EnerSys (ENS) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the EnerSys fourth-quarter fiscal year 2015 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I'd now like to turn the call over to your host for today, Mr. John Craig, Chairman and CEO. Sir, you may begin.

Thank you, Ben. Good morning, and thank you for joining us this morning. On the call, I have Dave Shaffer, our President and Chief Operating Officer; and Mike Schmidtlein, our Chief Financial Officer, with me.

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.

Before we get into the details of our fourth-quarter and full-year results, I'm going to ask Mike Schmidtlein 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 the factors which could affect our future results, including our earnings estimates, see forward-looking statements included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations set forth in our Annual Report on Form 10-K for the fiscal year ended March 31, 2015, 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 May 27, 2015, which is located on our website at www.EnerSys.com.

Now let me turn it back to you, John.

Thanks, Mike. I'd like to start by saying that we are very pleased with our accomplishments and fiscal results for our fourth-quarter and full-year of fiscal 2015. You'll notice on slide 3 that we reported record full-year adjusted results, with our gross profit margins at 25.6%, operating profit margins of 11.7%, and earnings-per-share of $4.32. Our year-over-year earnings-per-share were up $0.36 or 9% in spite of our net sales being negatively impacted by over $100 million due to FX rates.

On slide 4, we outlined that, for the last five consecutive years, EnerSys delivered record earnings to our shareholders. Earnings-per-share have tripled over this five-year period. I continue to be impressed with the record results from our Europe, Middle East, and African operations. For the full-year, our EMEA's operating earnings were up 33% as compared to the prior year, and in this region, achieved a record 13% operating earnings in the fourth quarter.

Similar to our strategy of improving EMEA profitability, we are executing a plan to expand our business and increase our profitabilities in our Asian markets. First, in fiscal 2015, we started up a new manufacturing plant in Yangzhou, China to replace our existing facility in Chengdu, China. This new plant will serve the growing China motor power market. During fiscal 2015, we had plant startup costs and transaction costs or transition costs totaling approximately $3 million. After the first half of fiscal 2016, the majority of these costs will be behind us and will no longer be a drag on our Asian profitability.

Second, in India, we continue to build our business following the buyout of our joint venture partner in 2014. In fiscal 2015, we took measures to upgrade our manufacturing equipment and processes, including additional expenses of approximately $2.5 million in fiscal 2015 to address these manufacturing issues. During fiscal 2016, these additional costs should no longer be incurred, and we should experience continued sales growth in this rapidly growing market.

Third, we have been focused on increasing our sales in China telecommunications markets with new product offerings, and successfully winning additional business in this important market. We anticipate in the second half of fiscal 2016, we'll experience higher telecommunications volumes based on these efforts.

And finally, we believe that there is significant opportunity to expand our sales of Thin Plate Pure Lead products in the Asian markets. Our goal is to expand our Thin Plate Pure Lead customer base, which should increase our sales of these premium products. We recently were awarded a contract for over $10 million for the first phase of a multiyear project for Thin Plate Pure Lead in this region.

I now want to focus on our current business activities and first-quarter guidance. Our incoming order rates for motor power are steady in the Americas and the EMEA region, and our up in Asia. The three months in electric fork truck orders for February through April are up 10% globally compared to the prior year.

In our reserve power business in Europe, Middle East and Africa, we are experiencing good quote activity for sizable telecommunication projects. However, current order rates are down, due to the short delay -- or short-term delays in large infrastructure spending. In the Americas, our reserve power orders are shown -- are down year-over-year, primarily due to the reduced orders from a -- major telecommunication customers.

As noted on our investor calls -- our previous investor calls, our Asian operations will continue to experience lower sales volume versus prior-year, given our reduced telecommunications orders. As I noted earlier, second-quarter orders and third-quarter sales should benefit from the large multiyear project we are -- we were recently awarded. Based on these terms, we reaffirm our earnings-per-share guidance for the first quarter to be between $1.00 and $1.04 per share.

We continue to work on new products. Our nickel-zinc product is being tested by customers that are interested in using this product in UPS applications, aerospace and defense, telecommunications. And we continue to deploy our OptiGrid large-scale energy storage system in the New York City area.

We recently announced that our Board of Directors approved a quarterly dividend of $0.175 per share payable on June 26. In addition, in fiscal 2015, we repurchased $205 million of EnerSys common stock. Our strong earnings and cash flow performance over the past several years has provided EnerSys with significant or sufficient capital to meet our plans, as well as allow us to increase our returns to shareholders.

In April, we issued a $300 million senior note bearing a 5% fixed interest rate and maturing in 2023. This will provide the basis for our capital structure and what we need to repay our convertible debt, which will be called in May -- which we recalled or called in May, and will be retired in July.

In closing, we've had a great fiscal 2015, and I'm looking forward to extending our annual record earnings to a sixth consecutive year. I continue to be excited about the future opportunities available to EnerSys.

And now, with that, I'd like to turn it back to Mike Schmidtlein to cover information on our guidance and results for the year.

Thanks, John. For those of you following along on our webcast, I'm starting with slide 5. Our fourth-quarter net sales decreased 5% over the prior-year to $630 million, despite a 3% increase in volume and a combined 1% from acquisitions and pricing, due to a 9% currency headwind. On a regional basis, our fourth-quarter net sales in the Americas were up 2% to $344 million, while Europe's decreased 11% to $231 million and Asia decreased 19% in the fourth quarter to $55 million.

