Good day ladies and gentlemen. And welcome to the EnerSys' Fourth Quarter Fiscal Year 2017 Earnings Conference Call. At this time, all participants are in a listen-only-mode. Later, we will conduct the Question-and-Answer Session and instructions will follow at that time. [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, Takea. 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 Web site, 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 Web site 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 date of such statements. For a list of factors, which could affect our future results, including our earnings estimates, see forward-looking statements included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, set forth in our Annual Report in 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 Web site 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 a $1.28 per share which was above our guidance range of a $1.19 to a $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 a $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 two 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 cost 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,…

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 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, my later comments concerning…

Takea, we will now open up the line for any questions.

Thank you, [Operator Instructions], our first question comes from Michael Gallo with CL King, your line is open.

I just want to parse into kind of the change in guidance from a few weeks today. 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 want to parse out to what degree, to what degrees 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 taking longer for the mechanism to work its work through? Thanks.

Hey Mike, this is Dave. We take a couple of pieces of that then Mike you can feel 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, 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 then the 8-K what we said is this reduction of approximately $5 million was a combination of some additional commodity costs which you've highlighted, the $2 million, plus some prices that didn't come through that we had modeled. So those were the two biggest issues. In terms of organic volume, or resistance to price increases, I don't know that those are the major things. Mike, is there anything you want to add?

Alright. Dave, I think you've kind a covered it. The 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've pointed out, commodity costs of $12 million, we previously have identified about $10 million cost related to lead, the extra $2 million was a little bit of a surprise for us. And then the pricing issue, it was about $3 million of that, and that was really trying to parse out the orders we were receiving in the March-April timeframe in terms of what price was relative to those orders. So for us, in light of the magnitude of the amounts involved in the increases we missed, but the miss wasn't as big as it would appear.

And Mike, this is Dave. In terms of, money mortgaging [ph] quarter backing 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 and the mechanics of the price increase, so that we do a better job next time. And as noted, that we think that the new systems that we're investing in our digital core will make our visibility better to which orders are going to shipped 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, 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 were some near term softness in motive in the Americas, but if 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 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 have spent a lot of time personally with customers in the last month or two in addition to the feedback from them and what we're seeing from the Wit's 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've made on the I think whether there is any inventory in the channel. I don't necessarily feel that there is a buildup of inventory in the channel here that has -- but these orders that were placed right before the affected dates of these price increases, those are orders that are being executed throughout the first fiscal quarters. So it's not that the customers took on a lot of inventory, they just accelerated what they've probably were going to order the follow month to catch the better pricing.

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

Thank you. Our next question comes from John Frenzreb with Sidoti & Company. Your line is open.

Could you talk a little bit about this forward buying, was it more in reserve products, or [technical difficulty] products and even maybe lead deeper [ph], how much was it in paid pure lead products?

John, I don't know that I have that sort of visibility in terms of -- in front 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 a very different buying practices and behavior. So there is no one way to look at our business. 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 are 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 is any place in our channels where I could anticipate a bit of an inventory buildup, it will probably be in the Reserve Power business in the U.S., which we have a lot of sales through distributors and distribution. So that's probably the most likely place we would see some sort of inventory accumulation.

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 is on a 20-week lead time, I'll try to take this battery 18 weeks from now. So it's a -- that's why I'm saying I don't see the channels build up. I think we just -- our policy of giving about three 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 led 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.

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 SPS product range. So I think that was part of your question as well.

Right. Well, let's just talk about the lead price curve. Of course, it's kind has been trending downwards [multiple speakers] beginning of the year. So are you absorbing the bulk of the $1.10 per pound number that from the beginning of the year. I know there is another spike a little bit later on, if it was February. 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 [multiple speakers]? How should we think about that, guys?

Alright. So John, for the most part, we generally, and I'm going to exclude Asia because they're on the Shanghai metal market exchanged. 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 proceeds. 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 pushout if you will, that is hopefully enough time, gives you a little bit more time to adjust your pricing. So, the months that 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 months just were at $0.97, so it went that down several pennies, $0.03 to $0.05. And the spot rate is probably a couple of pennies lower than that. So, if the spot rates stay 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 hurt 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 cost. 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 effective Q1, the spot rate is lower and so that -- and that's all I can tell you about it. And where the spot rate goes, I don't know, but it looks to be trending downwards.

