Good day, ladies and gentlemen, and welcome to First Quarter 2019 EnerSys Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session; 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 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 slides on our website that we will be referencing during the call this morning. If you didn't get a chance to see this information, you can go to the webcast tab in the Investors section of our website at www.enersys.com. 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 a $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 order 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 in 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 of 85% due to the sequential spike in lead costs flowing through this quarter. I would add that the cost of commodities that flow through our P&L this quarter were higher than any quarter in fiscal year 2018, as well as the highest in seven 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] (Ph). 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…

Thanks Dave. For those of you following along on our webcast I'm 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 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 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 and analyzing our Company's operating performance specifically excluding highlighted items. Accordingly, my following comments concerning operating earnings, my later comments concerning diluted…

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

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

Just a bigger picture question when we look at gross margins, I guess when I look at the $25 million or so you took out last year and this year when I look at where spot price is today and I look at your mix of premium product. Is there any structural reason that you think you wouldn't be able to get back the 2017 gross margin levels, assuming you are able to continue to grow your volumes and just assuming led stay 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 led cost impact our P&L and the timing of it that is why I gave a little additional insights into gross profit rate percentages for the remainder of this fiscal year. I would expect to see the rates that we have experienced in Q1 and should experience in Q2 probably get slightly better in Q3 and then get appreciably better by that, I would say maybe 100 basis points better. And that is going to then get you - you still need another 150 bips to get into those 2017 numbers. But I think that is an expectation that is reasonable.

Yes. And Michael the other piece to beyond the commodity story is the success we are seeing with the premium product mix, you know that is always been core to our strategy. And if anything that is accelerated of late, not slowed, so we are fairly optimistic 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 is with led staying somewhere in those zip coded it’s in right now.

Just on the demand side, I mean very strong quarter in terms of volume growth that was achieved despite obviously you still have capacity constraint on TPPL how logic would you say that those constraint kind of limited your volume growth, in other words how much kind of pent up demand is there where as you get that capacity outlined you will be able to even perhaps grow it at an even faster rate.

I think the place we felt that most strongly was probably in the EMEA reserve power sector, there is the lead times we had to quote just knocked us out. And really what it comes down to is, it’s our ability to get more aggressive in the transportation sector is what it really comes down to. Right now we have got as many orders as we can handle, the sales guys are - they have got new accounts teed up. So I'm fairly confident that as we bring on Thin Plate Pure Led capacity, we are going to be able to sell it out fairly quickly. Unfortunately these new lines that we are putting in, once 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 hey when the sun is shining, but needless to say there is 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 are 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 want a dimension that too aggressively. I just don't know how much more we can do there, but from a demand standpoint Michael, there is plenty of transportation sector growth out there.

Thank you.

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

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

Sure, we will 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 track and whether it’s from 5G, the broadband markets. They are 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, these higher speeds use more power and more power means more backup power. So that sector is live 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 two. And transportation sector as I was just saying to Michael, the product is 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 have been shocked. I think you have seen some of the trucking statistics, shortage of drivers. Certainly Mike didn't call it out in his prepared remarks, but we are 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 is being a key part of the growth. Defense spending, we have seen increased spending for tactical vehicles things like trucks and tanks for the military and again this is another sector that is embraced our Thin Plate Pure Lead technology. And then on the motive power and this is where we have 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 this time. I was with a major customer yesterday and I think we have called the right shot in terms of maintenance free, customer experience. And so I was with our CTO, we went up and spent time with the customer and we have been getting very good accolades that we are on the right track with what we are doing. So we just need to do it faster, we are pushing this hard as we can and on the new product side I'm really proud of the team, I want to give a shot out to the guys, they are very committed to maintaining these launch dates. So those are kind of the key areas in the U.S. sector. Our motive just globally has been great, but its green in the U.S. markets specifically for EnerSys its pretty much green on the dashboard in every sector.

So Dave, when you 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 we start this transition? Any color would be helpful here.

