EnerSys (ENS) 2017 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Q2 2017 EnerSys earnings conference call. At this time all participants are in a listen-only mode. (Operator Instructions). This conference is being recorded for replay purposes. It is now my pleasure to hand the conference over to Mr. David Shaffer, Chief Executive Officer.

Thank you Brian. Good morning, and thank you for joining us. On the call with me this morning is Mike Schmidtlein, our Chief Financial Officer. Last evening 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 the webcast tab in the Investor section of our website at www.EnerSys.com. I am going to ask Mike Schmidtlein to cover information regarding forward-looking statements.

Thank you Dave. Good morning to everyone. As a reminder, we will be presenting certain forward-looking statements on this call that are based on management's current expectations, and are subject to uncertainties and changes in circumstances. Our actual results may differ materially from the forward-looking statements for a number of reasons. Our forward-looking statements are based on management's current views regarding future events and operating performance, and are applicable only as of the date of such statements.

For a list of factors which could effect our future results, including our earnings estimates, see forward-looking statements included in item 2, management discussions and analysis of financial condition and results of operations, set forth in the quarterly report on Form 10-Q for the quarter ended October 2, 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 November 9th, 2016, which is located on our website at www.Enersys.com. Now let me turn it back to you Dave.

Thanks Mike. On Wednesday we announced our second quarter results of a $1.15 per share, which was above our guidance range of $1.06 to $1.10. You will notice on slide three, we had another very good quarter, and once again achieved an all-time record for as adjusted gross profit percentage of 28.5%. We also achieved a second quarter record for as adjusted operating earnings percentage, as well as earnings per share of a $1.15. Our organic growth was mainly driven by the reserve in motive power businesses in Asia. The increased year-over-year profitability was due primarily to lower commodity costs, higher volume, positive mix, tax effects, and per earnings per share from lower shares outstanding.

Please turn to slide four. I now want to focus on our current business activities and third quarter guidance. During the second quarter, the global motive power business continued to experience positive organic sales volumes in all regions, and our premium products continue to resonate with our customers. The second quarter organic growth is very similar to what we experienced in our first quarter of fiscal year 2017 and in fiscal year 2016. Global orders for motive power batteries continue their steady growth pattern. Asia continues to be our highest growth area, benefiting from the conversion of internal combustion Ford trucks to electric.

In Europe, Middle East, and Africa, we're increasing the percentage of our motive power sales that are value-added products, which include thin plate pure lead, iron clad, gel, high frequency chargers, and battery management systems. Year-to-date, premium product sales were up year-over-year by 24%. This has allowed EMEA to manage or maintain their operating earnings, in spite of weak telecommunications demand in the emerging markets. We announced plans to exit our South Africa joint venture, due to economic weak conditions, limited growth in the mining industry, and increased imports. We will continue to serve South Africa with our global manufactured products, just as we do for the rest of Africa.

Please turn to slide five. Moving to reserve power in the Americas, I am pleased to report we have received a large order for cabinet enclosures that should ship mostly in the fourth quarter of fiscal year 2017. These orders should be just the first year of what we anticipate will be a multi-year buildout. During the second quarter, we also received orders and generated sales for our Odyssey over the road trucks from our new fleet customer. We anticipate that full year sales to this customer could approach $15 million. We are currently working with other truck fleet operators, and I anticipate that additional fleets will begin to use our batteries for their engine start and auxiliary power unit, or APU, needs during fiscal year 2018. Also we are closing in on opportunities to further expand Odyssey sales into the retail sector. Over the past year our aerospace and defense organization has been concentrating on product development and testing with our current and potential customers. These efforts have been rewarded by a significant pick-up in orders, and interest in our space and munitions products. I would expect to see double digit growth in this business in fiscal year 2018.

In our EMEA region, reserve power organic sales for the second quarter versus last year's second quarter were down slightly. Telecommunications orders continued to be down year-over-year, primarily due to the reduced sales to the emerging markets. UPS orders continue to do well and benefit from the recent European Union decision on Safe Harbor, personal data privacy and storage. In our Asia region, the second quarter year-over-year operating earnings were up approximately $4 million, as we continue to see higher volume in reserve power products in China and Australia. Based on the above trends and information, our earnings per share guidance for our third quarter is between $1.12 and $1.16. We anticipate a sequential increase in our sales volume, and reduction in operating expenses to be offset by increasing lead costs, and a seasonal increase in manufacturing variances. On Wednesday, we announced that our Board of Directors approved a quarterly dividend of $0.175 per share payable on December30th.

