EnerSys (ENS) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the EnerSys Q3 fiscal year 2016 earnings conference call. (Operator Instructions) As a reminder, today's call is being recorded. I would now like to introduce your host for today's call, Mr. John Craig, CEO and Chairman. You may begin, sir.

Thank you, Kevin. 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. On Thursday, we posted on our website slides we are going to be referencing 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 and go to the webcast tab under www.EnerSys.com.

As previously announced, in March this year I will be stepping down as Chief Executive Officer of the Company, but will remain on as Chairman of the Board. With this move, Dave Shaffer will be replacing me as CEO. I have really enjoyed the last 21 years at the Company, and I believe we've accomplished a lot, growing the Company from approximately $200 million in revenue to over $2.4 billion. But now it's time for Dave and the rest of the EnerSys global team to take this Company to new levels. In a minute, Dave will be taking over the call. But before we do that, I would 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 2, management's discussion and analysis of financial condition and results of operations set forth in our quarterly report on Form 10-Q for the fiscal quarter ended December 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 financial information and the non-GAAP information, please see our Company's Form 8-K, which includes our press release dated January 28, 2016, which is located on our website at www.EnerSys.com.

Now let me turn it over to you, Dave.

Thanks, Mike. On Thursday, we reported third-quarter results of $0.92 per share, which was in the middle of our guidance range of $0.90 to $0.94. You will notice on slide 3, our year-over-year sales were lower in the third quarter, due mainly to the impact of foreign exchange rates and a continued pause in reserve power spending in the Americas and Middle East. This was the main reason our gross profit percentage declined 30 basis points to 25.4%.

Our operating profit percentage declined 130 basis points to 10.4%, including the previously mentioned decline in gross profit coupled with 100 basis points' increase in operating expenses, which Mike will address. Therefore, our year-over-year earnings per share were down $0.17 to $0.92 per share.

I now want to focus on our current business activities and fourth-quarter guidance. Our global motive power business continues to be good, as we experienced positive organic volume in all regions as well as a positive global mix. We continue to believe that the motive power business will do well given our order activity and new electric or truck orders.

Moving to reserve power, in the Americas, our enclosure business continues to experience a significant pause in spending. In addition, our UPS data center orders are lower. However, this reduction in volume will be partially offset by an increase in sales of Odyssey batteries into trucking fleets as this customer segment recognizes the benefits of our TPPL technology. Our fleet sales should begin to have a meaningful impact on revenue starting in the first quarter of fiscal year 2017.

In our EMEA region, the telecommunications business is down slightly in Western Europe, as 4G investment is somewhat lower for us than last year. However, this Western Europe volume is more than offset with an increase in our uninterruptible power systems business, or UPS. We believe UPS is benefiting from the recent European Union decision on Safe Harbor personal data privacy and storage. This is leading to more data centers being built in Western Europe. We are also experiencing moderate growth in our after-reserve power business. The key issue in our EMEA region remains the dramatic reduction in our Middle East and Russia telecommunications businesses.

In our Asia region, starting in late November, we began receiving significant telecommunications orders in China after the completion of the large tender we had mentioned on our last call. As a result, we anticipate double-digit telecom order increasing for the majority of calendar year 2016. In Australia, we continue to benefit from the fiber-to-the-home multiyear project. However, India continues to be a challenge from a volume and profitability perspective.

Also in China, effective in January, there was a 4% consumption tax imposed on all lead acid battery sales. We are in the process of recouping as much of this expense as possible through price increases.

Based on the above trends and information, our earnings-per-share guidance for our fourth quarter is between $0.98 and $1.02. In our fourth quarter, we expect that higher sequential volumes in addition to lower commodity manufacturing operating costs will increase profitability. On Thursday, we also announced that our Board of Directors approved a quarterly dividend of $0.175 per share payable on March 25. In August, we executed an accelerated share repurchase program of up to $180 million, and this program was completed in January 2016. We repurchased approximately 3 million shares at an average price of $56 per share. These repurchased shares will primarily replenished 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 positive with the performance of the majority of our businesses while recognizing the need for constructive action to improve performance elsewhere. We are committed to a disciplined approach of short-term cost-cutting and long-term investment to sustain solid growth in net earnings. Our strong balance sheet continues to prove vital in assuring we are well-positioned to take advantage of these opportunities for growth.

Now I'll ask Mike to provide further information on our results and guidance.

Thanks, Dave. For those of you following along on our webcast, I am starting with slide 4.

Our third-quarter net sales decreased 6% over the prior year to $574 million despite the 2% increase in acquisitions due to a 7% currency headwind and a 1% volume decline. On a regional basis, our third-quarter net sales in the Americas were down 3% to $306 million, while Europe's decreased 19% to $197 million. But Asia increased 28% in the third quarter to $71 million.

