EnerSys (ENS) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the EnerSys Fourth Quarter Fiscal Year 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to David Shaffer, President and Chief Executive Officer. Sir, you may begin.

Thanks, Tikia. 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 Investors section of our website at www.enersys.com.

I'm going to ask Mike Schmidtlein to cover information regarding forward-looking statements.

Thank you, Dave, 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 7, Management's Discussion and Analysis of Financial Conditions and Results of Operations, set forth in our annual report on Form 10-K for the fiscal year ended March 31, 2017, which was filed with the U.S. 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 30, 2017, which is located on our website at www.enersys.com.

Now let me turn it back to you, Dave.

Thanks, Mike. On Tuesday, we confirmed our fourth quarter record results of $1.28 per share, which was above our guidance range of $1.19 to $1.23. In addition, our full fiscal year record results were $4.75 per share.

You will notice on Slide 3, we had another very good quarter and achieved a fourth quarter record of adjusted earnings per share of $1.28. The increased year-over-year profitability was due primarily to lower manufacturing costs, improved pricing and mix and a lower tax rate.

Please turn to Slide 4. Now on the next 2 slides, I want to focus on our current business activities and first quarter guidance. During the fourth quarter, I was pleased to see that in spite of a year-over-year increase in commodity costs and continued currency headwinds, we were able to achieve operating earnings that exceeded 12%. The continued reductions in manufacturing costs were a critical element in generating savings that offset the increased commodity cost. In addition, we benefited from a positive mix generated by our premium product sales, exceeding 41% of net sales.

In Asia, we continued to experience improved year-over-year quarterly results due mainly to the completion of our manufacturing transition in China and an increase in ICS profitability in Australia. We achieved these results in spite of lower Chinese telecom spending versus a very strong previous year spend. On a full year basis, our Asia regional operating earnings percentage was approximately 5.5%, which is about 500 basis points higher than last year's comparable fiscal 2016 operating earnings percentage of 0.4%.

In addition, China is experiencing strong motive power orders, which will lead to higher sales in the first half of fiscal year 2018.

Please turn to Slide 5. During the first quarter of fiscal year 2018, our global lead cost will continue to rise sequentially. In addition, our other raw material costs such as steel, plastic and copper are also rising. We initiated price increases to combat the rising costs, but they are taking longer than anticipated to become fully effective. So we are seeing pressure in the first quarter from increasing cost of goods sold, only partially offset by price increases.

In May, the average LME price per lead will average under $1 per pound for the first time in 6 months. Hopefully, lead and commodity prices have stabilized.

Please turn to Slide 6. I want to briefly cover the remainder of our global businesses. In motive power, one, the Americas experienced strong sales and orders in the fourth quarter as customers placed orders before the April price increases, as expected, since April orders level off sequentially as customers absorb this extra inventory. Two, our EMEA and Asia regions are experiencing strong motive power order growth, which should generate good sales levels in the first half of fiscal year 2018. Three, in all of our regions and businesses, but especially in reserve power in EMEA and Asia, it is taking longer than anticipated for the recently enacted price increases to become fully effective. In light of sharply rising lead costs, our customers placed more orders than we anticipated at the old price levels, which delayed our price recovery.

In reserve power, the following trends continue: one, strong uninterrupted power system sales and orders in the U.S. and in Europe; two, lower telecommunication sales and orders in emerging markets, which slows our EMEA region, but improving U.S. telecom battery orders and quote activity; three, the recently announced Americas enclosure projects are delayed by a couple of quarters due to delayed customer implementation issues. We should see orders resume in October -- in the October quarter. And finally, four, our aerospace and defense business in the U.S. is seeing extremely strong demand and interest across all product sectors.

Based on the above trends and information, our earnings per share guidance for our first quarter is being lowered to between $1.10 and $1.14 from our previous guidance of between $1.21 and $1.25. We anticipate sequential sales will be flat, with pricing increases offsetting nominal season volume declines, and continued reduction in manufacturing expenses will need to be partially offset by increasing commodity costs.