Please turn to slide six. We are beginning to benefit from our Lean initiatives. As we discussed earlier, our initial goal was to permanently reduce our costs of goods sold by a minimum of 2%, or $35 million by the end of our fiscal year 2019. These savings will be driven by eliminating waste, increasing productivity, and reducing costs. In addition, we will expand our projects to include opportunities for savings in operating expenses. We have already identified enough projects that should easily get us to and beyond our goal. Looking beyond our current projects one of our longer term key areas of focus is to drive organic growth through cycle time compression. However, it is important to note that the margin improvements will not be linear. As we dig deeper into our Lean initiatives, our operating expenses may rise on a short term basis in advance of the savings.

Please turn to slide seven. Just as a quick reminder that our next Investor Day will be held on Tuesday, February 28th, 2017, at the New York Stock Exchange. In closing I am very pleased with our second quarter performance. In this slow growth economic environment, we remain focused on the continued expansion to higher margin product mix, while we continue to reduce costs in Europe, Middle East, and Africa. Our second half of fiscal year 2017 will get a boost from the large cabinet enclosures order, and the increasing sales of our Odyssey battery. Finally, as I previously noted we are confident that operating margins will expand, as we eliminate waste and compress our cycle times. I remain excited about EnerSys' future, and the short term and long term market opportunities we are pursuing. And 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 eight. Our second quarter net sales increased 1% over the prior year to $576 million, due to a 2% increase in volume, and 1% from acquisition, offset by a 2% decrease from currency translation. On a regional basis, our second quarter net sales in the Americas were up 1% to $325 million, while Europe's were down 5% to $181 million, and Asia increased 23% in the second quarter to $71 million. In the Americas, a 1% increase in acquisitions, and 1% from pricing, offset a 1% currency decline. Europe had a 1% decrease in volume, and a 1% decline in price, along with 3% in negative currency. In Asia, volume increased 17%, and the recent ICS acquisition contributed 4% growth, while pricing increased 1%, and currency improved 1%.

On a product line basis, net sales for motive power were up 1% to $299 million, while reserve power also increased 1% to $277 million. Despite a 1% currency headwind, motive power enjoyed a 2% volume gain, while reserve power enjoyed a 1% volume increase, and 2% from the ICS acquisition offset by a 2% negative currency translation.

Please now refer to slide nine. On a sequential quarterly basis, second quarter net sales were down 4% to the first quarter, from 4% less organic volume on 2% fewer working days in Q2. The Americas region was down 1%, while Europe was 8% lower, and Asia was down 4%. On a product line basis, motive power was down 2%, and reserve power was down 6%. Now a few comments about our adjusted consolidated earnings performance. As you know we utilized certain non-GAAP measures in analyzing our Company's operating performance, specifically excluding highlighted items. Accordingly, my following comments concerning operating earnings, and my later comments concerning diluted earnings per share exclude all highlighted items. Please refer to our Company's Form 8-K, which includes our press release dated November 9, 2016, for details concerning these highlighted items.

Please now turn to slide ten. On a year-over-year quarterly basis, adjusted consolidated operating earnings increased approximately $4 million to $70.9 million, with the operating margin up 60 basis points. The increase in operating earnings from the prior year reflects primarily higher volume and lower commodity costs. On a sequential basis, our second quarter operating earnings dollars were down $4 million on lower revenue and higher lead costs, with the operating margin down 10 basis points. Operating expenses when excluding highlighted charges were up to 16.1% for the second quarter, compared to 15.5% in the prior year. The full year's operating expenses for fiscal 2017 should be comparable to fiscal 2016 at approximately 15%. Excluded from operating expenses recorded on a GAAP basis are charges of $5.4 million primarily related to the EMEA restructuring or exit charges.

Excluding those charges, our America's business segment achieved an operating percentage of 15.5%, versus 15.3% in the second quarter of last year, primarily from the impact of higher sales and lower commodity costs. On a sequential basis, America's second quarter increased 10 basis points from the 15.4% margin posted in the first quarter, due to lower manufacturing costs. Europe's operating earnings percentage of 9.4% was up slightly from last year's 9.0%, but down from last quarter's 10.1% on lower volume. The operating earnings percentage in our Asia business improved in the second quarter this year to 5.1% operating profit , from a 0.1% income in the second quarter of last year, that is down from last quarter's 5.7%. Asia's sequential operating decline reflects lower volume.