In the Americas, 4% organic volume was reduced by 2% currency declines. Europe had 8% increases in volume and 2% in price but a 21% currency decline. In Asia, volume decreased 16% and pricing dropped 2%, along with 5% declines in currency translation, while the recent acquisition contributed 4%. On a product line basis, net sales for Motive Power were down 6% to $311 million, while Reserve Power decreased 4% to $319 million. Despite the 10% currency headwind, Motive Power enjoyed a 1% volume gain, 1% from acquisitions and 2% from higher pricing, while Reserve Power attained a 6% volume increase, less 1% from reduced pricing and 9% from negative currency translation.

Please now refer to slide 6. On a sequential quarterly basis, fourth-quarter net sales were up 3% to the third quarter, due primarily to 7% higher organic volume and 1% in higher pricing, less 5% currency pressure. The Americas region was up 9% while Europe's was down 5% from currency, and Asia was flat. On a product line basis, Motive Power was up 2% and Reserve Power was up 4%.

Now, a few comments about our adjusted consolidated earnings performance. As you know, we utilize certain non-GAAP majors 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 May 27, 2015 for details concerning these highlighted items.

Please now turn to slide 7. On a year-over-year quarterly basis, adjusted consolidated operating earnings decreased approximately $10 million with the operating margin down 90 basis points. On a sequential basis, our fourth-quarter operating earnings dollars were up $1 million on higher volume, but margins declined by 2 basis points on higher commodity costs. The decrease in operating earnings from the prior year reflects primarily commodity costs.

Operating expenses, when excluding restructuring, legal settlements, and due diligence costs, were at 13.5% for the fourth quarter compared to 14.2% in the prior year. The full-year's operating expenses for both years was 13.9%. You would expect our first-quarter's operating expenses to be comparable to those rates.

Our Americas business segment achieved an operating earnings percentage of 12.4% versus 13.7% in the fourth quarter of last year, primarily from the impact of higher commodity costs. On a sequential basis, Americas' fourth-quarter decreased 90 basis points from the 13.3% margin posted in the third quarter, due to higher commodity costs and other manufacturing costs.

Europe's operating earnings percentage of 13.0% was an all-time record, and was above last year's fourth quarter of 12.9%, and better than last quarter's rate of 11.5%, primarily from higher volume, better mix, and the impact of prior restructuring efforts, despite significant currency headwinds.

The operating earnings percentage in our Asia business declined in the fourth quarter of this year to 1.3% from 7.6% in the fourth quarter of last year and 4.5% in the prior quarter. Asia's operating earnings were $0.6 million for the fourth quarter, reflecting lower volume of Chinese telecom sales as well as the impact on earnings of plant startups and closures in Q4 versus the prior-year. Asia, due to its smaller size, remains our most sensitive region to operating inputs.

Please move to slide 8. As previously noted on slide 7, our fourth-quarter adjusted consolidated operating earnings of $73 million was a decrease of 12% in comparison to the prior year, with the operating margin decreasing 90 basis points to 11.6%. Excluded from our adjusted net earnings for the fourth quarter was approximately $27 million of highlighted charges, the largest being the impairment charge of $21 million net of tax. Please see our press release issued yesterday for details of these items.

Our adjusted consolidated net earnings of $53.7 million decreased 10% from the prior year to 8.5% of sales for a 40 basis point reduction, while our book tax rate was 23%. EPS decreased 3% to $1.15 on lower net earnings with 3.6 million fewer shares outstanding. The lower average diluted shares resulted primarily from share buybacks, which exceeded the dilution from our convertible debt, which becomes dilutive when our shares rise above $39.83. This convertible debt dilution added approximately 1.6 million shares to our EPS calculation and decreased EPS by $0.03 in our fourth quarter.

To offset this convertible debt dilution, we have acquired 3.2 million shares in fiscal 2015. We expect our first quarter of 2016 to have a comparable number of weighted average shares outstanding as our fourth quarter of 2015.

Our adjusted effective income tax rate of 23% for the fourth quarter was lower than the prior quarter due to the strength of our European results and comparable to the prior year's fourth quarter rate. We believe our tax rate for the first quarter of fiscal 2016 will be between 24% and 26%. And for the full-year, we expect a 25% rate on our as-adjusted earnings. However, these assumptions anticipate no significant changes in tax rates or legislation in the countries we operate in.

Please now turn to slides 9 and 10. As usual, we have provided information on a full-year basis, similar to that of our fourth quarter on the prior pages. These two pages are for your reference and I don't intend to cover them -- cover the full-year results.

Please now turn to slide 11. Now, some brief comments about our financial position and cash flow results. Our balance sheet remains very strong. We have -- now have $269 million on-hand in cash and short-term investments as of March 31, 2015, with nearly $465 million undrawn from our credit lines around the world. We generated $233 million in cash from operations in fiscal 2015, even after $50 million in additional primary working capital from higher volume.

Our leverage ratio remains at 1.0 times, despite spending over $237 million in share buybacks and dividends through the fourth quarter. Capital expenditures were nearly $64 million in fiscal 2015 compared to $62 million in fiscal 2014. We expect to generate adjusted diluted net earnings-per-share of between $1.00 and $1.04 in our first quarter of fiscal 2016, which excludes an expected net charge of $0.07 per share from our restructuring programs and acquisition activities.

We anticipate our gross profit rate in our first fiscal quarter to be between 25% and 26%, and our interest expense to be approximately $6.25 million. In conclusion, we believe we remain well-positioned to take advantage of future opportunities.

Now let me turn the call back to you, John.

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

(Operator Instructions) William Bremer, Maxim Group.

Good morning, John. Good morning, Mike, Dave, how are you? First and foremost, I want to go right to China in terms of the products. We were waiting on two products to be finalized, certified. It looks as though, based on your commentary, that has been proceeding through, and you are starting to expect some progress there in the back half of 2016.