Please turn to Slide 7. At our Investor Day in February, we discussed some of our new product and EOS, or EnerSys Operating System initiatives, additional project costs and introduced a goal to increase operating earnings percentage by a minimum of 200 basis points to 14.4% by the end of fiscal year '21. Therefore, on an ongoing basis, we will be supplying some additional metrics, which will assist in the analysis of how we were -- how we are doing in relationship to our new financial goals. In fiscal year 2017, we achieved approximately $27 million of cost reductions and increased our premium product mix to 40% of total sales for the first time. We did see an increase in operating cost of $5 million from our new information systems implementations and increased technology spending.

In fiscal year '28, we estimate that approximately $30 million of cost-reduction savings will be achieved.

In closing, I am pleased with our fourth quarter performance. In spite of commodity cost headwinds, we continue to deliver record earnings. It is clear that our increased mix of premium products and cost-savings initiatives are having a very positive impact on earnings. However, I am disappointed that our recent price increases are taking longer to be fully effective, which we need in order to offset the rising commodity costs in the first fiscal quarter of 2018. I remain excited about EnerSys' future and the short- 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'm starting with Slide 8. Our fourth quarter net sales increased 3% over the prior year to $627 million due to a 2% increase in volume, a 2% increase from pricing and 1% from acquisitions, offset by a 2% decrease from currency. On a regional basis, our fourth quarter net sales in the Americas were up 10% to $364 million, while Europe's were down 2% to $199 million and Asia decreased 70 -- 17% in the fourth quarter to $64 million. The Americas enjoyed an 8% increase in volume, 1% from pricing and 1% from acquisitions. Europe had a 3% pricing increase and a 1% increase in volume, offset by 6% negative currency. In Asia, volume decreased 20% and the currency declined by 1%, while pricing increased 4%.

On a product line basis, net sales for motive power were up 5% to $329 million, while reserve power was flat at $298 million. Motive power had a 5% increase in volume and 2% increase in pricing, offset by a 2% decline in foreign currency. Reserve power had a 1% volume decline and 2% currency headwinds, offset by 2% in acquisitions and 1% in price.

Please now refer to Slide 9. On a sequential quarterly basis, fourth quarter net sales were up 11% to the third quarter from 10% volume and 1% pricing. The Americas region was up 16%, while Europe was 7% higher and Asia was flat. On a product line basis, motive power was up 13% 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 30, 2017, for details concerning these highlighted items.

Please now turn to Slide 10. On a year-over-year quarterly basis, adjusted consolidated operating earnings increased approximately $6 million to $76 million, with the operating margin of 60 basis points. The increase in operating earnings from the prior year reflects higher volume and pricing as well as lower manufacturing costs, offset by nearly $20 million in higher lead cost. On a sequential basis, our fourth quarter operating earnings were up $7 million for similar reasons. Operating expenses, when excluding highlighted charges, were at 14.5% for the fourth quarter compared to 14.7% in the prior year. The full year's operating expenses for fiscal 2017 of 15.3% was comparable to fiscal 2016 at approximately 15.0%.

Excluded from operating expenses recorded on a GAAP basis are net charges of $22.8 million primarily related to $13.5 million in noncash impairment charges to intangible assets, a 6% -- a $6.7 million charge for European competition matter and EMEA restructuring charges. Excluding those charges, our Americas business segment achieved an operating earnings percentage of 14.7% versus 15.1% in the fourth quarter of last year. The decline was primarily from the impact of higher lead costs. On a sequential basis, America's fourth quarter increased 40 basis points from the 14.3% margin posted in the third quarter due to the higher volume, more than offsetting higher lead costs.

Europe's operating earnings percentage of 9.7% was down from last year's 10.5% and from last quarter's 11.0% on higher lead costs. The operating earnings percentage in our Asia business improved in the fourth quarter this year to a 5.1% operating profit from a loss of 1% in the fourth quarter of last year, but was down from last quarter's 6.3%. Asia's improvements year-over-year reflect lower manufacturing and warranty costs. Lead costs, however, were also up sequentially and year-over-year.

