EnerSys (ENS) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2018 EnerSys Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded. I would now like to turn the call over to David Shaffer, President and CEO. You may begin, sir.

Thanks, Mark. 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 can go to the Webcast tab in the Investors section of our website at www.enersys.com. And 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 views regarding future events and operating performance and are subject to uncertainties and changes in circumstances. Our actual results may differ materially from these forward-looking statements for a number of reasons. Our forward-looking statements are applicable only as of the date of this presentation. For a list of factors that could affect our future results, including our earnings estimates, see forward-looking statements included in Item 7, 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 quarter ended March 31, 2018, 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, 2018, which is located on our website at www.enersys.com.

Now let me turn it back to you, Dave.

Thanks, Mike. I will begin on Slide 3. We were pleased to announce fourth quarter earnings of $1.24 per share, which were at the top end of our guidance range of $1.20 to $1.24 per share. Sales increased 9% year-over-year, mostly from currency benefits and pricing. As I look at our markets, I see stability in motive power with strength in Asia. In reserve power, the Americas is strong, Asia is flat and EMEA is slightly weaker. I will touch on these issues in my remarks.

In addition, year-over-year quarterly gross profit increased $3 million over last year, despite continued commodity cost increases that created a $4 million headwind after recognizing selling price recovery. As a result of continued price increases and more favorable commodity price trends, our selling price recovery from rising raw material costs exceeded prior quarters, averaging approximately 85% of total commodity cost inflation during the most recent quarter. As a result, I am pleased we are making meaningful progress towards 100% quarterly price recovery of commodity cost inflation. And once again, we were able to offset the increased spending for LEAN, Digital Core installation and newer product development with our cost savings initiatives. Please turn to Slide 4.

I want to briefly review our global businesses. Despite the global organic sales growth of only 1% in our fourth quarter, recent reserve power sales and order trends continue to be robust in the Americas, driven mainly by increased orders for our industry-leading thin plate pure lead, or TPPL, batteries in all product groups and enclosures. Let me detail for you where we are experiencing this growth: one, in telecommunications for network infrastructure build-out, in preparation of future 5G deployment and greater data traffic, this is for both batteries and enclosures; two, for data centers and the cloud for uninterruptible power supply or UPS batteries; three, in broadband and cable TV for network upgrade, again in preparation for an increase in streaming and data traffic; four, transportation, as we continue to add long haul truck fleets and automotive retail store chains; five and finally, for batteries used for military tactical vehicles.

In the fourth quarter, the Americas' motive power business experienced flat sales growth. However, order growth has been very strong over the past 4 months. In EMEA, sales in the fourth quarter for reserve power were higher year-over-year, primarily due to the positive impact from foreign exchange rates and higher pricing, offset partially by lower volume. Organic volume decreased versus the third quarter due to the large telecom project in the Middle East and Africa region completed in the third quarter.

In the European long-haul truck and bus transportation market, we just exceeded sales of over $1 million. This is EnerSys' introduction of our thin plate pure lead product family for the European transportation market, which is a different footprint than the U.S. We expect, just like in the United States, this business will drive future growth in Europe. This market is valued at over $500 million, so we are very excited about this growth opportunity. Motive power continues to experience steady organic sales growth, including increased premium product sales.

Asia's reserve power organic sales in the third quarter were up slightly year-over-year, and the Asian motive power organic sales volume continued to deliver double-digit growth in the fourth quarter, which complemented the full fiscal 2018 double-digit growth in that region, and first quarter motive power orders remained strong.

As noted in prior calls, we remain committed to getting the Asia business to 10% operating earnings margin. Our plan to streamline India for motive power is progressing to schedule. In addition, we are nearing qualification on several reserve power Chinese-built products that should help us further balance global demand. The team is forecasting reduced demand from China Tower this year as they experiment with second life lithium battery packs. Though the China Tower business is lower margin, the absorption of factory overheads it provides needs to be replaced, which as mentioned -- as we mentioned above, we are working on.

