charges, the largest being European restructuring of $1.3 million net of tax. Please see our press release issued yesterday for details of these items. Our adjusted consolidated net earnings of $50.7 million increased 23% from the prior year to 8.0% of sales for a 110 basis-point improvement, with the book tax rate decreasing to 25% on improved European contributions, which were taxed at lower rates. EPS increased 23% to $1.02 on higher net earnings despite higher shares outstanding. The higher average diluted shares resulted primarily from our convertible debt, which becomes dilutive when our shares rise above $40.16. This convertible debt dilution added approximately 1.7 million shares net to our EPS calculation and decreased EPS by $0.04 in our first quarter. To partially offset this convertible debt dilution, we acquired approximately 1.2 million shares in fiscal 2014, and we have acquired $53 million worth of shares in fiscal 2015 year-to-date and have over $100 million still authorized. We expect our second quarter fiscal 2015 to have approximately 49.25 million shares weighted average outstanding, which represents a significant decline from the previous quarter. We believe our tax rate for the second quarter of fiscal 2015 will be between 26% and 28%. And for the full year, we expect a 25% to 26% rate on our adjusted -- as adjusted earnings. Please now turn to Slide 10. Now some brief comments about our financial position and cash flow results. Our balance sheet remains very strong. We have $235 million on hand in cash and short-term investments as of June 29, 2014, with nearly $318 million undrawn from our credit lines around the world. We generated nearly $42 million in cash from operations in Q1 of fiscal 2015 even after $19 million in additional primary working capital. Our leverage ratio increased by 1/10 to 0.9x due mainly to spending of over $50 million on share buybacks and dividends through the first quarter. Capital expenditures year-to-date were $15 million in fiscal 2015 compared to $13 million in fiscal 2014. Our increase in spending is attributable to our new plant in Gaoyou, China. We expect to generate adjusted diluted net earnings per share between $1 and $1.04 in our second quarter of fiscal 2015, which excludes an expected net charge of $0.08 per share from our restructuring programs and acquisition activities. We anticipate our gross profit rate in our second fiscal quarter to be between 25% and 26%. In conclusion, we remain -- we believe we remain well positioned to take advantage of future opportunities. Now let me turn the call back to you John.

Thanks, Mike. And with that, I'd like to open up the lines for questions.

[Operator Instructions] And our first question comes from Michael Gallo from CL King. Michael W. Gallo - CL King & Associates, Inc., Research Division: John, my question just on normally -- my question I guess when we look at the first quarter, the second quarter seasonality that we normally see, normally, we'd expect Q2 to decline sequentially. The guidance suggests it's going to be relatively flat. Was there some slippage of stuff from Q1 into Q2, perhaps World Cup or just A&D business, or help us with why you're not seeing the normal sequential seasonal pattern that we might normally.

Michael, it’s a great question, and I'm going to give you quite a bit of color on that. It starts first off with one of the major telecom companies in the United States. And by policy, we do not mention names. I'd appreciate it if somebody wouldn't ask me the name of the company. But anyway, it's been in press that this particular large telecom company has cut back or really stopped their capital spending temporarily for a number of reasons, and we were impacted by that. The cutback of this telecom company had a significant impact in our Purcell operations for cabinets and a significant impact on our reserve power business in the Americas. In fact, if you -- if we would have hit the forecast that we have with that one customer, we would've exceeded the high end of our guidance. It was that big of an impact. Now the press has also said and the customer's also said that there's a delay. They have some issues going on, and they will open that spending back up. In fact, they're anticipating to spend their full capital spending for the year and it'll come at a later point in time. That's reason one. Reason 2 is in our European motive power business that -- we missed really where want to be in that area too. And the reason for that is when we shut down the Bulgaria plant and move that production over to other plants in Western Europe, we ran short on some products. And we also had a new charger line coming out, so we were short on chargers also. So what happened was that, that extended lead times out. Now I'm happy to report that both of those issues, which are in our control, have been resolved and they were fixed by the end of July. So we will see a pickup take place in Europe on that, and we are seeing some slow up in orders that didn't hit the first quarter that will fall in the second quarter. In fact, you know we don't give guidance at the top line for the next quarter, but I'll say that our top line in the second quarter will probably be very close to what it was in the first quarter because of the problems that I mentioned.

Our next question comes from John Franzreb from Sidoti & Company. John Franzreb - Sidoti & Company, LLC: So you touched on the European slippage. The volume was down 1%. I was actually a little surprised by that also given the good order book numbers for the forklift market and what I thought was going to be benefits from 3G to 4G in the quarter. Could you talk a little bit about what the reserve side did in Europe relative to the motive in Europe?