In the Americas, the decline was from currency translation, while Europe had a 1% increase in price but a 12% currency decline and an 8% volume decline. In Asia, the volume increased 23% and the new ICS acquisition added 19%, overcoming the 13% currency decline and a 1% decline in pricing.

On a product line basis, net sales for motive power were down 1% to $302 million, while reserve power decreased 11% to $272 million. Despite the 8% currency headwind, motive power enjoyed a 6% volume gain and 1% from higher pricing, while reserve power incurred a 7% volume decrease and 7% negative currency translation while the new ICS acquisition added 3%.

Please now refer to slide 5. On a sequential quarterly basis, third-quarter net sales were up 1% to the second quarter due to a 3% increase in volume less 1% price and translation decline. The Americas region was down 5% while Europe was up 23%, all due to volume, and Europe was up 4%. On a product line basis, motive power was up 2% and reserve power was down 1%.

Now, a few comments about our adjusted consolidated earnings performance. As you know, we utilize certain non-GAAP measures in analyzing our Company's 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 January 28, 2016 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 $12 million, while the operating margin declined 130 basis points. On a sequential basis, our third-quarter operating earnings dollars declined $7 million, while the operating margin also declined 130 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, where at 15.0% for the third quarter compared to 13.9% in the prior year. The third quarter's operating expenses increased on higher selling expenses, stock and incentive compensation, and bad debt expenses.

While we expect our operating expense dollars for the full year to approximate that of fiscal 2015, it will be approximately 100 basis points higher as a percentage of sales due to currency pressure on our top line and our inability to flex these costs as quickly.

Our Americas business segment achieved an operating earnings percentage of 13.6% versus 13.3% in the third quarter of last year, primarily from the impact of lower commodity costs. On a sequential basis, Americas third quarter decreased 170 basis points from the 15.3% margin posted in the second quarter due to higher sequential commodity and other manufacturing costs.

Europe's operating earnings percentage of 8.4% was down 310 basis points on currency declines and lower volume from last year's third quarter of 11.5% and lower than last quarter's 9.0%.

The operating earnings percentage in our Asia business remained down at 2.3% in the third quarter of this year from last year's 4.4%, but improved from the break-even results of the prior quarter. Asia's operating earnings for the third quarter reflects higher volume of Chinese telecom sales. Asia, due to its smaller size, remains our most sensitive region to operating input. Please move to slide 7.

As previously noted on slide 6, our third-quarter adjusted consolidated operating earnings of $60 million was a decrease of 17% in comparison to the prior year, while the operating margin declined 130 basis points. Excluded from our adjusted net earnings for the third quarter was approximately $3 million of highlighted net charges, the largest being the $2 million net charge for costs associated with our restructuring efforts. Please see our press release issued January 28 for details of these items.

Our adjusted consolidated net earnings of $41.5 million decreased 20% from the prior year to 7.2% of sales for 120-basis-point decrease while our booked tax rate was 23%. EPS decreased 16% to $0.92 on lower net earnings, with 2.4 million fewer shares outstanding. The lower average diluted shares resulted primarily from the share buybacks which exceeded the 1.9 million share dilution from our convertible debt, which was 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 has concluded and will result in an additional 961,444 shares delivered this month for a program total of 2.96 million shares at a cost of $166.4 million for an average cost of $56.19.

Our adjusted effective income tax rate of 23% for the third quarter was slightly lower than the prior year. We believe our tax rate for the next quarter of fiscal 2016 will be between 23% and 25% for a full-year rate of 24% on our as-adjusted net 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 third quarter on prior pages. These two pages are for your reference, and I don't intend to cover the year-to-date results other than to point out that our year-to-date sales decline is primarily a currency decline followed by weakness in our reserve power business. 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 $346 million on hand in cash and short-term investments as of December 27, 2015, with nearly $447 million undrawn from our credit lines around the world. We generated $233 million in cash from operations year to date in fiscal 2016. Our leverage ratio is at 1.6 times despite spending over $200 million in share buybacks and dividends in both fiscal 2016 and 2015. Capital expenditures were nearly $46 million year to date in fiscal 2016 and should reach up to $70 million for our full year.

We expect to generate adjusted diluted net earnings per share between $0.98 and $1.02 in our fourth quarter of fiscal 2016, which excludes an expected net charge of $0.04 per share for our restructuring programs and acquisition activities. We anticipate our gross profit rate in the fourth fiscal quarter to be between 25% and 27% and our interest expense to be approximately $5.9 million, and our diluted shares outstanding to be approximately 44 million shares.

In conclusion, we expect our fourth quarter to be our normal, stronger finish to our fiscal year.

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

Thanks, Mike. Kevin, let's open up the line for questions.

(Operator Instructions) Ben Hearnsberger, Stephens Inc.

