EnerSys (ENS) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to EnerSys second-quarter fiscal year 2016 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 follow at that time. (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. Appreciate it. Good morning, everyone, and joining me on the call this morning is Dave Shaffer, our President and Chief Operating Officer, and Mike Schmidtlein.

Now last evening, we posted the information or slides that we are going to be covering this morning on our website, which is www.enersys.com. I was just informed a few minutes ago that there is some technical problems, so you may not be able to see these things, even though we will be referencing to them this morning.

But before we get into the details on our second-quarter results and what we are looking for our third quarter, I am going to ask Mike Schmidtlein to cover forward information.

So, Mike, would you take it over from there, please?

Thank you, John, and good morning to everyone. As a reminder, we will be presenting certain forward-looking statements on this call that are based on management's current expectations and are subject to uncertainties and changes in circumstances. Our actual results may differ materially from the forward-looking statements for a number of reasons. Our forward-looking statements are based on management's current views regarding future events and operating performance and are applicable only as of the date of such statements. For a list of factors which could affect our future results, including our earnings estimates, see forward-looking statements included in Item 2: Management's Discussion and Analysis of Financial Conditions and Results of Operations set forth in our quarterly report on Form 10-Q for the fiscal quarter ended September 27, 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 information and the non-GAAP information, please see our Company's Form 8-K, which include our press release dated November 2, 2015, which is located on our website at www.enersys.com.

Now let me turn it back to you, John.

Thanks, Mike. In September, we announced some organizational changes, which I would like to discuss this morning.

Effective April 1, Dave Shaffer will become the new Chief Executive Officer of EnerSys. I will be retiring as CEO at the end of the fiscal year, but will stay on as Chairman of the Board for the Company. This essential plan has been in the works for quite a while. And Dave has prepared himself for the CEO role by taking on excelling and leadership roles in the Americas, Europe and Asia. Dave knows our global business very well, and I believe this transition will be seamless. The Company is in great hands with Dave Shaffer.

We also announced the retirement of Executive Vice President Dick Zuidema, who joined the Company in 1997 and has been instrumental in helping build EnerSys from a $200 million company to the $2.5 billion company that it is today. I would like to thank Dick for what he has done and all the hard work he has put into the Company and wish him the best in his retirement.

Also, we announced that, effective January 1, Todd Secrest, who is the President of our EMEA region and previously was President of our Americas area, will be promoted to Executive Vice President and return to the US. At the same time, (inaudible), who has run our Reserve Power business in EMEA, will be promoted to President, Europe, Middle East and Africa. I am highly confident in the successful management team that we have set up. As an average, the individuals I've just mentioned have about 20 years' experience in the battery business.

Now I would like to turn the call over to Dave Shaffer.

Thanks, John. I appreciate your kind words.

On Monday, we reported second-quarter results of $0.97 per share, which exceeded our guidance range of $0.92 to $0.96. You will notice on slide 3, our year-over-year sales and earnings were lower in the second quarter due mainly to the impact of foreign exchange rates and a continued pause in reserve power spending. However, due to a positive mode of power business and lower commodity costs, we experienced a record gross profit percentage of 27.2%, while our operating profit percentage remains strong at 11.7%. Our year-over-year earnings per share were down $0.09, mostly due to lower reserve power organic volume and the impact of exchange rates.

I now want to focus on our current business activities and third-quarter guidance. Our global Motive Power business continues to experience good order levels and a positive mix. In the last 12 to 16 weeks, Motive Power orders have averaged year over year an increase of close to mid-single digits. We continue to believe that these positive order levels are sustainable due to the ongoing strength of new electric Ford truck orders. The three month electric Ford truck orders for July through September are up 7% globally, compared to prior year.

Moving to Reserve Power, most markets are experiencing relatively stable volumes with the exception of telecommunications, which continues to be soft, especially in EMEA. As we have said in the past, telecommunications is an up and down business, although we continue to have normal quote activity in both enclosures and batteries. Due to the reduced telecommunications volumes, we have taken measures to reduce our manufacturing and SG&A costs.

In Asia, we are experiencing double-digit order growth, mainly due to the fiber-to-the-home project in Australia, which we have previously announced.

Also, we now have visibility to the major telecom tender results in China, and the results are encouraging, though the tender is approximately three months behind original schedule. Our fourth fiscal quarter should benefit from increased volume from this tender.

