EnerSys (ENS) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the EnerSys Q1 fiscal 2016 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, Mr. John Craig, Chairman and CEO. Sir, you may begin.

Thank you very much and good morning, everyone. Thank you for joining us. On the call with me this morning is Dave Shaffer, our President and Chief Operating Officer, and Mike Schmidtlein, our Chief Financial Officer.

Last night we posted on our website slides that we are going to be referring to during the call this morning. So if you didn't get a chance to see this information, you may want to go to our website tab in the Investors section of our website at www.EnerSys.com.

Before we get into the details of our first-quarter results, I'm going to ask Mike Schmidtlein to cover information regarding forward-looking statements. Mike?

Thank you, John. Good morning to everyone. As a reminder, we will be presenting certain forward-looking statements on this call that are based on management's current expectations, and are subject to uncertainties and changes in circumstances. Our actual results may differ materially from the forward-looking statements for a number of reasons.

Our forward-looking statements are based on management's current views regarding future events and operating performance and are applicable only as of the dates of such statements. For a list of factors which could affect our future results including our earnings estimates, see forward-looking statements included in Item 2 of management's discussion and analysis of the financial condition and results of operations set forth in our quarterly report on Form 10-Q for the fiscal quarter ended June 28, 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 August 5, 2015, which is located on our website at www.EnerSys.com.

Now let me turn it back to you, John.

Thanks, Mike. Last evening we reported first-quarter results of $1 per share, which was in our guidance range of $1 to $1.04. You'll notice on slide 3 our year-over-year sales and earnings were lower in the first quarter, due mainly to the pause in reserve power spending and the negative impact of foreign exchange rates.

However, due to our lower commodity costs, we experienced gross profit and operating profit percentages up 26.8% and 11.9%. Our year-over-year earnings per share were down $0.02 in spite of our net sales being reduced by over $50 million due to the FX rates.

I now want to focus on our current business activities and second-quarter guidance. Our global motive power business experienced healthy order levels. In the last 12 to 16 weeks, motive power orders have averaged year over year an increase of mid single digits. We believe that these positive order levels are sustainable due to the ongoing strength of new electric fork truck orders. The three-month electric fork truck orders for April through June are up 10% globally compared to the prior year.

Moving to reserve power, all regions are experiencing lower sales volume. In the US, we believe the two largest telecom companies have reached a degree of 4G saturation and coverage, but the remaining telecom companies still have significant 4G buildout remaining.

In our Europe, Middle East, and Africa regions, during the first and second fiscal quarter we experienced a slowdown in telecom orders. We believe that our customers are taking a pause in spending in order to absorb some excess inventory and the finalization of plans from recent M&A and spending alliance activities. We expect to see a pickup in orders in the second half of fiscal 2016; therefore, we expect our Europe, Middle East, and Africa reserve power business to have a better second half of the year versus the first half.

I now want to update you on our plans to expand our Asia business and increase second-half profitability in the region towards our minimum 10% operating earnings target. First, in May we announced we have been awarded a $10 million contract for thin plate pure lead batteries in Asia for the first phase of a multiyear fiber-to-home build out project. This project appears to be an expanding opportunity as we are quoting for additional business of equal or even greater size.

Second, last year we elected not to participate in the low-priced telecom business in the China market, which is the reason our reserve power volume in Asia year over year is down.

This year's tendered bid process for batteries for the China telecom market has begun. A decision on battery allocation for this opportunity should be completed in September or October, with battery shipments to begin late in our third or early fourth quarter. We are optimistic that we will be awarded volume that would be an upside to our annual revenue.

Third, in our first fiscal quarter we completed the transition in China from the Jiangdu factory to our [Yangzhou] factory. This should eliminate over $1 million per quarter in transition costs starting in our second quarter.

Based on the above trends and information, our earnings-per-share guidance for our second quarter is between $0.92 and $0.96. However, second half of fiscal 2016 should be more profitable than our first half, given our solid motive power business, the improved reserve power business, and lower commodity costs.

We announced in July the acquisition of ICS Industries in Australia. One of the key reasons for buying this company was to utilize their nationwide service organization to grow our reserve and motive power businesses in Australia.