Please move to Slide 11. As previously reflected on Slide 10, our fourth quarter adjusted consolidated operating earnings of $76.1 million was an increase of 8% in comparison to the prior year, with the operating margin increasing 60 basis points to 12.1%. As previously noted, excluded from our adjusted net earnings for the fourth quarter was approximately $22.8 million in after-tax highlighted charges, the largest being the $13.5 million in impairment charges and $6.7 million charge for the competition matter in Europe. Please see our press release issued yesterday for details of those items.

Our adjusted consolidated net earnings of $56.6 million increased 24% from the prior year or $11 million and improved 160 basis points to 9.0% of sales. The $11 million increase reflects $6 million higher operating earnings and a lower tax rate.

Our adjusted effective income tax rate of 18% for the fourth quarter was lower than the prior quarter of 20% and the prior year's fourth quarter rate of 27% due to better performance and lower tax jurisdictions. Our tax rate for the full year of fiscal 2017 was 22.2%, which was a marked improvement over the 25% rate of the prior 3 years. We believe future full year tax rate should be in the 23% to 24% range. However, this assumption anticipates no significant changes in tax rates or legislation in the countries we are operating in.

EPS increased 24% to $1.28 on higher net earnings on similar amounts of shares outstanding. We expect our first fiscal quarter of 2018 to have approximately 44.3 million of weighted average shares outstanding.

Now please turn to Slides 12 and 13. As usual, we have provided information on a full year basis similar to that of our fourth quarter on the prior pages. These 2 pages are for your reference, and I don't intend to cover the full year results other than mentioning our GAAP and non-GAAP net earnings were both up year-over-year by 17%.

Please now turn to Slide 14. We have also previously added a slide to provide investors with additional insights into our business and how potential U.S. tax law changes might impact us. In light of our modest net importer position, we would expect an initial negative U.S. tax impact, which we believe we could mitigate relatively quickly. If overseas profits are taxed, it would have a larger negative onetime consequence but would free up nearly $400 million in cash for general corporate purposes and potentially lower interest expense.

In general, we believe our global footprint and strong capital position allow us the flexibility to adapt to any future tax law change.

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 $500 million on hand in cash and short-term investments as of March 31, 2017, with over $476 million undrawn from our credit lines around the world. We generated $246 million in cash from operations in fiscal 2017. Our credit agreement leverage ratio was just above 1.4x. Capital expenditures were $50 million in fiscal 2017 compared to $56 million in fiscal 2016.

We expect to generate adjusted diluted net earnings per share between $1.10 and $1.14 in our first fiscal quarter of 2018, which excludes an expected net charge of $0.05 per share from our continuing restructuring and acquisition activities. We anticipate our gross profit rate in our first fiscal quarter will decline to approximately 26% from the higher lead costs, while our interest expense will be approximately $5.5 million.

In conclusion, Q4's results were strong, while Q1's revised guidance is disappointing. However, Q1 is absorbing nearly $30 million in year-over-year cost pressure and $12 million sequentially. In light of the magnitude of the amounts involved, the adjustment of approximately $5 million we made to our guidance, hopefully, can be put into perspective. If lead and volume remain at current levels, we would expect our GP margin to improve after Q1 as pricing and lean initiatives take hold.

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

Thanks, Mike. Tikia, we will now open up the line for any questions.

(Operator Instructions) Our first question comes from Michael Gallo with CL King.

I just want to parse into kind of the change in guidance from a few weeks ago. I think you said previously it was going to be a $10 million sequential headwind on lead. Now you're talking about $12 million. So sort of back of the envelope, that's $0.03. It would seem like volume change perhaps was a bigger factor. So I want to parse out to what degree customers kind of loaded ahead of price increases. How much inventory is kind of out there in the channel? How long do you think it takes for normal kind of ordering patterns to resume? And then also whether there was any pushback or resistance that has caused you to take longer to get pricing or whether it's just simply take longer for the mechanism to work its way through.