One last question, and I'll let someone else 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 one quarter doesn't make a year, John. And I think as said, I expected earnings of -- in excess of $5 a share. The last year for comparable stats we did $4.75. The assumptions on the $5 million was the lead cost would be approximately $1 which is kind a what were seen 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 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 just add, our management team wants to make a bonus this year, it needs to be in that zip code.

Okay. Fair enough guys. Thanks for taking my questions.

Thank you. [Operator Instructions]. Our next question comes from Brian Drab of William Blair. Your line is open.

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 possibly, is there a days issue from the 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 of if there is any particular days issues this year versus last year, Mike is shaking his head, it looks to be a push.

There is 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, [multiple speakers] call it 62.5 working days across the world Q1 of year ago was 64.5. But, as you know we've always kind of -- Brian, talked about the -- fourth quarter is generally always our strongest quarter. So it's not unusual to see a mile step down in the volume regardless of the days. But certainly days can have an impact on it. But in this case --.

Okay, thanks. And then, would you mind sharing that Wit's data that you mentioned earlier at Telecom [ph]? I'm always the one who asked for this, it's great to get those three months rolling numbers for the region if you wouldn't mind?

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

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

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 surprising me.

Okay. And then and we're talking so much on the call, this will hang 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 if you highlighted the signing of the second truck fleet, and is there any more development in that, specific market opportunity and then the next gen fleet technology and the traction you're getting there?

Yeah. No, it's good to talk about something other than lead. I think everything we laid out and we had a quick review during this morning on the product roadmap is tracking according to the original time table. So we're pleased with the progress we're making in the over the road truck market. We exceeded our expectations in 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 European sales team in September. So I just checked to verify that we were still on target on 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 roadmap 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 the part of the headwind 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 are we're continuing to invest in our digital core, which again is introducing some additional OpEx, 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 officially in two factories. The launch is gone very well. This early days, we're focused on rapid improvement events, RIEs, and so far the progress has been very good. We've got two more as we've promised, we've got two more factories we're going to launch this summer. The total revenue of those four 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 what was discussed at the Investor Day, everything is on track. I think unfortunately, we've stumbled out of the blocks a bit on price recovery and some additional commodity cost we hadn't anticipated.

Okay. That's very detailed. 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 as what was the savings that ran through 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, same is true on the $27 million. But I will say, the 27 million may have -- those were the cost savings, there are normal inflationary headwind that would take place, like wage increases, et cetera, that would impact it.

Okay, I understand some offsets to that, I got it thank you very much.

Thank you, our next question comes from Noah Kaye with Oppenheimer, your line is open.

Good morning Dave and Mike, thanks so much for taking the question and for all the transparency on this call. Just want to pick up on the cost savings, so appreciate these new information metrics. I think you signaled at the Analyst Day kind of 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, 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 will appreciate that. So, we will stay committed to that original target. You know 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 one year. 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 roadmap, 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, you know are you seeing a fairly active pipeline of potential targets you know and how realist is it kind of still getting the low leverage to think about you're potential doing a major acquisition as you talked about the potential for doing it at the 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. In 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 and M&A and I don't think he's 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 out to be able to get something executed this year, but you just never know.

Okay, thank you very much for taking the questions.

Thank you. Our next question comes from John Frenzreb with Sidoti & Company. Your line is open.

Guys, back at the Analyst Day in March, you guys talked about a lithium initiative and make your spy proposition. Can you update us on where we stand on that?

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 of been progressing both in a dual pass recognizing that ultimately we'll 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. I just want to make sure I got a couple of things right. There is no competitive pressure issues as far as the pricing environment is concerned. And that it's a mechanism of you implementing the price increases that was issued, which kind of surprises me because lead volatility has been something we've been living with for ages. So I'm kind of surprised about that, since you're saying that IT switch has not yet happened. I just want to reconcile, make sure I got that right, reconcile with those statements.

We have not -- 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 headwind resistance to a pricing or competitive pressures. There is always noise whenever you're trying to do this. And in the short term, there is 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 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.

Okay, thank you. That's all I have.

Thank you.

Thank you. 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 take your time today to attend our call and please everyone have a good day.

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