EnerSys (ENS) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the EnerSys Q4 2016 earnings conference call.

(Operator Instructions)

As a reminder, today's conference is being recorded. I would now like to introduce your host for this conference call, Mr. David Shaffer, President and CEO. You may begin.

Thanks, Kevin. Good morning, and thank you for joining us. On our call with me this morning is Mike Schmidtlein, our Chief Financial Officer. On Tuesday we posted on our website slides we will be referencing during the call this morning. If you didn't get a chance to see this information, you may want to go to our Webcast tab in the Investors section of our website at www.EnerSys.com.

At this time, I would ask Mike Schmidtlein to cover information regarding forward-looking statements.

Thank you, Dave, and good morning to everyone. As a reminder, 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 reviews -- 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 seven, Management's Discussion and Analysis of Financial Condition and Results of Operations set forth in our annual report on Form 10-K for the fiscal year ended March 31, 2016, which was filed with the US Securities and Exchange Commission.

In addition, we will also be presenting certain non-GAAP financial measures. For an explanation of the differences between the comparable GAAP financial information and the non-GAAP information, please see our Company's Form 8-K, which includes our press release dated May 31, 2016, which is located on our website at www.EnerSys.com. Now let me turn back to you, Dave.

Thanks, Mike. On Tuesday, we confirmed our fourth-quarter results of $1.03 per share, which was above our guidance range of $0.98 to $1.02. You will notice on slide 3 our year-over-year sales were lower in the fourth quarter. This was due mainly to the impact of foreign exchange rates and a continued pause in reserve power spending in the Middle East and Russia, and in the Americas. However, our gross profit percentage increased 110 basis points to 26.3%, due primarily to lower commodity and manufacturing costs, partially offset by higher warranty costs.

Our operating profit declined 10 basis points to 11.5%, as we weren't able to flex expenses on reduced revenue. Operating expenses as a percentage of sales were higher, due to our executive Management transition, higher bad debt reserves, and a slow reaction to cutting costs while reserve power revenue in EMEA was falling. Therefore, our year-over-year earnings per share was down $0.12 to $1.03 per share.

Please turn to slide 4. I now want to focus on our current business activities and first-quarter guidance. Our global motive power business has been good, as we continued to experience positive organic volume in all regions, not only in the fourth quarter, but also for the entire FY16 year.

In the Americas, we are seeing current orders up slightly year over year, and a continued good mix towards our premium products. Orders from the e-retail industry are currently strong.

In Western Europe, we continue to focus on higher-margin business, which has result in a small loss in volume. We are seeing very positive acceptance in Europe of our recently introduced Ironclad brand. Ironclad is the premium global brand for motive power applications. In Asia, our current orders are up, which is positive for our Yangzhau capacity utilization.

Now please turn to slide 5. Moving to reserve power, in the Americas we are seeing positive year-over-year current orders. The growth is driven by our thin plate pure lead batteries for uninterrupted power supply, or UPS; cable television; auxiliary power units, or APUs, for trucks; and our A&D business. Telecommunications orders are remaining flat, while our enclosure business continues to experience a year-over-year decline in spending.

We believe a future growth area for EnerSys will be batteries in the fleet trucks, engine start, and APU needs. The addressable US market for the approximate nine million trucks is over $1.5 billion.

In April we launched a DataSafe TPPL battery, which will provide increased power density to support the migration to shorter run times at data centers. This shift to shorter UPS run times plays well into our premium product offerings.

In our EMEA region, reserve power orders are down slightly year over year. Current orders for telecommunications in Western Europe are flat, while UPS orders are up nicely, as this business continues to benefit from the recent European Union decision on Safe Harbor, personal data, and privacy and storage. We have also launched the DataSafe UPS product in EMEA, and we are receiving our first orders.

We are also experiencing modern -- moderate growth in our African reserve power business. The Middle East and Russia business orders continue to be off. Due to the organic volume decline in the EMEA reserve power business over the past year, we are taking actions to improve its profitability.

In South Africa, our mining process has been hit hard by the reduction in commodity prices. We are considering an exit from our JV in South Africa.

In addition, we nearly completed an SG&A restructuring program to reduce reserve power costs in our EMEA region by reducing positions, which should lead to $3 million in reduced expenses in FY17. We remain committed to achieving 10% or better operating earnings in this region.

In Asia region, we continue to receive significant telecommunications orders in China, which will increase the capacity utilization at our Chongqing facility and increase manufacturing efficiencies. In Australia, we continue to benefit from the fiber-to-the-home multi-year project. In India, we identified the issues that have led to the increase in warranty costs, and have taken steps to correct the problem.

Based on the above trends and information, our earnings-per-share guidance for our first quarter is between $1.08 and $1.12. In our first quarter, we expect that flat to higher sequential volumes, in addition to lower commodity, manufacturing, warranty, and operating costs, will increase profitability. On Tuesday, we also announced that our Board of Directors approved a quarterly dividend of $0.175 per share, payable on June 24.