Mike, this is Dave. Let me take a couple of pieces of that, and then Mike, you can fill in any gaps. The -- let's talk about the resistance to pricing first. I think this issue is more a reflection of the mechanics of the price increase being different in different parts of the world than it is here in the U.S. So in terms of about inventory in the channel, I think it might be an issue more related to some of these long-term projects we see, especially in the developing parts of the world and us offering quote protection on pricing is probably a bigger impact than pure worry about short-term competitive price pressures. So it was more mechanical. I think that in general, we've seen everybody's prices going up as this fairly significant increase in lead LME cost has come through. Yes, we are disappointed. So in terms of the volume question, from an organic standpoint, I don't think that's really the story. I think on the top line, we'll be missing some of the price recovery we had initially modeled. And in the 8-K, what we said is this reduction of approximately $5 million was a combination of some additional commodity costs, which you highlighted, the $2 million, plus some prices that didn't come through that we had modeled. So those were the 2 biggest issues. In terms of organic volume or resistance to price increases, I don't know that those are the major themes. Mike, is there anything you want to add?

Dave, I think you kind of covered it. Volume is, we think, is largely going to be okay. It might -- to Mike Gallo's point, it might be slightly softer than it was in Q4. But we don't think that -- that's not the reason that we're changing the guidance. The reason we're changing the guidance is, as you pointed out, commodity costs of $12 million, we previously had identified about $10 million of costs related to lead. The extra $2 million was a little bit of a surprise for us. And then the pricing issue was about $3 million of that, and that was really trying to parse out the orders we were receiving in the March, April time frame in terms of what price was relative to those orders. So for us, in light of the magnitude of the amounts involved and the increases, we missed, but the miss wasn't as big as it would appear.

And Mike, this is Dave. In terms of -- I -- Monday morning quarterbacking isn't always helpful. But I did ask Todd Sechrist to go back and do a bit of an autopsy as to what happened with the management, the mechanics of the price increases so that we do a better job next time. And as noted that we think that the new systems that we're investing in, in our digital core will make our visibility better to which orders are going to ship in which time period at which margins. That's not an excuse, Mike, but we need to do a better job, and we're disappointed, as you are, with having to lower that guidance.

And just as a follow-up to that. And I think you might have alluded to it a little bit without specifics in the prepared remarks, but what did you say the current -- the recent order trends were? I think you said there was some near-term softness in motive in the Americas. But if you could clarify or provide any specifics on what you've seen sort of current order trends since we've seen the new pricing.

Right. So we've seen what we think is a kind of a leveling out of a high order pattern that was announced or that we saw to beat the price increases. So when you level those out over a longer period, we don't anticipate. And then when we go and talk to the customers, I've spent a lot of time personally with customers in the last month or 2 in addition to the feedback from them and what we're seeing from the WITS statistics, we're not noting any significant changes in the U.S. And frankly, the motive power business in EMEA and Asia continues to be pretty strong.

And I guess, Mike, the final comment you made on the -- I think whether there's any inventory in the channel, I don't necessarily feel that there's any buildup with inventory in the channel here that has. But these orders that were placed right before the effective dates of these price increases, those are orders that are being executed throughout the first fiscal quarter. So it's not that the customers took on a lot of inventory. They just accelerated what they probably were going to order the following month to catch the better pricing.

Correct. And as noted, we have to do a better job of managing that, and Todd and the 3 regional presidents will come back to me with recommendations on how we can do it better next time.

Our next question comes from John Franzreb with Sidoti & Company.

Could you talk a little bit about the forward buying? Was it more in reserve products or motive products? And even maybe a little deeper, how much was it in things like pure lead products?

John, I don't know that I have that sort of visibility in terms of -- in front of me today as to which products. But one of the things I think is important to note is that by market and by region, the channels are very different and they have very different buying practices and behaviors. So there's no one way to look at our business. Say, I think a lot of the stuff in the developing world tends to be long visibility, high project related. So if somebody knows they're going to be building a telecom network in Mozambique in the summer, they can maybe accelerate some orders. In terms of motive power, a lot of times, it's dealers that are buying the batteries to marry up with a specific truck. So if the truck lead times, which I think have gotten out 20 weeks or sometimes and battery lead times are maybe 6 weeks, then they may have purchased the battery sooner than they normally would have to marry up with that specific truck, but it's not necessarily an inventory buildup. If there's any place in our channels where I could anticipate a bit of an inventory buildup, it would probably be in the reserve power business in the U.S., which we have a lot of sales through distributors and distribution. And so that's probably the most likely place we would see some sort of inventory accumulation.