This is Brandon in for Ben. Just real quick on the APAC region, I believe it runs at a lower gross margin profile. Just curious what kind of revenue run rate we need to see this back up in the historical range.

Well, there is a lot of moving pieces, and Brandon, we appreciate the question. This is Dave. The Chinese piece, the telecom piece, usually comes at a lower gross margin. We can agree with that. There's other parts of the region where that's not necessarily true.

So, the -- it is a blend. I think the critical issues for us are not only the revenue piece, which is on the uptick, and we're going in the right direction. But we also have some challenges, as we alluded to in the script, with regards to our India operations.

But given that, I think that we have a plan that puts us on the right trajectory to move towards what we consider healthy operating results. So, again, there's still lots of work to do. I think key among that was the timing of this tender, which we are seeing very positive results from. It came much later than we expected or we had spoken about earlier in the fiscal year. But that volume is upon us.

All the changes we made with regards to the product designs and qualifications is all complete, and the order is extremely strong. The plant loading has improved dramatically, which was a drain earlier in the year. So most of the things we spoke about earlier in the year are happening a little later than we thought, but we are optimistic about the coming quarters.

Sounds great. That's great color. I appreciate it. Just a quick follow-up. On the motive side, what's -- from a high level, what's really causing this to buck the trend of kind of overall slowing industrial production on a global scale? Thanks.

We can talk about the different regions, I guess. In the United States, I don't know that any of the markets that we serve are specifically at risk because of the strong US dollar. So when you think of the market segments we are in, not a lot of the use of our batteries are for export-oriented manufacturing. So, I think that's protected us somewhat from some of the softness we are seeing in the manufacturing sector.

I think in the European region, the weaker euro is giving some manufacturing opportunities in Europe that probably have improved. So, I think that there is a lot of export-oriented manufacturing in Europe, which we think we are exposed to. And, again, it has had a moderating impact on what -- like you are saying, the general softness.

I think as we go into the developing markets, those aren't historically big motive power markets to start with. So the exposure there even though on the telecom side, which I know you didn't ask about -- but the telecom side, there's certainly more exposure. On the motive power side, we don't have a lot of exposure to the developing markets. And except for China, I guess -- I don't know if you want to consider that a developing market, but let's end with the discussion on China specifically.

If you recall, we've been in a transition period from an older factory to a newer factory. So, there's been a lot of noise in our comps from prior quarters, which, again, we've been making up for. So, some of the strength, at least relative to our comps, is just getting back to what we consider normal operating ratios and so forth.

In terms of the longer-term impact of the Chinese market on our motive, we are yet to know what the real impact is going to be for us on the order book. So we are still in the positive recovery mode, which is giving us reasonably good results. But, again, the China market for us in motive, it's important, but it's not going to really move the needle for us. Really, it's really about the US and about Western Europe, which both markets seem to be stable. Does that help?

That's excellent. I appreciate it. Thanks so much.

William Bremer, Maxim Group.

John, first, a pleasure working with you since 2009 when EnerSys was sub-$700 million in market cap. So I take my hat off to you and your team there.

Thanks, Bill. I appreciate the comment.

Dave, first, let's touch base on overall volume in Europe. And give me a sense of where you are seeing that over the next quarter or so. We had a pullback of about 8% on the reserve side there. You know, are you still seeing that going forward? That's number one. And I guess my second question goes right into capacity and utilization there as you guys constantly are consistently restructuring your entities there. Can you give us a sense of what you are running at for both segments reserve and motive at this time?

Let's take a moment on each piece. The motive power business is stable. And so the -- when we look at our order rates, when we look at the worldwide Industrial Truck Association order statistics, we don't see any major causes for concern on the motive power side in the European market.

The reserve power side, as you noted, we are coming up on some tough comps. Last year we had some very exciting wins in the telecommunications market, specifically. Telecom is a very cyclic business. It is for us -- it's ups and downs. Last year, we were having great success. This year in the Western European market, we are a little softer than we were a year ago on the telecom side. But as we noted in the script, the data center has been kind of a nice surprise for us.

So, when you look at reserve power in the Western European between the data center and a little bit of softness in telecom, it's been a bit of a push. The real issue for us right now has been the impact of the slowdown in telecommunications network deployment spending in the Middle East region. And this has a couple complicating factors. It's historically high-margin business. It's historically our premium TPPL products. And so that creates not only mix issues, but it also creates loading issues in our European factories.

So, telecom, again, is a very cyclic business. We know that region is going through some economic changes. And it's just a question of when that spending turns back on. It's very difficult to say, but in general I would say the exposure we still feel is really mostly in the telecom spending arena, and that really applies globally, frankly. And there's puts and takes. One of the things I enjoy about this Company is our regional diversification. Right now, we are seeing exceptional telecom growth in the Asia region.