Now please turn to page 6. In April, we completed the asset purchase of ENSER, the cobalt disulfite thermal battery manufacturer for the defense and precision-guided weapons systems industry. We believe that the ENSER purchase provides EnerSys with additional technologies, an expanded range of large defense customers -- an expanded range of products for large defense customers, and opportunities for synergies within our lithium business.

Our focus in FY17 and beyond is to improve our operational efficiency. Over the next few years, I will focus -- or we will focus on manufacturing excellence and cost reductions. I have tasked Todd Seacrest, our Chief Operating Officer, to drive a global team to deliver within three years reduced operating costs of at least 2% of our cost of goods sold annually.

I wanted to provide an update on nickel, zinc, and OptiGrid. Please turn to page 7. A few of our large customers have installed and tested nickel zinc batteries, and the results are very favorable. We are waiting for our customers to finish their testing and approve our product. Once they give us the go-ahead, we can execute an industrialization plan for nickel zinc that will be ready to start next year, and take a full 18 months to complete.

Please turn to slide 8. In FY16, we received orders for 11 OptiGrid storage systems totaling $7 million. The growth of this product has been delayed by permitting, testing, and government inspections. We feel that most of the reasons for the delay are close to being resolved, and we have high confidence that over the next two years we should secure orders for 30 additional OptiGrid systems.

In closing, we have many positive opportunities in the markets that we serve. Among those are the fleet truck market, market share gains in our TPPL products for the UPS industry, increased military tactical vehicle battery orders, and increased telecommunications orders in China, driven by their 4G build-out.

I remain excited about EnerSys' future, and the short-term and long-term market opportunities we are pursuing. Now I'll ask Mike Schmidtlein 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 9. Our fourth quarter net sales decreased 3% over the prior year to $611 million, due to 2% decreases in volume and currency translation, offset by a 1% increase from acquisitions. On a regional basis, our fourth quarter net sales in the Americas were down 4% to $330 million, while Europe decreased 12% to $205 million, and Asia increased 40% in the fourth quarter to $77 million.

In the Americas, 2% decreases in organic volume and currency caused the decline. Europe had a 10% decrease in volume, and 1% declines in both price and currency. In Asia volume increased 30%, and the recent ICS acquisition contributed 19% growth, while pricing dropped 2%, along with a 7% decline in currency translation.

On a product-line basis, net sales for motive power were flat at $313 million, while reserve power decreased 6% to $299 million. Despite the 2% currency head wind, motive power enjoyed a 2% volume gain, while reserve power incurred a 6% volume decrease, 1% from reduced pricing and 2% negative currency translation, which overtook the 3% from the ICS acquisition.

Please now refer to slide 10. On a sequential quarterly basis, fourth-quarter net sales were up 7% to the third quarter due to 7% higher organic volume. The Americas region was up 8%, while Europe was up 4%, and Asia was up 9%. On a product-line basis, motive power was up 4% and reserve power was up 10%.

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 May 31, 2016, for details concerning these highlighted items.

Please now turn to slide 11. On a year-over-year quarterly basis, adjusted consolidated operating earnings decreased approximately $3 million, with the operating margin down 10 basis points. On a sequential basis, our fourth quarter operating earnings were up $11 million, on higher volume, and margins increased 110 basis points on the higher volume, and lower commodity costs. The decrease in operating earnings from the prior year reflects primarily lower volume and higher warranty costs.

Operating expenses when excluding highlighted charges were at 14.7% of sales for the fourth quarter, compared to 13.5% in the prior year. The full year's operating expenses for FY16 were 15%, compared to 13.9% in FY15. While operating expenses remained flat in US dollars at $348 million, they did climb as a percentage of sales. This 110-basis-point increase results primarily from higher bad debt expense and employee compensation charges. We would expect our first quarter's operating expenses to be comparable to our fourth quarter.

Our Americas business segment achieved an operating earnings percentage of 15.1%, versus 12.4% in the fourth quarter of last year, primarily from the impact of lower commodity costs. On a sequential basis, Americas fourth quarter increased 150 basis points from the 13.6% margin posted in the third quarter, due to lower commodity costs and higher volume. Europe's operating earnings percentage at 10.5% was below last year's record of 13%, but better than last quarter's rate of 8.4%, primarily from higher volume and better mix.

The operating earnings percentage in our Asia business declined in the fourth quarter of this year to a 0.9% operating loss, from 1.1% income in the fourth quarter of last year and 2.3% income in the prior quarter. Asia's operating loss of $0.7 million for the fourth quarter reflected continuing head wind in our Indian unit, primarily from a warranty charge. We believe corrective actions have been taken in India, and our Asia region should operate in mid single-digit incomes in FY17.

Please move to slide 12. As previously reflected on slide 11, our fourth quarter adjusted consolidated operating earnings of $70.5 million was a decrease of 4% in comparison to the prior year, with the operating margin decreasing 10 basis points to 11.5%. Excluded from our adjusted net earnings for the fourth quarter was approximately $36 million of highlighted charges, the largest being the impairment charge of $32 million net of tax.