Please move to slide 11. As previously reflected on slide ten, our second quarter adjusted consolidated operating earnings of $70.9 million was an increase of 7% in comparison to the prior year, with the operating margin increasing 60 basis points to 12.3%. Excluded from our adjusted net earnings for the second quarter is approximately $5 million in after tax highlighted charges, the largest being the exit charge as we exit from our South African joint venture. Please see our press release issued yesterday for details of these items. Our adjusted consolidated net earnings of $50.4 million, increased 13% from the prior year, or $6 million and improved 90 basis points to 8.8% of sales. The $6 million increase reflects $4 million higher operating earnings, a lower tax rate, and $1 million in currency improvement.

Our adjusted effective income tax rate of 24% for the second quarter was lower than the prior quarter of 26%, and the prior year's second quarter rate of 27%, due to discrete items. We believe our tax rate for the third quarter of fiscal 2017 will be approximately 25%, and for the full year we expect a 25% rate on our as adjusted earnings. However, these assumptions anticipate no significant changes in tax rates or legislation in the countries we operate in. EPS increased 18% to $1.15 on higher net earnings, with 2.1 fewer shares outstanding. The lower average diluted shares resulted primarily from share buybacks last fiscal year, we expect our third fiscal quarter of 2017 to have approximately $44 million of weighted average shares outstanding.

Please now turn to slides 12 and 13. As usual, we have provided information on a year-to-date basis, similar to that of the second quarter on the prior pages. These two pages are for your reference, and I don't intend to cover the year-to-date results. Please now turn to slide 14. Now some brief comments about our financial position and our cash flow results, our balance sheet remains very strong. We have $440 million on hand in cash and short term investments as of October 2nd, 2016. With over $473 million undrawn from our credit lines around the world. We generated $114 million in cash from operations in our first fiscal half of 2017. Our credit agreement leverage ratio is at 1.4 times, and will likely drop further by year end barring any significant acquisitions.

Capital expenditures were $21 million in the first half of fiscal 2017 compared to $34 million in fiscal 2016. We expect to generate adjusted diluted net earnings per share of between $1.12 and $1.16 in our third quarter fiscal 2017, which excludes an expected net charge of $0.13 a share, coming from continuation of our exit in South Africa, and our other restructuring and acquisition activities. We anticipate our gross profit rate in our third fiscal quarter to be approximately 27%, and our interest rate expense to be approximately $5.7 million. In conclusion, we believe we remain well-positioned to take advantage of future opportunities. Now let me turn the call back to Dave.

Thanks Mike. Brian, we can now open up the lines to questions.

Yes, sir. (Operator Instructions). Our first question will come from John Franzreb with Sidoti. Your questions, please.

Good morning everybody. I'd like to start with one of your last thoughts there Mike, when you talked about sequentially the gross margin dropping to roughly 27% from the 28.5% that you just recorded. What's the biggest driver in the decremental gross margin?

So the biggest driver in that decline is going to be sequential increase in the cost of lead from the second quarter. The first and second quarters had relatively comparable lead costs. We'll see Q3's increase of about $4 million, which is going to be about 75 basis points pressure. So if all other things were equal, that 28.5% would move down to 27.75 % or thereabout. The 28.5%, which was a record, I think was a reflection of the improvements we have made in the mix of our higher margined products, our premium products. I think it reflects the fact that we have intentionally tried to go after better business, rather than more business in regions like Europe. I think it reflects the fact that in our India activity, which had been losing money in the last year pretty heavily is getting closer to breakeven.

So we've been making progress there. So all of those things should help us to kind of counter the negative in lead. I will say as you go another quarter sequentially, with most of that lead costs being known but not all of it, I would expect probably another $4 million to come on top of it. So you have got another 75 bips of pressure next quarter, followed by an additional 75 bips thereafter. So once you get out to Q4, and even into Q3, what's going to keep us in that 27-plus range is going to be some of the cost benefit that we anticipate from our Lean initiatives. I think those are the two quarters, the second half of the year where you'll start to see some of those benefits.

John, I think that the other issue is that we have seen some movement in LME lead prices, as Mike just eluded to, and there is some lag in our recovery with our pricing action. So, that is historic we never can seem to recover as fast as lead can go up, so that's part of the sequential story as well.