In the U.S. aerospace and defense business, strong growth patterns continue. We are experiencing strong battery sales as well as order growth for tactical vehicles, satellites and missile-defense systems. As a testament to the inroads we are making in A&D, we were recently selected by Raytheon to receive their Supplier Excellence Program Epic Award. Raytheon selects suppliers for their outstanding performance, contribution and support of their programs. This is further evidence that our quality products are being embraced by the defense industry. We are executing our plan to grow this business through volume growth and market share gains. We estimate that our lithium segment in aerospace and defense will be up over 20% in fiscal year 2019 versus fiscal year 2018.

In addition, we are engaged with customers in over $100 million in new projects, mainly in the space, munition and medical areas. We are actively quoting and designing products for the lithium segment that we expect to result in strong organic growth over the next 3 to 5 years. Our A&D business demand is flat or down in the rest of the world. Please turn to Slide 5.

We will continue to provide investors with metrics pertaining to key initiatives and cost assumptions that we introduced at our Investor Day last February. I would like to turn your attention to one figure on this slide. The percentage of total sales represented by our premium products has exceeded 40% for the first time in the company's history, which is a very important and significant milestone. There is strong demand for all of our premium products in motive and reserve power. Over time, we should experience a continued rise in the proportion of total sales represented by premium products. One of the more recent premium product introductions has been our maintenance-free motive power thin plate pure lead NexSys product for material handling. We anticipate many of our customers will want to replace flooded batteries, which require maintenance, with our NexSys maintenance-free products.

In late 2018, we will be complementing our TPPL NexSys product with a motive power lithium-ion modular product. The percentage of total net sales represented by premium products would have been even higher this quarter if we had, had additional thin plate pure lead manufacturing capacity. We are remaining the sold-out situation where demand exceeds our current manufacturing capacity.

As noted prior, markets including telecom, UPS, transportation, tactical vehicles and now motive power, recognize the lower total cost of ownership provided by our thin plate pure lead technology. We recognize the need for additional TPPL CapEx to expand our manufacturing capacity. We anticipate the additional capacity from our new TPPL high-speed line will be in place at the end of calendar year 2018, which should help improve supply in calendar year 2019.

Please turn to Slide 6. I will now provide an update on the progress we have made on our strategic initiatives. Our Lean continuous improvement initiatives generated over $7 million in process and value stream cost reductions in our fourth quarter and a record of $25 million recurring cost savings in fiscal year 2018. In the fourth quarter, we introduced Lean concepts to our fifth and sixth facilities, and we will add 2 additional facilities during the first quarter of fiscal year 2019. Lean thinking is becoming more embedded in the culture of our facilities, which is ultimately leading to more process improvements that can be leveraged throughout the organization.

I want to provide some context to how Lean initiative savings will grow over the next few years. We introduced Lean at 2 plants in April 2017, and have added 2 additional plants every 6 months since. As I mentioned previously, during our fiscal fourth quarter, we introduced Lean to our fifth and sixth plants. The spending on of Lean training hasn't contributed much savings to date, but Lean programs of today give us increased confidence in our Investor Day goals of achieving a sustained structural annual savings of over $25 million.

For fiscal year 2019, we estimate Lean Consulting costs will total $4 million. We should experience Lean Consulting expense conclude by the first half of fiscal year 2021.

One of the important Lean processes that takes out waste and costs is a rapid improvement event or RIE. An EnerSys rule of thumb for RIEs is once a site has 100% Lean engagement operationally, it should generate at least 25 RIEs a year, and generate an average of $35,000 in savings from each RIE. Once we have all plants up and running on Lean, that should sustain annual savings above $25 million. Additional earnings will be realized as we harmonize and automate our manufacturing processes globally over the coming years.

EOS, or the EnerSys Operating System, is also about capacity creation. Removing waste allows plant floorspace to be freed and redeployed for additional productive purposes. This is especially important as we transform our product range with maintenance-free solutions.

I would like to update you on our exciting variant modular approach to the new products generation. As we have communicated previously, EnerSys will be launching our initial modular lithium variant at the end of 2018 in the motive power market. This product is not just 1 item, but is the start of multiple pieces of a broad product family or platform of products. The technology will be the same, but the applications will be very different. We are unaware of anyone in our industrial markets that will have the quality and depth of advanced chemistry products as well as service that EnerSys will offer.