We historically offered only regional service; therefore, some customers would not buy our batteries due to the lack of a national service program. ICS will allow us to provide the national service and execute our vision of complementary service and battery sales in Australia. Customers are already beginning to inquire about our batteries service packages.

ICS also provides a full line of shelters for the telecom industry and many other industries.

Last night we also announced that our Board of Directors approved a quarterly dividend of $0.175 per share payable on September 25. In July we retired our convertible notes by paying cash for the $173 million principal and issuing approximately 1.9 million EnerSys common stock for the premium. In a minute, Mike is -- will discuss this in further detail.

In closing, our global fiscal 2016 business should deliver improved financial results in the second half of the year versus our estimate for the first half. Even though we are seeing a pause in reserve power orders, I remain optimistic about the future opportunities available to the Company.

Now I would like to turn it back to Mike to provide further information on our results and our guidance.

Thanks, John. For those of you following along on our webcast, I'm starting with slide 5.

Our first-quarter net sales decreased 11% over the prior year to $562 million, despite a 1% increase in price due to a 9% currency headwind and a 3% volume decline. On a regional basis our first-quarter net sales in the Americas were down 4% to $317 million, while Europe's decreased 19% to $197 million and Asia decreased 21% in the first quarter to $48 million.

In the Americas, a 3% organic volume decline was further reduced by 2% currency declines net of a 1% price improvement. Europe had a 1% increase in price, but a 19% currency decline. In Asia, volume decreased 16% along with a 6% decline in currency translation, while pricing rose 1%.

On a product line basis, net sales for motive power were down 8% to $298 million while reserve power decreased 15% to $264 million. Despite the 10% currency headwind, motive power enjoyed a 1% volume gain and 1% from higher pricing, while reserve power incurred an 8% volume decrease and 8% of negative currency translation net of a 1% price increase.

Please now refer to slide 6. On a sequential quarterly basis, first-quarter net sales were down 11% to the fourth quarter due to 11% lower organic volume. This volume decline results primarily from 7% fewer days in our first fiscal quarter.

The Americas region was down 8%, while Europe was down 15% and Asia was down 12%. On a product line basis, motive power was down 4% and reserve power was down 17%.

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 August 5, 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 $7 million, while the operating margin rose 30 basis points. On a sequential basis, our first-quarter operating earnings dollars declined $6 million on 11% lower volume, again due in part to 7% fewer days in our first fiscal quarter, while the operating margin also rose 30 basis points.

This decrease in operating earnings from the prior year reflects primarily lower organic volume currency headwinds. Operating expenses, when excluding restructuring and due diligence costs, were at 14.9% in the first quarter compared to 14.0% in the prior year. Percentage rates of the first quarter's operating expenses increased on lower sales, while the absolute amounts declined by $2 million.

Our Americas business segment achieved an operating earnings percentage of 14.6% versus 12.5% in the first quarter of last year, primarily from the impact of lower commodity and manufacturing costs. On a sequential basis, Americas first quarter increased 220 basis points from the 12.4% margin posted in the fourth quarter, also due to lower commodity and manufacturing costs.

Europe's operating earnings percentage of 10.5% was down 130 basis points on currency declines from last year's first quarter of 11.8% and lower than last quarter's record rate of 13%. The operating earnings percentage in our Asia business declined in the first quarter of this year to breakeven from 5.9% in the first quarter of last year and 1.3% in the prior quarter.

Asia's operating earnings for the first quarter, reflecting lower volume of Chinese telecom sales as well as the impact of earnings of plant startups and closures to Q1 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 first-quarter adjusted consolidated operating earnings of $67 million was a decrease of 9% in comparison to the prior year, while the operating margin increased 30 basis points to 11.9%. Excluded from our adjusted net earnings for the first quarter was approximately $2 million of highlighted net credit, the largest being a $3 million gain net of tax on the sale of an idled plant in China.

Please see our press release issued yesterday for details of these items.

