EnerSys (ENS) 2019 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to First Quarter 2019 EnerSys Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, David Shaffer, President and CEO. You may begin, sir.

Thanks, Nicole. 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 that we will be referencing during -- we posted slides on our website that we will be referencing during the call this morning. If you didn't get the chance to see this information, you can 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 views regarding future events and operating performance 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 applicable only as of the date of this presentation. For a list of factors, which could affect our future results, including our earnings estimates, see forward-looking statements included in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, set forth in our quarterly report on Form 10-Q for the fiscal quarter ended July 1, 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 August 8, 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 first quarter earnings of $1.17 per share, which were at the middle of our guidance range of $1.15 to $1.19. Sales increased 8% year-over-year, with 5% coming from strong organic growth. Our motive power business is doing well in all regions.

In reserve power, the Americas continues to be strong. The strength is coming from the telecommunications, broadband, transportation, and aerospace and defense markets, which ordered significant quantities of Thin Plate Pure Lead or TPPL products. EMEA reserve sales and orders are down year-over-year, which has allowed us to use their excess TPPL manufacturing capacity to supply the United States. In Asia, orders are down year-over-year due to China Tower.

Year-over-year, quarterly gross profit increased by $2 million as a result of strong organic growth despite commodity cost increases that created a $4 million headwind even after recognizing selling price recovery. In an effort to offset continued raw material cost pressure, our selling price recovery actions averaged approximately 75% of total commodity cost inflation during the most recent quarter.

The 75% pricing recovery in this quarter is lower than our fourth quarter's recovery at 85% due to the sequential spike in lead costs flowing through this quarter. I would add that the cost of commodities that flowed through our P&L this quarter were higher than any quarter in fiscal year 2018, as well as the highest in 7 years. However, the lead prices have since declined, and we are likely to see those benefits starting early in the second half of fiscal year 29 ( sic ) [2019].

Please turn to Slide 4. I want to briefly review our global businesses. As mentioned, we experienced a strong 5% global organic growth in our first 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 batteries in all product groups. We have seen an increase in our enclosure sales.

As I detailed on our last call, there was a buildout in telecommunications for network infrastructure in preparation of future 5G deployment and greater data traffic, which should provide a tailwind for our businesses for some time. This is for both batteries and enclosures.

Next, broadband and CATV, or cable TV, are spending for network upgrades, as they invest to meet DOCSIS 3.1 data download speed standards. Sales and orders for the transportation business continue as we expand into additional long-haul truck fleets and automotive retail store chains. And finally, orders for batteries used for military tactical vehicles continue to be strong.

In the first quarter, the Americas motive power business also experienced healthy sales growth, and orders have continued to be strong in recent months. Over half of the volume growth came from new products. In addition, sales of our NexSys pure maintenance-free motive power battery more than doubled in the first quarter compared to last year's first quarter.

As previously mentioned, EMEA also experienced heavy motive power growth similar to the Americas. Most of the growth came from new products. In the first quarter, EMEA experienced over 100% year-over-year sales growth of our NexSys pure maintenance-free motive power battery, which customers have continued to rave about. EnerSys believes that the motive power market will move globally away from traditional flooded batteries in the maintenance-free solutions over time. The combination of our NexSys pure TPPL, as well as the NexSys iON lithium solutions will securely position EnerSys for the future.

Moving onto EMEA's reserve power business. Year-over-year sales in the first quarter were flat, primarily due to the positive impact from foreign currency exchange rates and higher prices, offset by lower volume. Organic volume decreased year-over-year, which was mainly due to the temporary Thin Plate Pure Lead manufacturing capacity constraints.

Opportunities in telecommunications and uninterruptible power systems are picking up in the Middle East. These types of opportunities can be somewhat lumpy as we experienced last year on our third fiscal quarter.

In the European long-haul truck and bus transportation markets, customers are very excited about our recently introduced Thin Plate Pure Lead product. They are realizing the same performance and value proposition that U.S. fleet carriers recognized a couple of years ago. These batteries will last much longer than conventional truck batteries due to their ability to handle high-temperature exposure, as well as on-road vibrations. This is just one of the exciting growth opportunities for the EMEA region as a result of our innovative new product set.