Based on the above trends and information, our earnings-per-share guidance for our third quarter is between $0.90 and $0.94. In our third quarter, we expect that higher manufacturing variances generated in the summer months will flow through cost of goods sold and impact gross margin.

In addition, our lead costs will be impacted at lead hedges and were locked in when the spot rate was higher, worked through the third-quarter financials.

On Monday, we also announced that our Board of Directors approved a quarterly dividend of $0.175 per share payable on December 24. In August, we executed an accelerated share repurchase program of up $180 million, which is a final settlement date in February 2016. These repurchased shares will primarily replenish the Company's treasury shares, which were issued in July to pay off the premium amount due on the convertible notes.

In closing, we are still on track to have our global fiscal 2016 business deliver improved financial results in the second half of the year versus our first half. Even if the pause in reserve power orders were to continue in the Americas and EMEA, our fourth quarter will benefit from lower lead costs, more days in the fiscal quarter and higher volume in Asia. I remain optimistic about the future opportunities available to EnerSys.

And now I will ask Mike Schmidtlein to provide further information on our results and guidance.

Thanks, Dave. And for those of you that follow along on our webcast, which I understand should be up in a few moments, I am starting with slide 4.

Our second-quarter net sales decreased 10% over the prior year to $569 million, despite 1% increases in both price and acquisitions, due to a 9% currency headwind and a 3% volume decline. On a regional basis, our second-quarter net sales in the Americas were down 3% to $323 million, while Europe's decreased 19% to $189 million and Asia decreased 10% in the second quarter to $57 million. In the Americas, a 1% organic volume decline was further reduced by a 2% currency decline. Europe had a 2% increase in price, but 16% currency decline and a 5% volume decline. In Asia, volume decreased 9%, along with the 13% currency translation and a 1% decline in pricing, while the new ICS acquisition added 13%.

On a product line basis, net sales for Motive Power were down 6% to $295 million, while Reserve Power decreased 13% to $274 million. Despite the 9% currency headwind, Motive Power enjoyed a 1% volume decline -- or excuse me, volume gain and 2% from higher pricing, while Reserve Power incurred an 8% volume decrease and 8% of negative currency translation net of a 3% price increase.

Please now refer to slide 5. On a sequential quarterly basis, second-quarter net sales were up 1% from the first quarter, due to 1% increases in pricing and acquisitions less a 1% currency decline. The Americas region was up 2% and Asia was up 18%, all due to the recent acquisition, while Europe was down 4%. On a product line basis, Motive Power was down 1% and Reserve Power was up 4%.

Now a few comments about our adjusted consolidated earnings performance. As you know, we utilize certain non-GAAP measures in analyzing our Company's operating performance, specifically excluding highlighted items.

Accordingly, my following comments concerning operating earnings and my later comments concerning diluted earnings per share exclude all highlighted items. Please refer to our Company's Form 8-K, which includes our press release dated November 2, 2015, for details concerning these highlighted items.

Please now turn to slide 6. On a year-over-year quarterly basis, adjusted consolidated operating earnings decreased approximately $7 million, while the operating margin remained flat. On a sequential basis, our second-quarter operating earnings dollars were similar, while the operating margin declined 20 basis points. The decrease in operating earnings from the prior year reflects primarily lower organic volume and currency headwinds.

Operating expenses, when excluding restructuring and due diligence costs, were at 15.2% for the second quarter compared to 13.8% in the prior year. The rates of the second-quarter's operating expenses increased on higher stock compensation, bad debt expenses, and foreign exchange rates. Our Americas business segment achieved an operating earnings percentage of 15.3% versus 12.9% in the second quarter of last year, primarily from the impact of lower commodity and manufacturing costs.

On a sequential basis, America's second quarter increased 70 basis points from the 14.6% margin posted in the first quarter, also due to lower commodity and other manufacturing costs. Europe's operating earnings percentage of 9.0% was down 220 basis points on currency declines and lower volume from last year's second quarter of 11.2% and lower than last quarter's rate of 10.5%.

The operating earnings percentage in our Asia business declined in the second quarter this year to breakeven from 7.2% in the second quarter of last year, but remained consistent with the prior quarter. Asia's operating earnings for the second quarter reflect lower volume of Chinese telecom sales, as well as the impact on earnings of plant startups in Q2 versus the prior year.

Asia, due to its smaller size, remains our most sensitive region to operating inputs.