Please see our press release issued yesterday for details of these items. Our adjusted consolidated net earnings of $45.6 million decreased 15% from the prior year, or $8 million, to 7.5% of sales for a 100-basis-point reduction, while our booked tax rate increased from 23% to 27%. The $8 million decrease reflects the $3 million of lower operating earnings, our higher tax rate, and $10 million in negative foreign currency head wind.

EPS decreased 10% to $1.03 on lower net earnings, with 2.4 million fewer shares outstanding. The lower average diluted shares resulted primarily from share buybacks. We expect our first quarter of FY17 to have approximately 44 million of weighted average shares outstanding.

Our adjusted effective income tax rate of 27% for the fourth quarter was higher than the prior quarter and prior year's fourth quarter rates, due to discrete items. We believe our tax rate for the first quarter of FY17 will be between 25% and 27%, and for the full year we expect a 25% rate on our as-adjusted earnings. However, this assumption anticipates no significant changes in tax rates or legislation in the countries we operate in.

Please now turn to slides 13 and 14. As usual, we have provided information on a full-year basis similar to that of our fourth quarter on prior pages. These two pages are for your reference, and I don't intend to cover the full-year results.

Please now turn to slide 15. Now for some brief comments about our financial position and cash flow results. Our balance sheet remains very strong. We now have $397 million on hand in cash and short-term investments as of March 31, 2016, with nearly $472 million undrawn from our credit lines around the world. We generated $308 million in cash from operations in FY16. Our leverage ratio remains at 1.5 times, despite spending over $208 million in share buybacks and dividends in FY16.

Capital expenditures were nearly $56 million in FY16, compared to $64 million in FY15. We expect to generate adjusted diluted net earnings per share between $1.08 and $1.12 in our first quarter of FY17, which excludes an expected net charge of $0.04 per share from our restructuring programs and acquisition activities. We anticipate our gross profit rate in the first fiscal quarter to be between 26% and 27%, and our interest expense to be approximately $5.8 million.

In conclusion, we believe we remain well positioned to take advantage of future opportunities. Now let me turn the call back to you, Dave.

Thanks, Mike. Kevin, we can now open up the line for questions.

(Operator Instructions)

Ben Hearnsberger, Stephens.

Thanks for taking my question. I've got a question on the sustainability of the margins you're putting up in the Americas business. Given all the puts and takes there, and what you're seeing in the commodity market, how should we think about that line over the next year?

This is Dave. Thanks for the question. I think we've talked about in the past, our motive power business continues to be strong. We attribute some of that to the increased complexity of today's supply chain. I think the e-retail sector for us right now is particularly strong, as these online companies try to reduce the amount of time it takes to deliver goods to their customers. I think the complexity and the speed of the new supply chains favors our business.

We've also discussed in the past that much of what's hitting or impacting the industrial production figures for the US have a lot to do with industries, heavy industries, that are export-oriented, that are being hurt by a strong dollar. These aren't markets that we're particularly exposed to. In terms of shipbuilding, planes, and tractors, and so forth, these aren't particularly large customer segments for us. We've never felt -- the sectors where we are exposed to -- food, the automotive industry, other areas of that nature -- tend to be holding up, so far that we can tell.

Looking forward with the worldwide industrial truck statistics, we still see a lot of positive momentum for electric forklift trucks, which isn't necessarily 100% correlation to battery sales, but is a good bellwether for the overall strength of that sector in motive power. The big issue for us -- and it's not necessarily commodity-related, Ben -- but the telecommunication spending, as you know, is very lumpy. We're coming off some really extraordinary quarters when the 4G roll-out was going out aggressively. That slow-down has hurt not only our battery sales, book also it's really hurt us badly on the enclosure side. That just comes in a cycle. At this point, hopefully that answers your question. Did I get it?

Yes. Maybe a follow-up. When you think about the offsetting factors to slowing telco, you mentioned the APU opportunity, and you mentioned some other call-outs. Do you have line of sight to stabilization in the reserve business, or do we need another up cycle in telco to drive growth in the reserve business ultimately?

It's a great question. We are seeking alternative markets to fill that production capacity. In fact, right now the factory utilization is improving. We've been hiring back people in our French factory recently, so there's a lot of positive signs.

To your point, we're finding alternative markets for the TPPL products. The truck industry is one of them. We've seen an uplift in tactical vehicle sales globally.

Yes, we can't sit around and wait for telecom to come back, but it will come back, it always does. That's going to be particularly exciting for our enclosure team, who's in a bit of a low period right now. Again, that also has a knock-on effect with batteries. Just as a reminder, one of the things that helps us and sustains us is the replacement battery market.