In addition, it is absolutely critical in the generation of lithium-ion products to develop a supply chain that delivers the safest cells. The EnerSys lithium technology will use automotive qualified cells, which mean we are using one of the more advanced and safest cells. We were able to create this sourcing due to the potential scale of EnerSys and the credibility of our technology group. EnerSys is showing our customers the company's commitment to safety leadership by being the first in the industrial battery market to adopt the ISO 26262 standard. This is the leading standard in the world for the safe use of lithium batteries in large battery packs.

During our conversations with investors, some were concerned that EnerSys is behind the curve on lithium technology. This perception about lithium is not accurate and here is why: one, we will be uniquely positioned in the market to provide a singular maintenance-free storage customer experience that is agnostic to chemistry, allowing us to always provide the lowest total cost of ownership for their particular application; two, we have established a world-class global technology center for our product development, which will eventually house over 200 engineers in a collaborative setting designed for simultaneous process engineering. We are in the advanced stages of developing wireless charging, wireless data gathering, iOS and Android apps, and prognostic algorithms able to provide user advanced notice of any issues. This will give our customers the highest level of reliability and uptime; three, most of the lithium battery development have taken place in consumer applications like the EV market. Lithium use in the industrial markets is just beginning and in the early stages. Our customers frequently tell us there is no other company in the market that will have the advanced variant battery management system approach of EnerSys; four, as mentioned earlier, we will limit lithium sourcing to credible suppliers of industry-standard cell sizes, with pack designs that can evolve as better chemistries come along.

On the M&A front, we are very active in pursuing companies that complement our growth, product differentiation and technology development strategies. We are at various stages of negotiation with several companies, and are hopeful to close a couple of deals this fiscal year.

In summary, I am pleased with our fourth quarter results, our increase in premium product sales, and especially the progress on our new product initiatives. The combination of increasing sales of higher-margin premium products and our ongoing continuous process improvements and cost reduction will positively impact our future financial results and better position the company to compete on a larger scale. I remain very excited about the future of EnerSys.

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 on Slide 7.

Our fourth quarter net sales increased 9% over the prior year to $683 million, due to a 5% increase in currency, a 3% increase from pricing, and a 1% increase from volume. On a regional basis, our fourth quarter net sales in the Americas were up 5% to $381 million, and Europe's net sales were up 14% to $228 million, while Asia increased 18% in the fourth quarter to $75 million compared to the prior year.

The Americas enjoyed a 2% increase in volume and 3% from pricing. Europe had 3% pricing increase and 13% of positive currency, but a 2% decrease in volume. In Asia, volume increased 8% while pricing and currency increased 3% and 7%, respectively.

On a product line basis, net sales from motive power were up 9% year-over-year at $360 million, while reserve power was also up 9% to $323 million. Motive power had a 2% increase in price, a 1% volume increase and a 6% currency benefit. Reserve power generated a 1% increase in volume and a 4% increase in price and 4% in foreign currency.

Please now refer to Slide 8. On a sequential basis, fourth quarter net sales were up 4% compared to the third quarter of fiscal 2018, driven by a 1% increase in volume and a 1% price improvement, along with a 2% currency benefit. The Americas region was up 8% and Europe was up 1%, while Asia was down 7%. On a product line basis, motive power was up 8%, while reserve power was down 1%.

Now a few comments about our adjusted consolidated and 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 expenses and 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, 2018, for details concerning these highlighted items.

Please now turn to Slide 9. On a year-over-year basis, consolidated operating earnings in the fourth quarter decreased approximately $3 million to $73 million, with the operating margins down 140 basis points due to the dilutive impact of rising commodity costs on margins and earnings. The 1% increase in organic volume from the prior year, along with $19 million in pricing, was not enough to offset $23 million in higher commodity costs.

On a sequential basis, our fourth quarter operating earnings were up $2 million, primarily from better pricing and volume.

Operating expenses, when excluding the highlighted items, were at 14.3% of sales for the fourth quarter, compared to 14.5% in the prior year. Our fiscal 2018 full year operating expenses were 14.6%, compared to last year's 15.3%. We expect fiscal 2019 operating expenses to be in the 14.6% range.