Alright. 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 are trying to line up our supply chain. I was over in Asia two weeks ago I guess and just trying to make sure that we have got our supply chain lockdown. So that is going to help uncap some growth. And so we think the customers are ready for some of these new products. So that is going to help on the Thin Plate Pure Lead. We just got push through on the capacity constraints, so that is going to be constrained a bit. The enclosure piece were in good shape. Our enclosure business has been much, much stronger. So we think there is good opportunity. And that is going to be probably one of the lumpier pieces as these telecommunications build out those, 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 a more of a steady - slower like we have been seeing for the last quarters, a couple of quarters be more like that then 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 were you exporting?

Those are mostly supporting the telecommunications and broadband market demand in the U.S. So its Tin Plate Pure Lead batteries.

Okay. alright, thank you for taking my questions. I will get back into queue.

Thank you. And our next question comes from Noah Kaye from Oppenheimer. Your line is now open.

So could you call out for us either by segment or region where you experience that $4 million price cost headwinds and what is your ability to put price through stronger in that area in the event that we see some sort of reversal from the current [indiscernible] prices?

So we make sure - you wanted to know where the 4 million of net of cost.

Yes, net price cost headwinds, right. And maybe implied by kind of the segment earnings trends, 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, but cross currency exchange rates because of the fact that we manufacture in Poland and so product produced with base currency is [lot] (Ph) into euros. But by and large, most of this put this cost is U.S. based, it’s for no other reason, because of the size of that manufacturing footprint and their sales growth that is Europe’s at this time.

Yes. And Noah it’s principally U.S. dollar, we have got cash 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 since reversed. So we have definitely picked up some pressure, but if we can stay where we are at. I’m fairly optimistic that the price stickiness in the U.S. is fairly good. Historically that is held up, so we are optimistic that it should follow prior trends, but we are behind the eight ball for sure. Especially right I don’t know if you caught in my prepared remarks. I want to highlight, this quarter we just got through was the highest commodity costs slug that we have had in years and years. So it's just because of the - all the things Mike called out with FIFO and [M plus one] (Ph) buying contracts and tolling agreements with different lead suppliers is a fairly significant lag between stock prices and how it works through our P&L. And I thought if you go to the transcript Mike gave a lot of color on hedging of course, I mean he mentioned hedging. But Mike gave a lot of color and he is really trying to help you guys with your models that there is 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 was a brutally high quarter on commodity costs.

A little more color, I mean if you look just to the year-over-year where Americas had the biggest decline of 280 basis points, so clearly, they are the biggest commodity cost versus pricing impact. So it's actually slightly more than $4 million as attributable to the Americas.

Okay. I mean I look at the sort of the price trends last year in America, you were kind of at that 3% level on. Is that kind of the right kind of price level you want to be at for this year is sort of can we be again sort of in a 3% type range, I know were 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 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 bit of reduction there. Can you kind of comment around that and where you might have decided to trim?

Well the 85 is what we typically, in the Investor Day we referenced that for typically annual CapEx spending and the execution will - our biggest investment is the major investment in the Thin Plate Pure Lead line which is still going full throttle. So, I think if we are at 70 to 80 versus the 85, a lot of it is going to depend on how quickly that line progresses and gets installed. So 85 is not outside of the realm of possibility, but I will tell you historically I think it's fair to say that we tend to have appetites. 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 missed the full-year by about 10 million. So that is part of the thought process that went in there.

Yes understood. And then one more Dave, I think near the end of the prepared remarks you talked about some increased spending on due diligence on the M&A environment. Can you talk about what you are seeing in the M&A environment? is there elevated activity? What is 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 have outlined historically and especially focused on at Investor Day of where we want to spend money, you know companies that fit the direction of configured systems, the product roadmap that we laid out energy storage just all of these areas that we have been consistently about nothing's 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 is just no guarantees in this world and there is certainly a lot of difficulty controlling the timing of it. But just take for assurance that this management team still looks in values M&A as a fantastic opportunity to leverage our balance sheet to drive growth for our shareholders.

I think we kind of went from fishing with a net to fishing with the spears. So we are much more - we have identified targets that we specifically want and actively go after those targets rather than be more reactive when we see offering memorandum passed over by people brokering businesses that are for sale. But to Dave's point we do remain busy.

Okay. Thanks so much for the color.

Thank you. And our next question comes from Brian Drab from William Blair. Your line is now open.

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?

