EnerSys (ENS) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the EnerSys second-quarter fiscal year 2015 earnings conference call. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, John Craig, Chairman and CEO of EnerSys.

Thank you, Nora. Good morning and thank you for joining us this morning. Last night we posted on our website slides that we are 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 investor relations tab on our website at www.EnerSys.com.

Now before we get into the details of our second-quarter results 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 date of such statements.

For a list of factors which could affect our future results 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 fiscal quarter ended September 28, 2014 which was filed with the US Securities and Exchange Commission.

In addition, we will also be presenting certain non-GAAP financial measures. For an explanation of the differences between the comparable GAAP financial information and the non-GAAP information please see our Company's Form 8-K which includes our press release dated November 5, 2014 which is located on our website at www.EnerSys.com.

Now let me turn it back to you, John.

Thank you, Mike. If you would please refer to slide three and you will notice that we reported second-quarter results off a 25.8% adjusted operating earnings of $74 million in adjusted earnings-per-share of $1.06 which exceeded our guidance of $1.00 to $1.04 per share. Our sales for the quarter were up 11% at $630 million and year-over-year our earnings per share were up $0.19 or 22%.

The results of our second quarter are even more impressive when you consider first, our sales volume is normally lower in the second quarter compared to our first quarter due to summer vacation seasons in Europe and the United States. Excluding the effects of foreign exchange, our sequential sales volume was up 1%.

Second, year-over-year our organic sales volume was up 7%. And third, we executed this record quarter despite one of our America's telecommunications customers significantly lowering spending on batteries and enclosures.

I now want to focus on our current business activities in third-quarter guidance. Both our incoming order rates and order backlog remained strong. In Motive Power, the three-month electric fork truck orders for July through September are 13% globally compared to the same period of last year. In Reserve Power, we continue to see sizable communication orders for replacement and 4G in our Europe, Middle East and African region.

Global orders for our premium Thin Plate Pure Lead products continue to be strong and based on this information, our earnings per share guidance for the third quarter is between $1.04 to $1.08.

Should we achieve the high end of our third-quarter guidance, it will be a record earnings for any third quarter in the Company's history. Our third-quarter guidance does not include any increase in spending by the large telecommunication customers I referenced earlier.

As we have said in the past, we view this reduced spending for batteries and enclosures to be a delay and not a permanent reduction of spending. We continue to expand our customer base for our enclosure business especially outside of the United States and we are experiencing significant growth in our quote activity for this business.

We recently announced that our Board of Directors approved a quarterly dividend of $0.175 per share payable on December 26 and the authorization for an additional $60 million of stock buybacks. Thus far in fiscal 2015, our Board of Directors authorized total stock buybacks of $214 million of which $121 million has been purchased through the end of September. The strong earnings and cash flow performance in the Company over the past several years has provided EnerSys with sufficient capital to meet our plans as well as allow us to increase returns to investors through dividends and stock buybacks.

In closing, I personally want to thank our employees for the excellent job they are doing which has allowed us to achieve these results and I want to thank our customers for their continued support.

Now I will ask Mike Schmidtlein to provide further information on our results and guidance. Mike?

Thanks, John. For those of you following along on our webcast, I am starting with slide four.

Our second-quarter net sales increased 11% over the prior year to $630 million from a 7% increase in organic volume and a 6% increase from acquisitions less a 2% decline in currency translation. On a regional basis, our second-quarter net sales in the Americas were up 16% to $333 million while Europe increased 4% to $233 million and Asia increased 10% in the second quarter to $63 million.

In the Americas, 10% was from organic volume, 8% was from acquisitions while pricing and currency translation declined by 1% each. Europe had a 6% increase in organic volume and a 1% increase in pricing less 3% in currency translation. In Asia, organic volume was down 9% while pricing was up 2% from walking away from lower margin business in China and acquisitions contributed 17%.

On a product line basis, net sales for Motive Power were up 9% to $314 million while Reserve Power increased 13% to $316 million. Motive Power had a 7% volume gain, 1% pricing gain and a 3% gain from acquisitions less 2% from currency translation. Reserve Power attained 9% from acquisitions and 6% from organic volume less 2% from currency translation and 1% from lower pricing.