Asia's motive power continued its double-digit organic sales growth during the first fiscal quarter. The growth in the Chinese electric fork truck market is truly astounding. Here is an example. For the 3 quarters of April through June of calendar 27 (sic) [2017], China's electric fork truck orders were at 80% of the United States' order rate. However, during April through June of this calendar year, Chinese electric fork trucks orders were 110% of the U.S.' order rate, simply amazing.

We expect this market to continue to grow rapidly as electric forklift trucks are still only 35% of the total Chinese new forklift truck market. Similar to the Americas, this percentage should approach well over 60% in time. In addition, as these new electric forklift trucks age, they will require replacement batteries, creating a second wave of growth in this market.

Our Indian operation has transitioned to motive power from reserve power and has exported its first motive power products. India's motive power startup will certainly help absorb some of the fixed and overhead costs that have been weighing down our Asia results.

Asia's reserve power organic sales in the first quarter were down double digits, as China Tower began the government mandated use of recycled lithium backup batteries. While we expect to continue experiencing the near-term impact from this transition, we are accelerating our strategy to replace this volume with increased sales to Chinese telecommunications OEMs for their global operations, along with the increased volume in the rapidly-growing Southeast Asia region.

In the U.S. aerospace and defense business, strong growth patterns continue. We received 2 major lithium battery orders for long-term contracts, for major defense OEMs, for missile-defense systems and space batteries. In order to fulfill these orders, we have added a second shift at our Tampa, Florida facility. There are additional large long-term contract opportunities that we are hopeful to secure in calendar year 2018.

Recently, we announced a new 5-year contract with the U.S. Navy to supply up to $75 million of TPPL submarine batteries. This contract value is 15% higher than the previous contract. Even with these recent order wins, we are still engaged with customers and opportunities over $100 million in other new projects, mainly in the space, munitions and medical areas. We continue to actively quote and design products for the lithium segment that we expect to result in strong organic growth over the next 3 to 5 years.

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 in February 2017. Since the end of fiscal year 2017, we experienced commodity cost increases, which appear to have peaked in this recent quarter.

This commodity cost pressure has mapped the significant progress we have made in cost reduction savings. But as I mentioned earlier, if the price of lead remains below $1 per pound, we should experience gross margin expansion and incremental earnings growth starting early in the second half of fiscal year 2019. These significant cost reductions have more than financed the increased costs associated with the company's transformation into lean initiatives, new modular products and systems development, and system enhancements such as SAP, Salesforce and SuccessFactors.

Please turn to Slide 6. I will now provide an update on the progress we have made on our strategic initiatives. Our lean initiatives, which we call the EnerSys Operating System, or EOS, is provided a cultural change initiative that we targeted when we launched it more than a year ago. Our push to make continuous improvement a way of life at EnerSys is taking hold.

EOS' strategic initiatives now span more than 70% of our facilities, and lean is becoming ingrained in the way we operate. EOS' activities are successfully decreasing factory flow times, raw material and work-in-progress inventory levels and direct labor costs throughout most sites under transformation. As an example, the first Americas motive power manufacturing facility introduced the lean about 1.5 years ago has reduced factory flow times by 25%, raw material and work-in-progress inventories are turning 30% faster, and 10% of the factory floor space was freed up. And we have identified even more opportunities to improve at that facility.

In EMEA, EOS is providing the management tools and framework to identify and implement reserve power productivity and capacity improvements. Additionally, engineering product cost reduction efforts have been successful at identifying several million in potential savings in both existing and new products.

More importantly, we are defining the EnerSys global standards and frameworks for managing factories in the continuous improvement process. Based on successes to date and expectation going forward, we continue to increase our rate of deployment for EOS globally. We will initiate EOS in all Americas non-aerospace and defense factories and in Australia by year-end ahead of our original schedule.

In EMEA, we have already targeted -- we have already launched at our final planned factory. We maintain our fiscal 2019 total target for $30 million, in gross non-related cost improvements, with Q1 having achieved approximately $7 million.

We continue to discuss our exciting variant modular approach to the new lithium and TPPL product offerings with our customers. There is significant interest in reviewing and testing these new maintenance-free products. We consistently receive positive feedback from our customers regarding wireless charging and the adoption of the ISO 26262 safety standard.