Can you give us a sense on what was implemented there? The pricing and the margins? Are they comparable to what we had in the past? How should we look at that?

Yes, I'm going to turn that to Dave Shaffer to pick up on that question. Dave?

Yes, the objective of the program was to get a product that was more in line with the market pricing, and so the margins are meant to be competitive with what we normally see. As we alluded to in the past, we walked away from significant volume because we weren't competitive. We tried to narrow that gap. And, as John noted in his opening comments, we expect a improvement in the latter half with regards to that Chinese telecom volume.

Dave, did both products receive the certifications?

The product has been certified approved and we now have SAP codes in the customers' database.

Okay, fantastic. John, you alluded to Thin Plate Pure Lead in the Asia markets, a nice $10 million project. Can you give us a sense of what the end market is there and a little more granularity?

Well, I think when you look at the end market -- let's start with the product itself. The Thin Plate Pure Lead product is recognized globally as being a superior product to other lead acid batteries. I take as an example -- probably the best example of that, in Japan, the Japanese tend to want to buy products that are manufactured in Japan, or if they have a manufacturing plant in China, bringing the products over there. It's recognized even in Japan that the Thin Plate Pure Lead product is superior to the other product types.

And Dave, do you want to add to it?

Yes. The application for TPPL is broad. In this case, it's telecommunications. It's outside of China. And we are excited about this project. This large award is, hopefully, just the first phase of a multiyear contract.

Nice, congratulations. And then, finally, can you give us an update on Purcell? Just want to see the overall rollout. And have you expanded it to some international fronts? And there maybe just --

Yes. Bill, for those that aren't familiar, let me give a little bit of history or background on Purcell. We bought that company a year or so ago. And at the time that we bought it, it had a couple of major telecommunication companies in the US as a large percent of their business -- a very large percent of their business.

When we look at that company or buying that company at that time, we said, look, 4G is about saturated in the US. 5G will come along in the next five or seven years. So, we have to be very careful we are not buying it just for the US operations. Our objective in buying that company, our plan was that we are going to expand this globally. And it will take about two years, or 18 months to two years, to finally get approved to in-source as outside -- or customers outside the United States.

We started day one with that. And the progress we've made on it, it's been slow but it was anticipated to be slow. Unfortunately, one of the major customers in the US market stopped buying. And that wasn't because of Purcell. They just cut back on sell deployment, period. It affected our Company and we believe it also affected many other companies. We didn't lose market share, but what we did lose is we lost that one major customer, Purcell.

Now, going forward, we've made some organization changes. We have internally a lot of emphasis being placed on enclosure sales. We are seeing orders come in from those customers that are outside the United States. We're just at the beginning of this.

Short-term, when you look at Purcell, not happy with the acquisition. Long-term, I still believe it's going to be a very good acquisition for us. The enclosure business is not going to go away. There's going to be enclosures used globally. And I think that's a business that we need to further ourselves in and look for further opportunities in growth. But to answer your question, the quote activity is starting to come in much stronger than it was just three months ago.

Okay, great. Thank you, John.

Ben Hearnsberger, Stephens.

Thanks for taking my question. John, I think you mentioned that you are seeing slower -- slowing order rates in the EMEA reserve market. And I'm curious if this changes the outlook for the year? I know that was expected to be an improving market, driven by the improved telco spend over there.

Yes. Ben, one thing about the Reserve Power business, it's feast or famine because you are selling very large orders. Take as an example the one I mentioned earlier about in the Asian market, a $10 million order. You don't see many $10 million orders in Motive Power. But that is very -- it's typical to see it in Reserve Power. It's feast or famine.

Now, if you look at our fourth quarter, our Reserve Power business in Europe was way up, doing tremendously well. So, the comp comparing first-quarter to second-quarter is quite a comp. I mean, it's quite a challenge. What we are seeing is delays taking place, but we are not seeing a movement away from 4G in Europe.

Europe needs 4G. Europe will deploy 4G. But what you're going to see over the next few years is you are going to see some very large orders come in, and then you are going to see very small orders come in, because this is a job-type business. It's not a normal flow. So I'm not at all concerned about the low rate coming right now in the EMEA area in Reserve Power. Because we'll see, in the next quarter or quarter after, some very large orders, is what we are anticipating.

Understood. Thank you. And then in Asia, is the expectation -- I know you had mentioned on prior calls, the expectation is that you can get to double-digit or greater than 10% operating margins by the back half of this year. Is the expectation -- is that still the case?

Ben, this is Dave. Absolutely the target is to exit the fourth quarter near the 10% objective. No one is happy with the performance from last year. But this business -- it's too small. We've made some significant investments, and we've had some serious transition costs as a result. But the plan is still to exit this fiscal year near that rate.

Let me take and pick up on that one also. When you take a look at our market share in Europe and in the Americas, we are the leader. We're number one. When you look at our market share in Asia, we are a long ways from number one.

One of the areas that is a primary focus for us is that we want to be number one and number two in every market that we do business in. In the Asia market, we've got a lot of work to do there. And when you look at the short-term on it, you say, gee, you are down to just north of breakeven in the last quarter. I'm not at all worried about that. Because we're making investments today that are going to get us number one or number two in that market.

And we're not going to be number one or number two in that market unless we make those investments. And with making those investments, we're going to see some quarters that are going to be low performance. And, as an example, this last quarter, when you build a new factory -- which we just did, which just is starting up as we speak -- you are going to have inefficiencies with that factory. And our number one goal is to protect the quality that's going out of that factory. So if we have to slow it up, we'll slow it up. And we will take and spend more money in that short run.