Excluded from operating expenses recorded on a GAAP basis are net charges of $1.8 million, primarily related to the EMEA restructuring and professional fees in our fourth quarter related to the recent Tax Act, which I will talk about shortly.

In addition to $1.8 million in net charges related to operating expenses, we excluded $2.2 million in inventory write-offs associated with our recent Cleveland, Ohio facility closing. Excluding those charges, our Americas business segment achieved an operating earnings percentage of 13.0%, which was 170 basis points below the 14.7% fourth quarter record of last year. Higher volume and pricing only partially offset the impact of higher lead costs.

On a sequential basis, the Americas' fourth quarter increased 60 basis points from the 12.4% in margin posted in the third quarter, primarily due to higher volume and pricing. Americas OE dollars were down approximately $4 million from prior year, but sequentially up $6 million.

Europe's operating earnings percentage of 9.6% was down from last year's 9.7%, and lower than last quarter's 10.7%. OE dollars increased $2.5 million from the prior year, but decreased $2 million from the prior quarter in EMEA.

Operating earnings percentage in our Asia business declined 270 basis points in the fourth quarter of this year, to a 2.5% operating profit from a 5.2% income in the fourth quarter of last year, and was also down from last quarter's 4.1%. Asia's OE dollars were down approximately $1 million in both the prior year and sequential quarters.

Please move to Slide 10. As previously reflected on Slide 9, our fourth quarter adjusted consolidated operating earnings of $73 million was a decrease of 4% in comparison to the prior year. Our adjusted consolidated net earnings of $52.5 million decreased 7% from the prior year of $4 million, and declined 130 basis points to 7.7% of sales. The $4 million decrease primarily reflects the higher volume, pricing and cost savings offset by the $23 million in higher commodity costs.

Our adjusted effective income tax rate of 20% for the fourth quarter was higher than the prior quarter and the prior year's rate of 18%. Discrete tax items caused most of these variations. This adjusted tax rate was not impacted by the rate reduction of the recent tax legislation. Our full year effective rate was also 20%. We expect fiscal 2019's rate to be between 18% and 20%.

EPS decreased 3% to $1.24 on lower net earnings and lower shares outstanding. We expect our first fiscal quarter of 2019 to have approximately 42.5 million shares outstanding. As a reminder, we have not exercised the $100 million authorization by our Board of Directors in November for repurchases.

Please now turn to Slides 11 and 12. As usual, we have provided information on a year-to-date 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 year-to-date results.

Please now turn to Slide 13. Now some brief comments about our financial position and cash flow results. Our balance sheet remains very strong. We now have $522 million on-hand in cash and short-term investments as of March 31, 2018, with over $615 million undrawn from our credit lines around the world. We generated $211 million in cash from operations in fiscal 2018. Our credit agreement leverage ratio is just above 0.7x. Capital expenditures were $70 million in fiscal 2018, compared to $50 million in fiscal 2017.

Please now turn to Slide 14. While the new Tax Act had another $4 million negative impact on this quarter, and $81 million on fiscal 2018 on as-reported tax expense, we continue to expect it to be favorable in future periods, with our effective tax rate to be approximately 19% to 20% in future years. The table on Slide 14 provides additional detail of our $81 million charge as current year and next year's fiscal year's expected net income and cash impacts. We have not made any final determination at this time as to how much of our cash we might repatriate in the next fiscal year, but it will likely be between $250 million and $400 million.

We expect to generate adjusted diluted net earnings per share between $1.15 and $1.19 in our first quarter fiscal 2019, which excludes an expected net charge of $0.06 per share from continuing our restructuring programs and acquisition activities. We anticipate a gross profit rate in our first fiscal quarter of 2019 will be approximately 25%.

In conclusion, we incurred $125 million in higher commodity costs on a year-over-year basis in fiscal 2018. We recovered nearly 75% of that increase in pricing, with the balance nearly recovered by higher volume. We have made tremendous strides in new product development, lean initiatives, investments in our digital core and in progressing our acquisition strategy. Even though our adjusted net earnings declined 4%, we look back on fiscal 2018 with tremendous pride in our accomplishments.

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

Thanks, Mike. Mark, we will now open the lines for any questions.

(Operator Instructions) And our first question comes from the line of Michael Gallo from CLK.