Enclosures, where they really don't have a replacement interval -- you're fully exposed to the capital spending of the customers and network roll-outs. At least in the battery side, even when they're not putting in new networks, they still have replacement cycles. I would say by and large in all regions, that replacement interval continues to sustain us, even in the telecom markets. Then we're particularly kicking it pretty good in China right now as they're doing a 4G roll-out. Hopefully that gets the telecom question.

That's helpful. Thanks, Dave.

Okay.

John Franzreb, Sidoti & Company.

Good morning, guys. I'd like to talk a little bit about the lack of operating leverage with the gross margin performing so well in the fourth quarter. It didn't really translate to the operating line. You called out a couple items, executive compensation and higher warranty expenses. But you also that said Q1 would be similar type costs as Q4, and that's what has my head scratching a little bit. Can you walk us through what's going on?

Okay, John. As I mentioned in my prepared remarks, for the full year the dollar amount for operating expenses stayed constant. Now the top line, as you know, went down about $100 million, which is what drove that number. Part of that is the top line was more affected by currencies than our operating expenses, because as you might expect, a US-based multi-national Company has more of its operating or overhead costs based in the US than it does overseas. That is part of the reason for the lack of leverage.

We did talk about some of the things we are attempting to do, including a restructuring plan that was going to deliver $3 million in savings in 2017 to try to strengthen that. In addition, there are other -- you have the normal compensation increases for let's say cost-of-living adjustments of 3% to 4% of wages throughout most of the countries we operate in, so that puts pressure on you. Then in addition to that, as you know, there's also Management incentive plans and stock compensation plans, the balances of which can change. What the accrual might be for where you expect to finish or start a year can be different.

I think we were hopefully a little conservative by telling you that the first quarter should be 14.7% with the rate we finished the fourth quarter. I think out of conservatism we used that number. It could be smaller. But on a quarterly basis, you have to understand we're adjusting to where we see ourselves finishing the year in general. There is a little bit of flexibility as to the timing.

I don't know, in light of the fact that we've taken on a couple acquisitions like Purcell and ICS that have historically higher operating expenses than what we had three years ago, at least in terms of the base EnerSys model, that will put a permanent pressure. The call-it 14% numbers we saw in the past may not be achievable, unless you really see some strengthening of foreign currencies that will expand our top line to put that kind of leverage back out there.

And the warranty costs?

The warranty costs were primarily related to our India operation. That was about $4 million, with some associated bad debt charges. It was probably $5 million or $6 million in total that we identified. Those were the primary ones, caused by an action or the process break-down that we've identified and remediated. We feel like we're now --we've done the corrective actions, we've replaced the batteries.

We're now busy selling new product rather than replacing old product, so we think that will have a tremendous benefit in the Asia business, because it was about a 500- or 600-basis-point drag on their results for the fourth fiscal quarter. That's why we feel pretty good that Asia, while it's not going to achieve our 10% or 12% op earnings target in FY17, at least it's not going to be a break-even that it's been for the last few quarters.

Okay, got it. Taking a step back, it seems to me the seasonality that years back we saw back in Q4 versus Q1 is not as pronounced as it used to be. Is there a particular change in spending patterns that's happened over the past couple years that wasn't in place four or five years ago?

It's more, John, a matter of Gregorian calendar. About every fourth or fifth year we have to leap forward one week, so that -- because as you know, we always finish the year on March 31. As it turns out, this first quarter has I think four working days more than the prior year's first quarter, and it has a comparable number of days to our fourth quarter.

Part of the reason it's not as pronounced in terms of the dip from Q4 down to Q1 is because they both have fairly consistent working days. But other than that, I would say order intake looks fairly similar. The benefits we will see in Q1 over Q4, and the reason you're seeing our guidance jumping up $0.07 per share from $1.03 to $1.10 is because we don't anticipate a repeat of those warranty costs.

Some of the manufacturing variances, which are typically good in our first calendar quarter, roll through our P&L on a FIFO basis in our first fiscal quarter. Those are the benefits that we're attributing that gives you the jump up in earnings.

One last question. The new plant you're putting in place for the nickel zinc product line, has that decision been made, and do we have an idea what the capital expense would be associated with that?

This is Dave. No, we don't have approval from the customers yet to proceed. The capital will really be dependent on a couple things. One, and most of importantly, is how many cells we plan to build. It's a bit modular, and depending on our aggressiveness on the forecast, the sales forecast will scale.

I think the CapEx-to-revenue ratio is probably something in the area of 1.2 to 1.3. Depending on what level of annual revenue we load into the budget, that will give you an idea as to how much CapEx will be required to industrialize that. Then the other factor will be whether we do a greenfield site, or put it into an existing EnerSys facility. Obviously our preference is to keep it under an existing roof, if possible.

Got it. Thank you very much, Dave. I will get back into queue.

Brian Drab, William Blair.

Good morning, thanks.

Good morning, Brian.

I just wanted to talk a little bit more about the margins in Asia. You said very clearly mid-single-digit operating margin's the target for 2017. With this warranty issue in India, I guess we're going to see -- I'll ask in the form of a question. Are we going to see a step-function up in op margin in Asia in the first quarter, or more of a ramp throughout the year that will end up averaging mid-single digits for the full year?