But long-term -- long-term, when you look two, three, five years down the road, our Asia business needs to be much greater than just 10% of our total business. It needs to be up in the 20% to 30% range. If you look at the growth in the world, where is it coming from? A lot of it is in the Asia market. And we are not getting our fair share of the market share in Asia today and we need to aggressively go after that.

Okay, thanks. And then on the OptiGrid product, I know it's a very small product, but it seems like the Tesla Powerwall announcement has helped to kind of shine a light on the opportunity that you have in front of you for that product. I'm curious if you have seen a pickup in demand since the Tesla announcement? And then maybe if you can speak longer-term to how you've kind of sized that market and sized the opportunity for OptiGrid?

Well, let's take the -- first off, our OptiGrid. We are deploying about $10 million right now. And I believe we have somewhere between $40 million to $50 million of new quote activity that's taking place right now. So, our OptiGrid system is taking off quite well. We can put lithium batteries in our OptiGrid solution. It can use almost any electrochemistry.

In New York City is where this is being deployed for the most part. The fire marshal in New York will not allow lithium because of the safety concerns with it. When you look at small lithium ion batteries, that's one thing. When you start building very, very large lithium ion batteries, the safety aspects of it become a big concern.

Even with the lead acid was a concern. And we've had to send engineers in to meet with the fire marshal and go through a lot of testing to really get this approved.

Now, when you look at the OptiGrid, and if you listen to the Tesla analyst call, there are two different approaches to this. One is being off-line entirely by using solar or wind to generate the electricity and then store it. And as it was said on that call, that in the United States, that it's really cost-prohibitive to do that. And I tend to agree with that.

What they really were talking about on the Tesla call was to have backup storage to a house in case the electricity goes out. That is not a new market. That market has been around for many, many years. The biggest player in that market are the generators. Personally, at my house, I have a generator.

The reason generators are better in that application than batteries is because, on a battery, you've got a limited timeframe that, with that stored energy, that you can use it, whether it's 20 minutes or two hours. With a generator, you've got as long as you've got natural gas, in my application as an example. So you've got electricity as long as the natural gas is working.

So we make those batteries. In fact, we've -- Germany, and that was alluded to on the Tesla call -- that Germany is the big market for it. We have those today and we have sold those in Germany. There is incentives in Germany to buy them. We've sold about -- ballpark about 150 of the units, I'd say, because it's a newer product going out. But it's about a little over half the cost of what it would be for lithium ion batteries.

And keep in mind that these batteries are not cycled batteries. And what I mean by that is, when you've got a battery that's a backup, what happens is, as long as electricity is there, that battery is just on float, meaning it's just got a charger on it. The only time that battery is used is when the electricity goes off. So it doesn't cycle -- cycle being discharging the battery and recharging. It doesn't cycle very often.

So, a lead acid battery will work as well on that application as a lithium ion. The advantages, though, of a lithium ion battery is that it is smaller and lighter. The disadvantages of it is it's much, much more expensive.

Understood. Thank you, gentlemen.

Michael Gallo, King.

I joined the call late but I wanted to just -- a question for John, I know you've spent a lot of time talking about each of the divisions being at -- or regions being a 10% minimum operating margin. You've done a great job getting there and exceeding it dramatically in Europe.

I know you've talked about some of the transitional or other items in Asia. Obviously, there's some things there like currency that are out of your control. But can you walk us through a roadmap? Do you see this division getting to 10% operating margins? I know it's been there before, but certainly a 1% margin was -- you know, I guess we've got to go back to the second quarter of 2012 the last time we saw that.

So, do you think this stuff is in the rearview mirror? Or is it such that the pricing -- it just isn't going to allow you to get there any more?

So, Michael, you did join the call late. We've covered a lot of this already. I'll give you just a quick summary on it, but what I would like you to do is call Tom O'Neill to get more color on it. But just to kind of repeat ourselves -- this is a long-term investment we're making. It's less than 10% of our business today.

It's one that, when you start up new factories, it's going to cost you more. When you start a new factory or buy a company in India that's just a manufacturing operation, and you have to take into development, the bottom line to the things is that there's a lot of things that we're doing right now in the short run, you're not going to see operating earnings at 10% or 11% or 12%. Because we're making investments to the future.

The bottom line to it is, we cannot -- I do not believe that we can afford to stay at 10% of our business in the Asian market. It needs to get up to 20% to 30%. And the way we're going to do that is we are going to take and grow our manufacturing. We're going to add more to the sales force over there. These things are expensive to do in the front-end.

These short-term investments that we are making today will have good returns in the long run. But in the end, the bottom line to it, to really answer your question, we believe right now that there is a possibility that, the exit this fiscal year, that we will be somewhere near 10% operating earnings. It should start to pay off at that period of time.

But I will tell you, even a year after that, we've got to take and get this business up from a $250 million business or whatever it is. We've got to double or triple the size of that business. That is a high-growth area in the world. And we are not growing at the rates we should over there. And a big reason is because we don't have the critical mass in place. And we need to put that critical mass in place -- new manufacturing facilities, extended sales force. We need to do in Asia what we've done in the Americas and what we've done in Europe.

Just a follow-up on that, John. I mean, is that something -- I know, historically, in the acquisition environment, the issue has been multiple. With some of the environment being a little slower, do you see multiples now that are more reasonable? Or is multiple still an issue from an acquisition standpoint?

The answer is, they have come down. We do see some opportunities over there today that we've got our eye on. And you've hit a good point there. I don't believe that we are going to take and go to 20% or 30% of our total business in Asia unless we do acquisitions. And we are actively looking at a couple different things right now.