Dave, I guess just a couple questions. First on thin plate pure lead, obviously, demand has been strong, you're in a sold-out situation. Can you remind us how about how much in revenue you did the last fiscal year from TPPL? And how much do you expect the new high-speed line will enable you to increase the sales of that once it's on, which I know won't be until next year?

Yes, it's going to be end of calendar year. I would say TPPL is roughly 21% of the volume, and we think that, that -- with where we're at today, we're hoping to add another $40 million to $50 million of revenue capability. And I got to say, Michael, the issue for me is, I think some of the things that we had clearly signaled and identified at our Investor Day, they'll happen. They just happened a little sooner than we thought. So I'm a little bit caught flat-footed in a sense that we didn't think we'd be sold out as soon as we have been, which is a great -- I mean, that's a -- it's a first-world problem because the margins on this business are better than average, and so it's a testament to the efforts of the team and the strategy and the direction we're pushing. And really, what it comes down to is -- and I think some of that or a lot of it is related to politics and the election results. But we've seen -- just say like on the broadband side, we see the big companies, Comcast, Charter and others are really pushing hard on their DOCSIS 3.1 strategy, which is to get 1 gigabyte per second type of speeds out to their customers. And to do that, they've had to make significant investments in their power architecture, and that includes batteries, so we didn't anticipate that at the time. We talked about 5G, but I guess we didn't recognize that some of the investments would need to be made in advance of the 5G rollout to buttress or harden the network in anticipation of the heightened data demand. I think a good analogy is -- someone shared with me is that a lot of the traffic is in the fiber. When we think about 4G or 5G, we think so much of the aerial traffic, but really so much of the foundational expense is in the fiber-optic networks. And so we've seen a nice uptick in that area in preparation of this higher demand. I think a good analogy, Michael, might be a building. I think we might have said that before, that a lot of the cost of a building is in the foundation, or it's not really seen above the ground. So that's been a delightful surprise, and it just happened sooner than what we had anticipated. The transportation sector, we told you, we signaled hard that we were going after that. But frankly, I think if you follow the trucking markets, we hadn't anticipated just the natural growth of that whole business. I think the economic activity and a rising tide raises all ships, so we've certainly benefited from that as well. And then obviously, defense spending, we certainly didn't have a good, clear vision back at the time of the Investor Day at how fast -- or how much tactical vehicles were going to increase, and the demand for [stoke]. So again, it's a good story. And then on top of that, we've seen a big push as part -- on our whole maintenance-free strategy that we talked about at the Investor Day, is we want to lead the market with a modular agnostic concept of maintenance-free solutions with a common customer experience. So let's just say in motive power, we don't want the customers to really be able to tell from the experience what the chemistry is inside. The other day, Joern dragged me down, the CTO dragged me down to the lab and showed me a new product. And I had to ask him, I said, "Is that lithium or lead?" Because I just couldn't tell by looking at it. And that's the approach we're trying to take. And as we said, we're going to really focus on letting the computer decide what provides lower total cost of ownership for that particular application. So the strategy is working. As we said in our prepared remarks, we're really pleased in the progress. And but that, again, is in another market on thin plate pure lead, so we've got to get busy, and you can be assured that I'm exerting maximum pressure on our teams. And certainly, as we signaled at Investor Day, we're going to have to go a little higher than we have historically on CapEx, as we build out this incremental capacity.

Okay. That's helpful insight, Dave. Just a follow-up on 5G, just kind of your latest thoughts. Some of the, kind of industry M&A, do you see that impacting the timing at all, or is it just kind of full speed ahead, and just your latest thoughts on what 5G means to EnerSys?