Please now refer to slide five. On a sequential quarterly basis, second-quarter net sales were down 1% to the first quarter due to 2% lower currency translation net of 1% volume growth. The Americas region was up 1% and Asia was up 4% while Europe decreased 4%. On a product line basis, Motive Power was down 3% driven primarily by Europe but Reserve Power was up 1%. Since our second quarter is usually our weakest sales quarter, it is not unusual for our second 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 highlighted items. Accordingly my following comments concerning operating earnings and my later comments concerning diluted earnings per share exclude all highlighted items. Please refer to our Company's Form 8-K which includes our press release dated November 5, 2014 for details concerning these highlighted items.

Please now turn to slide six. On a year-over-year quarterly basis, adjusted consolidated operating earnings increased approximately $10.4 million with the operating margin up 60 basis points. On a sequential basis, our second-quarter operating earnings dollars were flat with margins improving 10 basis points. From a historical perspective, operating earnings reached a second-quarter record 11.7% of sales. This increase from the prior year reflects primarily higher volume and lower commodity costs.

Europe was a primary contributor for the improvement in the year-over-year although sequentially Europe declined slightly during their summer holiday season.

Operating expenses when excluding restructuring, legal settlements, due diligence, costs and the acceleration of stock compensation, were at 14.1% for the second quarter compared to 14.3% in the prior year. We would expect our full-year operating expenses to remain near fiscal 2014 full-year rate of 13.7%.

Our Americas business segment achieved an operating earnings percentage of 12.9% versus 15.3% in the second quarter of last year primarily from the impact of lower pricing in our aerospace and defense sales and dilution from our recent enclosure business purchase. On a sequential basis, Americas second quarter increased 40 basis points from the 12.5% margin posted in the first quarter.

Europe's operating earnings percentage of 11.2% remained above our target of 10% and well above last year's second quarter of 6.8% primarily from better volume, pricing and mix and the impact of prior restructuring efforts.

The operating earnings percentage in our Asia business improved in the second quarter this year to 7.2% from 7.1% in the second quarter of last year and from 5.9% in the prior quarter.

Please move to slide seven. As previously noted on slide six, our second-quarter adjusted consolidated operating earnings of $73.6 million was an increase of 16% in comparison to the prior year with the operating margin increasing 60 basis points to 11.7%. Excluded from our adjusted net earnings for the second quarter was approximately $4.7 million of highlighted net credits, the largest thing these settlement of the Altergy matter for an amount of $11.9 million net of tax below the initial ruling. Offsetting that credit were costs relating to restructuring in due diligence and a non-cash $5 million charge for stock compensation relating to the recognition of the accelerating vesting benefits or features of the plans for our CEO and Executive Vice President now that their retirements are becoming more foreseeable. Please see our press release issued yesterday for details of these items.

Our adjusted consolidated net earnings of $51.7 million increased 20% from the prior year to 8.2% of sales for 60 basis point improvement with the book tax rate remaining just below 27%.

EPS increased 22% to $1.06 on higher net earnings and lower shares outstanding. The lower average diluted shares resulted primarily from recent buybacks less dilution from our convertible debt which becomes dilutive when our shares rise above $40.05. This convertible debt dilution added approximately 1.6 million shares net to our EPS calculation and decreased EPS by $0.04 in our quarter. We offset this convertible debt dilution by acquiring 1.2 million shares in fiscal 2014 and we have acquired $125 million worth of shares in fiscal 2015 to date through October and have nearly $90 million still authorized. We expect our third quarter of fiscal 2015 to have approximately 47.75 million weighted average shares outstanding which represents a meaningful decline from the previous quarter.

We believe our tax rate for the third quarter of fiscal 2015 will be between 26% and 28% and for the full-year we expect a 25% to 26% rate on our as adjusted earnings.

Please now turn to slides eight and nine. As usual we have provided information on a year-to-date basis similar to that of our second quarter on prior pages. These two pages are for your reference and I don't intend to cover the year-to-date results.

Please now turn to slide 10. Now some brief comments about our financial position and cash flow. Our balance sheet remains very strong. We have $240 million of cash on hand and $240 million on hand in cash and short-term investments as of September 28, 2014 with nearly $380 million undrawn from our committed credit lines around the world. We generated $90 million in adjusted cash from operations year to date in fiscal 2015. Our leverage ratio increased by 3/10 to 1.1 times due mainly to spending of over $137 million on share buybacks and dividends through the first half.