Yes. I wanted to add a little bit more to motive power, John, before you do that. The other reason motive power on a percentage basis was down was -- you'll recall we said that it was not negotiable. We would get Europe over 10% operating earnings. And with that, we had to go after some pricing. And I told our guys over there that look, if you lose 10% market share, I'm okay with that because when you run the math and you look at what the earnings are, that -- I expect that we will have much better results. We will downsize the business, but we're not going to give batteries away anymore. We're going to get the pricing to where it should be. We did that. But what I'm really pleased about is if you take a look at the earnings out of Europe right now, over 12% in the fourth quarter, approaching 12% or over 11% in the first quarter, phenomenal job done over there. The downside to that is we did lose some market share in the motive power side, and that was okay. I'm all right with that. Now looking at the reserve power side, 4G kicking in has been very strong, and the 4G just about totally offset the loss in the motive power side. The reserve power side almost offset it entirely. So it worked off very well for us and the whole thing and to stay flat in -- on market share with that. In fact, that's where we're ending up on the market share side. In Europe and Asia, we're actually flat year-on-year. The Americas were up 1%. So I'm very pleased with how we're positioned on this thing. We're not going to go after high volume and go after driving the top line at the expense of not making it at the bottom line. John Franzreb - Sidoti & Company, LLC: All right. So would you say that the market share issue is stabilized? Or it's still ongoing?

Well, I think right now when you look at the data, which I believe we're releasing that data either today or we've released it.

Yes. We released it in our press release last night. So -- and then that information -- and keep in mind this is calendar year, so it doesn't line up with the quarters that we are talking about. But for calendar '13 versus calendar '12, we believe on the motive power business, our market share was roughly the same. Now some of the shifting that we're talking about here has happened in quarters subsequent to that. So it's not necessarily lined up perfectly. I would say we believe it's -- the market share, while it's slightly down, that the decline is probably more due with product availability and the timing and not so much a broader market share phenomena.

That's exactly right, and it goes back to what we talked about, shutting the Bulgaria operation down, moving the product to other plants and the charger, a new product line we have, which was very well received. But the start-up of that, we couldn't build them fast enough. So those are in our control and those are, I'm going to say, are short-term events that we have corrected. John Franzreb - Sidoti & Company, LLC: Okay. Then now switching over to Asia. The Chinese telecoms formed a JV to manage the rollout over there, China Communications Services. How does that impact you, if at all?

Well, I don't have any hard data on that as of this point. I mean, we haven't really seen anything on it. So I mean, there's a lot of assumptions we could make, but I'm not going to get into the assumption line of it. We'll have to play it out and see what happens with it. I will say that the pricing on the first go-around with one of the major telecom companies over there, the pricing was lousy. It was something that we didn't want to participate in. We didn't get -- we're not participating in that nor do we want to participate in it when you sell batteries and lose money. Now if -- all of a sudden, if you take the assumption that was going to happen, it's going to drive pricing way down on this thing and people aren't making money to start with, it really raises the question about what will happen to the industry in total in China if the companies aren't making money. John Franzreb - Sidoti & Company, LLC: Okay. Well, against that, the op margin in Asia was down. You mentioned -- you cited India as part of the problem. How much is India versus maybe some jobs you walked away from in China?

Well, there's really 3 things. I think the way to view the whole Asian market is this, that Asia is a long-term development market for us. We completed the construction of one factory in China about 1.5 years, 2 years ago. We're in a process of building another good factory right now that hasn't even had equipment set in it yet. That's in China. In India, $1 billion market -- we're $25 million in there. We planted the seed there. I want at least $200 million. We need to grow that business. We're making investments right now that are impacting our operating earnings. In fact, if we didn't do these things the base business is north of 10%. But because of these drains we're going through right now with India in a plant start-up, short-term thinking, it's hurting us. Long-term thinking, we're doing the right thing because we will get that business to grow significantly. These are large areas of the world. This is going to help us lead to our $4 billion target at 10% minimum operating earnings. So I expect a lot of great things out of the Asia market in the next 3 years. But it's going to hurt us in the short run.

Our next question comes from Tim Mulrooney with William Blair.