As we have communicated previously, EnerSys will be launching our initial module lithium variant at the end of calendar year 2018 in the motive power market. This product is not just one item, but rather, it is the start of multiple pieces of a broad product family or platform of products. The technology will be the same, but the application 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. We will continue to build on this progress through continued investment in R&D as we drive further lithium innovation.

In addition, we continue to be very active on the M&A front. Our focus remains on acquisition candidates that would complement our growth, product differentiation and technology development. We have increased our due diligence expenses in the last quarter in advancing deals.

In summary, I am pleased with our first quarter results, especially given the higher year-over-year and sequential increases in commodity costs. That said, while we began experiencing commodity cost increases at the end of fiscal year 2017, the spot price for lead appears to have peaked in this recent quarter. Commodity costs, net of selling price increases, should become a tailwind starting early in the second half of fiscal 2019.

Motive power is enjoying good growth in all regions in the world, and our new maintenance-free NexSys product is setting the standard for the industry. Our EOS transformation is going very well. And as I meet with our employees are around the world, who have embraced this strategy, I remain very excited about its positive impact in 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 am starting with Slide 7.

Our first quarter net sales increased 8% over the prior year to $671 million, due to a 5% increase in volume, a 2% increase from pricing, and a 1% increase from currency. On a regional basis, our first quarter net sales in the Americas were up 11%, to $393 million; and Europe's net sales were up 6%, to $210 million; while Asia decreased 2% in the first quarter, to $68 million compared to the prior year.

The Americas enjoyed a 9% increase in volume and 2% from pricing. Europe had a 2% pricing increase, and 4% of positive currency. In Asia, volume decreased 7%, while pricing and currency, increased 1% and 4% respectively.

On a product line basis, net sales for motive power were up 9% year-over-year at $347 million, while our reserve power was up 6% to $324 million. Motive power had a 5% organic volume increase, a 2% increase in price and 2% currency benefit. Reserve power generated a 4% increase in volume and a 1% increase in price and 1% in foreign currency.

Please now refer to Slide 8. On a sequential basis, first quarter net sales were down 2% compared to the fourth quarter of fiscal 2018 driven by a 3% currency decline and offset by a 1% increase in price. The Americas region was up 3%, while Europe and Asia were down 8% and 9%, respectively. On a product line basis, motive power was down 4%, while reserve power was flat.

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 the 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 August 8, 2018, for details concerning these highlighted items.

Please now turn to Slide 9. On a year-over-year basis, adjusted consolidated operating earnings in the first quarter decreased approximately $3 million, to $68 million, with the operating margin down 130 basis points due to the dilutive impact of rising commodity costs on margins and earnings. The 5% increase in organic volume from the prior year, along with $12 million in pricing, was not enough to offset $16 million in higher commodity costs and increases in other operating costs. On a sequential basis, our first quarter operating earnings were down $5 million, primarily from higher commodity costs.

Operating expenses, when excluding highlighted items, were at 14.6% of sales for the first quarter, compared to 14.7% in the prior year. We currently expect fiscal 2019 operating expenses to be in the 14.5% range. Excluded from operating expenses recorded on a GAAP basis, are net charges of $2.8 million, primarily related to EMEA's restructuring and professional fees for due diligence on M&A opportunities.

In addition to the $2.8 million in net charges related to operating expenses, we excluded $0.5 million in inventory write-offs associated with our recent withdrawal of manufacturing reserve power products in India. Excluding those charges, our Americas business segment achieved an operating earnings percentage of 12.6%, which was 280 basis points below the 15.4% first quarter record of last year. Higher volume and pricing only partially offset the impact of higher lead costs.

On a sequential basis, Americas' first quarter decreased 40 basis points from the 13% margin posted in the fourth quarter, primarily due to higher volume and pricing. Americas' OE dollars were down approximately $5 million from the prior year, but flat with the prior quarter.

Europe's operating earnings percentage of 8.2% was up from last year's 6.9%, but lower than last quarter's 9.7%. OE dollars increased $3 million from the prior year, but decreased $5 million from the prior quarter in EMEA.