Yes. But I think, John, the key here is they were able to place the orders. That doesn't necessarily mean they took delivery. They would have simply said, "I don't need that truck battery. Since the truck's on a 20-week lead time, I'll try to take this battery 18 weeks from now." So it's -- that's why I'm saying I don't see the channel buildup. I think we just -- our policy of giving about a 3-week amnesty before the pricing went into effect really caught us. And if you think about it, if you have a very flat but rising lead cost curve and you have price increases, those are not dramatic changes, and therefore, customers don't necessarily act. But what we had was a fairly steep cost curve, which was going to make significant differences in the pricing. And they were significant enough that it did motivate customers to look at their order patterns, and they changed accordingly.

Right. And John, just a little bit of more color. The place that would have the biggest inventory build would be in a lower-margin UPS product, not necessarily in the SBS product range. So I think that was part of your question as well.

Right. Let's just talk about the lead price curve because it's kind of been trending downwards since the beginning of the year. So are you absorbing the bulk of the, I don't know, $1.10 per pound number that's from the beginning of the year? I know there was another spike a little bit later on. I think it was February. I mean, what price are you absorbing now in the first quarter? And when can we look past that at the current, whatever it is, $0.95 or so we're doing? When does that flow through? I mean, how should we think about that, guys?

All right. So John, we -- for the most part, we generally, and I'm going to exclude Asia because they're on the Shanghai middle-market exchange. But for the Americas and EMEA, which are on the London Metal Exchange, we are generally priced based on the average of the month that precedes -- if I take delivery in March, it's going to be based on the preceding month's average. So you get a little bit of a deferral or a pushout, if you will, that is hopefully enough time -- gives you a little bit more time to adjust your pricing. So the months that are relevant to Q1, which are going to be January through calendar April, those average rates were $1.01, $1.05, $1.03, $1.01. And May, the most recent month just wrapped up at $0.97, so it went back down several pennies, $0.03 to $0.05. And the spot rate is probably a couple pennies lower than that. So if the spot rate stays around $0.95, then this is the egg is passing through the snake in the first quarter, and we know that our pricing in general is about a quarter behind the cost impact. So what caught us in Q1 was that we didn't get the pricing traction as quickly as we anticipated. We will be receiving some price increases in Q1, obviously, but not nearly enough to cover that nearly $30 million of commodity costs. So we'll get a little bit more of that benefit in Q2 to try to make up for it as well. So that's why I think the costs were higher in the months affecting Q1. The spot rate is lower. And so that -- and that's all I can tell you about. And where the spot rate goes, I don't know, but it looks to be trending downwards.

One last question, and I'll let some of this go. Given the lower-than-expected start to the fiscal year, in March, you gave some guidance about revenue and earnings all of fiscal 2018. Are those targets still intact or not?

So 1 quarter doesn't make a year, John. And I think I said I expected earnings of -- in excess of $5 a share. The last year for comparable stats, we did $4.75. That -- the assumptions on the $5 was that lead cost would be approximately $1, which was kind of what we were seeing at the time as I just went through some of those numbers. So definitely, if lead stayed at $0.95, I should see at least the second half of the year at -- with a tailwind, whereas I have a headwind in the first half of the year. So yes, I think those numbers are still viable for the year, but we're off to a slow start.

And John, I'd add, if our management team wants to make a bonus this year, it needs to be in that ZIP code.

(Operator Instructions) Our next question comes from Brian Drab of William Blair.

So just one more question on the pricing. You mentioned that revenue is expected to be -- total revenue is expected to be about flat sequentially. You're going to get some price in 1Q, and I'm wondering what is sort of the -- can you give us any insight into the magnitude of the volume decline sequentially? Is it expected to be kind of in line with normal seasonality or more or less than that? And also, is there a days issue from fourth quarter '17 to first quarter of '18, fewer selling days?

Mike will look up the days issue. I would say that as you noted, seasonally, there usually is a difference between Q4 and Q1. So we anticipate a normal, from a volume standpoint, seasonal adjustment. And then in terms if there's any particular days issues this year versus last year, Mike's shaking his head. It looks to be a push.