I think that right now, based on the best available data, you should see a fairly significant step up in Q1. Then our plan is to grow from that new base. Ultimately, and again I don't have a time for you. I have Todd in the room with me and I'm staring at him. But we do plan to take that business, as we do all businesses, back to a minimum of a 10% operating target. But to Mike's point in his prepared remarks, we won't achieve that goal in FY17. But I think you will see a pretty good step-up in Q1, and we're going to work from that new base.

Okay. I think Mike said that it's about a 400- or 500-basis-point head wind in the fourth quarter, so do we model that essentially going away?

I think that's in the right -- I'd say 500 basis points is plus or minus the right ZIP code.

Okay, thanks. Then can you give us a little more color regarding the tone of your conversations that you're having with the big telecom companies in the US. Any better indication of what the spending activity's going to be like as it pertains at your business in FY17?

Let's -- the battery side is okay. I think that the budget figures in the budgets continue to be there to do the replacement intervals. That portion of their business, their operating budgets tend to grow slightly, low single-digit figures is what those companies usually allocate for their expense budgets for replacement spending.

I think your question is more related to their capital expending and network expenditures. You get a different answer depending on which one of those four of the major carriers you speak to. They're all at different places and different cycles. I don't have any good color for you on when 5G is coming, if that's really the nature of your question, if there's going to be a 4.5 G or anything like that.

The one thing I think we can be fairly uncertain of is that whatever the 5G network looks like, it's going to be smaller sites and more ubiquitous. It's going to be closer to Wi-Fi than it is to AM radio. As such, we have to stay abreast with our enclosure designs and with our batteries to make sure that we are well positioned.

I think in the 5G area, one of the key concerns or challenges for the carriers is back haul. That's to collect all of this data that they collect wirelessly, and it's going to be an immense amount of data. They're probably going to need fiber optics to -- because of the immensity of that data, they're going to need fiber optics to get it back to their central switches and so forth.

It's not just a wireless network challenge for them, but they are also going to have a significant amount of fiber. We think we're well-positioned there. We've done a lot of work with enclosures for fiber node powering and batteries for these applications. But I don't have a good feel for timing.

Okay, just so I understand, you're saying that 5G not only might be a better opportunity than -- or might -- not only a great incremental opportunity because you have these smaller cells that will require more batteries, potentially, but also for the Pursell business, it's a good opportunity for enclosures?

Absolutely. My other point was it's not just wireless, but it's also the back haul fiber. Yes, it's going to be good; but in the meantime we can't wait. I think it was Ben I was speaking to first where I said we've got to make sure we're utilizing our fixed assets, and we're going after some new markets. We not going to sit around and wait for telecom.

Just to make sure that I'm understanding, the opportunity related is your enclosures business, or something else?

Batteries and enclosures.

Batteries and enclosures, okay.

Like (inaudible).

Okay. Then last question I wanted to ask is it seems like we're in the new norm in terms of your consolidated gross margin. It's been -- it's averaged 26% over the last 11 quarters. What's the potential -- where could gross margins go, and is that sustainable at the 25%-plus level?

I think that the 25% or better is sustainable. In the near term with lead pricing -- I think the spot was $0.75 or $0.76 today. I think $0.27 is probably going to be more likely than $0.26.

I think I won't speak for more than a quarter or two out, because I can't tell you what commodity prices will look like four months from now. But in the near term based on what we see right now, I would say those are achievable until conditions start changing.

I think that -- this is Dave. Just to bring up what Mike was saying, the sales guys are continuing to -- they're incented and continue to focus on mix and improving the mix of our products, which has a favorable impact on the gross margin.

Okay. Thanks very much.

William Bremer, Maxim Group.

Good morning, Dave, Mike, and Tom.

Hello, Bill.

Would you provide some more color on your fleet in terms of the fleet trucks and what you're seeing there, given the thin plate pure lead activity are? Maybe just provide the underlying products that you're utilizing there. Do these incorporate not only the lead facet, but do they also incorporate possibly some of the lithium, as well?

Thanks, Bill, this is Dave. The product we're currently selling into that space is our thin plate pure lead technology. We have not introduced any lithium into that market.

I think what's really important to these customers is the total cost of ownership. It's resonated with some of the key fleet users, that they just see -- even though our products tend to be a bit more expensive on the front end, they're just seeing extra service.

Now these batteries are subjected to very serious vibration. There's more electrical content in the cabins than there ever has been with entertainment systems, comfort systems, global positioning satellite systems. Maybe a radar detector here and there inside of those cabs.

There's so much electrical content. It's just putting more strain on the batteries than they're accustomed to. That, coupled with vibration and heat tolerance, has moved this market into looking for a more premium product that lasts longer in the application. That's right in our wheel house. We see great opportunities for us at good margins.