And you are right. We're not going to overpay for them. We are going to wait until the market is such. We are very patient on it. If it's something that if they are looking at a multiple EBITDA of 10 or 14 or whatever, we're not going to be paying that kind of money. We'll be very patient on it. We'll wait for the opportunity. Some of those opportunities exist; we'll take advantage of them.

Thank you.

Tim Mulrooney, William Blair.

So, volume was up about 6% in the reserve business in the quarter. Does Europe account for most of this increase? Or were there other pockets of strength as well?

Yes, Mike, you've got the data there in front of you. Why don't you go ahead with that?

So, I think you -- Tim, you are referencing our fourth quarter.

Yes.

So it's -- in the fourth quarter, the -- most of that volume was coming out of the European operation, which had very healthy, call them, as high as 20% organic growth. But there were, in the quarter, other pockets of improvement.

So -- but as we've said before, Asia was down. And we talked about the fact that we elected not to participate fully in those Chinese telecom tenders starting even as early as the first -- or the second quarter of last year because of the pricing on them. So, I guess I would say Asia has been a negative; Europe has been a positive.

Yes. And just to take and go a little bit further on that question, when you look at -- I mentioned earlier about the Reserve Power business. The question was about, is Reserve Power business in Europe starting to dry up? Are we concerned about 4G? And I did mention about the comp. And Mike threw out the 20% there.

The fourth quarter was a tremendous quarter of Reserve Power for us. And to try to see that to go another 20%, will it be back there? I think it will be back there. We've said this prior, and I still mean it, that I think for about a two to three-year period, we will see double-digit growth in the Reserve Power business European market. But looking at any given quarter, that could be up or down, because it is more of a jobsite-type relation business.

Okay, thank you. Just sticking on the Asia reserve business for a second, I'm just curious on these tender offers, how often do they come up? And do you envision participating in any this year?

Tim, there is really no rhyme or reason. There's actually several that we are quoting, as we speak. And so -- but I can't tell you that, with any regularity, when they come. There doesn't seem to be any seasonality. It's just when new network capitalizations are planned.

Dave, you may want to go into a little detail about the three telecoms over there, and about what's happened with China Tower, and how the market is changing.

Well, that's specific to China. So, most of these tenders we see all over Asia. But specifically in the Chinese market, there's been a consolidation, as we've referenced on prior calls, of the outside plant assets of the three major wireless telecom providers over there into China Tower.

And we've actually started our relationship with China Tower. We have orders from 13 different Provinces so far this year. And we expect the major tender for China Tower to come out in June. That's what they are telling us. So, again, we see a lot of upside in the latter half of the year in the telecommunications in Asia.

Yes. And keep in mind, that's an area of the telecom industry in China which has been very tough on a competitive standpoint. We've talked about new products and new designs. Our new factory in Chongqing on the block products, 12 volt products, is running very, very well over there.

The combination going to China Tower, with all of them going together, and doing business with 13 different Provinces so far, is a good indicator. What will come out of it? Don't know. But I'm very pleased to see that we've got 13 Provinces already working with the new organization in China Tower.

And China is in the midst of a 4G deployment, so they are rapidly expanding their network.

Got it. Thanks, Dave. John, one last thing. I think you said fork truck orders were, for February through April, were up 10% globally. I was wondering, could you give this detail for your three main geographies?

Yes. And this is on a three-month average. You are right. And compared to the three-month average last year, geographically, the Americas are up 6%; Europe is up 12%; and Asia is up 11% for a total 10% increase.

That's pretty good. So, based on these figures, do you expect positive volume in the Motive business in the first quarter?

I don't expect volume to be as high as those numbers right there, and it's for several reasons. One, when you look at when Motive Power drops way off, we will see about half the drop-off. In other words, just to use an example, if the -- instead of being up 10%, let's say the market was down 10%, we probably would drop down about half of that. And the reason for that is because of the replacement business.

When it goes up 10%, what happens then, you have customers that are not buying batteries to (technical difficulty) replace into the existing fork truck. They are buying a new fork truck. So it switches from an aftermarket to an OEM.

Now the problem with it is -- and when you look at the increase taking place in Europe at 12%, and we've talked about going to 13% operating earnings in Europe, the reason we've gone to that, in part, is because we've walked away from low-margin business. Walking away from low-margin business has been in some of the fork truck OEM business.

So, if you look at it, did we lose market share with the OEMs in fork trucks? The answer is, we believe so. And the reason we lost it is because we weren't going to take and lower our pricing. And when you look at it, our point of view on it is, we are best value. And if the market isn't willing to pay for that -- if the customers aren't willing to pay for that best value, then we have one of two choices -- either lower our product designs or go to other customers. We've gone to other customers.

Understood. Thank you, guys.

Sven Eenmaa, Stifel.

Thanks for taking my question. First wanted to ask about the US telecom market. And what spending trends are you currently seeing there? I believe, in the June quarter, you are reaching a one-year anniversary here when you started seeing headwinds with Purcell. But it would be great to see an update on what you see in the second half of this year.

Well, I think when you look at the US telecom market, you see some deployment of 4G going out in the replacement business. My opinion on it is, you're not going to see a lot of growth going forward in 4G. I think what you're going to see is, if you read the literature of what's out there, 5G is coming at us, but it's probably five years away.

5G, and when you look at things like cars driving themselves, and you look at the response time on 5G versus 4G, bottom line is you're going to see a lot more receivers in place. In fact, some articles are saying every 100 meters, you'll see a receiver. They are going to be small in size.

You are still going to have base stations in place, but you're going to continue to see growth in telecommunications in the US. On 4G, it's going to be a little bit in growth, but a lot of it is going to be in the replacement market. And then it will be 5G kicking in. 5G, I think, is going to have a significantly positive impact on our business in the long-term.