Well, there's not much difference between Q4 to Q1. There is a difference of a couple days that Q1 a year ago had versus this year. But Q4 (inaudible) had, call it, 62.5 working days across the world. Q1 of a year ago was 64.5. But we -- as you know, we've always kind of -- Brian talked about the -- that fourth quarter's generally always our strongest quarter, so it's not unusual to see a mild step-down in the volume regardless of the days. But certainly, days can have an impact on it. But in this case, I don't think...

Okay. And then would you mind sharing that, WITS data that you mentioned earlier? I feel like I'm always the one who asks for this with the -- it's great to get those 3-month rolling numbers for the regions, if you wouldn't mind.

Sure. So WITS data, this is April data for the trailing 3 months compared to the prior year. Total Americas has a 1% new truck order. This is classes 1, 2 and 3, 1% growth. Total Europe is up 12%. And total EMEA, once you include the Middle East and Africa, it remains at plus 12%. Asia is up 35% for a worldwide increase of 15%.

Okay. Are any of those numbers particularly surprising to you? It seems like Asia is really strong, and the disparity between Americas and Europe, EMEA is pretty significant, too.

Yes. I don't see -- in terms of just looking at it right now, I think the strength of Asia is a bit surprising. In terms of the U.S., this time period, it doesn't surprise me.

Okay, okay. And then we're talking so much on the call this morning about the near term and the pricing margins. Can we just step back and maybe get a quick update on some of these new market opportunities that you highlighted at the Analyst Day? Dave, you highlighted the signing of a second truck fleet then. Is there any more development on that specific market opportunity and then the next-gen thin plate technology and the traction you're getting there?

Yes. No, that's -- well, it's good to talk about something other than lead. The -- I think everything we laid out, and we had a quick review with Joern this morning on the product road map is tracking according to the original timetables. So we're pleased with the progress we're making in the over-the-road truck market. We exceeded our expectations in fiscal -- last fiscal year, and things are looking up this year as well. So we're optimistic about that. In terms of the thin plate pure lead next-generation products, that's still early days. But so far, the testing and the results and the plan is progressing according to schedule. In terms of the lithium product development, our goal is to introduce the new product to our sales -- European sales team in September. So I just checked to verify that we were still on target for that. So that introduction to our sales team is still on schedule. And in terms of the energy storage systems, I'm not aware of any changes in the product road map or the plan since the Investor Day. I know that wasn't that long ago. But in general, most of the signals on that front are up. We are dragging a little extra operating expense as we signaled we would at the Investor Day. That's part of the headwinds we're seeing in the F '18 budget, but nothing that we didn't think or nothing that's caught us by surprise there. And as Mike noted or I think we noted earlier, we were -- we're continuing to invest in our digital core, which again is introducing some additional OpEx, but we think is absolutely on track for long-term changes we're trying to make. In terms of the lean initiatives, we've kicked off in officially in 2 factories. The launch has gone very well. This early days, we're focused on rapid improvement events, RIEs, and so far, the progress has been very good. We got 2 more as we promised. We've got 2 more factories we're going to launch this summer. The total revenue of those 4 factories will be about $900 million, so it's a significant portion of our business. And we're still very optimistic about that. And as noted in the prepared remarks, we are making progress and stay committed to driving cost reductions net of inflationary price increases throughout the business at every level. So I think in terms of the -- what was discussed at the Investor Day, everything's on track. I think the -- unfortunately, we stumbled out of the blocks a bit on price recovery and some additional commodity costs we hadn't anticipated.

Okay. That's great detail. Can I just ask one clarification question? Just can you remind me, as I'm looking at Slide 7, the $27 million in cost-reduction savings and the $7 million, are you reporting that in terms of that is what was the savings that ran through the P&L in 2017? Or is that the run rate that was achieved by the end of 2017?

So those were the -- I'm going to speak to the $7 million. That was the benefit that, that quarter received. I don't think the same is true on the $27 million. But I will say on the -- the $27 million may have -- that -- those were the cost savings. There are normal inflationary headwinds that would take place like wage increases, et cetera, that would impact it.

Our next question comes from Noah Kaye with Oppenheimer.