Our adjusted consolidated net earnings of $46.7 million decreased 8% from the prior year to 8.3% of sales for a 30 basis point increase while our book tax rate was 23%. EPS decreased 2% to $1 on lower net earnings with 3.0 million fewer shares outstanding. The lower average diluted shares resulted primarily from share buybacks, which exceeded the final 1.9 million share dilution from our convertible debt, which was extinguished in July.

To offset this dilution, the Company expects to enter into an accelerated share repurchase agreement with an investment bank to acquire between $120 million to $180 million of our shares by the end of this fiscal year. This program should result in an average diluted shares outstanding of approximately 46.0 million shares in our second fiscal quarter and 45.0 million shares in our third fiscal quarter.

Our adjusted effective income tax rate of 23% for the first quarter was lower than usual due to a $2.3 million non-recurring benefit in Europe. We believe our tax rate for the next fiscal quarter of 2016 will be between 26% and 28%, but for the full year we expect a 25% rate on our as-adjusted earnings.

Please now turn to slide 9. Now for some brief comments about our financial position and cash flow results.

Our balance sheet remained very strong. We now have $445 million on hand in cash and short-term investments as of June 28, 2015, with nearly $652 million undrawn from our credit lines around the world. We generated $82 million in cash from operations in our first quarter of fiscal 2016.

Our leverage ratio remains at 1.0 times despite spending over $237 million in share buybacks and dividends in fiscal 2015. Capital expenditures were nearly $20 million in the first quarter of 2016 and should reach up to $75 million in the full year.

We expect to generate adjusted diluted net earnings per share between $0.92 and $0.96 in our second fiscal quarter of 2016, which excludes an expected net charge of $0.07 from our restructuring programs and acquisition activities. We anticipate our gross profit rate in our second fiscal quarter to be between 26% and 27% and our interest expense to be approximately $5.2 million.

In conclusion, we expect our second quarter to be followed by our normal stronger second half to our fiscal year. Now let me turn the call back to you, John.

Thanks, Mike. With that, I would like to open the lines up for questions.

(Operator Instructions) Michael Gallo, CL King.

Good morning. John, I just wanted to dig in a little bit on the reserve business. Obviously it has been somewhat sluggish for a number of quarters.

I was wondering if you could just give us a little more detail on what makes you think we will see a rebound. I know you've talked about for a few quarters now that you thought the cabinet business would start to improve. So help us get a little more comfort about what you are seeing in reserve. I get that Europe probably rebounds with the 4G rollout, but what makes you think that the US isn't perhaps in a lower state of spend for a little while? Thanks.

Michael, let me start out by saying that the telecom business globally is -- what we really have to look at is by region, because the events that take place in each of the regions are different. So let me start with the China -- the Asia market.

The Asia market what we're seeing, as an example, in Australia where the buildout is very positive for us. The other side of the fence; you know in China in the past we've walked away from the telecom business because the margins were very low. Payment terms 250 to 300 days.

We also talked in the past about designing new products to put into our Chongqing factory to offset that. I have to report that that is going very well for us. The new products that we introduced are going very well for us. And going into the tender bid in China, which I mentioned earlier should be completed by September or October, we think we're in a much better position this year with new products and cost reductions and things that we should pick up a little bit more business there.

Now looking at the US market, as I stated earlier, when you look at the major two players, they have had -- they are reaching saturation of 4G. 4G in the United States, as we all know, is very, very solid.

You mentioned about Purcell as an example. Purcell is one that took a big hit and I've mentioned many times in the past with Purcell, when we bought the Company our objective was not to keep it just to the United States, but to spread it across the world. I am very happy to report that over 50% of our sales from Purcell today are outside of the United States.

Now you can argue, well, the denominator has gone down because we have lost some business in the United States. But the fact is outside the United States our business in closures has grown by 30% in the last year. So our plan to really hit that, the outside areas, is working quite well for us.

Now when you go to Europe, it's a whole different story. In Europe -- in China, as an example, you have three telecom companies. In Europe, you have over 100 telecom companies and Europe is way behind on 4G. I think it's about 10% of the users today actually have access or are actually using 4G.

It's a matter of time that it has to come. And is it going to be lumpy? Yes, it is. Have we seen this before in other regions? We certainly have.