Got it. And so there's obviously been a lot of discussion about distributed cell sites and smaller cell sites due to increased network densities. For smaller cell sites by companies like Verizon or AT&T, what is the backup power requirements or how do you serve that market?

Well, they are each going to have some form of backup requirement. There's going to be a battery of some sort in it. Think about it this way. And when you look at 5G and they talk about automobiles driving themselves, what they are talking about is millisecond response, not seconds but milliseconds or even microsecond response. You can't afford to have one of those cell sites go down when you look at where the future is going with it.

There will be backup in place. And as you said, they're going to be smaller and there's going to be a lot of them.

Got it. And in terms of the TPPA order announced in Asia, what is typically, on orders like this, when do you expect that to convert into revenues?

Again, we've noted in the opening comments that we expect to see the second half significant improvement, and an exit rate in the fourth quarter of approaching 10% for Asia.

Got it. That's very helpful. And the last question I have is -- there obviously was a lot of discussion around margin improvements in Asian market. How do you see operating leverage evolving in your European and also American regions as the year progresses?

I'm not sure I understand your question. How do you see the -- ask it again. I'm sorry.

No, how do you see operating leverage and the margin performance in the segments in Europe and Americas as the year progresses here?

Well, I think the operating margins -- you know it's going to depend a lot on the market what our competitors do, and it's going to be on pricing. There's two ways of driving those margins up. One, the cost reductions, which we are constantly working on and looking for ways that we consolidate things.

I'll tell you what I'd like to find. It's like last year, year and a half ago, we made about a $20 million investment in our Bulgaria operation, and actually closing it down and moving product over. That had a one-year payback. I wish we -- what we are looking for, at opportunities like that, that we can save that kind of money and reduce our costs.

The second part of that equation is going to be on the pricing in the market. And as I've said, we are willing to walk away from the low-margin business and let our competitors have it. We are the leader in this industry. We need to act like the leader and we have been acting like the leader in this industry. Hopefully, the competitors are not in as good a shape financially or don't have the balance sheet that we have, but they will follow suit with the pricing.

But it's one that's hard to predict, what competitors are going to do with it. But our pricing management and our cost reduction programs have worked quite well for us in the past. And I anticipate that they will in the future.

I guess the -- sorry, go ahead.

Sven, the only thing I'd add to that -- this is Dave -- is, we try to take advantage of the currencies as best we can from an operating standpoint. And right now, with a weak euro, we have the ability to flex certain volumes, and we try to take advantage whenever we can. We think that's a key advantage of being a global company.

Mike, why don't you add to it too?

Yes. So, Sven, the other items to keep in mind is that our commodity costs for lead, when you compare the first half of this upcoming fiscal year, will be lower than they were in the second half. So that should lead by itself to margin expansion.

We would anticipate our first quarter, because it has fewer working days, will have less revenue or less volume than our fourth quarter. So, that kind of offsets some of that good guy. And as Dave mentioned, and we've kind of talked about, with the euro down at sub-$1.10 per euro, that's a headwind for us as we translate European results back into our results.

So I would say as we said -- or as I gave guidance, at the gross profit line, even though the first quarter anticipates lower volume than the fourth, we should get better lead pricing. I would say margins should be comparable, perhaps better than the fourth quarter in our first quarter. And operating expenses should be fairly comparable, as we pointed out. So, margins should look okay when you compare them to previous quarters.

Great, perfect. Thanks so much.

John Franzreb, Sidoti.

Yes, just sticking to the European market. Just so that I understand, the restructuring changes, John -- changes that you made to the Company will enable you to withstand a lumpy environment, a more difficult competitive environment, and a more challenging currency environment so that you can maintain that 10% operating margin through the balance of the year?

We believe so.

Okay, perfect. Secondly, John, what's your assessment of where we are in that 3G to 4G rollout in Europe?

I think that we're -- if it's a baseball game, we are in about the second inning. First or second inning.

And how many years are we talking here?

I think it's going to take multiple years. If you look in the US how many years it took, I think you're going to see something similar to that and maybe even longer in Europe.

Okay. And switching gears here to M&A, given the -- I don't know, the lack of success, in my words, of Purcell, could you just address what your current thoughts are about tangential acquisitions versus battery-operated -- related acquisitions? And also maybe geography versus adjacent purchases?

If I believed that Purcell in the long run was a bad acquisition, we wouldn't be looking at other enclosure companies. I believe that Purcell in the long run will be a good decision. I think that we have a setback because of one major customer right now. As I said in the front-end, we didn't buy this Company because of the customer base that they had. We bought it because of the customer base that we think we can take it to globally.

I think to expand in that business would be a smart thing for us to do, because enclosures are needed. They are needed. You're not going to see a continuation of the telecommunications industry, whether it's 4G or 4.5G or 5G; there are going to be enclosures needed for that business. Long-term, it's there.

If I didn't believe that, I would say right now that we should not look ahead with this. But when I think you look at the next five to seven years out, that this is going to be a good business for us, and that it's something that we need to continue to work towards.

The short-term setback? None of us like it. None of us like it at all. But it's reality. And what do we do with it in the long run? I think we double down on it. I think it's a good business, long run.

Okay. So you would prioritize the enclosure type acquisition as something you are more aggressively pursuing versus maybe a battery-related acquisition in China?

All of the above. You know, I am asked that question all the time -- what are we looking for? And I've stated it this way. We are looking for areas that we can invest shareholders' money to get the greatest return. And I've gone through many times where those four areas are. I'm willing to do it again if you want to get into it.