Again, it's really just if you go back to the investor day and just trying to drive into those areas of the roadmap that take us what we have identified as key areas of growth and more integrated system mindedness, I think is really key to what we are trying to do. And you know we just see the customers are changing, the market is changing, the expectations are changing. So 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 roadmap. And that is where our focus continues to be.

Okay. Thanks. And then quite a bit of discussion on gross margin obviously understandably and I’m wondering if you could put a final point on what gross margin could be in the second half of the year, maybe given some assumptions like lead price remains where it is, volume growth is kind of mid-single digits, can your gross margin get through 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, in addition to the lead cost based on how we incur it and pay for it, we also contemplated the tariffs that I mentioned in my remarks towards the end. So we have that pressure as well that we have assumed, but I'm not certain, I think the exit rate at the end of the fourth quarter, will be getting close to that range. But I guess I would say that that still have a lot of things that that will be dependent upon. But, let's say 26 in Q4 is a reasonable number.

And then I know you mentioned the 5 million approximate impact from tariffs, that is for fiscal 2019 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 three quarters you would see like 1, 3, 1, I think by the fourth quarter, we largely changed 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 there has been so much noise about tariffs, we are only commenting on what we have seen in terms of the HF codes that have been published, so I know there has been a lot of continued - I don’t want to use bluster that sounds negative, but there is continued discussion of even higher tariffs. So what we have dimensioned so far are the ones and I guess you would calibrate that with maybe the $200 billion sanction list, but that is a moving target. But I think the most important comment that Mike made is that we have suppliers, we have factories inside the China and outside of China and so it's really just for us the aggravation of moving things around and really may be 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 have got to work through inventories and so forth, so it's frustrating. We just like the goalpost to get set and one [indiscernible] that we pretty confident we can adjust accordingly.

Alright. Understood. Thanks for taking my questions.

Thank you. [Operator Instructions] And our next question comes from John Franzreb from Sidoti. Your line is now open.

Yes. I just want to talk about some of the Asia opportunities and what is going on there. Talk a little bit about refilling of the business in China Tower that you lost for the numbers are down. In the quarter, how much of this is - and also I know you are doing transition in India to a motive power product from a reserve power product. May be little bit about what the plan is and addressing the Indian market in total, I know there is a lot there, but I just wanted up there.

Okay. No its great. 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. So we just didn't have the right products, didn’t have a right footprint. and we got a retool and so we drop back and where were you thinking our best line of attack for the India telecommunications market. It’s a great opportunity, but we have taken some restructuring hits and we have really found an opportunity to get that factory. I think I’m looking at Mike I think probably India drive the P&L as much as $7 million last year was a big, big number, and we think that these actions we have taken are certainly going to stem some of that bleeding. Mike is that was about the right dimension for India?

Its, well you are certainly in the range, that maybe to high-end of the range, but I would certainly...

Okay, I’m not too far off it. So that is really been the focus. And in Asia markets so Southeast Asia, Australia places like that which were great motive power markets for us, we have 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 with very accretive than attractive. So that is where our foot, we have got those first export shipments done, the factory looks great and so we feel like that piece is leveling out, but really, we have got to comeback. We still believe in India telecommunications market. So then if we rotate up into China where we are still extremely positive about the China motive power market that the emergence of the middle class that is going as we outlined at the investor day. It’s very much inline the electrification initiatives. I just got back I was over in China a couple of weeks ago and every place I was in China, I had blue skies except for when I cross the beyond sea river into Shanghai. That was sort of the same old same old, but everywhere else I was and I was in four cities the skies were blue so the [indiscernible] 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 and you know this because you have been on us for a while, we rely 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 the telecom remain very buoyant and then the rest of Asia I would say there has been no significant departure from normal growth rates to product mix.

Just a quick thought, any feedback on the lithium reused batteries in the buses that they are using over there is, is there anything initial...

I will give you a little market intelligence we get, it's not gone well. Everything is so open over there, there is actually web portals where you can see what all the product types are being bought. So it's all very transparent and so we know exactly what they are doing and it's gone very poorly, the whole initiative. So we will see what happens, but we are of the mindset, hope is in a strategy and we are not going to just sit back and wait, if it comes back great. If it doesn't that is okay too, we are going to find something else. So I would - I 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.

Great. Thanks a lot. I appreciate the color.

Okay.

Thank you. And I’m 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 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.