The operating earnings percentage in our Asia business declined 250 basis points in the first quarter of this year, to 2.2% operating profit from a 4.7% income in the first quarter of last year, and it was also down from last quarter's 2.5%. Asia's OE dollars were down approximately $2 million from the prior year, and down approximately $0.5 million, sequentially.

Please move to Slide 10. As previously reflected on Slide 9, our first quarter adjusted consolidated operating earnings of $68 million was a decrease of 5% in comparison to the prior year. Our adjusted consolidated net earnings of $49.7 million was comparable to the prior year. The results reflect higher volume, pricing and cost savings, and lower taxes and foreign currency losses, offset primarily by $16 million in higher commodity costs.

Our adjusted effective income tax rate of 19% for the first quarter was slightly lower than the prior quarter and the prior year's rates of approximately 20%. Discrete tax items caused most of these variations. We continue to expect fiscal 2019's rate to be between 18% and 20%.

EPS increased 4% to $1.17, on a slightly higher net earnings and lower shares outstanding. We expect our second quarter -- fiscal quarter of 2019 to have approximately 42.75 million of weighted average shares outstanding. As a reminder, we have not exercised the $100 million authorized by our Board of Directors last November for share repurchases.

Please now turn to Slide 11. Now some brief comments about our financial position and cash flow results. Our balance sheet remains very strong. We now have $513 million on hand in cash and short-term investments as of July 1, 2018, with over $540 million undrawn from our credit lines around the world. We generated $26 million in cash from operations in the first quarter of fiscal 2019.

Our credit agreement leverage ratio is just above 0.7x. Capital expenditures were $16 million in the first quarter fiscal 2019. We expect full year spending of approximately $70 million to $80 million for this fiscal year.

Please now turn to Slide 12. The table on Slide 12 provides additional details of our fiscal 2018 and 2019 impacts from the new Tax Act. As I previously mentioned, our first fiscal Q1 effective tax rate was 19% and was as expected and should remain around 18% to 20%. We have not made any final determination at this time as to how much of our cash we might repatriate in this fiscal year, but it'll likely be between $250 million and $400 million, including the $112 million we returned in Q1.

We expect to generate adjusted diluted net earnings per share of between $1.14 and $1.18 in our second quarter of fiscal 2019, which excludes an expected net charge of $0.06 per share from continuing our restructuring programs and acquisition activities.

We anticipate our gross profit rate in our second fiscal quarter of 2019 to be between 24% and 25%. As many of you know, we defer recognition of raw material purchase price variances on a 2- to 3-month FIFO method to better align with our revenue. In addition, due to the impact of our lead hedges and our lead suppliers' 1-month deferral of average monthly prices, the recent drop in spot rates for lead won't improve our results until mid Q3. Consequently, our gross profit rates will not improve appreciable -- appreciably until our fourth fiscal quarter.

We believe our global manufacturing footprint and supply chain gives us flexibility to adapt to changing economic, tax and trade conditions. We currently anticipate no more than $5 million of impact to operating earnings in fiscal 2019 from recent tariff actions between the United States and China, with approximately $1 million impact in Q2. If these tariffs continue, we believe our adjustments in our products' origin will largely mitigate their impact before the end of fiscal 2019.

In conclusion, we are pleased with our organic growth and order rates and look forward to declining commodity costs. Now let me turn it back to you, Dave.

Thanks, Mike. All right, Nicole, we can open up the line for any questions.

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

Just a bigger picture question. When we look at gross margins -- I guess when I look at the $25-or-so million you took out last year and this year, when I look at where off-prices today and I look at your mix of premium products, is there any structural reason that you think you wouldn't be able to get back to the 2017 gross margin levels assuming you can -- you're able to continue to grow your volumes and just assuming lead stays at today's prices?

No. I think, Mike, that premise is absolutely correct, although it will be in fiscal 2020 before you see those kind of numbers again. I tried to give -- because of some of the cloudiness, if you will, of how the changes in lead costs impact our P&L and the timing of it, that's why I gave a little additional insights in the gross profit rate percentages for the remainder of this fiscal year. I would expect to see the rates that we've experienced in Q1 and should experience in Q2, probably get slightly better in Q3 and then get appreciably better. By that, I'd say maybe 100 basis points better. And that's going to then get you -- you still need another 100, 150 bps to get into those 2017 numbers. But no, I think that that's an expectation that is reasonable.