The exact reasons that it's going on, we suspect it's because of the M&A activities. We suspect it's because of some consolidation that is going to take place with it, but we don't have the whole story and I would have to talk to each one of those providers. But we have got to believe that 4G -- they are not going to stay with 3G in Europe forever and it's going to continue to go on.

I have said many times in the past the reserve power business is a feast or famine business. We see gigantic orders come in sometimes like this thing I mentioned in Australia, a $10 million order that we think is even going to grow way beyond that. The other side of the fence in Europe that we are seeing the reduction, or the pause that is taking place today.

I hope that answers your question, Michael.

It does. Thanks very much.

William Bremer, Maxim Group.

Good morning, John, Mike. First question going back to Asia, have you -- and I remember you were gunning for new product launches there. Last quarter you emphasized that you have received certification. I think you had one or two other products in queue to receive the certifications there. I just wanted to get an update on that, whether or not that has been completed.

Then secondly, I'd like you to possibly go into the latest acquisition, the thoughts behind that -- ICS. I understand the better distribution. Could you give us a sense of, say, on a yearly basis what you feel as though that maybe you lost or what you hopefully see as a potential gain of lost sales without having that distribution in that area?

Well, let me take your questions. I'm going to take the first part on ICS and give you a little detail. Then I'm going to turn it to Dave Shaffer on your first question.

On ICS, as I mentioned earlier, we have a successful battery sales division in Australia. What we don't have is a service organization. If you look at what's going on at the national level, in Australia to put fiber to homes there's going to be very large spending that's taking place.

ICS is tied in with each of the major telecom companies over there. They have a nationwide service organization. We now have customers that are calling us that we haven't done business with in the past that are now interested in doing business with us because we have the full package: the sales and service, the maintenance, the installation, and the shelters that go along with it.

So we believe that this is a great opportunity for us from the standpoint of really growing not just ICS as an independent, but more importantly to me, is growing our reserve and motive power battery business.

Let me stop there, Bill, before we go on to the second part of your question, or actually the first part of your question, and see if that satisfies you for the ICS acquisition.

It does. Can you give us a sense of what you feel as though you lost over the last couple -- over a year because you didn't have this service capability?

I don't know exactly what we have lost in it, but a couple of things for sure. One, there's business that -- and I wouldn't say we lost it. We just weren't capable of providing it. It's something the customer wanted in service and we weren't capable of doing it. The dollar amount on that, I don't really have a real strong feeling on it, but we do know that we are getting calls from customers today.

But I think, as important to that, is what is happening Australia as for spending and where do we see the spending going on in the fiber to the home. That we know is large.

And to back that up, as I mentioned earlier, we just recently received a $10 million order and we suspect that we are going to receive more orders that could be equal to or greater than that $10 million. We wouldn't be able to take and service and do the installation on those if we didn't have ICS.

So let me turn it back over to Dave on the first part of your question.

Regarding the low-cost products design changes in China, the key -- the Chongqing factory, which John mentioned has two parts. The block factory, that business is going very well. The block lines are doing very well.

The key is going to be how we fair in these tender results, which John mentioned September or October we will find out how we do. We think that we are in a much better position than we were in years prior to achieve a meaningful gross profit from those bid results. Hope that answers your question.

Dave, so how many products do we have for that type of auction? How many are we queuing up there that we feel are competitive to our competitors?

It's a product family, Bill, but -- it crosses, but they tend to buy heavy in one or two SKUs.

Okay. And you feel that as though we will have a portfolio to attack that?

We are in a better position than we were prior.

Okay, all right, then the certifications have come through on a number of different SKUs?

Yes, we are working very well on that regard. Again, the key will be how we fair in these tender results.

Okay. Then one for you, Mike, on the lead. Can you breakdown what the lead benefit was for the quarter?

Well, I am hesitant to do that, Bill, because in any given quarter you have what the LME is doing. You also have what our hedges are doing. I would say that on a sequential basis -- it depends on if your reference point is year over year or if it is sequential, but I would say in general the first quarter lead was better than it was the previous quarter or the previous year, mildly better. And as you have seen, spot rates for the LME have been going down.