A couple of questions here. First of all, on the last call, I think you mentioned that fork trucks were -- orders were up double digits in all geographies between February and April. But then the organic growth in this motive business only ended up about 1% in the quarter. I know we shouldn't read it as a one-to-one type scenario, but could you talk about the disconnect between kind of the stronger fork truck orders that you're seeing and this quarter's results?

Absolutely. In fact, to add more color to that thing, when you look at the June results, looking at trailing 3 months, this is April through June and compare it to the same period last year, it's up 10%. And when you look at it by region, the European side is up 16%. The Americas in total are down 2%, and Asia is up 15%. Now when you look at Europe up 16% -- and our battery sales are up. I won't give you the exact percentage on it, but it's up considerably. I'd tell you it's about half that. But part of the reason we're only getting about half of it is because again of the pricing. But you take a look at our bottom line at the op earnings standpoint, we've done very, very well in that region and I'm very satisfied with it. Again, the whole thing strategy is that we're not going to go after the low-margin business. Let the competitors have it. And the bottom line is what we're trying to do is we're trying to drive the earnings for our shareholders, not the top line.

Okay. Staying in Europe then, I noticed -- at least in your 10-Q, it said pricing I think was up 1%. Let me see. Yes, 1%. So that's good. But I mean, Europe margins expanded 480 basis points year-over-year. Can you talk about or just remind us about some of the other things that you guys are doing operationally to achieve that good result?

Yes, Tim, the -- So you're right, pricing is part of the -- what we've done there. The other one is the tremendous investment we have made over the years. Really probably if you go back the last 7 or 8 fiscal years, we've spent nearly $70 million restructuring our business -- our European business operations. So you are seeing, in large part, the benefit of a culmination of multiple years, including most recently, the project that was -- the focal point was moving or transitioning our motive and reserve power business out of our Bulgarian operations back to Western facilities. So restructuring's a big part of it. Selecting and walking away from the lower end of some of the business and then improving our business mix is the other part.

Yes. And let me put a little bit more color on that thing. You've got an excellent point there because it isn't all pricing that we've done. If you look at the project that we did in Bulgaria that we announced about a year ago, that actual investment in total was just over $22 million. And then from a cash standpoint, it was less than $10 million. So we wrote off about $12 million -- over $12 million in assets. The return on that investment on a cash basis is less than 1 year, less than 1 year. So when you take a look at the improvement that took place starting in the fourth quarter and into the first quarter, we started to see the pickup take place -- or the improvement take place in Q4. In Q1, we continued to see it, and we hope to see additional savings with it going forward in Q2 and Q3.

Our next question comes from William Bremer with Maxim Group.

Let's go back to Europe. The ECB, they're actually voicing recovery is weak. Can you give us a little insight of the bookings and the backlog across both segments? And my second question is, I know you voiced one significant customer in the telecom arena, but there's a few pending acquisitions or just movements of some top players there. You voiced that the budget of one has been sort of halted. What about the budgets of the other peers in the space? Are they still being implemented? Or is it at a slower pace?

Well, it is an excellent question. I think what you're seeing -- and it's hard for us to assess, so I'm just going to go -- kind of hearsay things from our sales guys. And we believe that there is some impact because of some of the consolidations that are being referred to. But those are relatively minor compared to this one big one. Now as far as by region, the -- your question was about the orders coming in?

Yes.

The first question -- I'm sorry. I forgot what it was.

Yes. Just in terms of -- overall, the ECB is talking about a weak recovery in Europe. So just trying to get a sense of how the orders are playing out.

Yes, and let me start by saying -- I'm looking at the industrial fork truck orders. And I know when you read about the Europe and how bad things are over there, but the fact the matter is when you take a look at the trailing 3-month average versus prior year on just the fork trucks, it's up 16%. And as I said, we're not at 16% increase. We're about half of that in -- in fact, we're actually down on our motive power side in Europe even though it's increasing. And as I said earlier, it's because of product availability. We didn't have it and the second thing was because of pricing. So the product availability side will be taken care of, and I think that's the bulk of it. That's the big reason for the miss that we had were the numbers between the new fork truck orders don't exactly correlate with our battery orders. It's because of self-inflicted problems that we have that we've -- as I said earlier, we've put behind us. Now on the reserve power side in Europe, it's just the opposite. The problem that we have in reserve power in Europe, we just got flooded with orders for thin plate pure lead, which is great news. But when you have machines sitting there at a certain capacity, then you've got to man -- and I'll make number up, it's 70%, and also when you've got to drive that capacity utilization up to 95%, that means you have to add people and train people. It takes time to do that. So the good news story on it, orders are strong. We have the capacity to meet those orders. We have to get people hired to get them in place and get our lead times down. So I'm really happy with what I'm seeing in reserve power in Europe in the first quarter. I'm not happy with what I'm seeing in motive power in Europe in the first quarter. But most of what I'm not happy about in motive power in Europe is self-inflicted that we have since fixed.