Capital expenditures year to date were $28 million in fiscal 2015 compared to $25 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 of between $1.04 and $1.08 in our third quarter of fiscal 2015 which excludes an expected net charge of $0.10 per share from our restructuring programs and acquisition activities.

We anticipate our gross profit rate in our third fiscal quarter to be between 25% and 26%. In conclusion, we remain well positioned to take advantage of future opportunities.

Now let me turn the call back to John.

Thanks, Mike. At this stage, I would like to open the lines up for questions.

(Operator Instructions). Michael Gallo, CL King.

Good morning. A question, John, on Purcell. Obviously it has been below certainly where you thought it would be when you did the acquisition. Does anything change in your thinking or surprises beyond the delay in the customer? How dilutive is it in the quarter? I think you would have expected it would have been accretive at this point.

If you look at the three acquisitions in total year to date, they are modestly accretive and if you go back and you look at what we said when we bought these three acquisitions, we should be in the ZIP Code of $0.18 to $0.21 accretive for the full year which we are not going to hit that.

Now let me go back and I'm going to tell you when we bought the company, Purcell, which is the big driver, at the time we looked at it during our due diligence we said one major flaw that we see with this is that it is tied to very few customers and it is mainly the United States telecommunications business is where all of the business was coming from. This one major customer that we referred to earlier was about 50% or about half of the business with Purcell. That obviously is a red flag. That was an issue when we bought it.

At the time that we bought it though, what we said was this is a gold mine to get this thing globally, to get the thing overseas because day one we started quoting and had training for our salespeople on how to sell enclosures. If you look today our quote activity is part of a couple hundred million dollars. It is very exciting what we are seeing happening there but that is quote activity.

It has not turned to orders yet. What has happened with it, with the one major customer going away, sorry, slowing up on spending, it has hurt our last two quarters and it is going to hurt this fiscal year. We believe but we don't know factually, we believe that that customer will start spending capital again and we hope that happens in the near future but we don't know exactly when. We don't have inside information on them.

But the strong point, the point I really want to emphasize is outside the United States it takes a year to a year and a half or two years to get approval with major telecom companies but when you are sitting on a couple of hundred million dollars in quote activity of new customers, I still believe we are going to look back on this thing in a couple of years and say it was a great investment but at this stage can't say that because of the one customer slowing up.

Okay, great. And then, John, when I look at the third quarter and typically your second half you tend to see seasonal strength obviously the second quarter was abnormally strong seasonally but it seems like at the midpoint of your guidance you are kind of anticipating flat sequential quarter. If I look at fork truck orders up double digits, Purcell I mean obviously you had the drag in the second quarter. So why aren't we seeing the normal seasonality where you normally see the pickup in the third quarter relative to the second quarter and into the back half of the year? Is there something that you are seeing demand wise? Is it just a function of mix? Help us with why that would be flat sequentially?

Well, I think the first thing you said, Michael, starting off with a strong second quarter and let's back up a little bit go back to our first quarter. We came in at the low end of our guidance at $1.02. And at that point in time, I said the reason in part that we are at the low end of our guidance is because we had some orders that pushed out of Q1 into Q2 and we expected to have a stronger Q2 than normal and which we have coming in at $1.06. It is very rare that we would see higher earnings in the second quarter as compared to the first quarter.

So the comp, when you start looking at third quarter and compare it to second quarter, the second-quarter comp is higher than normal. Now that being said, when you take a look at where we should be, we should be much higher than $1.06. I think we ought to be at $1.20 to $1.25 range. So why aren't we there?

The reason really comes back to that one major customer in the US. It is not only enclosure business that has been hit, it is also about the battery business. They have virtually cut back on CapEx spending for whatever reason and we hope that it turns back on.

But I can tell you if we were running at normal rates with that one customer, we would be north of $1.20 a share in guidance, that is the big hit that we are really seeing take place in the third quarter when compare second to third quarter.