Got it. Perfect. That was great, guys. And Dave, you mentioned that in motive Asia's growth has been better than expected. Can you just talk a little bit about that, and my impression has always been that was the hardest region to crack for the motive side of the business.?

It's actually going fairly well for us. So, I mean, the wood statistics demonstrate that region seems to be coming back to life a little bit better, which is exciting, and even though the economic situation in China which we feel is improving a bit, we still see a lot of lift from the conversion from gas to electric within the China market. And outside of China in the Asian market, we're seeing fairly stable situations similar to what we are seeing in the US, and actually Europe is pretty good in motive right now. So really the gas to electric conversion is sustaining us in China, and we look for better things as the China market continues to improve, and we made a fairly significant investment in the new factory there, which we hope to take better advantage of as the market and the situation does improve there. India, not much of a motive power market today, but we feel well-positioned to take advantage of that, as that market begins to mature, and then just as a reminder, John, Japan, Korea, a fairly significant motive power market, a fairly significant part of the wood statistic. Given the xenophobic nature of those regions we have never really had much success in those markets. You have to just keep in mind that we don't participate much unfortunately in Japan and Korea.

How big of a potential is motive Asia 3 to 5 years down the line?

Yes, I'm cautiously optimistic. I think as the Chinese market can get back to what were historic rates layered that on top of, on the gas to electric conversion and then put in the perspective of our untapped factory capacity in Shuangqiao, I am cautiously optimistic that there is some upside especially in the Chinese market for EnerSys.

Okay, guys. I'll get back in the queue. Thank you.

Thank you.

Thank you. Our next question comes from the line of Michael Gallo from CL King. Your question, please. Pardon. Michael. Please check your mute button.

I think we lost Michael.

Our next question comes from the line of Ben Hearnsberger from Stephens.

Thanks for taking my question. I wanted to ask about the Purcell order. Is that in the telco space?

It is in the teleco space. We haven't seen any major network deployments like we did a couple of years ago in terms of 4G rollout. But there are still some projects out there, specific filling in areas, adding some additional capacities to networks. And we're excited. And we think that this is going to breathe some life into that group. I really like that group of folks, and I'm very encouraged and happy for our team out there, to enjoy the success and keep them busy for at least the foreseeable future.

Okay. So would it be fair to say that it's a helpful order, probably not big enough to back fill the slow down we see in that business, but a step in the right direction?

That is a perfect summation.

Dave, also I think you also eluded to some higher operating expenses in advance of Lean. Can you kind of detail what some of costs are, and how they impact the margin?

It's not just Lean, but a lot of the change oriented initiatives that we have going. So Lean initiatives and IT both are going to potentially have an impact on OpEx in advance of the savings yield. And so those will be consulting fees. It will be bringing on licenses for software in advance of actually using them to their full extent, a transition in nature, but we are very confident and optimistic about all of these programs, otherwise we wouldn't be doing them. But we wanted to flag to you. We're very keenly focused on operating expenses but we wanted to flag to you that there may be some short term headwinds. We think they're manageable, and we'll just discuss that at every one of these calls, to make sure you're aware what's going on.

Okay. I know we're going to have some gross margin impact from lead. Can you size the potential margin impact from some of these incremental costs on the OpEx side?

Ben, it's Mike. So the costs that Dave was talking about is probably incrementally about $1 million to $1.5 million a quarter. And as you know, our operating expenses when you add them up full year are about $360 million. They're going to come far below. probably about 0.5% for those incrementally. So they exist. They should help us to drive costs savings elsewhere, although not initially. But they should allow us to grow to be faster and more responsive on all of those benefits should show up elsewhere in our P&L.

Okay. That's helpful. Lastly on the ERP rollout. Where do we stand and do you need that system in place to accomplish your Lean goals?

I think that what's important is that the two initiatives work in concert with each other. I don't know that it's entirely dependant to achieve. The Lean frankly is more about flows and process and waste. So they're not, they certainly don't, they are a bit mutually exclusive, but the one thing that we have to be careful of is making sure that the design and the rollout is done in unison. So you've got our new CIO and our new COO meeting on a regular basis to make sure these two rollouts are not fighting each other along the way. And so far I have to say I am extremely pleased with what I have seen. On the IT side, things are improving. We took a fairly significant charge last quarter as we reset our direction. We have a new engagement partner. We just had our SAP executive steering committee yesterday. And we got an update from the team, and I'm pleased with where things stand. And in terms of Lean, we're not really started yet, but in terms of the initial assessment, the opportunities we think are very tangible to achieve that $35 million sustainable and structural reduction in cost that we have targeted for the last couple of quarters.