Okay, got you. And then you touched upon Purcell a little bit. Can you give us an update, a little bit more, a little more granular than what you mentioned earlier?

Yes. Purcell, for those who are not aware of it, they build cabinets. They make cabinets. The batteries go in the cabinets. We thought it was a very good fit for us. It is a very good fit for our company. The problem with Purcell, when we bought it, we knew it was tied very heavily to one major customer. And we said, okay, we will buy that. But day 1, we know that what we have to do is we have to take those cabinets that are made for primarily U.S. customers and we have to spread it globally. So we had training that took place from the Purcell management to our EnerSys battery salespeople. The cabinet people were training the battery people on how to sell cabinets, and we've done that globally. We have a lot of quote activity out right now. Our objective was to grow that business significantly and not lose the sales of the one customer I referred to but to really dilute the percentage they would have by growth in other areas, and that's the path that we're on. Unfortunately, it takes about a year or 2 to get approved by these things. But we have a lot of quote activity going on in Europe and other parts of the world right now for Purcell cabinets. But what happened in the short run is this is one major customer, which we're highly dependent on, stopped the -- or slowed their CapEx spending, which had affected us. But it also affected our sales on batteries to them also. That's really the big reason for our sales volume in Q1 being lower than we'd like to have seen it.

Our next lesson comes from Howard Rosencrans from Value Advisor (sic) [Value Advisory].

John, can you give us some color on -- you've mentioned that commodity prices are favorable. I used to be able to do some math, with your Q that I don't think I can do any longer, associated with the lead contribution. And I know this isn't your favor topic and historically, there was a over -- an excessive focus on it. But what sort of contribution do you see including gross margins? Are your gross margins largely a function of more aggressive pricing in the European region? Or what sort of contribution are we getting on from that?

There's a couple of questions I think you have there. First off, let me correct here one thing. I do like talking about lead, and we follow lead every morning. It's the first thing I look up every morning. "What's the price of lead?" Because it has a significant impact on our business. So we follow it very, very closely. As you know, lead traded on the LME. It's going to go up or down. And I've said it before, I don't care if lead $2 a pound or $0.20 a pound because we have the ability in our business, in our markets, in our industry to pass that pricing along. And our customers understand it, and our competitors understand it. What I really care about more than anything is stability. I wish that we'd go at some point and just stay there, but that's not going to happen. So we do follow it very closely, and what we've seen -- lead was very stable for quite a period of time there. It was running in the $0.95 per pound range. And today, it's up about $1.01. Now as you know, we fight for our inventory or in other words, 3 months ago, when we bought lead, it hits our P&L now. So that being the case, if you look at lead going from $0.95 roughly up to $1.01, in probably third quarter, we're going to see a some headwind with that. And we know that what we've got to do is we need to get pricing in place to offset that. And I will tell you, historically, when you look at our pricing versus the costs of lead, you will see when lead goes up, we go down in gross profit until lead stabilizes at a price and then we catch up with the pricing. When lead goes down, it's just the opposite. We can hold that pricing for a while, and we have really great margins with the thing. So you really have to look at in a longer term. Now that being said, the other side to it is we do hedge our lead, and the general rule of thumb to think about on it is think about 3 to 4 months ahead, we would like to hedge about 50% of the lead that we're going to be using. We don't want to go out longer than that because it's too volatile. What could happen is, we could hedge lead at let's say $1 per pound, just to pick an arbitrary number, and all of a sudden, we're locked into those contracts and lead drops down to $0.70 a pound. Therefore, the cost of our batteries or price of our batteries will go down, but we're stuck with that hedge and would hurt us. So we're very cautious about how we hedge. We do look out 3 to 4 months. Mike, you want to add to that?

Yes, I would just say, Howard, that you're right, that if you're looking year-over-year, most of the improvement to our EPS from last year's $0.83 to this year's $1.02 is largely a function of commodity costs declining, with a little bit of better pricing that we talked about, some of the actions Europe was taking, et cetera. On a longer-term basis, I would tell you is -- your question that was pertaining to margins, we came off our high point with about nearly a 27% gross profit margin in our fourth quarter. But that was on very strong volumes. So the 2 things that drive our gross profit is mostly the input of our commodity lead or major commodity lead and then how much volume we're running through the business. As I made a comment in my remarks -- written remarks that we would expect our gross profit is going to remain in the 25% to 26% range for the balance of the year. It is -- obviously, if lead stays at the plus $1 range, it's going to put a little pressure on that margin. But right now, I still think that that's a reasonable gross profit attainment level.