Okay, great. Just final question obviously seeing lead really reverse hear from where it was I think it was pushing $1.05 coming out of your second quarter and sort of south of $0.90 I think this morning when I looked on the LME. When should we start to see those lower lead costs again start to filter through? Is that probably still the first quarter next year assuming they stay down here we start to see that in the fourth quarter?

Fourth quarter.

Okay, thank you.

Fourth quarter, we should start to see it. If things stay where they are right now, our lead cost fourth quarter compared to the third quarter would conservatively be flat but we actually think that the lead cost will be less in the fourth quarter.

By the way, you may have read that we do have hedges out there that will offset a little bit of where the LME is. I am taking those in account when I make that statement.

But then at some point as you roll those of and I presume you will roll new ones on as you typically do forward at the lower pricing by the first quarter you should really see the full impact assuming lead prices stay down there?

If your assumption is correct, Michael, I would agree with your comment. We will have to see where the market goes but if it stays down at the $0.90 range, yes, it should be a nice pick up for Q1 and it should be a pick up for Q4.

Great. Thank you very much.

William Bremer, Maxim Group.

Good morning, John, Mike. Let's touch base on the EU and China. Can you give us a little more granular color of what you are seeing currently there in terms of their buildouts or are things sort of moderating back in the EU?

When you read all of the stuff in the newspaper about what is going on in the EU and the concern, fortunately our numbers don't really reflect what you read in the newspaper. In fact, when you take a look at our Motive Power business, total business as we mentioned earlier is up about 4% in Europe, Middle East and Africa and when you look at the Motive Power business, it is down just a little bit basically flat. You look at the Reserve Power business, it is really up. I mean it is up double digits for us and the primary reason for that is that we are seeing buildouts taking place in the Middle East and Africa, we are also seeing replacement business which has picked up and we are also starting to see 4G.

Now one of the things that I want to emphasize on 4G and we are starting to see it. We believe that looking forward that what you are going to see is more upside in the 4G as it really starts to take off. We are just at the beginning of the deployment of 4G in Europe today so I think there is going to be some upside there.

Your next question was about the Asian market. With the exception of China, I think things are going pretty well. China for us is not growing as well as we would like to see it and when you look again at the volume in Q2 compared to Q2 last year, total volume is down 9%. And when you look at where that is, it is down in Reserve Power but Motive Power in the Asia market for us is going tremendous right now. it is really going well. But it is not offsetting the total in the Reserve Power.

Now what is the problem with Reserve Power? The problem with Reserve Power in China is the telecommunications industry are deploying 4G right now and the price they are willing to pay for batteries is very low and we walked away from a lot of that business. So what we have to look at is doing a competitive analysis and looking at the other battery manufacturers. If you compare our battery to their battery, our battery will outperform their battery but the reality is the market is not willing to pay for that.

So we need to come out with a product that performs more like what the market will buy and put that product in place to go after that telecom in China.

Now keep in mind I'm not saying that we lower our prices to keep our costs the same. I'm saying we lower our pricing and lower the cost and increase the margins on the business. That is one of the action plans that we have in place moving forward for the China market.

And your timing on that, John, for a new product launch?

We are probably looking about six months. It is not going to happen overnight.

No, agreed. Okay. Let's touch base I know military and defense is quite small but given what the environment is like now, are you seeing a pick up?

We really are. We are actually selling more blocks this year than we did last year surprisingly enough and I say blocks, batteries for tactical vehicles. But as Mike alluded to or stated in his opening comments when you take a look at the Americas, the operating earnings percent which was at 15.3% last year in the second quarter down to 12.9%, one of the big reason for that drop was the pricing drop with the batteries for tactical vehicles. What the military has done is they have another source that they brought in and that other source at a much lower price on their batteries, we had to come down. Volume is up, pricing is down, net net obviously we would like to see the higher price that we had but we weren't able to hold those prices long-term.

Bill, you know, you have followed the Company for a lot of years and you know I stated this many, many years ago -- two to three years ago that the sustained 15% in the Americas is going to be darned tough to do. There comes a point where you can't push it higher. And what we said at the time the way to offset that is we have got to get Europe turned around, we have got to get Europe north of 10%.