But the only caution I give you there is just because of some of the hedges and the timing of the FIFO rollout, it's not quite always as plain. But it's, I would say, mildly positive.

I think one other point pick up on this thing, if you go back and look in the last few years that lead has been low and then it goes very high and then it goes low. It swings all over the place. And, Bill, you have heard me say many times in the past I don't care if lead is $2 a pound or $0.20 a pound. Our industry has demonstrated it has the ability to pass along in pricing.

Now with lead coming down, obviously with automatic pass-throughs, pricing is going to come down also. So when you look -- you just can't isolate lead alone. You've got to look at lead, the cost of commodity, and you have to look at the automatic pass-throughs, and then you have to look at the general market to see where it is.

But I'll tell you the thing that is really good is that we've got some reasonable level of stability in the LME right now. The thing that was really bad in the past is when you go from $0.80 a pound to $1.30 a pound and you are playing catch up on pricing. Then $1.30 a pound, back down under $1, and then your pricing is holding for a while. So we got stability right now, which is really nice.

I hear you, John, but we have here is, what, 23% pullback year over year. [I think] that's very solid for you going forward.

Yes, I would agree.

All right, thank you.

Ben Hearnsberger, Stephens.

Thanks for taking my question. I wanted to dig into the 2Q EBIT margin expectations. It looks like you are guiding for EBIT margins to be lower than 1Q, despite the fact that we'll expect a little bit of a back half pick up this year. We've got the commodity tailwind persisting.

Can you just give us some color around maybe why the conservatism in the EBIT margin guide?

I'm going to turn that to Mike. Before I do though, keep in mind our policy has been and continues to be that we will project ahead one quarter what our EPS is. And we don't want to get into a situation about volume and all the other variables with it because it just creates a lot of confusion.

Everything that we have in there, whether it's volume or commodities or anything else is reflected in our guidance. But with that being said, Mike, why don't you pick up on that question?

I guess the two factors I would point to, Ben, would be I would expect the gross profit margin -- strength of our gross profit margin to continue through the next quarter. And also, based on timing of our stock compensation awards, which are done in the middle of our first quarter, I would expect our second quarter's operating expenses to be higher.

So I would say those two things will offset one another and you should see operating margins would be comparable to the current quarter.

Okay, that's really helpful. And then you mentioned that the 1Q margin held in as well as it did both driven by commodity costs and then some manufacturing efficiencies. Do you have -- are there more efficiencies out there that you can go and tackle or do you feel like you are running about as lean as you can at this point?

When you look at every quarter we have restructuring charges in there and you look at that number and say, gee, when does that end? Well, my answer to it is I hope it doesn't end. I hope we can continue to find these great paybacks on restructuring that we've seen.

And, yes, we are constantly looking at how we restructure the business to become more efficient. Mike, you want to pick up it also?

The only thing I would say -- and I can't promise the relief will be in the second quarter, but I think our biggest opportunity when it comes to manufacturing costs will be as we move out of the transition and are -- as we transition from the older plants in China to the new plants -- and the new plants are starting up, etc., but that's where we anticipate the best near-term opportunity is to put behind us those transition costs in China.

One other thing I want to bring up here is going to be about margins increase. We talked about margins and where they are going. And, Dave, why don't you pick up on what we're doing in the new product area to increase margins?

Again, there's a lot of new products; the modular charging line we've seen some great results. It's not higher -- it's definitely not higher pricing. It's higher margins. And we've got other new products; that has been a key component of our margin improvement and one of the messages for sustainability about margins.

Okay, that's helpful. Then, John, maybe one last one for me. Can you give us a sense for how the OptiGrid pipeline looks?

This year we are looking in the ZIP Code of about $10 million. Let's go back a little bit for those that don't know what OptiGrid is. It's really off-grid storage. The main application for us would be behind the meter. It would be a situation that when electricity is very expensive during the daytime, that you would be discharging the batteries and using that energy to run a building. Then during the nighttime, when electricity is cheaper, you would recharge the batteries.