Just to add to that, I think we have, call it half a dozen or more entities in North America we need to roll out the SAP ERP system to. So the timing of which we would probably continue to go with some of the smaller ones, as we gain confidence in our buildout, which allows us to focus the Lean initiatives on our larger facilities, which will give us the biggest bang for our buck in the Lean initiative, and that's where you want to have that Lean initiative done, let's say that is two years from now when you're doing that implementation on SAP. Now you've gotten some of those things in front of you, and hopefully your bill of materials are going to incorporate some of the labor savings, or any other changes that you are going to make in the product or processes as a result of those.

Ben, I want to remind you, I think it's inherent in the roll-up history with EnerSys that as we have assessed internally with our own folks, and we have brought in outsiders to assess the opportunities, we have some significant confidence that we can do what we do today better, faster, and certainly with less waste. And I partially am a believer that the faster that we can compress that cycle time from the day from which we make a quotation, to the day which we can actually ship the product, if we can do that, and certainly we don't want to cheat. We don't want to do it by simply layering in too much inventory. But the faster we can compress those cycle times, we think it is going to have a meaningful impact on our traditional organic growth rates, and to help us take share, just by getting it out faster. So we're very optimistic about that point.

That's really helpful. Thanks very taking my questions.

Okay.

(Operator Instructions). Our next question comes from the line of Brian Drab from William Blair. Your question, please.

Good morning. I was wondering if you could step through the latest WITS data for us. Typically you're able to give the rolling three months in the different regions?

Trailing 3 months versus prior year, we'll break some out. The United States at 20%, the total Americas 18%. So pretty exciting and demonstrates that the momentum is holding in that region. Western Europe 17%, similar. Eastern Europe 24%, so some recovery there. With a total European number of 18%. In the Middle East and Africa, a smaller market, 1%. So the EMEA, Europe, Middle East, and Africa subtotal, a total of 17%. In Asia as we noted earlier, we're starting to see some recovery. China is up 19%. And the total Asia figure, 13%. So worldwide, 3 month trailing versus prior year, we're seeing a 16% increase in the unit orders. Now the one thing I have to remind you of, is that these unit figures, these are unit figures, will include fleet replacements. So as they decommission older trucks and bring in newer trucks, we will see increased truck volume reflected in these results, that don't necessarily mean that there's an increase in the amount of materials being handled, or an increase in the amount of batteries sold. So it's not a one for one, but it certainly demonstrates that the material handling markets are staying healthy.

You can just clarify that? If there's a fleet replacement, wouldn't each unit come with a new battery?

Not necessarily. Oftentimes trucks come with multiple batteries. And then how the trucks are repurposed and how batteries are reconditioned, it's absolutely not a one for one, in terms of new trucks and new batteries.

Okay. And then I think this is a question that I know I've asked over the years, and you've gotten many times over the years. Can you reconcile some of this growth you're seeing, 20% in the US, 18% in Europe, in this specific niche of the industrial world relative to kind of the industrial recession that we're seeing in general?

Again, just be cautious. These growth rates do include that fleet replacement.

Outside, I know you mentioned the fleet replacement. Maybe could you talk a little bit more about that, because I'm trying to understand how there's a global fleet replacement. What drives that? You're talking about hundreds of different customers operating Ford trucks?

I think the cost of money is a factor, the lease terms are a factor. The technology and the desire of the customers to get a more modern vehicle that's more efficient is part of the drivers that can impact these WIT statistics. I think that, and I mentioned this prior, the statistics that we are quoting you for are electric forklift trucks, Class 1, 2 and 3. Also inherent in these numbers are conversion from gas to electric. I think that is another key driver for this. And then I think where these electric forklift trucks are used Class 1, 2 and 3, these are in retail areas and distribution centers, and automotive parts and automotive assembly factories. So the markets where we are seeing good activity in electric forklift trucks, aren't necessarily as exposed to strong dollar export.