So when you look in this quarter, last year at 15.3% in the Americas, this year 12.9% in the Americas operating earnings but then you look at Europe, 6.8% last year, 11.2% this year. Net net last year second quarter our operating earnings percentage was 11.1%, this year it is 11.7%.

Now that being said, we are hoping that we get the Americas back up with some other areas, some other products, some things that we are working at. Are we happy at 12.9%? No, we are not. Are we going to work to get it back to 15%? Yes, we are. That is going to be a tall task to do that.

Agreed. All right. Thank you, John.

Tim Mulrooney, William Blair.

Good morning, gentlemen. Okay, let's see. So you reported 6% organic growth in the reserve business in the quarter. That is a pretty solid number especially given the fact that the telecom customer you referenced that spending hasn't really come back. Can you just talk about what did contribute to the strong organic growth in reserve for the second quarter?

Europe. Europe is the big one and that is what has really jumped up. We don't have the acquisitions in that number but Europe has come through very strong for us.

Okay. That was easy. And then, John, you gave fork truck orders I think for -- was that July through September were up 13%, is that a year-over-year number?

Yes, it is.

Could you give a little bit more detail maybe walk through what it looks like for the three geographies during that timeframe?

Yes, I'm going to have to pull the (inaudible) data up here. I don't have it right in front of me but it will take me two seconds to get it and I can give you that. We are looking at three months and when you take a look at total, the Americas it is up 3%. When you look at Europe, it is up 15%, when you look at Asia, it is up 17% and globally it is up 13%.

Now one thing I'm going to caution you on in Europe, there is something has taken place here that is kind of an anomaly and you look at the fork truck orders being up that much, what happens is this. That the comps -- when you are looking -- Europe wasn't buying anything in new fork trucks. It went way up. At one point, go back to 2008, 2009, the market was down about 50%. So what people were doing they were cannibalizing fork trucks. In other words, if you have three fork trucks, we will take the parts off of a third fork truck and run two. What happened during that period of time, the batteries they were buying, the replacement batteries were very, very high.

Now with the fork truck business being up, the new fork truck business, the replacement business has been lower because those batteries are going in new fork trucks. So I don't expect to see the same type of growth, the 17% in Europe, I don't expect to see that in our battery sales. I think it will be lower than that.

Okay, good color. Thank you, guys.

John Franzreb, Sidoti & Co.

John, you walked right into my question. I remember the numbers being up substantially starting a year ago in Motive Europe. I suspect that the outlook going forward would be flat to modest growth. Is that your expectations and against that backdrop, does it still pay to be so aggressive on pushing through pricing and giving up share?

Well, we are not really giving up share, John. You will recall from a couple of years ago when we started the pricing side, I told our people in Europe that if you lose 10% market share and get the pricing, the numbers say that you'd lose the 10%. You also recall either last conference call or the call before that our estimate was that we lost about 1%. I think that obviously I'm not going to go into a lot of details on forward about pricing on a call like this where you've got competitors and customers are listening at it.

But I think what we are going to do is the same thing we have done all along. It is where is the optimum point to be on pricing relative to the capacity? And we need to continue to analyze that and make the decisions. What we have done in the past we've said, hey, the pricing is more important than the volume and you see the results, it is there.

Okay. It seems to me if I looked at the numbers correctly that you borrowed to repurchase the stock in the quarter. Was that the case? What led to that decision?

I will turn it to Mike. Go ahead, Mike.

Typically we wouldn't utilize our US credit facility to borrow that money. Of the cash we have on hand, a large amount of it is not inside the United States which is pretty normal for a lot of major corporations. So yes, we did borrow the funds and we did it because we thought the value of the stock or at least its market price was below the intrinsic value of the Company. The additional $60 million authorization that we announced yesterday I think is further evidence that we continue to have that belief.

Mike, how much of your cash is domiciled overseas?

Let's call it 90-plus%.

Okay, it is that high.

$230 million of the $240 million I think it is. It is almost all of it, it is a very large percentage.

And I guess Mike, while I have you, could you just walk through the sizable stock-based comp that you had in the quarter and how it impacts SG&A going forward?

Okay, so we announced that we accelerated the recognition of the vesting benefits that are in the stock grant plans for our CEO and our Executive Vice President.