Please move to slide 7. As previously noted on slide 6, our second-quarter adjusted consolidated operating earnings of $67 million was a decrease of 10% in comparison to the prior year, while the operating margin remained consistent at 11.7%. Excluded from our adjusted net earnings for the second quarter was approximately $5 million of highlighted net charges, the largest being the $3 million net charge for costs associated with an investigation of the industry competition matters in Europe.

Please see our press release issued November 2 for details of these items. Our adjusted consolidated net earnings of $44.7 million decreased 14% from the prior year to 7.9% of sales for a 30 basis point decrease, while our booked tax rate was 27%.

EPS decreased 8% to $0.97 on lower net earnings with 2.5 million fewer shares outstanding. The lower average diluted shares resulted primarily from share buybacks, which exceeded the final 11 -- excuse me -- 1.9 million share dilution from our convertible debt, which was distinguished extinguished in July.

To offset this dilution, the Company entered into an accelerated share repurchase program with an investment bank to acquire between $120 million to $180 million of our shares by the end of our fiscal year. This program should result in an average diluted shares outstanding of approximately 45.0 million shares in our third quarter and 43.75 million shares in the fourth fiscal quarter.

Our adjusted effective income tax rate of 27% for the second quarter was comparable to the prior year. We believe our tax rate for the next fiscal -- next quarter of fiscal 2016 will be between 25% and 27%, but for the full year, we expect a 25% rate on our as adjusted earnings.

Please now turn to slide 8 and 9. As usual, we have provided information on a year-to-date basis similar to that of our second quarter on the prior pages. These two pages are for your reference, and I don't intend to cover the year-to-date results.

Please now turn to slide 10. Now for some brief comments about our financial position and cash flow results, our balance sheet remains very strong. We now have $321 million on hand in cash and short-term investments as of September 27, 2015, with nearly $443 million undrawn from our credit lines around the world. We generated $175 million in cash from operations in our first half of fiscal 2016. Our leverage ratio is at 1.5 times, despite spending over $200 million in share buybacks and dividends in fiscal 2015.

Capital expenditures were nearly $34 million in the first half of fiscal 2016, and we should reach up to $75 million for our full year. We expect to generate adjusted diluted earnings per share between $0.90 and $0.94 in our third quarter of fiscal 2016, which excludes an expected net charge of $0.06 per share from our restructuring programs and acquisition activities. We anticipate our gross profit rate in our third fiscal quarter will be between 25% and 27%, and our interest expense would be approximately $5.5 million.

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

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

(Operator Instructions) Ben Hearnsberger, Stephens.

First question on pricing, it looks like it held up really well in the quarter, despite some negative macro trends we have seen. Can you give us a sense for how you expect pricing to play out in the back half of the year, and what you have seen so far in Q3?

This is Dave. The pricing largely reflects a very positive mix. We have introduced some new products, and we always try to focus on the value our products provide. So we don't expect any major changes in that throughout the second half of the year.

Okay. And then, along that vein, if we see more pronounced industrial downturn, would the expectation be that your customers start to trade down from premium products to more of the standard products?

I think it is a very mature market, and those kind of decisions, they see the value and the -- it is a total cost of ownership play. So it is possible, but we don't anticipate a major change in the mix.

Okay. And then, last question, on China telco, it sounds like you expect some volumes in Q4. Will that be enough to get the segment to 10% operating margin by the end of the year?

You know, we have stated prior that that is always our goal for every business unit to maintain that minimum. We think we're going to make a significant move in that direction, and that is always our goal.

One thing I would like to add to that is, keep in mind, that with the company -- a business in Asia running at $200 million to $250 million, as I have said on prior calls, that is just unacceptable for us. We have to look at doubling the size of that business over there. And the actions that we have taken, even though they hurt the P&L in the short run, in the long run, they are the right decisions. We need to see this business go to $400 million to $500 million. That is why you see expansions that we have done on an acquisition in Australia, what we are doing in India, the new plants in China. We are investing for the future. If we wanted to keep that at 10% or near 10% in the short run, we wouldn't have made those investments. But whenever you start doing the things that we are talking about, thinking about long-term, there is some pain you go through with that. So we will look back on this in time, and we will be happy with what we are doing.

So I guess the question is, are we going to go through more pain in the near term on the margin line, or would the expectation be that we do get to that 10% some time in, I guess, near to intermediate term?

We feel like many of the major changes are behind us, and we are in the recovery phase. So we are on the way up. And, specifically, on exactly when the timing will be there, I can just say we are optimistic about the direction.

