Good day, ladies and gentlemen, and welcome to the Q4 2018 EnerSys Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn this conference call to Mr. David Shaffer, President and CEO. You may begin, sir.

Thanks, Mark. Good morning and thank you for joining us. On the all with me this morning is Mike Schmidtlein, our Chief Financial Officer. Last evening, we posted on our website slides we will be referencing during the call this morning. If you didn't get a chance to see this information, you may want to go to the webcast tab in the Investors section of our website at www.enersys.com. I'm going to ask Mike Schmidtlein to cover information regarding forward-looking statements.

Thank you, Dave, and good morning to everyone. As a reminder, we will be presenting certain forward-looking statements on this call that are based on management's current expectations and are subject to uncertainties and changes in circumstances. Our actual results may differ materially from 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, 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 on Form 10-K for the 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 a $1.20 to $1.24 per share. Sales increased 9% year-over-year mostly from currency benefits and pricing. As look at our markets, I see stability in motive power which strengthen Asia. I 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 cost 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 in closures; two, for datacenters and the cloud…

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 in 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 the 2% increase in volume and 3% in pricing. Europe had 3% pricing increase and 13% in 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 promoted power were up 9% year-over-year $360 million, while reserve power was also up 9% to $323 million. Motive power at a 2% increase in price, 1% volume increase and 6% currency benefit. Reserve power generated 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 fiscal 2018 driven by 1% increase in volume and a 1% price improvement along with the 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 earnings performance. As you know, we utilized certain non-GAAP measures in analyzing our company's operating performance, specifically excluding highlighted items. Accordingly, my following comments concerning operating expenses…

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

Thank you. [Operator Instructions]. And our first question comes from the line of Michael Gallo from C.L. King. Your line is now open.

Hi good morning. Congratulations on the good results.

Thanks Michael.

So, Dave I guess just a couple of questions. First on Thin Plate Pure Lead, obviously demands have been strong and you're in a sold-out situation. Can you remind us about how much in revenue you did last fiscal year from TPPL? And how much you expect the new high-speed line will enable you to increase the sales of that once a ton, which I know won't be till next year?

Yeah. It's going to be end of the calendar year. I will say TPPL is roughly 21% of the volume. And we think that that, 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 have clearly signaled and identified at our Investor Day. They all happened, they just happened a little sooner than we thought. So, I'm a little caught flat footed in the sense that we didn't think we'll be sold out as soon as we have. And which is a great -- I mean 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 see to say like on the broadband side, we see the big companies, Comcast, Charters and others are really pushing hard on their DOCSIS 3.1 strategy, which is they hit 1 gigabyte per second type of speed to their customers. And to do that, it have to make significant investments in their power architecture and that includes battery. 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 we need to be made in advance of the 5G rollout the bunches are heart of 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…

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 try and take one-by-one, if you listen to some of the CEOs and you’ve got the Timo Sprint deal, they’re talking about using data speed as a competitive way of going the market. We mentioned earlier, the broadband company. So, 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. The aerial piece will come later. So, it will be complicated. I don't know that there is a singular business model, I can point to like we did in the 4G days, where it was just a flat our foot race between AT&T and Verizon and who could 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 who signaled that they're getting into the wireless markets and obviously they're going to try to keep you on to 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 in 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 on to the network capabilities for each region or city. So, I think it's going to be a 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're feeling that uptick in our Americas reserve power business.

Okay. Thank you very much.

Thank you. And our next question comes from the line of John Franzreb from Sidoti & Company. Your line is now open.

Good morning guys, and nice quarter.

Hey John.

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 home smaller commercial networks versus cellphone 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 used to. but in the end, I think again like we said most of the cost of the 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 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 Timo 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 spend, but in general, I don’t see a big difference for us.

And going back to the TPPL. How much in CapEx, do you expect to spend this fiscal year?

We’re saying, 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’d 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.

And Dave you talked about the China Tower migrating to new lithium technology. I think, you had to backfill some of the lost revenue there. Can you kind of put a size on that and maybe a little bit more color over what’s gone beyond that decision from China Tower?

Yes. So, I think that, they’re going to try, we don’t know how successful is 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. 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 strength 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, unless we mention in the prepared remarks, we trying to get some export products qualified. So, 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 region. So, everybody is going to driving and fully committed to achieving what we’ve laid out and the vision we sort of rolled out in 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 acid pricing was to use virtually free batteries, which are the 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 going to be material to our results in any way.