I think that -- we can kind take them one by one. If you listen to some of the CEOs and you've got the T-Mo Sprint deal, they're talking about using data speed as a competitive way of going to market. We mentioned earlier the broadband companies. We sort of see, Michael, a convergence of a handful of dominant companies all sort of converging into a singular broadband space. And that broadband will be delivered as a combination of Wi-Fi and wireless, and it's going to be complicated. And I think the most important thing is, as we noted is, a lot of the spending will be on the fiber-optic portions of these networks. And that's what we're seeing today. Now the aerial piece will come later. So it will be complicated. I don't know that there's a singular business model I can point to like we did in the 4G days, where it was just a flat-out foot race between AT&T and Verizon on who can get the most map coverage. It's different, it's going to be different this time. And we're going to have different competitors and different players. I think that the cable companies have signaled that they're getting into the wireless markets, and obviously, they're going to try to keep you onto their networks with Wi-Fi as much as possible, and they'll use different strategies once their wireless customers get outside of Wi-Fi coverage. So we're seeing a lot of activity right now on the fiber-optic and the buttressing of the networks, but we don't have a clear vision yet as to the timing or the topology for the aerial portions of this.

If I could make one other comment, Mike, on that. I think the other difference on 5G versus 4G, where 4G was fill out the map, and it was more of a standard-sized protocol equipment situation, 5G is very much probably going to be localized to build onto the network capabilities for each region or city. So I think it's going to be more of a spoke. And that's part of the reason why some of the variability. But the hardening of those networks that is going on right now is real, and it is, at least in the Americas, we are feeling that uptick in our Americas reserve power business.

Yes.

And our next question comes from the line of John Franzreb from Sidoti & Company.

Just a follow-up on that last discussion. Does it matter to you if the initial rollout on 5G is Wi-Fi or targeted to the home or smaller commercial networks versus cell phone-enabled? Does that change the spending pattern from your customers to yourself?

That's a great question. I would say, right now if the model is more kind of a virtual mobile network, which is reliant on the -- using Wi-Fi, from a power architecture standpoint, that's probably closer to home or what we're used to. But in the end, I think again, like I said, most of the cost of a building is underground. In all cases, the real CapEx is going to be spent on the fiber-optic and central switching portions of the network. So I don't know that we're really too worried about it. We're supplying into the broadband cable television markets, the telco markets. It's really like we said, we see a convergence in -- and it's really just going to be making sure that you're selling to who the relevant players are going to be, so kind of a T-Mo Sprint will be one of the winners, probably. Certainly, AT&T and Verizon will be there. Comcast, Charter are going to be there, and how they deploy will be different. Each company will have its unique spin, but in general, I don't see a big difference for us.

Okay, fair enough. And going back to be TPPL. How much in CapEx do you expect to spend this fiscal year?

We're staying -- I don't think we've deviated from our $85 million CapEx that we signaled at the Investor Day. And probably next year, we may -- I don't know if we'll be in that same ZIP Code or not, but we'll probably still be in '20 above average as we finish up this capacity expansion.

Okay, got it. And Dave, you talked about the China Tower migrating to a new lithium technology. I know you're going to have to backfill some of the lost revenue there. Can you kind of put a size on that and maybe a little bit more color what's gone beyond that decision from China Tower?

Yes. So I think that they've -- they're going to try, we don't know how successful it's going to be, but they're going to try to use second life batteries. I think most of these are coming out of electric buses. We've always been a little bit dubious about second life business models, but they're going to try it and so our guys have lowered the forecast. So China Tower -- so I think the reduction in revenue will be in the $10 million to $15 million ZIP Code, and that was probably some of our lowest margin business globally. So and not so much -- replacing the GP isn't the biggest concern. And then we're so busy around the world, we're just going to try to -- and that's one of the real strengths of EnerSys, is our ability to shift around globally as geopolitical or things happen, exchange rates and the like. So it's going to take us a little while. And as we mentioned in the prepared remarks, we're going to get some export products qualified. So we're confident, we're confident in the team's ability to shuffle the deck. It just takes them a little while to get things lined up. We certainly haven't backed off on budgets or targets for the guys in the regions. So everybody's going to be driving and fully committed to achieving what we've laid out and the vision we sort of rolled out at Investor Day. But we'll see how it goes. It's the only way I think that China Tower could come anywhere close to lead asset pricing, was to use virtually free batteries, which are these second life batteries that they really don't know how to get rid of because that's really -- so that's the beauty of this. And it's a state-owned enterprise, so they're trying to help out other departments in the Chinese system. So we'll see how it goes and again, it's not a showstopper, it's not going to be material to our results in any way.

And our next question comes from the line of Noah Kaye from Oppenheimer.