Just to pick up on the cost savings. So appreciate these new information metrics. I think you signaled at the Analyst Day kind of a minimum goal for 2018 to get $30 million in active cost reduction. How confident are you in that? Kind of as you go through some of these early steps, could you see potential upside there? And if so, where might it come from?

The team is still committed to the goals that we laid out at the Investor Day, and I'm not aware of any deviation from that. So I don't want to commit anything extra. I don't think my team would appreciate that. So we will stay committed to that original target. We've talked a lot about commodity pressures and disappointment, but I can only tell you, it could have been a lot worse had we not started down some of these paths. So I'm disappointed in a lot of ways, but I'm also proud of the team because we've done a lot of different things in 1 year. And so we're going to continue to push these initiatives. And we need to because it really is providing the funding for the long-term initiatives of changing our product road map, increasing our addressable markets and modernizing our digital core. So it's imperative that we do this. Otherwise, we're going to deviate greatly from our historic trends on earnings per share.

Just a question on the M&A environment. I mean, I would imagine that a lot of the peers are now having to manage and navigate this volatility around lead as well. How would you think about the landscape for M&A now as some of these peers start to face increasing cost pressures? Are you seeing a fairly active pipeline of potential targets? And how realistic is it, kind of still given the low leverage, to think about potentially doing a major acquisition as you talked about the potential for doing it at Analyst Day?

Right. Well, some of the targets on the list might be lead-based tuck-ins, but a lot of the targets might not be. So we certainly haven't limited ourselves in terms of the environment. The -- at certain markets, we're constrained on how much more lead acid we think we can do just because of market share constraints. But I agree with your assessment that these sorts of near-term pressures not only make it more difficult for certain other owners, maybe it's shareholders, maybe it's a private equity firm, but it certainly hasn't made it any easier. But I would say, in general, to reinforce what Mike said earlier on the M&A pipeline, it's very full. We did tell you at the Investor Day, we've hired a new dedicated VP of Business Development M&A, and I don't think he stopped running since the day he stepped in the door. So that part of our day is very full and we're optimistic that we ought to be able to get something executed this year. But you just never know.

Our next question comes from John Franzreb with Sidoti & Company.

Guys, just back at the Analyst Day in March, you had talked about your lithium initiative and make-versus-buy proposition. Can you kind of update us on where we stand on that?

Yes. John, we have not finalized that decision. We've got a very important meeting next week, which is going to be part of that decision-making process. We've been active -- I've been spending a lot of personal time assessing different supplier opportunities. So it's a very strategic decision for us, a very important one. And -- but we aren't in a position yet to announce any final decisions.

But to date, John, we've kind been progressing both in a dual path, recognizing that it ultimately will probably take one over the other. But we may leave an option open just to have that safety net. But that decision we're gathering together as a management team to make that decision next week.

Okay. Fair enough. And just to circle back on the lead discussion, and sorry for doing so but I just want to make sure I got a couple of things right. The -- there was no competitive pressure issues as far as the pricing environment is concerned and that it's the mechanism of you implementing the price increases that, that was the issue, which kind of surprises me because lead volatility has been something we've been living with ages. So I'm kind of surprised about that, especially since you're saying the IT switch has not yet happened. I just want to reconcile it, make sure I got that right and reconcile those statements.

We are not -- and I've got Todd in the room with me and I'm looking at him, and he's not signaling. We're not aware of any heavy resistance to a pricing or competitive pressures. There's always noise whenever you're trying to do this. And in the short term, there's always decisions are made. My assessment to date, and as I told you I've asked for a more thorough report, my assessment to date is that we could have done a much better job of managing quote protection and price protection on some of these longer-term jobs outside of the U.S. I think that's really where our focus is right now, and we have to tighten it up and we have to get better at it. We've had -- business review meetings this week with the different regional leaders, and the message is clear. And we know that we've created some pressure for us in Qs 2 through 4, but we remain committed, as we discussed earlier, to staying on track.

I'm showing no further questions at this time. I would like to turn the conference back over to David Shaffer for closing remarks.

I just want to thank everyone for taking your time today to attend our call. And please, everyone, have a good day.

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