It's is a new market for us. It's just an area that has a lot of up side, and it fits extremely well into our manufacturing footprint. As noted with Ben and I think it was Brian, that we've got to make sure that we keep the plants running. This is a great opportunity for us.

Dave, are you running at your full capacity on your thin plate pure lead because of this, or because of other end markets have possibly come back a little that you do have excess capacity there?

I think telecom is stable, so that's a good baseline to work from. I think we've seen some growth in our cable television market, which has been a net adder for us. I think we're really at the beginning phases on this truck APU market. There's up side to go there.

It's not just this market. This is just really -- we're just getting started there. But cable, basic telecom -- actually, we've seen, and I mentioned in the prepared remarks a little bit of stabilization in Africa, sub-Saharan Africa. Clearly, we're still struggling in the Middle East. I think we were very open about that. That's been a traditionally good market for our TPPL products. But signs of life in sub-Saharan Africa, for sure.

The last one that I probably should mention, and it was in the prepared remarks as well, is that tactical vehicles -- tanks, truck, jeeps -- these users also -- and this isn't just in the US, but other markets as well -- are also seeing the inherent value of our TPPL products relative to traditional flooded batteries. Similar to the truck market, it's about the total cost of ownership. Again, this is a market that we're seeing some exciting growth opportunities, as well. Hopefully that provides enough color for you.

But I guess -- Bill, it's Mike. I would simply say our concern right at the moment on thin plate pure lead is capacity constraints. That's obviously a good problem to have.

Excellent, thank you. My follow-up is I noticed you are hedging quite a lower amount of forward contracts. Given the price of where lead is now, the $0.74, $0.75 per pound, at what point do you possibly consider buying forward here and locking in those prices?

Well, you're right. We are -- from a traditional standpoint, we are considerably lower than we have been in the past. Part of that reflects what I'll call the stability of commodity pricing over last six months. When it's not moving, obviously you're more interested in hedging when you think commodities are moving upwards; less likely if you think they're downwards. But at this point in time we are less.

Now Dave became CEO on April 1. These numbers are as of March 31. I think you will see the strategy for EnerSys to be much more systematic in the future.

If in the past you were used to seeing us with about 100 million pounds hedged and about $100 million US notional dollars of foreign currency hedged, those numbers may be less than that, maybe half of that. Our focus is going to be always to, where we have long-term contracts with fixed commitments to take product, we will hedge those.

Other than that, we tend to want to be about 50% hedged on our order book. Our order book typically only goes out two to three months. When you add those up, the number's a little smaller. We also want to be taking positions every week, and not be more selective or sporadic in terms of when we place orders. I think that's the change in the strategy, but you're right, we are lower than we traditionally are.

Okay, and my final question, an update on your stock repurchase plan, and where you stand with that at this point?

We've completed that accelerated share repurchase program we announced last year. We have -- as always, we have an evergreen resolution from our Board that allows us to go out and buy back the dilution caused by stock -- employee stock compensation programs. That's -- call it a $15 million program, so it's probably not going to move the needle for most analysts in terms of what that would do.

Right now we have no programs, other than that evergreen one. Certainly at the moment, we would rather look at investing in ourselves. We think there are some exciting opportunities out there. We don't have any programs in mind at the moment, but if share pricing were to make it a little bit more attractive, then perhaps we would. But right now we would rather invest in ourselves. We think there's better opportunities there.

Okay, gentlemen, thank you.

Michael Gallo, CL King

Hi, good morning.

Good morning, Michael.

A couple follow-ups. First, recycled batteries, I know that's been a pressure. Has that eased at this point, or is it about the same as it's been in prior quarters?

I would say the cost of -- this is Dave. The cost of scrap batteries has stabilized versus the period where it was very dynamic. I think it's still higher than what we would expect. But I would say for at least the last -- Todd, would you say the last three or four quarters it's been trading at a fairly narrow window?

Yes.

Okay. Second question's for Mike. Mike, I know you mentioned -- I think there's four more selling days in Q1 year over year. Are there fewer selling days in Q2, or how should we think about how the calendar play out? I assume by the time we get to the end of the year, it's going to be -- the fiscal year -- it's going to be a similar number of selling days?

Typically, when you make that leap forward it's because the fourth fiscal quarter has been stacking up with more and more days. Then when you finally jump forward another week in Q1, it comes out of Q4. Q2, Q3 will both be 13-week quarters. Where you'll see the smaller number is in our fourth quarter.

So Q4 -- by the time you get to the end of the year it will be -- it will wash itself out, is that right?

Right. We're still going to end the year on March 31, as we always have. For this year that will be 364 days, since the leap year came up against this last year.

Right. How big is the US enclosure business at this point? I know it's continued to decline. I'm trying to understand how much more is left to decline, and whether you expect the enclosure business could be up in FY17, or there's still more to decline in terms of just the US enclosure business? Thanks.

I don't have a great figure for you right now in terms of the -- where the market spending is, because it gets a little complicated with some of that channel going through the big OEMs like Alcatel and Nokia and so forth. I don't have a great figure right now.