A little bit of background. Members of the year original management buyout team from the 1999, 2000 era, John and Dick are the last two of that group and largely as those members have retired, they have been given vesting on a fresh basis by the compensation committee. The comp committee determined or elected several years ago to formalize that feature in their plans.

So grants that are issued let's say May of this last year, just five months ago, they will get the proceeds from that three years ago but the plan say that they vest and they have a right to it if they stay for just one year and the logic behind that is that as you get closer to your retirement age under the three-year cliff vesting, the plans become worth less to you if you are not going to be around just because you intend to retire which hopefully we all one day do. These plans become worth less so as an incentive to keep executives here through their full retirement date, that acceleration feature was there.

Not given the ages of the two participants, it kind of came to the point years ago or when it was first introduced, it didn't really seem to make much difference because we were talking about events that were many, many years out. You fast-forward four years later, and you say you know, now is the time to recognize that. So we have accelerated and we have caught up for all the grants the last two years worth of grants, so there are three great years out there. We fully expensed in this quarter all the grants that were issued before this year, before 2014 so those were two grants that got fully expensed and we have expensed half of this year's grant. Now most of the -- and going forward with every succeeding year, that grant for those two individuals will get expensed in the year of that grant.

So future years as long as they are both still working for us, exclude this one acceleration, the cost that will hit our P&L will be broadly the same. The benefit of this acceleration is going to occur whatever that might be one, two, five, six years out for the periods which would have normally gotten that vesting let's say the two years after they had retired where we would have seen -- we would have continued on with our three-year amortization and those years post-retirement for them would have been charged.

So that is when the benefit is going to occur and that is years out and as you duly noted, John, they are non-cash although it is still a piece of the pie as you recognize. But for those others, I just want to make sure everybody recognizes we are not granting any additional shares and all we are simply doing as a company is accelerating the recognition of that expense and that is essentially it.

Great, that was helpful. John, back to you. Normally Q4 is a big telco spending quarter but you didn't really -- I don't know -- convey a lot of confidence that the North American customer is going to come back by Q4. When should those orders materialize that would suggest a sequential improvement is in the offing? Or do you have some kind of intelligence that suggests they are just not going to be spending any time near-term?

First off, I didn't try to say anything about fourth quarter at all because as you know, John, we only go out one quarter and that is third quarter and we talk about that.

Now I will go a little bit further than that and say that historically our fourth quarter is always our strongest quarter or usually our strongest quarter. Whether that trend repeats itself this year or not, we will have to see. Personally my belief is it will as history states, history will repeat itself here.

Regarding that one major customer, I can't speak to when they are going to come back. I don't know. We really don't know. All they have said is that they will spend their capital this year and they have implied it will come back but I think and you have noticed for a lot of years, we tend to be very conservative on what we do here and if we are going to have a surprise on this, I want to have a pleasant surprise that it came back. In our forecasts, we are not putting any major upside into it with that one particular customer.

Okay, fair enough. Thanks for taking my questions, guys.

(Operator Instructions). (inaudible), Stifel.

Just a couple of quick questions. First, I mean you guys had a very strong organic growth in Europe and the Americas this quarter. In terms of -- and that obviously does not include that one telecom customer. What are your expectations in terms of year-over-year organic growth for the next quarter?

I would say the comps if we are comparing year-over-year for Q3, Q3 of last year was a very good quarter so I would say that you are going to see pretty comparable results on an organic basis year-over-year.

Got it. Then I guess the only headwind there is Asia was very strong, right, last year so that will be a negative number on organic terms? Is that a fair way to think about it?

Yes, we did Asia more specifically I believe Japan was very good about this point in time a year ago. Asia will be down a little bit from a -- exchange rates are going to be putting pressure on us which we try to distill those out because they are mostly noise because they affect both revenue and expenses and the net impact is only on your earnings.

I would say broadly if you think about it, we are guiding to a midpoint of $1.06. We had a second quarter of $1.06. The third quarter of a year ago was $1.07 with more favorable currency set up so I am going to say broadly you are looking at a fairly comparable situation.

But do you mean comparable in terms of the organic growth in the September quarter, similar to the September quarter or just revenues being about flat year-over-year?

I think you will see a mild improvement in organic growth from Q2 of this year to Q3. I think as you compare it to a year ago it is probably going to be broadly flat.