But when we are specifically talking -- and your question was about Europe -- it's the Middle East softness that continues to plague us. And, again, given the cyclic nature of telecom, it's hard for us to predict when that's going to come back. And Mike, do you want to add anything?

Bill, for your comment about the utilization, Europe as a whole is running at factory utilizations in the low 70 rate. And the motive power business, as Dave has pointed out, has been very stable. So that, compared to the -- and that 70 -- low 70 numbers combine motive power and reserve power.

So, given that you have a very stable motive power platform, the utilization rates can be a little bit higher there, higher than the low 70s. And reserve power, because we are looking at the EMEA's impact primarily Middle East and Russian reserve power, that utilization is slightly lower than the low 70 number.

Just one final thought on that. Historically, our Q2 is a little bit softer on manufacturing anyway. Last year was a bit of an anomaly given some of the big telecom wins we were scoring. But in normal, that and given our FIFO, that has usually a bit of a drag on our third quarter in terms of gross profit because we FIFO that slow period into our third quarter. So that's certainly a meaningful contribution to our gross profit decline sequentially.

Got you. And my follow-up -- John, would you happen to have the truck order numbers that you historically provide?

We've got them here, Bill, for sure. Mike, do you want to --?

The -- well, for the truck order information that we would have, Bill, is for December, and it has new truck orders worldwide are up 9%. And there's strength in the European performance in terms of new truck. Although in that area, we're looking at Class 1, 2 and 3. So you have to kind of standardize for these new truck orders. But I would say overall you are seeing growth in Europe and the Americas new truck orders, and you are seeing, at least for the month, a softness in the Americas. But when you look at it from a trailing three-month trailing compared to the same period of a year ago, you are flat in the Americas. You are up strong in Europe at about 14%, and Asia has got 5% growth for worldwide growth of 8%. So that's three months ended December compared to the same three-month period a year ago.

Okay, Mike. Thank you.

Michael Gallo, CL King.

Good morning. And just want to echo, John, great job you did over all the years.

Thank you. I appreciate the comment.

I had a couple of questions. First, obviously reserve has been soft. Volumes were slightly better, I think, than they were in the first half. I know you pointed to the opportunity that you have in truck fleets. I was wondering, how much in order of magnitude would you expect that to help reserve, that minus-7 volume, could it help make up half of it? Or are we talking smaller order of magnitude than that?

Mike, the truck fleet opportunities -- this is Dave. The truck fleet opportunities have significant upside. Certainly from a plant-loading perspective, we are going to be in the right ZIP Code.

On the battery side of telecommunications, we are actually -- in the US, we are okay. That's not really been an issue. On the enclosure side, that's been a bit more of a drag. I think one of the things that's different about this enclosure business is there isn't a replacement like there is in batteries. So, we are fully exposed to kind of the normal deployment cycles of the telecommunications networks. So, we don't see so much an issue there. But just in terms of replacing the revenue, there is certainly significant upside in these truck fleet markets to replace anything we've lost recently on the telecom side. (multiple speakers)

Then just a follow-up question. I know you have said in the past that the goal was to get to a 10% op margin in Asia in terms of run rate. You saw a nice improvement in volume, but I think you were still only at in the low twos. Is a 10% target by the end of the year, the end of the fiscal, still realistic, or does that get pushed out somewhat?

I think it's going to be pushed out. I think -- what I spoke about earlier is what -- when we made those comments, we correctly forecasted the positive impact of the Chinese telecom business. It just came much later than we had originally thought. So it's going to take some of the lift we get from the manufacturing side comes later with our FIFO methodology. So we still have that -- we still have a lot of that ahead of us. We are -- our plant utilization in Asia has increased dramatically versus prior quarters. So we still have some good news there.

The Australia business opportunities are very good. The consolidation of our new acquisition into our existing business has gone slower than we had hoped. I think that's part of the delays. So we've got some upside there.

In India -- we have got a lot of work to do in the India region. The -- just the transition from our JV partner when we bought them out, we've just continued to have negative surprises. But, again, the -- with India, it hasn't been a large contributor yet to our revenue profile. So from a risk, it's not a big number. For Asia, it's a relative -- it's a noticeable -- but from EnerSys worldwide, it's not big enough to hurt too, too bad. But we certainly have opportunities, and the good news is that market continues to present significant opportunities for battery sales in the future.

All right. Then one quick follow-up to that. I know the 4% consumption tax -- Asia has always been a tough place to recover margin. Are you confident you can recover that through pricing? It seems like that's always been a market that's been hard to get the pricing you need.

I would say that the domestic piece is going very well. So, in the domestic Chinese market the price recovery is going as expected. I think what will take time is -- and you properly say -- is the inventory that's in the channel across the world. So on our export piece, we've got to work very hard, whether it's Europe or Australia or the United States. Whenever we've exported out of our Chinese factories -- local competitors, you know, with inventory there could be some delay there, but that's no excuse. We've got the message out loud and clear to our guys that we have to get that back.