And Dave, thanks for the color around the modular lithium product that you're bringing to market, particularly for some of the attributes, and what you see as the competitive characteristics. You also referenced customer excitement about those products. So maybe can you talk about your expectations for where sales of those products might get to, say over the next 2 years? And at what level do you see those products being accretive to corporate margins?

Okay. Thanks, Noah. It was good to see you at your conference recently. The -- I would say it's very difficult for me to predict. We'll control it somewhat by where we price the products, and we're going to take a very strategic and disciplined approach. You don't want to open the taps necessarily until you've vetted the supply chain and all of the product features and so forth. So I would say we're going to take a disciplined approach. Now if you recall, we didn't really model in a whole lot, if any, incremental sales from this into our Investor Day models. But as I told you all year long in F '18, we made a decision to try to pull some of this forward, and that's been the big push. So if you go back to the Investor Day road map, we should see some growth in these areas. But I don't want to give you a number yet until -- I want to see how robust the supply chain and the designs are. But clearly, the upside potential and our ability to take share based on the feedback we've got from the customers looks exciting. And so motive power has been a very steady Eddie business for us for years, and our shares, especially in Western Europe and the Americas, the U.S. especially, has been fairly static, but we think that this might be a great opportunity for us to really start to take more share. Because the experience and again, I can't stress enough, we're focusing on the experience, how the product is used, it's specified, it's ordered, how it communicates with a user, how it gives you feedback, how we're going to use predictive modeling. You've seen those IBM Watson commercials where the guy comes to fix the elevator before the elevator is broken. We're trying to embrace all of this functionality in our modular systems in, be it lead or lithium. And so one of the things that I can't tell you is what cobalt prices are going to be 2 years from now, or what lead prices are going to be. So as we said at the industrial conference, that we're going to -- we're just going to focus on the experience, and then we're going to let the computer decide which technology provides the best solution. So we will, as I tell our team, I guarantee you 5 years from now we'll be selling flooded batteries, thin plate pure lead batteries and lithium batteries, but I really don't know what the mix is.

And Noah, based on our current product roadmap, we would not expect to see any sales until the fourth quarter of the next fiscal year. So I think it's probably going to be -- the answer to the question you asked is probably going to be answerable about this time a year from now because we will add some new products, hopefully, that we will see, and then we will get a much better feel for market acceptance and adoption.

Yes. We want to be disciplined though. This stuff is -- and our customers are careful, and -- but I tell you, the one thing I did want to communicate, and I think Mike communicated in his prepared remarks as well, is we couldn't be happier about the progress the team made this year in accelerating these products for sale.

Right. And we've seen you pull those investments forward to be positioned. So we'll be looking forward for more details on that. Kind of just switching gears, I guess, just at a high level so we have our models right, what kind of bogey should we be thinking about for 2019 EPS? You did give a number last year, just kind of curious to know where we should be penciling out.

Well, I guess I would say, Noah, the price of lead being such a dramatic impact, what I will tell you is that internally, we target 10% improvement year-over-year in our operating earnings. There's a couple of variables that will impact that. As you know, next year's going to have fewer outstanding shares so that will be a benefit. The other question is how much cash and how soon we bring it back home and how big of an impact that could have on our interest expense, which is somewhat of a variable. So our target is 10% operating earnings improvement. When you get below that, we've got the new Tax Act, so we got some uncertainty in our tax rate, different basis for the share count, et cetera. So I would expect our EPS to be more than a 10% improvement, but I'm not willing to venture at this point as to how much more.

I mean that certainly gives us a lot to work with. And I don't want to ask you about your lead price assumption because it's been so tough to get a hold of, but it does seem like at least it's come down a bit. And so you talked about confidence in your preliminary release of being able to get margin improvement again as we kind of get into the second quarter here. I guess, maybe if you can just talk about it at this point your level of confidence and ability to recover the higher lead prices for pricing.