Got it. That is very helpful. And then in terms of that one telecommunications customer, have you disclosed how big of a share of the total revenues they are?

Well, we don't disclose because we don't have any customers that exceed 5% of our revenue or we have not to date. So we haven't identified that customer. I think most of you can make a very educated guess as to who that is. But the point I want to make is we probably have half a dozen customers that are call it 4-plus% that we feel very comfortable and we think we are well diversified, broadly diversified in our customer base so that when you have an incident like this, it is a headwind but it is not a takedown impact.

When you look at the organic business year on year as we said earlier, our earnings are up about 19% and that is obviously good news. But what we spent and with the investment in Purcell and what we anticipated hitting, we have not hit because of this one major customer. When you look at the percent on Purcell's business as I said earlier, it is about 50%. It is a big, big number on that business.

What we anticipated hitting this year if this one customer would have been where it is as I said earlier, our guidance in this quarter wouldn't be midpoint of $1.06, it would be $1.20 something. That is how big a hit because of Purcell that we are seeing.

No again, I want to emphasize we believe that will come back, we don't know when but I think what is more important, what is much more important to me is the diversification on the business that we are working on, the customer diversification. As I mentioned earlier over a couple hundred million dollars in quote activity that we have right now. As I said earlier in the short run, I'm very disappointed in the enclosure business. In the long run, I am still very high on that acquisition.

Got it. That is good to know. In terms of that one customer, the last question on that front, is that your sense that this is a replacement business in their existing infrastructure or are they just delay additional build out?

We really don't know, we really don't know. There has been articles written on it and a lot of different reasons have come up. But I'm not going to comment on it because I don't know factually and I don't want to throw a supposition out. All I know for sure is that our battery sales to that customer are down and we have not lost that business to competitors. They have in fact just slowed up and our sales on enclosures are down and we do not believe that they are buying enclosures from others. They are just not buying.

And by the way, I would add that other companies that are in a similar situation selling to that one customer, they have reported publicly the same information we have, that their business has been hurt because of the lack of CapEx spending with that customer.

Got it. And the final question is I am not sure whether you guys provide it but what are your expectations in terms of gross margin performance in the third quarter?

We don't provide that information on the third quarter.

We actually, well, if you looked at my script, I did say we broadly expected to be between 25% and 26% rate. So I think you will see a little bit of pressure on margins from the fact that lead will be going up sequentially but I don't think it is going to be a tremendous impact but I did note that in my script.

Got it. Thanks very much.

Howard Rosencrans, VA.

Thanks, guys. Appreciate all of the color as always. Two questions. One is regarding -- it is a little tough to quantify the impact of lead on the third quarter, you had the supplies which ran -- you had I guess lead is probably $0.07 to $0.08 sequentially and higher or at least it was during the summer which is what feeds into the third quarter and maybe $0.05 higher year to year again referring to the inventory that you had during the summer. So if it impacts you to the extent of $0.07 over the course of a year and $0.02 -- I don't know, at the end of the day I get to about a dime as the negative lead impact in the third quarter. That was one question. Then I have a quick follow-up. Thank you.

Okay. Let me just give you the bottom line and then I will turn it over to Mike to put a little bit more color behind it. When you look at the second quarter and the third quarter the impact on lead was about a penny or two in the third quarter. When you look at fourth quarter even with the hedges that we have, if the market stays -- the LME stays where it is, we will have a favorable fourth quarter in lead compared to the third quarter.

As you may have read in the Q, we have I think it was 98.4 million pounds of lead hedged at $0.98 and when you run through the whole thing on this thing and look at where the market is today, the bottom line P&L impact Q3 it is a penny or two headwind compared to Q2 and in Q4 compared to Q3, it will be flat to slightly positive. Mike, do want to pick up on it?

That is great, thank you. Let me just completely change gears. John, you put out some numbers I guess it was in April, May of a year ago talking about what your five-year plan was. Asia as you openly acknowledged has not performed or specifically the most important region there has not performed. How do you feel about your ability to execute on the five-year plan which if I have a timeline right would be clear me up on it, it is F18 or F19 and are basically called if you go through the math for $7 or $8 eight dollars in EPS?