Okay, great. Thanks very much.

Brian Drab, William Blair.

Good morning, thanks. Of course, I want to start by saying also congratulations to John. We've enjoyed following the Company's growth and your accomplishments over the years, so congratulations.

Thank you very much. Thank you. Appreciate it.

The first question I had is you mentioned early in the call today the fleet opportunity -- I believe that was in the United States. I was wondering if you could talk a little bit more about that. The timing and significance of potential revenue from that opportunity.

As we alluded to earlier -- and Brian thanks for the question -- this presents a significant opportunity. It's going to start to ramp up from the first quarter of fiscal year 2017. So that's when we should start to see the benefits of it. It is using our Thin Plate Pure Lead technology. What we're finding is that many of the trucking companies are seeing the benefits of this technology in that over-road application. And that's a changing market from a regulatory standpoint. So, the benefits of this battery and the efficiency of the battery is real. The longevity of the battery and its vibration resistance are real, and we expect to see some significant impact for that in the coming quarters.

How is the regulatory environment generating demand for Thin Plate Pure Lead?

It's just the fuel efficiency standards. The idling requirement for trucks when they are at stops in terms of running either an APU or keeping the diesel engine running. There is -- it's mostly related to the idling requirements. And so the more they can use battery or battery loads to provide either the electrical load or the air-conditioning load of the cabin while the guys are waiting or in idle, it's an opportunity for the higher-quality batteries to deliver a lower total cost of ownership.

Great. Any idea in terms of -- I mean, you are clearly not saying how big this could be in terms of revenue.

No, we haven't dimensioned that yet. And I think as we get into next quarter, we'll have a little bit better visibility on that. And we can dimension it better next quarter.

Okay, great. And then if I could just ask about gross margin as you head into the fourth quarter, your guidance was for 25% to 27%. I'm wondering what factors would prevent gross margin from ticking up a little bit in the fourth quarter. Given increased volume, I would imagine that the price of lead has been favorable. Maybe the hedges won't be as unfavorable as they were in the third quarter.

I guess I would say you should see a mild benefit on lead. Keep in mind because the euro is at a low point for several years, they don't see the same benefit as US currency-based operations do from a lower-priced pound of lead. So that is somewhat muted.

The higher volume will improve. You know, the key is -- some of the operations that have been a drag, such as India, to see performance improvements in those.

But the mix of where we see our sales -- if Europe and the Americas remain flat or slightly down and Asia increases, you will see the mix change. And Asia does, as a whole, have a lower gross profit margin, which causes pressure. But I would say overall, I would anticipate you would see a normal pickup sequentially from Q3 to Q4.

Okay, thanks. Then one last quick one -- this energy bill that's working its way through the Senate. I'm curious -- I guess it's something longer-term, but what impact that could have on your business and, I guess, potentially the OptiGrid business specifically.

So far, the OptiGrid opportunities have been fairly narrow in scope, as we've talked about. And in terms of the broader opportunities, there are certainly incentive plans out there for these grid-scale storage opportunities, and we look forward to any benefits there. But, as of today we haven't seen any meaningful change, other than in California I believe that there's been some significant legislation and opportunities created for large energy storage systems in the gigawatt hour kind of categories. But so far, we haven't seen any real meaningful shift in the demand. And our OptiGrid, as we have talked about in the past, is -- it's exciting, but it hasn't been broad-based in terms of the demand.

And I would point out that it's -- that is largely a behind the-meter-type operation for large commercial buildings, whereas some of the legislation is more at the other end of the meter where there is large utility scale, and that's not one that we see our future lying in.

Got it. Thanks for taking all my questions.

John Franzreb, Sidoti.

Firstly, John, best of luck. It's been fun working with you for the past decade. Enjoy your retirement.

Thank you, John. Appreciate it.

Secondly, I just want to go into the Americas and the sequential drop in the operating income. You kind of called out it sounds like lead costs. But lead went from $0.77 to $0.80 roughly sequentially in the quarter. I wonder how much mix was an issue in the Americas or if there is something else I should be aware of.

Well, sequentially you did see lower volume. You saw the fact that our manufacturing variances that from the summer months when we had plant shutdowns, those FIFO out into the third quarter, so that becomes a negative impact.

And the last thing is in the Americas we were transitioning our chargers into a new modular arrangement. And to get that transition done successfully, we incurred some higher freight charges than we normally would've anticipated. But I would expect the Americas should see an improvement in Q4 at the GP level.

Okay, great. You've called out the Middle East as a headwind. I don't recall you ever saying the Middle East before. How big of a business is that? I know it's a highly profitable business (technical difficulty). In terms of revenue, what kind of size are we talking about -- the noise? And Russia, if you could also.