But geographic expansion is definitely one of them. New technologies, electrochemistry is definitely one of them. Integration of looking at things like cabinet companies is one of them. So, there is -- we are looking for the great opportunities that are out there. And it's not just having one line in the pond. We want four or five lines in the pond to be looking at many different things that we can maximize the returns.

You know, one of the problems that we had, we were negative leveraged about -- I don't know, a year ago. And we are now leveraged at about a one. We are still underlevered. And I think the thing that we've got to do is we've got to take a look at how we best deploy shareholders' money, whether it's in, as I called it, investing in ourselves, looking at new products and things, or whether it's doing acquisitions, or whether it's doing a stock buyback or a dividend -- that's our four priorities -- we need to maximize the returns for shareholders.

And not just on a short-term basis, but really on a long-term basis. We didn't go from $400 million to $2.5 billion by being short-term thinkers. We are long-term thinkers. We're not looking at -- from quarter to quarter, yes, we are concerned about it, but what we are really concerned about is the next year or two years, next five years, where is the business going?

Okay. And one last question. And maybe I'm just not saying this properly, my understanding was that in Asia, that you weren't initially price-competitive enough. But then in your prepared remarks, you mentioned that you want to address the Thin Plate Pure Lead market, which I thought was more of a premium priced product. Can you kind of reconcile those --?

Yes. What you're looking at -- and let's take and break this down a little bit. The China market, which is telecommunications, where we are not selling Thin Plate Pure Lead into that market yet. And the reason is the market doesn't want to pay for it.

Outside of China, other regions within the Asia market, they look at the value proposition on a Thin Plate Pure Lead versus a me-too type product. To give you an example, I mentioned the one about Japan, which was a year ago, which was a great order for us -- a very, very large order that came in. And when the Japanese customer looked at it and said, the Thin Plate Pure Lead product was so superior to the other products that were out there, they were willing to pay the premium for it.

And we're finding that in other regions. Hopefully, some day we will see that take place in China, but we're not counting on that. It's the areas outside of China.

Okay, great. That helps very much. Thank you for taking my questions.

JinMing Liu, Ardour Capital.

Thanks for taking my question. Just a quick follow-up on the OptiGrid. So, out of the $40 million or $50 million other pipeline, what kind of end market or users you guys are working with? Are those mainly commercial users like the New York City projects or some related to renewable integration?

Well, most of it is looking in New York City right now. And these are multiple family dwellings or they are buildings -- large buildings. And what they are looking for is that -- I don't know the exact cost on a kilowatt in New York, but during the peak period, I've heard numbers in the $1 range. But don't quote me on the numbers. But I can give you just in kind of order of magnitude what they are.

During the real peak periods, where you're looking at $1, let's say per kilowatt, versus during the off period, that you are looking at, let's say, $0.20, that $0.80 spread is pretty big. So, what the OptiGrid does is, during the off period, it will store the electricity in our batteries at $0.20 per kilowatt. And then when the rate jumps up to, in this example, $1 per kilowatt, it will use the energy that's stored in the batteries at $0.20.

So, net-net, it's a saving. The thing of it is that this isn't government subsidies. This is pure economics of looking at the return on investment on this.

Okay. So you -- so most of your current potential customers are still looking at a load shifting application, not something like reduced layer demand charge?

Yes, yes.

Okay, got that. Thank you.

Dana Walker, Kalmar Investments.

John, you were talking about Thin Plate Pure Lead in Asia. Can you talk about the value assessment that your Japanese customer or some other customer might be making when you talked about how they were overwhelmed by the qualitative difference in the product versus the options?

It's total cost of ownership -- this is Dave. In terms of the longevity of the product, it's recharge times -- it's available ampere hours in the same available space. It just provides a lower TCO.

Yes. And you look at that whether it's on a Reserve Power battery or a Motive Power battery, it's total cost of ownership is the whole thing. Even on our Thin Plate Pure Lead batteries, they go in automotive or they go in defense or wherever, is total cost of ownership. If you are going to get a premium -- I'll pick a number, 15%, 20% on a battery, you better have a good reason for justifying that. And the 15% to 20% premium, it will actually save you money in the long run.

And, Dana, the backdrop there was -- you had the tsunami that caused the Fukashima power plant disaster, really disrupted the Japanese electrical grid. So that they -- suddenly, a premium product was required; whereas before, a me-too was able to suffice.

Very interesting. Dave, perhaps best for you. How many other product families do you think need to be reengineered to be fully competitive in China versus the one initiative that you've taken thus far?

I think that the biggest market that we address in China historically has been the telecommunications market. And that market has a fairly homologated standard, which is the good news in terms of complexity. So, I think that with the redesigns we are currently doing, we cover broad swaths of the market.

But it applies in Motive Power as well. It applies in all markets, that it is a keenly competitive area, and we just have to always -- and never stop improving our cost to be competitive.

The China market is actually a good news/bad news story. And let me tell you the good news on it. The good news is the export of battery out of China has become much, much more expensive because of the export taxes associated with it. The Chinese government regs have made it more difficult or more costly to ship products outside of China.

The good news is, we don't see the Chinese and the Americas in our business hardly at all. And in Europe, it's really been cut back because of what I just referred to, and also the FX effect. That's the good news. It's kept those manufacturers at our Chinese base out of -- for the most part, less of a player in the Americas and in Europe.

The bad news is, with that excess capacity that they have, that they were shipping product outside the US, what they are doing is to keep the factories loaded, they've lowered their pricing on it. So it's made it a tougher market for us to do business in China. Now, with most of our business being outside of China, with China being -- I don't know, probably 6% of our total operations, I'm glad that this is the way it is. Because I'd hate to see the low-cost manufacturers in China shipping product into Europe and the Americas, and just dropping their pricing.