Yes. And Michael, the other piece to it beyond the commodity story is the success we're seeing with the premium product mix that's always been core to our strategy. And if anything, that has accelerated of late, not slowed. So we're fairly optimistic that the -- that between the commodity relief and the favorable mix, your comments about getting back to those margins is feasible.

And just the caveat being that's with lead staying somewhere in the ZIP Code it's in right now.

Sure, yes. I definitely understood. Just on the demand side. I mean, very strong quarter in terms of volume growth that was achieved despite, obviously, you having -- still have capacity constraints on TPPL. How much would you say that those constraints kind of limited your volume growth? In other words, how much kind of pent-up demand is there, where as you get that capacity online, you'll be able to even, perhaps, grow at an even faster rate?

I think the place we felt it more strongly was probably in the EMEA reserve power sector. We've just -- there's -- the lead times we had to quote just knocked us out. So -- and really what it comes down to is it's our ability to get more aggressive in the transportation sector. It's what it really comes down to is right now, we've got as many orders as we can handle. The sales guys are -- they've got new accounts teed up. And so I'm fairly confident that as we bring on Thin Plate Pure Lead capacity, we're going to be able to sell it out fairly quickly. Unfortunately, these new lines they were putting in, ones coming in at the end of this calendar year, they just take a long time. And it's a bit frustrating for the sales team. Obviously, you want to make hay when the sun is shining. But needless to say, there's plenty of upside. It will just come down to the rate at which we can get this production capacity expanded. Now -- and we noted in the prepared remarks that a big part of what we're doing with the Lean focus in Europe is to try to at least get better optimization and better utilization of our existing capacity. So that is a keen focus, but I don't wanted to mention that too aggressively. I just don't know how much more we can do there. But from a demand standpoint, Michael, it's -- there's plenty of transportation sector growth out there.

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

I wanted to focus a little bit also on that -- the organic growth and more so in the Americas. 9% was kind of substantial. Can you kind of hustle out what markets or product lines are driving the growth? That would be helpful.

Sure. We'll take them one by one. Telecom and broadband are really key, and we have been talking about, for several quarters, consecutively now, what we see are these customers preparing for higher amounts of data traffic and whether it's from 5G, -- the broadband markets. They're really spending money right now or starting to spend money in order to increase the speed. It's a bit of a speed race. And so people are having to buttress their networks to accommodate these higher speeds. Higher speeds use more power. And more power, it means more backup power. So that sector is alive and well in the U.S. We don't see quite that activity level in Europe yet, but we suspect that will lag in a year or 2. And transportation sectors, as I was just saying to Michael, the product's working really well. The customers are seeing the benefit. And it really just comes down to our ability to produce and how much of that market we can go after. I've been shocked -- I think you've seen some of the trucking statistics, shortage of drivers. Certainly, we're feeling it. Mike didn't call it out in his prepared remarks, but we're feeling pressure on the freight lines. Our freight costs are going up. The trucking companies are really in a strong position right now. So that over-the-road trucking market has been a key part of the growth. Defense spending, we've seen increased spending for tactical vehicles, things like trucks and tanks for the military. And again, this is another sector that's embraced our Thin Plate Pure Lead technology. And then, on the motive power, and this is where we've seen some really exciting growth on Thin Plate Pure Lead. I mean, that business is doubling over -- year-on-year. And we expect it's going to be close, if not more than 10% of our revenue, in the motive power sector. So it's just exciting. And I think we called the right shot based on -- I was with a major customer yesterday, and I think we've called the right shot in terms of the maintenance-free customer experience. And so I was with our CTO. We went up and spent some time with the customer, and we've been getting very good accolades that we're on the right track with what we're doing. So we just need to do it faster. We're pushing as hard as we can. And on the new product side, I'm really proud of the team. I want to give a shout out to the guys. They're very committed to maintaining these launch dates. So that -- those are kind of the key areas in the U.S. sector. Motive just globally has been great. But it's green in the U.S. markets, specifically, for EnerSys. It's pretty much green on the dashboard in every sector.