As I mentioned, you are looking at about $10 million in revenue this year. We have somewhere between $50 million to $100 million in quote activity that is out there today. I don't expect -- and I've said this all along -- I don't expect this thing to grow rapidly. It's going to be slow growth with it.

And it's not because of EnerSys. I think it's the whole thing of how many people are going to be investing in this type of systems going forward. You have government subsidies today that is helping out quite a bit. They go away, what happens to it?

So it's one that is a relatively minor investment for us to be in, but it has some pretty good upside for us.

Okay, that's helpful. Thank you, gentlemen.

John Franzreb, Sidoti.

Good morning, guys. I just want to revisit the lead story. With lead prices at five-year lows I'm kind of surprised that you are not more optimistic about potential tailwinds on the commodity side of the business. Is that because you are a little concerned maybe about what the volumes are looking like in reserve or you just don't believe they could stay down here at this level?

I think it's this, John, and we talked about this all along, that when lead goes up we play catch up on getting pricing. When lead goes down and you have automatic pass-throughs, it's hard to hold anything. So, yes, the lead is going to be a real pickup for us that is going to help us, but the pricing is going to offset with it.

Now the second point is keep in mind that in Europe lead is -- we sell in euros, but when we buy lead we have to convert the euros to dollars to buy the lead. And with the FX effect being down you really -- you get little to no advantage with the LME dropping down when the currency is low.

Where you're really going to pick up the advantages on this is going to be in the United States and to a lesser extent in China, but you are not going to get a lot of benefit out of the Europe operations. And keep in mind, only 40% of our business today is in the United States.

Got it. Can you just remind us how much of your revenue is tied to automatic pass-throughs?

In Europe -- first of all, we have to say 60% of our business is done outside of the United States. And that portion that is done in Europe, about 60%-plus of that business is on a pass-through mechanism of some type or another.

Got it. Thank you, Mike. Could you just update us on maybe the competitive landscape, especially in light of some of the weaker spending in European reserve market? Does the pricing become more competitive or not? Can you just kind of bring us up to speed there?

Not at all. I think that it has been a very rational market. I think that's what has taken place with it is when you look at the balance sheets of many of our competitors, they are not in the same situation that we are in. I think many of them are struggling and that, if anything, they would love to get higher pricing.

So if we go -- we are the market leader and we go for price increases, normally our competitors will follow.

Okay. Thank you very much, John.

Sven Eenmaa, Stifel.

Great. Thanks for taking my questions. First wanted to walk through the organic growth dynamics you guys saw in reserve power business across regions from March quarter to June quarter. On telecom side, which -- where did you see the biggest drop off? Was it in European side? Did you see further declines in the US as well?

Sven, this is Mike. Typically we provide regional background across geography, but not by product line. So on product line we tend to want to say what it is for the total of the product line, because for purposes of segmentation I can't slice and dice.

So I would say, overall, we had an 8% organic decline in reserve power across all regions. The largest decline of those was in Asia, which we've mentioned on a couple of calls was in large part because of our decision over a year ago to not participate at high levels in the tender offers that were coming from the major telecom customers. So I would say the biggest pressure on reserve power is coming out of Asia.

Got it. And so when you think about the commentary you provided in your earnings announcements regarding third-quarter order activity improving, are these expectations tied primarily to Asian markets or is it tied to Europe or US?

It's tied to both, it's tied to both. We believe that there is a pause that is taking place, which will see have seen many times in the past. As I said before, it's a lumpy business. It can be feast or famine.

We think that we're going to see a pick up that is going to take place in Europe. And we also believe, with the new product designs that we have, the cost reductions we have, with our Chongqing factory being more efficient that we have been able to lower our costs and we think we have a better advantage to go after some of the China mobile business.

We will have to wait and see in it, but I will say, of the 23 or 24 provinces that are in China today, that we are doing business with China Power with over half of those provinces right now before this tender offer even goes out. So I think we've got a pretty good shot at it, but we're going to have to wait to see. This is forecasting ahead of what we think is going to happen, but things could change.

In terms of kind of the visibility of the European carriers, what is the typical process for you? When does the quoting activity start? When do you get a sense of that order activity actually is improving?