Yes, I think that region especially -- this is Dave -- represented some significant wins last year. And you I would say that region historically has delivered upwards of $40 million plus of revenue opportunities. And we are -- we've got a lot of headwind there. And I think the real challenge for us is the quality. As you just alluded to, it's the quality of that revenue, which is somewhat painful. But these telecom networks -- and it is principally a telecom play for us there. And these telecom networks, they ebb and flow. And so we are just waiting for the next peak to arise.

All right. And it looks like operating cash flow was up roughly $100 million year over year. I guess that begs two questions. It looks like a lot of it is because of low working capital. But can you just talk to that, A, and, B, your priorities for cash as cash rises? Could you discuss that a little bit?

Well you are right. Working capital typically is at a benefit this quarter year over year, and that's a big chunk of why you are seeing the improvement. If you were to look at it, I'm just -- as you know, the cash flows go on a year-to-date basis. But last year, there was about a $40 million -- $37.5 million drag in primary working capital compared to March of the year before. This year is a benefit of $46 million. So that explains about $100 million of the year-over-year change. So it's -- but that would be the primary reason for it. Other than that, as I scan our cash flow statement, that is the primary explanation, John.

And your priorities use for cash -- and while I'm at it, how much of the cash is domiciled here in the US?

As you might expect, most of the cash is not domiciled here in the US. It's in Europe and elsewhere. And that's one of the reasons on our credit facility we get credit up to, I think, $150 million of foreign-based currency. And, as you know, we have about $347 million of total cash. And as I said, most of it is overseas. So there is that impact.

But when we look at where we want to spend our cash, as you know, we say we want to grow. And whether that's by organic growth or by acquisition, we still say that's priority number one. But we also recognize the importance of if we are not using it in that activity, growing organically or growing in acquisition, then we are focused on returning it to the investor. And that's why you've seen in the last two fiscal years, year to date, there will be $200 million-plus returned to shareholders in share buybacks and dividends. And I think you would see -- as we go forward, we think there are opportunities in the M&A landscape and continue to be very active in that. But if that doesn't occur, we will continue to look for opportunities in share buybacks as well.

Okay, and one last question, and this is really a clarification. Did you say that Asia-Pacific would grow at a double-digit rate in calendar 2016, or just the China part of AP would grow at a double-digit rate?

The net effect will be Asia will.

Will in Asia. Okay, thank you very much, guys. Thanks for taking my questions.

(Operator Instructions) Sven, Stifel.

First, I wanted to just follow up on some of the reserve power commentary. What where the trends for you in North America and Western European markets? Where those kind of year-over-year or sequentially flat, or did you see the deterioration there as well?

Sven, this is Dave. In the US specifically, we can go through the different regions -- sectors. As we noted, the enclosure piece on the telecommunications part of our business in the United States is still a disappointment. On the battery side of the telecommunications business in the US, we are okay. The data center market, the big UPS markets in the US are slow. And the specialty side of our business, or the Odyssey, has been an improving situation. So, the net effect of the reserve power in the US has been down a little bit. So, it's -- Mike, how much would you say (multiple speakers)?

It's roughly about 5%.

5%. And that's really mostly the data center story is -- and, again, similar to telecom, that has ebbs and flows.

So moving over to Europe, the enclosure piece of the business is actually good. We've got some great opportunities there. The battery side of the business on telecom is down single digit. But the data center business in that theater is actually very favorable. We think that's related to some of these new Safe Harboring requirements. So that sector of the business is good in Europe.

We talked about a lot about the Middle East. That's a telecom story. And that's been a very big disappointment for us. And then finally, we know the story in Asia.

So, does that give you the color that you are looking for on those --?

Yes, that's very helpful. The second question is more on the housekeeping side. If I look at the sequential gross margin performance, down close to 200 basis points, how much of that -- I understand there was some transportation cost, and there is a five-point back. How much of that sequential decline was driven by Asia pricing?

That wasn't the most meaningful impact of it. I would say the biggest sequential impact related to the manufacturing variances FIFOed from Q2. So I would say to a much smaller effect, so far, the impact of the Asia has been much less meaningful. Now, that could become -- as this Asia volume increases, become a more meaningful impact in future quarters.

And I guess I would point out, Sven, that I know you've made your reference sequentially. And you are coming off of our second quarter's 27.2% gross profit, which was an all-time high. So, dropping down to 25.4% looks like a big decline. But if we compare it year over year to last year's 25.7%, it's a 30-basis-point decline. So the comp year over year is slightly down. At that point when you look at Asia, the mix does become a little bit more relevant, and you do have a substantial amount of currency that is kind of wreaking havoc. And in addition year over year, you did have a 1% organic volume decline in that period impacting gross profit.