So Dave, when I think about the telco part of that spend, is it going to be a constant kind of growth rate? Or is it going to be a lumpy kind of a spend? How does that play out as you start this transition? Give us -- any color would be helpful. Yes.

All right. So capacity constraints are going to limit some of the lumpiness, especially on the battery side. We think that the new products and the new lithium products are going to help us. We're trying to line up our supply chain. I was over in Asia 2 weeks ago, I guess, and just trying to make sure that we've got our supply chain locked down. So that's going to help uncap some growth. And so we think the customers are ready for some of these new products, so that's going to help. On the Thin Plate Pure Lead, we've just got it pushed through on the capacity constraints. So that's going to be constrained a bit. The enclosure piece, we're in good shape. Our enclosure business has been much, much stronger, so we think there's good opportunity. And that's going to be probably one of the lumpier pieces is -- as these telecommunications buildout goes, they tend to be real peaks and valleys. So that will be where the lumpiness comes. But I think given the capacity constraints and some of the approvals, I think it's going to be more of a steady, slower, like we've been seeing for the last quarters -- couple of quarters, be more like that than a hockey stick.

Okay. And one last question. In your prepared remarks, I'm not sure if I heard this correctly, did you say you were exporting some products from Europe to the U.S.? And if so, what are you exporting?

We've got -- those are mostly supporting the telecommunications and broadband market demand in the U.S. So it's Thin Plate Pure Lead batteries.

And our next question comes from Noah Kaye from Oppenheimer.

So could you call out for us, either by segment or region, where you experienced that $4 million price cost headwind? And what is your ability to put price through stronger in that area in the event that we'd see some sort of reversal from the current dip in lead prices?

So let me make sure, Noah. You wanted to know where the $4 million of net of cost...

Yes. Net price cost headwind, right. Right. And maybe implied by kind of the segment earning strength, but just any color you can give would be helpful.

Well, so the bulk of that is obviously in the Americas with some in Europe. Europe has the additional cloudiness of having not just currency exchange rates, the cross-currency exchange rates because of the fact that we manufacture in Poland and sell products produced with base currency in zloty and through euro. So -- but by and large, most of this cost is U.S.-based if for no other reason because of the size of that manufacturing footprint and their sales relative to Europe's at this time.

Yes. And Noah, this is -- it's principally a U.S. story. We've got a lot of pass-through pricing in other parts of the world. In the U.S., we have much less of it. And lead actually popped up on us and got ahead of some of where we had gotten pricing to. It's since reversed, and so we've definitely picked up some pressure. But if we can stay where we're at, I'm fairly optimistic that this -- the prices is -- the price stickiness in the U.S. is fairly good. We've -- historically, that's held up. So we're optimistic that it should follow prior trends. So -- but we're behind the 8-ball, for sure, especially, right now, I don't know if you caught it in my prepared remarks. I want to highlight, this quarter we just got through was the highest commodity cost slug that we've had in years and years. So it's just because of the -- all the things Mike called out with FIFO and n+ 1 buying contracts and tolling agreements with different lead suppliers. There's a fairly significant lag between spot prices and how it works through our P&L. And I thought if you go to the transcript, Mike gave a lot of color. In hedging, of course, I didn't even mention hedging. But Mike gave a lot of color, and he's really trying to help you guys with your models that there's a lot of -- we just got to manage the lag. I know it's frustrating, but it will just take some time for this to work itself out. But this first quarter, we just got through what's a brutally high quarter on commodity costs.

So and (inaudible) a little more color, I mean, if you look just at the year-over-year, where Americas had the biggest decline of 280 basis points. So clearly, they're the biggest commodity cost versus pricing impact. So it's actually slightly more than $4 million that's attributable to the Americas.

Okay. Yes, I mean, I looked at sort of the price trends last year in Americas. You were kind of at that 3% level. Is that kind of the right kind of price level you want to be at for this year? And sort of can we be again sort of a 3% type range? I know you're 2% in the first quarter.

Well, I think because the comps will change depending on when those pricing actions were initiated, so the comps get tougher as you get further along. What I would say is, our expectation is, beyond the second quarter, you will -- you should see parity there on out, where the pricing is at or above commodity costs on a year-over-year basis.