Yes. Let's -- on the lead piece, Noah, as you know, the lead price is complicated. On the demand side, demand is principally driven by automotive batteries and that's fairly stable. So I don't know that it's a big issue on the demand side for lead. I think the more unpredictable variable is on the supply side. As you know, lead is often co-mined with zinc. And so zinc prices can have a very meaningful impact. And then on the smelter side, if there's -- a smelter could go down somewhere, sort of like an oil refinery going down somewhere, that can have some short-term impacts. And then you know better than me, that commodities are denominated in USD, so FX cross rates can certainly impact that. So it's very difficult for Mike or I to give you any sort of a prediction as to where lead's going. But I think hopefully what F '18 demonstrated to you is the ability of this industry and specifically, this management team, to recover prices in a disciplined way. So it was a very difficult year. As Mike concluded with in his prepared remarks, it was probably one of our best years, and yet earnings per share stepped back a bit because of us in that chase mode, chasing commodities. But hopefully, what we've demonstrated is that we can continue to recover. It takes us a couple quarters, but the discipline is in place in the industry, with us, and that's all I think we can say about lead.

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

Just a clarification, Mike, you said that bringing cash home and reducing interest expense, is that a function of the fact that you have to actually pay to have cash invested in Europe? Or are you bringing it home to pay down debt, can you elaborate on that?

Well, the -- largely, the balances that are held overseas have, we'll call it for practical purposes, no interest accreted to them. So whereas in the U.S. we have our revolver with at least $600 million outstanding or thereabouts, so it's the ability to pay off that interest, is what we would be looking to do.

Okay. And you do have a negative interest rate on a lot of this cash overseas, is that correct?

I think there are some instances of that, yes.

Okay. And then I wanted to clarify one other point that came up during the call. You had mentioned a couple questions ago, you wouldn't see revenue, the comment, I think, Dave made until the fourth of next fiscal year. I think you were talking about the maintenance-free products. But is that -- fiscal fourth quarter of fiscal '19, right, not fourth quarter of fiscal '20?

Yes. I think Mike might have stumbled on that a little bit. We'll start to see light incremental revenue in the fourth quarter of fiscal year '19, but no real meaningful impacts probably until F '20.

But just for clarification, we are seeing on other maintenance-free products, we are seeing revenue now.

Yes.

Got it. Okay, yes. And then, I think, Mike, you mentioned 25% gross margin is the target for the first quarter of '19, and I know in a previous caller just tried to get, I think a little detail around this. Can you give us any sense, directionally at least on gross margin, though, if we assume lead stays where it is today?

Well, I guess our gross profit rate in total was 25% in Q4, expect it to be somewhere in that vicinity in Q1 as Q1 has incrementally slightly higher commodity costs going through it than Q4. Lead is currently, the last trailing 3-months averaged $1.07, I think the spot is $1.10. At those kind of rates, I would expect we would probably see an improvement as we moved through fiscal 2019, but that improvement could be fairly small so that maybe exit rates, maybe 100 basis points better than where we started the year. Let me add one other thing. We do spend a lot of time talking about margins, but one of the attributes of rising commodity costs, and particularly when it has to do with the cost of zinc because they're mined together, if commodities are rising, not because of some anomaly in supply or demand, whether it be a smelter or a particular demand surge, if they're just rising because they're in a basket of commodities, which reflects general economic activity, we have found that the margin isn't the key. The margin percentage rate does not have to be at its highest point for us to get our highest dollars of gross profit, and that's what drives EPS. So when we look back over the last 5 or 6 years, some of the periods with highest gross profit dollars had some of the lowest gross profit margins. So I would tell you volume and its impact on utilization in our factories is every bit as important, if not more important, than what our margins are doing. So if commodity prices are going up because economic activity is going up, demand is going up, utilization is up, we'll be fine.

Right. No, I understand. That makes great sense. And then do you mind, Mike, if I bother you for that, which data the trailing 3 months, just for the record?

All right. Thanks for asking Mike, because I can never see that little print.

All right. The trailing 3 months, as a percentage of increase over the prior year, in the Americas is 22%; in Europe, it's plus 7%; and when you throw in the Middle East and Africa, EMEA is plus 6%; while Asia is plus 17% to round out a global plus 13%.

Got it. And that's ending April 30, 3 months ending April 30?

That is correct.

And I'm not showing any further questions at this time. I would now like to turn the call back over to David Shaffer for closing remarks.

Thanks, Mark. Well, everybody, thank you for your taking your time today to attend our call. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.