Sven Eenmaa, Stifel.

First, I wanted to ask in terms of the telecom and reserve power markets and regional dynamics you saw there. What is the North American telecom revenue stream for you guys, stable quarter over quarter, or did it still decline?

This is Dave again. I would say that specifically in the United States, we see that the telecommunications volume has stabilized. We have noted in prior calls that we had seen some historically high numbers as two of the major carriers were doing their 4G rollouts. I don't anticipate we will necessarily go back to those volumes in the short-term. There are other businesses -- other carriers that are trying to close that gap. So we will see some improvements, but the business in the US has stabilized. The biggest issues we are seeing right now in telecommunications are stemming from the Middle East and Western Europe as a choppy rollout of the 4G continues.

Got it. And so moving to the EMEA region, you mentioned that the quoting activity remains normal, but obviously revenues were sequentially lower here. What is your expectation in terms of quoting activity, or how much visibility do you have in that quoting activity converting into orders?

No. That has been a mixed bag in terms of -- it usually happens -- it usually is a question of timing when those quotes turn in, and that is always the dynamic that is hard to control. I think that, unlike the US, the rollout in 4G isn't as continuous. It is not just one country and one set of legislation they are dealing with. They are trying to do it across many different government bodies. It is made for a choppier rollout, and so it is difficult to say. And then the Middle East region was also a significant growth for us last year, and that region has slowed way down.

That's very helpful. And the final question is, you reported organic growth in Motive Power on 1%. Your order growth rates are around -- you mentioned around mid-single digits, and the WITS data has been showing (inaudible) markets in up in 7% to 10% year-over-year levels in recent quarters. How do you see the order rates you are seeing? Are they translating into your actual organic growth in Motive Power? Should we expect continued 1% to 2% level of growth here, or do you see an uptick here in coming quarters?

Yes, I think you have to take a look at -- if you look at the ITA data and, to your point, that the Americas are up about 5%. But keep this in mind, that whenever we see an increase in new Ford truck orders, we're going to pick up about half that amount. In other words, if the Americas are up 5%, we're going to look at about 2.5% on batteries.

And the same thing takes place on the downside. If all of a sudden the market were to drop by 10%, we will go down about 5%. That is because of the aftermarket batteries in place.

But, Motive Power continues to be running along at a very good rate for us. And we don't see -- based on the data that we are looking at and the averages, I don't see the thing going down.

In other words, what I am basing it on, if you look at the three-month average right now compared to the three month average a year ago, worldwide it is up 7% on new Ford truck orders. So we are seeing the correlation on a battery sales that I mentioned earlier come through based on the ITA data.

(Operator Instructions) William Bremer, Maxim Group.

This is Travis DiGiacomo on behalf of William Bremer. My first question comes in China and if you could elaborate more on the certifications that you guys are trying to achieve there.

Yes. This is Dave. So there's several different types of certifications. There's product certifications and factory certifications. We are active on all.

Now let's talk about the factory certifications first. As you know, China went through a major upgrade of its battery factory regulations a couple of years ago as a result of some bad performance by some of our competitors in terms of the pollution. So the Chinese have implemented a new standard for what it takes to manufacture batteries in China. I can tell you is very rigorous. It has caused significant dollars of investment for the industry. Thankfully, we were closer to the standard than many of our competitors, so the impact on us was slightly less.

In terms of the product qualifications, we had noted that we had walked away in the past from the large China telecom business because the margins were just too unattractive. We have since gone back and redesigned our products, prequalified the products, and as I noted earlier, we have had very good feedback about the tender results as a result of some of this testing qualification redesign. And so we are optimistic that the volume is going to increase as we exit the fiscal year and in our fourth quarter.

Great. Thank you. And can you touch on the Thin Plate Pure lead?

The Thin Plate Pure Lead continues to be one of our key profit drivers for the Company. It has experienced very good performance, and it is qualified at most telecommunications carriers around the world.

Okay. Great. And my last question is, do you guys achieve any revenue sources from Direct TV at all?

There is nothing direct that we know of with regards to revenue from them, and it is very difficult for us to anticipate how what is going on with AT&T and Direct TV would impact our revenue directly.

John Franzreb, Sidoti.

In your prepared remarks, you mentioned some sort of manufacturing variances or some sort of variances that would flow through into the third quarter. What exactly where they, and how do they impact the margin profile?