Okay, CapEx question. I think in 4Q, you guided to around $85 million spend for the fiscal year. Now kind of signaling a bit of reduction there. Can you kind of comment around that and where you might have decided to trim?

Well, the $85 million is what we typically, in the Investor Day, we referenced at for, typically, annual CapEx spending. And the execution -- our biggest investment is a major investment in our Thin Plate Pure Lead line, which is still going full throttle. So my intent was -- I think, if we're at $70 million to $80 million versus the $85 million, we -- a lot of it is going to depend on how quickly that line progresses and gets installed. So $85 million is not outside of the realm of possibility. But I will tell you, historically, our -- I think it's fair to say that we tend to have appetite. Our eyes are bigger than our stomachs when it comes to how much we can spend in capital, and we typically have a trend where we miss the full year by about $10 million. So that's part of the thought process that went in there.

Yes, understood. And maybe one more, David, I think near the end of the prepared remarks, you talked about some increased spending on due diligence in the M&A environment. Can you talk about what you're seeing in the M&A environment? Is there elevated activity? What's causing it? What areas? Just sort of the thought process there that now may be a more attractive environment.

Yes. I just think that the areas we've outlined historically, and especially, we focused on at the Investor Day is where we want to spend money, companies that fit the direction of configured systems, the product road maps that we laid out, energy storage. Just all of these areas that we've been consistently about, nothing has changed. And it's just we continue to push every day on this front. You can see from the spending, we have been busy. But you know as well as I do, there's just no guarantees in this world, and there's certainly a lot of difficulty controlling the timing of it. But just take for assurance that this management team still looks and values M&A as a fantastic opportunity to leverage our balance sheet to drive growth for our shareholders.

And if I (inaudible) [just add to that] I think we've been -- we kind of went from fishing with a net to fishing with a spear. So we are much more -- we've identified targets that we specifically want and actively go after those targets, rather than be more reactive when we see offering memorandums passed over by people brokering businesses that are for sale. So -- but to Dave's point, we do remain busy.

And our next question comes from Brian Drab from William Blair.

Dave, so first, just on M&A. I guess, I wanted to build on that question. What types of companies are most of interest at this point?

Yes. Again, it's really just -- if you go back to the Investor Day, and it's just trying to drive into those areas of the road map that take us what we've identified as key areas of growth. And more integrated system mindedness, I think, is really key to what we're trying to do. And the -- we just see the customers are changing, the markets' changing, the expectations are changing. And so we want to -- we just want to modernize our product portfolio, and we think that those are the kind of opportunities. And they have to fit hand in glove with our technology road map, and that's where our focus continues to be.

Okay. And then quite a bit of discussion around gross margin, obviously, understandably. And I wonder if you could put a finer point on what gross margin could be in the second half of the year, maybe given some assumptions like lead price remains reduced, volume growth is kind of mid-single digits? Can your gross margin get to the 26% level in the second half of the year or better than that?

Well, as I gave my guidance for the next quarter and kind of some less-specific, but generalities, for the second half of the year, we -- In addition to the lead costs that, based on how we incur it and pay for it, we also contemplated the tariffs that I mentioned in our -- in my remarks towards the end. So we have that pressure as well that we've assumed. But could -- I'm not certain. I think the exit rate at the end of the fourth quarter would be getting closer to that range. But I guess I would say that, that still has a lot of things that, that will be dependent upon, so -- but let's say, 26% in Q4 is a reasonable number.

Okay. And then I know you mentioned the $5 million, approximate impact from tariffs. Is that -- that's for fiscal '19, and would that be kind of -- how would that trend in the -- I think you said you had $1 million impact in the current quarter. And how does that kind of trend during the year?

I would say, for the next 3 quarters, you'd see like $1 million, $3 million, $1 million. I think by the fourth quarter, we'd largely change the sourcing of our products. And that will be the last quarter based on what we know about tariffs today that we would expect an impact.