Yes. Final question relates to Purcell. You've helped size the negative that Purcell played in your prior year and prior calls. But could you update us on that? And then, roughly speaking, on a comparative basis, how would you expect Purcell to play incrementally this year versus last?

This year, we are projecting it to be flat to last year. And when you take a look at it, the first half of last year, there was a good run rate with it. This major customer we referred to in the past was ordering in the first part, and it fell off the second part. So when you look at last year, the second half was way off compared to the first half.

This year, we are anticipating that we'll be -- actually we are forecasting a higher volume this year than last year, just marginally higher. But when you look at the run rate coming off third and fourth quarter, being as low as it was, and going into this year at higher rates, it's starting to pick up.

And as I said earlier, where I think we are really going to see the benefit is going to be in the following year, as we get further approved with telecommunication companies that are outside of the US -- which, and as I said earlier, we've already started seeing orders and things -- activities take place in that arena. It's started, and we just got to -- we need to continue to grow it.

Thank you.

William Bremer, Maxim Group.

Just a few follow-ups. I was just curious, in Beijing, they've been implementing the 4G in the Metro subways. I was wondering if you had any exposure there?

And then also, India. I wanted to get a sense on the strategy there going forward, and if you're going to have to proceed with some larger acquisitions in that space? Or can you just bolt-on and continue to grow your capacity there?

Yes, to your first question on Beijing with 4G, from our viewpoint is, it's whether it's 3G, 4G or 5G even, it's going to require a battery. So whether it's going into a 4G or 3G application, we're not 100% sure. As I said earlier, that most of this is going through China Tower today. So, they are buying the batteries. And how they use those batteries or what generation, we're not 100% sure of.

Now, on the India side, I've mentioned before that was a seed that we planted to be in that market. It's a $1 billion-plus market. We are at $30 million in that business. You know, we bought this company -- we were actually going to do a greenfield over there, and we found this company that had a workforce in place, and had some decent equipment and a decent facility. It's a -- basically, it's a greenfield, I think is the best way of looking at it for us.

We're making investments over there. We are going to be a player in that market. We are starting to see order activity pick up on it. The old company that -- the owners that had it, the product quality was not good. We've got some legacy problems. And our philosophy has always been and will always be that if there is a problem with a product, and we own it, we will take care of it. We'll stand behind it. Even if something happened under prior ownership.

So we still have some of those legacy problems that we are contending with now right now. Again, this goes back to the same thing we talked about in total about the Asia market -- it's a longer-term view that we have. In the short run, there are going to be some setbacks.

And then, Mike, I have one for you, if you don't mind. You mentioned that the first-quarter overall revenue will be sequentially lower than the fourth-quarter we just posted. I was just wondering, the second-quarter is seasonally your lowest quarter. Is that going to play out again in 2016?

Well, the -- I guess I would say a couple of things about the second-quarter, Bill. The -- I don't have any insight as to what kind of FX rates I might be experiencing. But I would expect that they should be comparable and maybe slightly better than the second quarter of a year ago.

Okay, fair enough. Thank you.

(Operator Instructions) Ben Hearnsberger, Stephens.

Thanks for taking my quick follow-up. So, just on your buyback plans, you are in effect putting in place a large buyback when you call your converts here in the next couple of months. Outside of that action, do you expect to continue to be active in the market buying back your stock?

So, Ben, the -- so we have, as you should be aware, we did put out a call notice on the convertibles, and those convertibles will be retired in late July. Now, we have an option. We can -- we will pay the principal in cash, call that about $173 million. And the premium, which will be anywhere from $120 million to $130 million, if based on current share prices, we have an option. We can either pay it in cash -- and if we do that, that's going to take what was about $1.6 million of dilution, in our fourth-quarter, off.

So that 46.5 million share count is going to drop starting in the second quarter and thereafter down to about 45 million. Now, that's if we do it all in cash. The other option you have is to issue shares. And that's what really the financial statements assume you will do, is that you will issue shares.

So, if we did issue shares, you would expect our share count to remain somewhere close to the 46.5 million shares that are outstanding at the moment through the balance of the year, with the only other items playing in would be the impact of the annual stock comp grants, and the buybacks that we typically do to try to neutralize that. So we have two options.

If we issue shares -- and there are some benefits to issuing shares, which I won't get into -- but if we issue shares, then we must make a decision, which we haven't today -- are we going to let -- just let those shares remain outstanding? Or will we buy them back? And how quickly we will.

So, none of those decisions have been made at this point, but they will be made and potentially very soon because of the call and the conversion features. Those decisions will be coming up in the next week, actually. So when you said a couple months out, I just want to alert people it's sooner than that, but we haven't concluded on what we're going to do.

Okay, that's helpful. Thank you.

Thank you. And with no further questions in queue, I'd like to turn the conference back over to Mr. John Craig for any closing remarks.

Well, thank you. And you know, we started the call on this. We mentioned that it's our fifth consecutive year that we produced record earnings for our shareholders. And I'm hoping and fully expect that next year at this time on this particular meeting that we'll be saying it's the sixth consecutive year.

I'm very bullish on what's going on in the Company right now. Not only short-term, looking at the next year, but as we've talked a lot on the call this morning, about longer-term where we are going. You know, as I said earlier, we didn't go from $400 million in revenue to $2.5 billion by looking at the short-term. You know our objective is to get to $4 billion. We've got a ways to go.

We will continue to be aggressive and active in the M&A area. We'll continue to look for new products in areas that we can help improve shareholders' return. All in all, I'm very bullish on the Company; remain that way, not only in the next year but beyond that.

So, with that, I appreciate you taking your time today to call in. And thank you, and have a great day, everyone.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of your day.