It is Mike. Yes, David did comment in his prepared remarks about the fact that, in our third fiscal quarter, it is normal that the manufacturing variances that we incur during our summer slowdown, where we are oftentimes shutting down factories to allow the staff there to go on vacation or holiday and to do maintenance repair. So those variances typically because we had a three-month delay or a FIFO rollout, those manufacturing variances hit our third fiscal quarter, even though they were incurred in our second fiscal quarter. So that puts a significant amount of pressure on the third quarter that you don't normally see.

So we did have the impact of that. We also, as you probably saw in the Q, that we do still have about 85 million pounds of lead that is hedged in the mid to low $0.80 range, which is higher than the spot rate. So between the fact that sequentially our lead costs are not declining and our manufacturing costs are increasing, that is the primary reason you are seeing our guidance, which might surprise you that we were guiding down because we don't necessarily anticipate the volume declines sequentially. We probably expect a slight increase. But those two are the primary factors that are leading us to expect and, as I commented in my remarks, that I would expect that 27.2% gross profit to decline slightly sequentially in our third quarter.

Okay. Well, taking that thought a step further then, Mike, two things. One, would you expect based on your telecom order trends that you mentioned earlier to have Q4 be seasonally stronger in telecom? Two, would you expect those variances coupled with lower lead costs to result in a bound back on the gross margin profile in Q4 versus Q3, all things being equal?

Well, I guess, John, to comment on what we might anticipate in Q4, I got very little visibility, particularly on the telecom side. So I'm not going to venture to guess on that. The only thing I can say about Q4 is typically that is our strongest earnings performance, and if we are talking specifically to manufacturing variances, yes, the -- normally other things being equal, you would see a better P&L impact from manufacturing variances in Q4 versus Q3.

Okay. And the orders profile that you are hearing from the European telco customers doesn't give you confidence one way or the other that telco will be sequentially better?

John, I think if you take a look at our Q1 to Q2, our volume -- actually, our sales revenue went up in Q2 versus Q1. And I will tell you, in our Q3 guidance that we have in place, that we are looking at a step-up. The whole story is this, that we have seen year on year because primary of telecommunications, volume has come down. We believe that it has hit the bottom, and it is on its way up.

Now, relative to Q4, our practice has been we don't go out, we don't talk anything beyond the next quarter, and it is on an EPS basis. So I really don't want our guys getting into what we're going to do in Q4 because that is just things that we have not done historically.

No. I'm just trying to make sure that the normal seasonality is in place to play out. That is kind of what I am looking for, John.

Okay. And I guess one final question. When you think about in the past you have been willing to comment about what inning you thought we are in as far as rolling out the 3G to 4G in Europe. I guess I am staying with this theme a little bit. Would you be willing to update your thoughts on that? Is it still early innings, or are you thinking maybe where they are in the process based on the tempo of the rollout?

The comments I made some while back that we were in the early innings to 4G, and I really believe at the time that I was basing that on the patterns of what we saw in the US and the way Verizon, AT&T -- or I should say the telecom industry in total -- were spending money and how fast they were doing it. I assumed at that time we're going to see the same thing take place in Europe.

I'm really surprised that we have seen this pause, and I believe it is a pause and I am not sure why. You look at the percentage of people that are actually on 4G in Europe, and it is still a relatively small percentage.

Now, the question is, and I don't know the answer to it, if you believe that Europe is not going to go to 4G in the long run, we are in the late innings if that is the case. If you believe that Europe is going to ultimately go to 4G, we are in the early to middle innings. So I don't know exactly where it is, but it would be early to middle innings.

So I am surprised by the pause that we are seeing take place on it. And I am not -- I don't have a good answer for it, to be honest with you.

William Bremer, Maxim Group.

Just one more question. The pause in reserve power, can you elaborate a little bit more on that? What is impacting this? Is it hospitals, data centers, what have it?

Yes. That is a good question. This is Dave again. So the pause principally we discussed so far has been surrounding our telecommunications business, and you bring up the point about data centers. That is hit or miss depending on the region, and we don't break out reserve power by regions, specifically. But I can make a broad comment that the data center business is stronger in some regions than others, but it is not a particular strength right now as it may have been a few years ago. But most of what we have talked about today and most of what we are feeling sequentially or versus prior year is related to telecommunications.

At this time, I am showing no further participants in the queue. I would like to turn the call over to John Craig.

Okay. Well, everybody, thank you for calling in this morning. We certainly appreciate your interest in our Company, and we wish everybody the best of day today. Thank you.

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