Well, as I said earlier, when you got a feast or famine type thing and you think you've got some dynamics that are taking place with consolidation or consortium buying. You've got 100 different carriers over there and things have to be sorted out. It has to be sorted out with the EU commission and it's going to take some time to do this.

But I am of the belief that Europe cannot afford to stay at 10% of the users using old technology. I believe it will change.

Dave, why don't you pick up? You were in Europe for a few years. What's your thoughts?

I think there's a couple of key points that you had mentioned in the script. One is that we are seeing an inventory workdown on some of the key customers that's not necessarily related, just a timing issue. So that has been part of it.

I would say that the order activity, the quote activity, the feedback we're getting from the guys is actually positive. So there was a breath taken with regards to some of the key customers working down some excess inventory, but we are still optimistic about the second half, as reported earlier.

Dave had a meeting last week with the sales organization in Europe for reserve power and it was really for us to get a better feel for where we thought it was going. A lot of it is when you're talking with our vice president of sales for reserve power in Europe and his team and the president, Todd Sechrist, of Europe and they are talking about specific customers and quote activities and the events that are taking place, it sounds very positive.

Have we baked all that into our forecast? Absolutely not. But we think that it's a pause and we think it will come back. And I will emphasize we think. We don't know for sure what they are going to do, but I do believe very strongly that Europe will not stay -- will not continue without 4G. They are going to put in place, it's just when.

Got it. That's very helpful. And last question on that front, on the reserve power side. With US telecom tower companies we have seen improving activity in terms of bookings and more positive commentary on that front, when supplying to tower buildout or cell site buildouts, what is typically the timing when your batteries get brought in?

Dave, go ahead and pick that one up.

It varies by customer. Sometimes we are working through the OEMs who have a little bit better visibility on their forecasting. Sometimes when we are dealing with the end-users they have very rotten visibility to their forecasting, so it's not an easy answer there.

I think the key for us is that the investments we are making, the acquisitions, the products, the new products we are developing, we're just trying to put ourselves into the best position we can all over the globe to take advantage of these spendings when they do come. As John had mentioned earlier, it's feast or famine and we just want to make sure we are well-positioned for the feasts when they occur.

Many times what will happen is for an installation like this, what they will do is they will collect all of the equipment -- the shelter, the enclosure, electronics equipment, the batteries, and everything -- and imagine that they store it in a warehouse. And then what happens is you actually have the implementation.

They're not going to go out there with the shelter and then come back, and then with electronics, and then come back with the batteries. They go out and they do a complete installation.

One of the thoughts that we have on the excess inventory is just the actual deployment or installing it. They bought the batteries and they may be waiting for another component or they may have all of the components sitting there but they are just overloaded from an installation standpoint. There is just a lot of variables.

And remember what I said earlier, every one of these regions are different. It is not a telecom -- global industry is not the way to view it. It's very regional. In fact, it goes further than that, because even the installers, they all have their own processes and the way they do things.

And that's one of the things of the complexity of this business that we've been very successful in dealing whatever they throw at us; we can work with them on it. In fact, the whole philosophy we will be the best in the industry to be easy to do business with.

Got it. That's good to know. On ICS Industries, you indicated in an announcement that you expect the transaction to be accretive in the coming year here. What are your expectations in numeric form? Is there -- can you provide any metrics around the revenue or EPS guidance?

Well, I don't want to go too far into that because we haven't given that information out, but I will say right out of the chute it will be accretive. It will be a few cents a share. But, again, this is something we are looking at just not as ICS alone.

In fact, our sales organization; day one when we acquired it, we merged ICS right into EnerSys and it isn't ICS anymore. It's EnerSys because the people all report in to the same organization. It's a bolt-on to what we had over there and it's a big bolt-on because we haven't had the service. We just haven't had it and we haven't been able to pick up business.

So we had a choice: go add nationwide service, which is very expensive, or to acquire someone who could do it for us. And we chose the latter.

Got it, thanks a lot.

William Bremer, Maxim.