And our next question comes from the line of Noah Kaye from Oppenheimer. Your line is now open.

Thanks for taking the questions. And Dave thanks for the color around the modular lithium product that you're bringing to market particularly for some of the attributes in 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 may get to say over the next 2 years? And at what level do you see those products being accretive to corporate margins?

Thanks Noah. It's good to see you at the conference recently. 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 and tell you that at 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 roadmap we should see some growth in these areas, but I don't want to give you a number yet until, I want to see and 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 a very steady eddy business for us for years. And our share 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. And how communicates with the user, how it gives you feedback, how we're going to use predictive modeling. You have 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 and letter lithium. And so, one of the things I can't 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 the technology provides the best solutions. So, we will, as I tell our team, I guarantee 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 based on our current product roadmap, we would not expect to see sales until the fourth quarter of 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 what we will see. And then we'll get a much better feel for market acceptance and adoption.

Yeah, we want to be disciplined and this stuff is and our customers are careful 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 happy about the progress the team made this year and accelerating these products for sale.

And we’ve seen you pull those investments forward to be positioned. So, we will be looking for more details on that. Kind of switching gears. I guess, just at a high level, so we have models right. What kind of bogus will 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 no other price of lead be such a dramatic impact. What I will tell you is that internally, we target 10% improvement year-over-year in our operating earnings. There is a couple of variables that will impact that. As you know, next year is 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 10% improvement, but I’m not willing to venture at this point as to how much more.

I don’t want to ask about your lead price assumption because it’s been so tough to get a hold off, but it does seem like at least it come down a bit and so you talked about confidence in your preliminary lease of being able to get margin improvement, again as we kind of get into the second quarter here. I guess maybe you can just talk about at this time your level of confidence and ability to recover the higher lead prices for pricing?

Yes. On the lead piece, I mean as you know the lead, 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 is a smelter can 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 to give you any sort of prediction as to where lead is going. But I think hopefully what F’18 demonstrated to you, is the ability to this industry and specifically this management team to recover prices in a disciplined way. So, it was a very difficult year. As Mike concluded within 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 demonstrate is that we can continue to recover, it takes us a couple of quarters. But the discipline is in place and the industry with us. And that's all I think we can say about lead.

Much appreciated. I'll jump back in queue. Thanks.

Thank you.

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

Hey good morning. Thanks for taking my questions.

Hey Brian.

Hey. Just a clarification, Mike you said it would bring cash home and reducing interest expense. Is that a function of the fact that you have to potentially pay to have cash invested in Europe? Or you bring it home to pay down debt, can you elaborate on that?

Well largely the balances that are held overseas we will call it for practical purposes no interest accreted to them. Whereas in the U.S. we have a revolver with $600 million outstanding or there about. 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 want to clarify one other point that came up during the call. You'd mentioned a couple of questions ago, you wouldn't see revenue. The comment I think Dave made was until fourth quarter of next fiscal year, I think you are talking about the maintenance free products. Is that fourth quarter of fiscal '19 right now or fourth quarter of fiscal '20?

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 '20.

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

Got it okay. Yeah thanks for that clarification. And then I think Mike, you mentioned 25% gross margin is the target for the first quarter of '19. And I know in previous call just try 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?

Our gross profit rate in total was 25% in Q4 expected to be somewhere in that vicinity in Q1. As Q1 has incrementally slightly higher commodity cost going through it than Q4. Lead is currently the last trailing 3-months averaged to $1.07. I think the spot is above 10. At those kind of rates, I would expect we would probably see an improvement as we move 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.

Okay very helpful.

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, particularly when it has to do with the cost of zinc, because they are 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 it’s 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 margin. 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 economy activity is going up, demand is going up, utilizations up we will be fine.

I understand, that makes great sense. And then do you mind, Mike, if I bother you for that, which data that is trailing 3 months, just for the record?

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

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 trail in the Middle East and Africa and EMEA is plus 6%, while Asia is plus 17% to round out a global plus 13%.

And that’s ending April 30 -- 3 months ending April 30?

That is correct.

Thank you. 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 taking your time today to attend our call. Have a great day.