And just as a reminder, Sven, last fiscal year, we were scoring some very big wins in the telecommunications market in EMEA, in the Middle East and some 4G in Europe. So, the comps are -- the comps are also tough there because typically in our summer months we are slow. Last year was the anomaly; in Europe, especially, where we were extremely busy then. So, hopefully that answers your question.

Yes, that's very helpful. One more here. In terms of I think you mentioned bad debt expense is in your -- some of the cost commentary earlier. Could you just elaborate a little more? Is that Middle East region related? Or -- and what was the magnitude of the charge in the quarter?

Well, let me start by saying our DSO as a Company is at its normal point in the cycle. So the DSO itself is -- looks fine in comparison with where we normally would expect to see it. Now, when you break it down on a regional level -- and most of these bad debt calculations are mechanically driven and to be [Sox] compliant. And they are triggered based on percentages as to whether they are current or past 30 days, 60 days due, etc.

And so mechanically, what we saw was an increase year over year of about $0.75 million. When we looked at it over about a five-year trend, that reserve, which is a little over $10 million for us as a Company -- so, just to put that in perspective of how the reserves are. But that number is well -- exactly where we would expect to see it based on our overall aging profile. So I guess I would say these are sensitive to swings. And depending on when a receivable breaks over from going into a 60-day to a 90-day category, et cetera, can have an impact.

So while it is a hit year over year -- and I will say last third quarter there was actually no bad debt expense whatsoever, so we had a good -- we are going against a very good comp of a year ago. However, we had a tough comp from the prior quarter. The prior quarter, we had a large mining company that went bankrupt, and we had about an $800,000 reserve we had to take for that bankruptcy.

So, this year in comparison with last year, bad debt is a significantly higher expense. But when we look at our DSO and we look at our overall profile, we feel like it's within normal traditional ranges.

Got it. That's helpful as well. And last question. On the M&A front, how is your activity pipeline and what are you focused on?

Sven, this is Dave again. I would say the activity level is normal to better than normal. So I think there is some exciting opportunities. I wish I could talk more about those, but obviously we can't give much detail there. But certainly, it's average to above average in terms of what we are working on.

And it's across all three regions. We would say we have transactions that we feel confident that we'll probably consummate.

Great. Thanks very much.

Richard Rosen, Columbia Management.

Thanks a lot. First of all John, thanks for everything. As you know, we've been there since the beginning, and we can't begin to say thanks enough for the job that you've done for us as investors.

Thank you, Rich. I appreciate that.

Second, on their earnings call, Verizon made some comments about 5G, starting to talk about rolling it out. My understanding is that this would be a very, very big business for you -- small-cell technology, more batteries, et cetera. Have you start to see any of that? Is that in the discussion stage at this point, or was Verizon more talking bigger picture?

Rich, this is Dave. We had an executive meeting with Verizon. I'm trying to think back now. It must be about four or five months ago that I personally attended. And at that point, they were very unsure as to what the timing of 5G would be. And, frankly, it was very unclear. And I'm not aware of anything so far that goes beyond thinking about it, testing it. And as far as we know, most of it is still deep in the bowels of the big OEMs.

So, we have received no RFQs or tenders or anything significant. But as you alluded to, we do know that the transmission radius of those cell sites will be much shorter than the lower-frequency technologies. And as such, the sites will have less power but will be more ubiquitous. And so we anticipate with our enclosures and smaller battery technologies, it will be a different opportunity than it's been in the past.

Great. And will there be a technological difference between having smaller cell technologies, or is it the same as the current cell tower power backup stuff?

We don't know for sure. It's still too early to say. But at least we feel fairly well-positioned to offer a couple different chemistries, whatever their particular needs are. So if it's a weight savings or a space savings issue, or if it's a cost-driven issue, we've got a suite of products we think we can help them with.

Okay. And then one final question. And that is, about six months ago there was speculation that Johnson Controls was about to acquire EnerSys. And since then they've made an acquisition, or they have -- they are entering into making an acquisition elsewhere. Can you confirm or deny that such conversations may or may not have taken place or whether they approached you in the first place?

You know we can't comment on any of that. So we are just focused on net earnings and capital to shareholders. Our heads are down and we're working hard here.

Yes, okay. All right, thanks a lot. And John, best of luck to you.

Davis Paddock, Invesco.

First question was just about CapEx. Is the China plant completed in terms of capital expenditures going forward?

Yes. I think there might be some extra equipment we have to layer in for additional capacity, but principally, by and large, it's done.

And just are there any other sort of major CapEx projects planned for fiscal 2017? I'm just kind of -- I'm not looking for a number but just a directional look at what CapEx might look like in 2017 given that this plan is largely complete.

I would say, David, that traditionally our CapEx has ranged from $50 million to $70 million. And it kind of goes up if you do have a plant addition. The only significant project that I could speak to that's still ongoing is our implementation of the SAP ERP system. That's about a $30 million CapEx program over two to three years.