Just a couple follow-ups. First going into reserves, can you give us a little bit of sense of how you see the revenues portraying throughout the rest of this year? I want to go into pricing there as well of -- the orders that you are getting now, are they comparable to what we saw here in the first quarter or --? How is the pricing environment there?

Pricing is good. Pricing is not an issue. As I said, it is a pause that we are seeing right now and, Bill, it's projecting the future. Where do we believe it's going to go. And it's very difficult to do that, obviously.

But it's our belief, as I mentioned earlier, and with Dave talking with our sales organization in Europe and what we're hearing from customers, that it should -- it's our belief it will pick back up again, but we are going to have to wait and see. Dave, you want to add to it?

Bill, this is Dave. Just note that we continue to focus on improving the mix of the premium products. I mean in every day and every way, that's our goal and that has a positive impact on margins.

Do you expect the back half of this year to be greater than the first half in terms of top-line revenue?

Absolutely, absolutely. We've said that in the script. We are fully anticipating it. We have to look at it right now, where do we think the second half is going to come out?

The reason we have to look at that is we have to be sure our manufacturing plants are capable of providing what is needed to support that forecast. And if that forecast is way low, then we need to do cutbacks.

So we are analyzing that daily on where we think that things should fall and right now we are anticipating it will pick back up. If it doesn't, then we're going to have to look at other alternatives. But we feel at this stage, based on the data we are receiving, the intelligence that we are receiving from our sales organization, from our customers that we should see a pickup.

John, with that commentary do you believe the second half, in terms of earnings per share, will be greater than say year-over-year comparable time?

That's what we said earlier. Oh, comparable time? No, what we have said (multiple speakers) second half will be better than (technical difficulty) [previous].

Second half of 2016 versus second half of 2015?

I don't know on that. Mike, you know?

Well, I would say again, Bill, you're stretching us beyond our comfort zone in terms of what we can see from activity on commodities or actual orders from our customers. But I would say we should expect it to be better, if for no other reason, than you are talking on an earnings per share basis because you're going to have significantly fewer shares in the second half of this year. On a dollar basis, it's probably going to be more flat.

Okay. Thanks, Mike.

(Operator Instructions) Howard Rosencrans, (inaudible).

Quick question. The Americas -- John, you've talked in the past when the margins get good about what the sort of long-term sustainable margins are. This quarter you were down in -- you had -- it was a weak sales quarter, but you were able to achieve a strong margin.

Obviously, commodities were a key driver there. So where do you think the margin --? Is this sort of the top end of where the Americas margin can be? What are you seeing for the next however long you want to share with us? Thank you.

Howard, that question was asked a couple years ago when we talked about Europe and how Europe had a pickup, because I said at the time we were running about 15% in the Americas. We are not going to plan on that being sustainable. You can price yourself right out of the market.

We believe that we are best value, that we actually save our customers money in the long run by the services and things we bring to them. And I think we have demonstrated that by the market share that we hold in the Americas. I think customers do recognize that.

Now the heart of your question is can you get higher than 15%? That's a real stretch, because I think you price yourself out of the market.

Right now I'm very pleased with what we've seen, especially in motive power business in the Americas. It's going extremely well for us because of the value that we bring to it, so we want to maintain the same level we are at right now. I'd be very happy with that.

Okay, great. Thanks so much.

Michael Gallo, CL King.

Just a follow-up. Mike, what you expect the tax rate for the year to be?

I would expect, Mike, that the tax rate for the full year would be approximately 25% and typically just because of, if for no other reason, the U.S. Congress waits to pass legislation with regard to the exemption of the look through rules for taxes.

Our fourth-quarter rate typically is our lowest rate of the year and our first and second quarters are typically the highest. But this year 23%; I think I said 26% to 28% in Q2. Full-year average 25%.

Okay, thank you.

Thank you. At this time I'm showing no further questions in the queue. I would like to turn the call back to John Craig, Chairman and CEO, for any closing remarks.

Thank you very much. Everyone, thank you for taking your time this morning to join us on the call and have a great day. Thanks.

Ladies and gentlemen, thank you for your participation on today's conference. This concludes the program. You may now disconnect. Everyone, have a great day.