I have mentioned in the past plane building, ship building, some of these industries, oil and gas, that have been hit hard with strong dollar or commodity issues, these really aren't the markets for electric forklift trucks. The other thing I've mentioned in the past, is that electric forklift trucks are used in the developed economies, so the United States, western Europe, Japan and Korea, these are big markets. China is becoming an increasingly important electric forklift market. But the developing markets, where we're seeing a lot of commodity price struggling, those aren't big electric forklift truck markets, so we're not seeing the same drags as you would see in a global GDP or a global industrial production statistic. The exposure to the bricks, it's not, these are narrower in scope, and we think that all of those factor into why we continue to see fairly healthy growth in the electric forklift markets.

And I think as retailers and distributors want to get their product to their customers with goals of same day, you're seeing distribution centers being built out to try to enhance that delivery system.

It's a great point, Mike. The velocity at which goods are moving and goods are turning is a great positive impact or material handling equipment.

Okay. That's all really helpful. Thanks for going through that. Sticking at a high level, you have a new chief technology officer onboard. I'm wondering if you could give us a better sense for what the priorities are for him, and for that team?

That's great. Well, we couldn't be happier with the start that he has made. Right now he's spending a lot of time assessing our current technical capabilities, and meeting the teams. Again, I mentioned earlier our history is a roll-up company. As such, we have a tremendous amount of technical talent and capability, but it's distributed globally, it is not very uniform, and we don't think we're getting perfect utilization out of our current technical resources. One of the key areas of Jorn right now is to get the team, get to know everybody, assess our capabilities, and then start to think through how we can do a better job of utilizing existing resources.

The other reason we brought on Jorn is to make sure we take advantage of markets that emerge in the future that would be incremental opportunities for EnerSys. But we haven't seen tremendous conversion or threats to our existing markets today, but we do see some markets on the horizon where we think we're going to need to change our product portfolio to take advantage. I'll give you one example. It's not all of the examples. But one example is the grid storage market, where all of the energy storage opportunities related to traditional AC powering of homes, or commercial sites, or industrial sites. We have been talking about this for some time. It's been a little of a Moby Dick. We've been chasing the white whale now for a decade.

My personal assessment is that these markets are starting to materialize. The opportunities are starting to materialize. And we think that the lithium has a real future in these markets. And so that's one of the reasons we brought in Jorn, who has deep experience in these areas, to make sure we're well-positioned to take advantage. Just a reminder. We have several Lithium facilities today, so we understand the markets, but today we're limiting it in scope really to our aerospace and defense business. But as these industrial opportunities emerge, we'll make sure that we're well-positioned to capture the growth. It's not as much of a defensive move, as it is an offensive move.

And the thing that I preach to our team every day is that we have to be somewhat agnostic to the chemistry, and really what needs to drive our product road map are the products that we think provide the customer the lowest total cost of ownership. And that total cost of ownership is not only the price of the product, but it is also the longevity of the product, it is about the service before and after the sale. It's just about the ease of doing business with the supplier, so that's what we are focused on.

Right now in our traditional markets we've demonstrated to many of our customers that our thin plate pure load products do provide the lowest total cost from ownership. One of the greatest drivers of our earnings growth over the past several years has been our ability to push this technology into an increasing number of the markets that we serve. We're going to stay on that path, but again, as new markets for energy storage start to get more tangibly real, we want to be well-positioned for that growth as well.

That's really great detail. I'll just sneak in. What percent of revenue is the premium products today? Did you say 24%?

We have always said around 24% or 25%. But I think we need to reset that number. It 's going to be 30-plus today. We have had nice movement with our European team. We're doing the right things there. We have changed some compensation schemes with some of the sales folks. So yes, that number continues to go in the right direction.

Thanks for all of the detail.

Thank you.

Thank you. Our next question comes from the line of Michael Gallo with CL King.

Hi, good morning.

Welcome back, Michael.

Just a follow-up question obviously with the change in the administration, it's possible that in 2017 there's a tax holiday that might allow you to bring some cash back., I was wondering, how much cash is outside of the US today, and how you would think about utilization of that cash, or potentially bringing it back. Certainly it seems you've been doing some acquisitions certainly on the international side of the business, versus returning it to shareholders if you could bring it back at a 10% tax rate? Thanks.