So I would expect you would probably see it slightly lower than it's been the last couple of years. But, I think you should expect a minimum of $50 million just because of our normal replacement cycles, investments in environmental health and safety issues, et cetera.

Got it. Thank you. And so, given -- I'm guessing working capital might not be quite the tailwind next year that it is this year. But you will still -- it looks like you will have some pretty healthy cash flow. And just curious, I know that the share repurchase was to repurchase the --sort of offset the convertible. But any thoughts on why you were -- you haven't considered sort of renewing another share repurchase authorization?

Well, when we look at that -- and let's assume that these are major repurchases, so, $100 million to $200 million range. As we do that, we're also looking at the M&A forefront and saying, what transactions do we think are actionable. How large are those? Where do we need to deploy our capital? So, that's the put and take that we generally will look at, along with what is our share price and what are our future prospects.

So whenever the share price dips below what we think its intrinsic value is, then you would normally see us in the market buying. And the only time that might not occur if those conditions existed is if we were -- we thought that there was a transaction that we thought was imminent.

Are there any opportunities in the pipeline that would be kind of larger than the norm -- like a very meaningful size to bite for you guys?

Well, there -- I guess I would say there are -- generally, the larger they are, the lower the probability of landing them because they are more difficult. But they do exist. And we do pursue them. And sometimes that's a multi-year effort.

Right. Okay. Well, I'm just looking -- your stock price is kind of lower than it's been in a couple of years now. And it seems like with the cash flow, lower CapEx and reasonably stable outlook in comparison to other industrials and the valuation, it might be -- it might make sense to consider another repurchase.

We certainly agree with you, and we would likely be doing that unless we see other opportunities that we think will have a greater return.

Fair enough. Thank you for your time.

William Bremer, Maxim Group.

Gentlemen, just a quick follow-up. Dave, could you give me an update on the product set for the China market that was needing certification due to the revamp of the product line geared for telecom? Has that been completely completed, or you still have some that you are awaiting certifications on?

No, we're done with that, and the tender results were great. So that's behind us now. And now it's about execution more than anything else.

Okay, great. Thank you.

And the orders shipped.

Got it.

(Operator Instructions) Howard Rosencrans, VA.

I'll just join the fray and to say John, thank you for the fabulous work and communications and everything you've done for the Company and for shareholders and employees. Thank you.

Thank you. Thank you, Howard.

Dave, the last couple of questions pretty much fed into mine. You've largely addressed it, but I will regurgitate it. I just wanted to get a better understanding of what your posture is since this is your show now in terms of return of capital. And we know you will follow the -- or we suspect you will largely follow the same game plan. From an M&A standpoint, I know things may turn up. But where do you stand in terms of your view of maybe a potential leverage ratio? That would be the focus of my question.

Howard, at this point our goal is to optimize the capital we return to you guys and to the shareholders. So I don't foresee any major departure. As you noted, we are going to remain acquisitive. In terms of our dividend yields, in terms of the amount of buybacks, those happen, as Mike alluded to, as an evolving set of circumstances. So it depends on where we're at on an M&A potential. So, it's difficult to give you an answer.

But at this point, in terms of our capital structure, the balance sheet is in great shape. I think Tom and Mike have done a super job with that. They've given me -- as you alluded to, it's my show now. They've given me a lot of opportunities. And really job one, largely, is going to be staying on the M&A front.

We also need -- there are some opportunities for us to invest in ourselves. And this is something we've spoken to the Board about. There are some operational excellence initiatives which might present great return to our shareholders that we are going to consider.

But, by and large, from a dividend -- from a share buyback and from an M&A perspective and CapEx ratios, it should feel pretty comfortable. Mike, do you want to add any color?

Howard, I would just say to your point about the leverage ratios, normally we would tell investors -- and we've told you over the years -- 2.5 times is typically our comfort range. We are at 1.6 times at the moment. But, as you look at targets, generally the bigger the target, the more stable the cash flow generation is, which allows you to think a little higher maybe at 3 times because you know you're going to get the cash generation to pay that debt down faster.

So, in normal standard operating procedure we would say we'd like to be below 2.5 times. If the opportunity comes along, the right opportunity, you could see it go a little higher.

Very good. Thank you so much.

I'm not showing any further questions at this time. I'd like to turn the call back over to Dave Shaffer for closing remarks.

Thanks, Kevin. First of all, I would like to thank John for all he has done with EnerSys. John had the vision that a $200 million North American industrial battery Company could become the global leader in industrial batteries. John led the transformation of that Company into the global leader that EnerSys is in annual sales, geographic coverage, profitability, breadth of product offerings and always providing the best value. For that, we just want to say thank you, John.

I am personally excited about the future for EnerSys, and I look forward to the challenges and opportunities that await us. Thank you all for taking your time today to attend our call. Everyone have a great day.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.