I think to answer your question I'm going to go back to a meeting we had about 2, 2 1/2 weeks ago for the top 33 executives in the Company around the world we are here in Reading, Pennsylvania and as a team we looked at that and we analyzed it and we said where are we on this thing? And we understand that we have to do more on acquisitions, we understand that the organic growth has to come in place. Look, I think the bottom line to it is right now there are some things that have taken place and I will cover those in a second, things we've got to be focused on. We are in this for the long haul and it is kind of an awkward situation to be in because when you see the kind of growth that we have had year on year, we are very pleased with it.

But when you compare it to where we want to be, the genesis of your question, at $4 billion, we have got to goose this thing up a little bit. We know that. I can tell you at the end of that meeting we had some specific action plans of things that we have to do to get this up.

Now in the short run what are we focusing on? First off is the enclosure business. As I said, we have hundreds of millions of dollars in quote activity out there but quote activity doesn't take money to the bank. We need to convert those into hard orders so we are pushing very hard on doing that.

The second thing we need to do and I touched on it was on our China telecommunication business to get another product in place that is more competitive to what the market wants.

And the third thing on it is continue the work that we are doing -- the fine work that we are doing on new products as an example with the OptiGrid, our Thin Plate Pure Lead that we mentioned in a couple of conference calls ago or a year ago putting that in motive power two volt cells in Europe. That is starting to take off but the surprise which is a good surprise is the Reserve Power business wants that 2 volt Thin Plate Pure Lead product also.

So new products, our new charger line coming out is upside. Our nickel zinc product that we are working on right now we have some upside with that. The other thing I think we've got to focus on is buried in our numbers here is we are going through a plant start up right now in China. We are shutting down an old factory and moving over into a new factory and we have seen some impact on having our products available in the short run because of that transition and managing through that.

Finally the last thing I will comment on this, we need to continue to be aggressive on the acquisition front but always keep in mind that we are not going to buy for the sake of buying. If we miss the $4 billion target because we couldn't find acquisitions that were good acquisitions, I am okay with that. I would rather take and not do bad acquisitions. We are not going to do bad acquisitions. We are very disciplined on this and we will continue.

But make no mistake about it at the end of that meeting, the top 33 executives around the world highly focused, understand what we need to do, action plans in place and we are pushing very hard to hit that. Bottom line, we are not giving up on $4 billion in 2018 and 10% minimum operating earnings.

Would it be fair to say that in F16 as a function of having the new product out in China that that is potentially a game changer that gives us more visibility to getting to that big five-year number or am I overstating the importance of that China product?

Yes, I don't think that is going to be a game changer. I think a game changer is going to take five or six different things. It is going to be continuing to do new products in Europe and the Americas, continue to work to get the 12% back to 15% in operating earnings. It is a host of things. No one thing, there is no home run in this game. It is a bunch of little things that all add up to be a big thing.

Great. Thank you. Keep up the great work. Thank you so much.

William Bremer, Maxim Group.

Gentlemen, just a quick one. You called out that Purcell definitely was a little bit of a disappointment this quarter. Can you sort of give us an idea of the other two acquisitions, [Quallion] and UTS. Are they running ahead of schedule since overall M&A was approximately 6% of consolidated sales?

Yes, I would say the two acquisitions, Quallion, a lithium ion business located in California north of LA and UTS, a Kuala Lumpur-based business with operations in Malaysia and Singapore broadly I would say they are where we expected them to be. One case slightly ahead, the other case about where we expected. But those as you might recall those are transactions that were valued in the $30 million range and Purcell even if you combine those other two, Purcell is twice that combined size. So Purcell is the one that pushes the boat toward the M&A activity for us.

Agreed, Mike. Could you provide us the contributions for the two for the quarter? I realize they are small, just to get a sense.

What I would say is collectively as John said, when you add them all up, they were mildly accretive and I think that is a fair statement to make is that there wasn't one that is wildly accretive to cover up for one that is deeply dilutive. They are all mildly accretive.

Okay, thank you.

I am showing no further questions in the queue at this time.

Okay, thank you everyone for taking the time to call in and your interest in EnerSys and we wish you all to have a great day today. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the call. You may now disconnect. Everyone, have a wonderful day.