What I can tell you is that the spending overall is well off of the peak periods of the 4G roll-outs. We think that for us to see any return to that spending will take a major announcement by one or two of the carriers about either a 5G wireless or maybe some sort of fiber network roll-out across the country nationally. But it's going to -- to get back to those heydays, it's going to take the next wave of telecom investments. Again, as I noted earlier, we don't have good visibility as to when that will occur.

In the meantime, and similar to what we talked about with TPPL, the guys are actively seeking alternative opportunities. We've talked about this many times. We're trying to grow the international piece of that enclosure business. That's been a real keen focus for us.

The one that takes a little longer, and it's frustratingly slow, is getting into new markets. Maybe it's utility, maybe it's railroad. The approval intervals in these alternative markets tends to be very long. That's the other side of it. Really, and being frank, to get back to what we were experiencing during the 4G roll-out will take another major roll-out of the next generation of networks.

Right. Would you expect US reserve overall to be relatively flattish the coming year? I know it obviously was down. It's flattened out a little bit here in the fourth quarter. Obviously that enclosure business is still under pressure; but just overall US reserves, should we think about it as flattish over the next year, assuming nothing happens in terms of 5G or 4.5G, or what have you?

I would say we're through the comp period now. We're getting through the period where the comps are going to be a little bit better for us. The eggs move through the snake a little bit.

We should see some modest growth, and then on our base or core businesses; but again, the focus for us is going to continue to be to grow our market share of TPPL. We're trying to really get the favorable mix going. As noted earlier, we see some nice opportunities with the tactical vehicles, with the truck APU markets, cable television. Some of these areas we're excited about.

Okay, great. Thanks very much.

Thanks, Mike.

Sven Eenmaa, Stifel.

Thanks for taking my question. First wanted to ask about your M&A strategy. How do you think about current fiscal year, and whether there are focus areas here in terms of M&A?

Sven, hi, it's Dave. Right now the M&A pipeline continues to be very solid. I would say in general comments I'll make, and I think I've made these before, my objective in the coming quarters is to increase the average size of our M&A deals. I think we've done a lot of small deals.

Regardless of the size of the deal, a significant management bandwidth is consumed. I'm committed to increasing the average. That's not to say we won't do small deals when they come along, but one of our focuses is to get that average size up.

We think there's some great opportunities for us, both in the adjacent markets as well as in some of our core markets. We remain optimistic. We put out a $4 billion goal. My goodness, that's got to be going on four or five years ago that we set that goal out there.

I can't nor will we try to achieve $4 billion revenue by FY18 and do something foolish. But again, we lay these goals out there to drive us. We continue to seek revenue top-line growth through acquisition, and that hasn't changed, nor will it.

Got it, that's very helpful. Then a couple of follow-up questions. First, on the Middle East and Russia, what was the size of headwind you guys saw in the current quarter? Can you quantify that? How long -- remind us, how many quarters we are in the process went you get into the favorable comp territory here?

On the comparison period, I don't have a figure for you. Typically, that business was probably in the $40 million a year range at good margins -- and good margins because it's our premium TPPL products. That's been the real keen challenge for the team in EMEA is it's just not the loss of revenue, which hurts badly; but it's really the favorable -- the favorability of the mix for that particular region for those product types. I'm going to say roughly for the quarter in the ZIP code of $10 million in revenue, but I don't have a real good figure for you.

Got it. Following up also nickel zinc side, when do you expect to complete the trial periods? I think you have a number of them going on. When would you expect to make a decision in terms of capacity additions here?

I ask that question once a month of my team. The life-testing portion is -- the performance testing has gone well, and that's the piece that goes quickly. But then the customers have to do life cycle evaluations, and you just can't rush time. They want to make sure that when they cycle this battery once a day or 10 times a day, whatever their application, that it's going to hold up.

I don't have a good feel for you. I would hope -- and in the prepared remarks, the key is that once we do drop the green flag, the starter flag, it's probably going to be 18 months to industrialize. If we get an answer this year, we are still talking a couple years plus before we get any meaningful contribution revenue.

Got it. Last question, wanted to -- you previously have provided metrics in terms of electric lift truck growth rates, order growth rates globally across various regions. Could you provide that, as well as comment on what you see on new lift trucks side versus replacement battery side for you on the order side?

Okay, I do have the latest worldwide industrial truck association data in front of me. I'll quote you some of the relevant figures.

The trailing three-month versus the prior year, for the United States it's up 10%. For the overall Americas region, it's up 7%. The US is doing really well. Canada, Mexico are off a bit. But 10% for the US, 7% for the Americas.

Western Europe is doing really well right now. Western Europe, their three-month average over the prior year is up 15% based on worldwide industrial trucks. Eastern Europe is actually doing pretty well, at plus 18%. The total Europe market is up 15% three months versus prior year.