And Brian, just as -- there's been so much noise about tariffs. We're only commenting on what we've seen in terms of the HS Codes that have been published. So I know there's been a lot of continued -- I don't want to use bluster, that sounds negative. But there's continued discussion of even higher tariffs. So what we've mentioned so far are the ones, and I guess you would calibrate that, with maybe the $200 billion sanction list. But that's a moving target. But I think the most important comment that Mike made is that we have suppliers, we have factories inside of China and outside of China. And so it's really just, for us, the aggravation of moving things around and really maybe moving some of the European customers into China and some of the U.S. customers out of China into Vietnam or Thailand or somewhere else. So it's easy enough for us to do. But certainly, it can't happen overnight and we've got to work through inventories and so forth. So it's frustrating. We'd just like the goalposts to get set. And once we're set and we feel pretty confident, we can adjust accordingly.

(Operator Instructions) And our next question comes from John Franzreb from Sidoti.

Yes. I just wanted to talk about some of the Asia opportunities and what's going on there. Talk a little bit about refilling of the business in China Tower that you lost. Clearly, the numbers are down in the quarter. How much of the business is that? And I also know you're doing a transition in India to a motive power product from a reserve power product. Maybe a little bit about what the plan is and addressing the India market in total. I know there's a lot there, but I just want an update.

Okay. No, it's great. And let's just start in India. So at Investor Day, I think our biggest miss versus the Investor Day plan to date has been the India telecommunications market. We just really got our head handed to us in that market. We just didn't have the right products, didn't have the right footprint, and we've got to retool and -- so we've dropped back and we're rethinking of our best line of attack for the India telecommunications market. It's a great opportunity. But we've taken some restructuring hits, and we've really found an opportunity to get that factory. We -- I mean -- I think, I'm looking at Mike, I think, probably, India dragged the P&L as much as $7 million last year. It was a big, big number. And we think that these actions we've taken are certainly going to stem some of that bleeding. Mike, is that -- that was about the right dimension for India?

It's -- well, you're certainly in the range. It -- that may be the high end of the range, but I would certainly...

Okay. I'm not too far off.

Yes.

And so the -- that's really been the focus. And in Asia markets, so Southeast Asia, Australia, places like that, which were great motive power markets for us, we've often exported out of Europe to support those markets. And so we see an opportunity right here to support those regions with the India factoring in those business plans look very accretive and attractive. So that's well afoot. We've got those first export shipments done. The factory looks great. And so we feel like that piece is leveling out. But really, we've got to come back. We still believe in the India telecommunications market. And -- so then, if we rotate up into China, we're still extremely positive about the China motive power market, that middle -- the emergence of the middle class, and that's going as we outlined at the Investor Day. It's very much in line the electrification initiatives. I just got back. I was over in China a couple of weeks ago. In every place I was in China had blue skies, except for when I crossed the Yangtze River into Shanghai. That was sort of the same old, same old. But everywhere else, I was, and I was in 4 cities, the skies were blue. So the Xi administration is doing some very good things for the environment, and part of that is using electric vehicles be it forklift, trucks or cars. And certainly, battery energy storage systems are an enormous leg of that. So I remain very optimistic about China. But we've -- and you know this because you've been on us for a while, we've relied heavily on that China telecom business for too long, and it's time to get this thing retooled. So China motive power good; telecom, bad; but the opportunities outside of telecom remain very buoyant. And then the rest of Asia, I would say there's been no significant departure from normal growth rates or product mix.

Just a quick thought, any feedback on the lithium reuse batteries in the buses that they're using over there? Has there any been initial positive or negative?

I'll give you a little market intelligence we get. It's not gone well. One of the things -- everything is so open over there. So we -- there's actually web portals where you can see what all of the product types that are being bought. So it's all very transparent and so we know exactly what they're doing and it's gone very poorly, the whole initiative. So we'll see what happens, but we're of the mindset hope isn't a strategy and we're not going to just sit back and wait. If it comes back, great; if it doesn't, that's okay, too. We're going to find something else. So it's -- I just want the team in Asia to stay upbeat. It's tough right now. Transformation is never easy, but we will come through the other end.

And I am showing no further questions at this time. I would now like to turn the call back to David Shaffer, President and CEO, for any further remarks.

Well, Nicole, I just want to thank everybody who took the time to attend the call today and just tell everyone have a great day. Take care.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.