[Operator Instructions] Our next question comes from Sven Eenmaa from Stifel. Sven Eenmaa - Stifel, Nicolaus & Company, Incorporated, Research Division: Yes. I just wanted to clarify first, in terms of the telecom push out in the U.S., what was the organic growth impact from that?

The -- so it was a negative impact on that one. So our reserve business in the Americas year-over-year actually went down as we had commented. So that was a negative impact for us.

Yes, and there's -- let me add a little bit more to that. It was down year-on-year. But when you look at reserve power in total, there's really 2 reasons it was down year-over-year. The surprise, obviously, was this one major customer. The one that wasn't a surprise that helped bring it down though was the A&D group, our aerospace and defense group. As you know, military spending has slowed up, and we've been impacted by that. And that's comparing again a year ago, first quarter, to this one. But we knew that was going to happen, and that was in our forecast. We had it down. The surprise in the quarter, again, in our reserve power segment was this slow up by this one major customer, which impacted both our cabinet business and our battery business. Sven Eenmaa - Stifel, Nicolaus & Company, Incorporated, Research Division: If I look at, let's say, last quarter's organic growth versus current quarter organic growth in reserve power, is that one customer then account the difference in terms of that organic growth rate pretty much? Is that...

I can't say categorically it's all of it, but I can tell you that relative to the forecast that we had in place that -- which we projected we probably would've been at the high end of guidance. If we would've hit our sales forecast that we had and when we gave our guidance of it, if we would've hit that number, we would have exceeded the top end of our guidance. In other words, our top end was at $1.06. We'd been at something -- yes, at $1.06 or maybe even a little bit higher if we would've had that one customer come through. Sven Eenmaa - Stifel, Nicolaus & Company, Incorporated, Research Division: T Got it. And in terms of when you think about the organic growth in the U.S. or in Americas and in Europe for the rest of the year, what are your expectations on that?

Well, I fully believe that this one major customer is definitely going to start spending again. I think that there's -- it was brought up in a prior question. There's a lot of M&A activity and -- going on right now in the telecom industry. And I think that you probably are seeing, within the industry in total, a pause until they decide who's going to own who. But I fully believe that we're going to see this thing pick back up again. And as I've said -- back to what I've said historically, that I suspect our business in total, organically, is going to have high single-digit growth, and I'll stick by that statement. But we have a quarter here that, for the reasons I've stated, the self-inflicted problems, if you will, in Europe with our motive power side, and our not having the ability to take and get our thin plate pure lead manned quickly enough to support the demand and this major -- if the industry doesn't shake out in the U.S. on who owns who, I think what you're going to see is some very good growth going forward in it. But I think we're in a pause right now for Q1. When you're thinking about guidance, we think it's going to pick up in Q2. Sven Eenmaa - Stifel, Nicolaus & Company, Incorporated, Research Division: Yes. I -- well understood on that. In terms of the European side, now that you implemented the price actions, are you planning to or are you implementing any more in the current quarter? Or are you steps behind and now you kind of are in new organic growth environment there, what you -- kind of post price reductions.

Yes. We haven't announced anything on a price increase. The last thing I want to do from a customer standpoint is announce something on this call about pricing. But I can tell you historically, when we see lead go up, we assess on how we offset that. But at this point, we have not announced anything on our price increases. But I can tell you that you can see that we have a history of walking away from low-margin business. We're not going to take a low-margin business. We're going to find a way of keeping our earnings up.

And keep in mind, Sven, that 60% of our business in Europe is mechanically on a pass-through mechanism. So Europe, of all regions, is very well equipped to deal with the rising lead prices, albeit it takes usually a quarter before the recovery on the pricing for the costs that you've incurred. So there's a little of a delay. But Europe lead costs won't be an impact in the longer term for them. Sven Eenmaa - Stifel, Nicolaus & Company, Incorporated, Research Division: All right. And the last question from my side. In terms of the European restructuring, how much of the kind of savings are yet to be realized there?

I'm going to guess on this one because I don't have the hard numbers in front of us. But I think it's -- Mike, if you've something there, go ahead.