Then going to Asia, the Asia market is the same as the Americas, at 7%. The China market within Asia is also at 7%. That gives us a global three-month trailing 12, our trailing three-month versus prior year, excuse me, of up 11%.

Back to your point about what that means to batteries. As I warned earlier, there's not a one-for-one correlation between truck sales and battery sales because of replacement, because of the fleet sales of trucks, because of the rental fleets of trucks. What it does do, and we do track favorably, is as the truck business goes, the battery business follows. I just want to -- we are not experiencing these sorts of double-digit growth rates.

A couple things, and we've mentioned earlier -- one, some of this growth, especially in Europe, is occurring with very low margin private label batteries. That's a market that we've just -- we let the competitors take, because it's -- it doesn't meet our margin profile for our investors. That's been a big part of why we aren't matching the growth rates of the trucks, and also obviously the replacement batteries.

Is there anything else you need on that piece?

No, I think that was very helpful. Thanks very much.

Okay, thank you.

William Bremer, Maxim Group

Yes, and Dave you just hit part of my question. I really wanted an update on Europe and what you're seeing there. I thank you for the commentary you just deployed to us. Maybe if you could take it a step further of what you're seeing there on the reserve side, and what you anticipate in terms of your top-line growth over -- year over year, as well as the path for margins?

Right. I think for us, Bill, Europe for many, many quarters in a row from a top-line perspective has been relatively flat, stable, flat. I think that applies both in the traditional reserve power markets and in the motive power market. What pops for Europe obviously is when there's a big project-related telco spend that we saw in the Middle East a few quarters ago, and parts of Europe on 4G spending. Beyond the bluebirds, what we still continue to experience and forecast is a very stable growth environment.

One of the things I want to -- and we remain committed to and I think it's evidenced in our results, is that we're just not going to chase the low-margin business. Sometimes you just have to say no, and you let the competitors eat the poison. We remain committed to that strategy.

Again, similar to what we do in the US, we are working hard with our sales team, with our incentives, and our product innovation to move the customer base increasingly to our higher-margin, better total cost of ownership product portfolio. That will be our remain focus.

Holger, the new President, he understands very clearly that 10% operating earnings is non-negotiable. We will try to continue to hit that objective. But we want to be -- we don't want to paint the wrong picture in terms of top-line growth.

In terms of some of those premium products we talked about, we continue to push TPPL in both reserve and motive products. We recently introduced the Ironclad battery, which has been really successful for us in the US. We're getting some great momentum on that product in Europe, as well. Is that the right message, or right detail, or is there more you need?

No. I think you articulated well. I appreciate the insight in terms of the new products being launched there; and of course the classic Craigline of let the customers -- let the other clients eat the poison. But thank you very much, Dave.

(Operator Instructions)

John Franzreb, Sidoti & Company.

Hi, guys. The product redesign in China seems to be paying off. Revenues are up. Could you talk a little bit about how long that process is expected to continue, the 3G to 4G upgrade? I know you're a little late to the game there. What's the timeline for that completion of that upgrade?

Good question, this is Dave. I think really, there's two major drivers for increased battery spending in China right now on the telecommunications side. One is, if you remember, there was three state-owned telecom companies in China -- China Mobile, China Telecom, and China Unicom. They consolidated the outside tower resources and assets of those three companies into a new co called China Tower.

There is two phases of investment that China Tower is going through, and they're doing them simultaneously. One is to bring the networks up to snuff. They have to get everything back to what they consider a usable baseline standard. That included some batteries that really needed to be replaced that weren't.

I would say that's probably maybe even a bigger part of the spending than the 4G right now, is these guys. Let's just say that the batteries weren't replaced as often as they should have been, and these guys are trying to bring everything up to a new credible standard.

Then on top of that spending is the 4G piece. I just don't have a good answer for you this cycle; but as far as we can tell at least for the remainder of this fiscal year, we feel very good about these very high volume sales in China.

Okay, got it. In your prepared remarks, you talked about delays in OptiGrid has been a little bit of a head wind. Could you provide a little color as to simply what those delays are?

I think we've disclosed to you in the past that OptiGrid is largely being deployed right now in Manhattan. Manhattan, as you probably know better than I do, is subjected to many codes and many overlapping governmental legislative bodies with regards to transportation of fire, building codes, and this is new. This is new for everybody.

We're all adjusting to making sure that these systems are in full compliance with all these codes and are sustainably safe. It's really been a lot of hard work by everyone. I think everyone's motivated -- the utilities, the fire folks. Everyone recognizes the need for energy storage, specifically in Manhattan.

But we've got to make sure we check all the boxes and cross all the t's. We feel better. It's been slower than we had hoped; but as we noted, we think we're going to be back on track over the next two years to go from 7 systems to 30.

Okay, thank you very much Dave.

You're welcome.

I'm not showing any further questions at this time. I'd like to turn the call over to David Shaffer.

Great. We very much appreciate everyone joining us today. Again, I'm personally excited about what should turn out to be a record first quarter. Thank you, and have a good day.

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