It's a great question and one that we have been looking at, and we're looking at the taxation situation not just because of the possibility now of the opportunity perhaps to bring funds back into the US, say at a 10% rate versus maybe attracting as high as 35-plus% if we were to do it, and we have to your first part of your question, out of our $440 million of cash on hand and short term investments, $400 million of that lies overseas. Not all of it in foreign currencies but still for US tax purposes has not been brought into the US. So there is great opportunity for us to bring these funds home. We likely wouldn't bring all of them home because there are opportunities to spend that money and certain level of operating cash we need for those units across the world. But we're certainly looking at it.

But we're looking at it. We were already looking at the situation just because of some of the BEPS initiatives across most of the EU countries, the base erosion profit-sharing initiatives, and the country-by-country reporting requirements that are starting to show up across the EU. All of those have caused probably not just us, but every big company that operates globally to be assessing their tax situation, and we certainly are, and certainly if we were looking at a potential to bring money home for a 10% tax rate, we would certainly be considering it.

Beyond the repatriation of the tax holiday issue, just operating in an environment of lower taxation and lower regulation is something that EnerSys is really looking forward to.

Okay, great. Then just I might have missed it earlier. Did you say how big the enclosure order was, and is this, you kind of back where you think this business is going to come back on a more consistent basis, to kind of where it was when you bought it. Or is this, I know there can be some lumpiness in this business. Is this a one-off, you got an order this quarter, and then you may or may not see anything in a while in that business again?

No, I think it's certainly not going to bring us back to the heyday. You did miss that. We touched on that earlier. It's not going to bring us back to the full run rate but it is going to have, I think a meaningful impact. That business is not material to the overall EnerSys volume. But for that particular business, this is going to have a meaningful impact. We hope for many quarters to come, because this is a multi-year project.

And keep in mind that this is a unit that has had some impairment charges on its intangible assets the last two fiscal years. We're optimistic that can take that off the table, and put this from having that distraction occurring.

Okay, thank you.

Thank you. We have follow-up questions on the line from John Franzreb with Sidoti. Please proceed.

Thank you. How much of the $35 million in the cost savings has been realized in the second quarter of this year?

So in the second quarter of this year, I would say it's small. It's probably $1 million or $2 million collectively. These are things that kind of start small, and they take up to 12 months to kind of hit their stride. So I think you're going to see starting from very modest Q2, increase is benefits in Q3, and then Q4. So I think in light of the pressure that we've described on lead, our ability to stay in the 27-plus rate of our gross profit, is going to be a demonstration to you that these cost savings are coming through.

Okay. And Dave, could you give us an update on your thoughts on the potential 5G roll outs, and how EnerSys will participate in that, and the timing of that?

Yes, Tom forwarded some nice articles for me to kind of dement to some of the timing. They are in trials. They are early, early days, the trials are already happening in this now, 2017 there are going to be some trials. Most of the stuff that I am reading is that Europe is going to be kind of a 2020 to 2025 type of roll out. And then in the US maybe a couple of years sooner than that. And then I think what we have talked about in the past is that we think that we are extremely well-positioned for the back hauling portion of the increase in the network loads. So this 5G is going to dramatically increase the amount of 1s and 0s that are flying through the air, and as all of that data concentrates, and has to be brought back to the web, we think that we're well-positioned on the back haul portion.

In terms of the actual distributed and we have said in the past, ubiquitous, small radius sites associated with the 5G, it's really unclear as to what battery technology, if batteries are going to be included in that portion of the network topology. So I don't have a good answer for you there. But the one thing we do know is that when it comes to the fiberoptic portion of the networks, the back haul portions of the networks, we feel well-positioned with our products, and our relationships globally.

If the technology went to a Lithium-based chemistry versus lead, do you have a roadmap, is that part of bringing Jorn in to maybe participate in that capacity, to do it as--, can you talk to that a little bit?

It is part of the roadmap. It's what we are calling, and we'll be talking about it in February. Our small site enclosures with integrated Lithium batteries. That is part of the roadmap.

Okay. Didn't mean to get too far ahead of your February presentation. Thanks for taking my questions.

No worries.

Thank you. Ladies and gentlemen this concludes our question and answer session for today. Now it's my pleasure to hand it back over to David Shaffer, Chief Executive Officer, for closing comments or remarks. Sir.

I want to thank everybody for taking their time today to attend our call. Everyone have a great day.

Ladies and gentlemen, Thank you for your participation in today's conference. This does conclude the program. You may all disconnect. Everybody have a wonderful day.