Yes. I would say we probably believe we've got a benefit of $4 million to $5 million in the quarter. We would expect as high as $18 million, $19 million for the full year. And beyond that, it trails off pretty good because we're not anticipating at this point any further action. So I think you could say from where we stand right now, you've probably got another $15 million that you should expect over the next 6 quarters to run out.

Yes. I was going to guess we're about 75% completed on it. It would've been my guess, so it's [ph] post.

We have a follow-up William Bremer with the Maxim Group.

Just a quick one. Given this delay that we're seeing from a telecom entity here, should we expect possibly some type of restructuring to come through on the Americas side here? Or are you anticipating a pent-up demand? Or should we see increased inventory? Can you give us a little guidance on that?

Let's talk about the inventory first. Our inventory did jump in the vicinity of about $20 million in Q1 because we anticipated sending those batteries out, but they're sitting on the shelf. It's my belief that you will not see a -- you will continue to see advancements in both data storage and telecommunication. I think you're going to see that. I think that we're going through a period right now where they're kind of in a pause. The answer to your question, the cutting of capacity's absolutely not my concern. It's going to be probably on the other side. And if this thing flips on like a switch, which it has historically, then we're going to be playing catch-up to get enough batteries built to ship them. So that's my take on it right now, but we'll have to see in the next -- in coming months if things change. But I'd be hard pressed to believe that the telecommunications industry in the United States is going to cut back on their spending right now. In fact, if you look at the 2 major companies that are out there, they have said what their CapEx spending is going to be for this year, which by the way, happens to be equal to what it was last year -- the same -- almost the same number, and both have said that they're on target, that they will spend that full amount this year. But so far, as I said there was a slow up. And my guess, our hope and anticipation is that it will turn itself out again, and then it'll be very good for us. In other words, pent-up demand.

We have a follow-up from Howard Rosencrans with Value Advisory.

Just trying to get a little clarity. I'm pretty sure you addressed this. The -- so in Europe on the telecom side, there was a -- you just couldn't -- things that you couldn't process quick enough. And on the American side, there was a cutback by one telecom player, and you anticipate they're -- they'll be coming back into the mix.

That's correct.

Okay. And in terms of how big you think the 4G could be in the context in Europe, maybe you could give us some bigger picture color on how significant that could be to you over time.

Yes. I don't know the answer to that question. All I can tell you on that is -- and I've said this for years is that what'll happen in Europe -- Europe was just the 3G, the Commission -- the EU Commission finally got together and the license as I've said before on 3G were up to $50 billion for a license. And on 4G, there were one that sold for $5 billion. So the price in the license has come down. The telecom industry is starting to get into it. But one thing I am fairly certain of is once that one of the telecom companies has 4G in place, the others are going to run as fast as they can to get it in place because if they don't have that, they will cease to exist. They're not going to be competing or be competitive if their competitors have 4G and they're still running on 3G. So how big it will get, I don't know. But what I hope happens it'll duplicate what happened in the United States. The thing was just very robust for us. And with the exception of this last quarter, I think it will continue to be robust for us. I'm hoping in Europe it takes off the same way. But as far as having hard numbers or predictions on it, I don't have them. But I will tell you this, that we are planning -- in the planning stages right now of looking at how we add extra capacity for thin plate pure lead products because if it does take off and exceeds our capacity, that's a situation we don't want to be in. So we may be making further capital investments in capacity for thin plate pure lead in our global operations.

And the TPPL specifically feeds the 4G more so than anything else. Is that right?

Well, that's what they're trying. That's the bulk of it. It's not all thin plate pure lead, but it seems that's what the customers want. And as I said, you go back a few years ago and remember when we were in 2008, 2009, in a recession, people were saying, "My God, you're spending $60 million to take and increase your thin plate pure lead," which we did. We implemented it, and it went very smooth. And now, we're looking again that we're running up towards the high end of capacity. And if 4G takes off like it did -- in Europe, if it takes off in Europe like it did in the Americas, we're going to be in a situation where we're going to have to add more capacity.

And TPPL right now represents 20%, 25% of the mix?

In the -- yes, that's about 25%, but keep in mind that the other portion of business is growing, 20% to 25%.

That's 20% to 25% of reserve.

No, total business.

Thank you. I'm showing no further questions at this time. I would like to turn it back to Mr. John Craig for any closing remark.

Well, thank you very much, and I appreciate you taking your time this morning to spend with us and talk about our company. So thanks again, and I'm looking forward to seeing you.