EnerSys (ENS) Q3 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q3 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, 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 the call over to David Shaffer, President and CEO. Sir, please begin.

Thanks Mark. Good morning and thank you for joining us. On the call with me this morning is Mike Schmidtlein, our CFO. 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 Investor 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 December 30, 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 February 6, 2019, 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. Excluding the effects of the Alpha acquisition that closed on December 7, EnerSys reported third quarter fiscal 2019 adjusted earnings of $1.21 per diluted share, which fell slightly below our prior guidance range of $1.23 to $1.27. The shortfall was primarily due to, one lower calendar year-end volume from U.S. telecom customers who are going through recent, but well-publicized restructuring activities during the transition from – between prior 4G deployment and upcoming 5G deployment causing a temporary slowdown in orders; and second higher-than-anticipated freight costs. Please turn to slide 4. On the positive front, our Motive Power business continues to do well and we are beginning to see a pickup in U.S. telecom activity with carriers forecasting substantial purchasing increases for calendar year 2019. We again saw mixed results in reserve power. In the Americas, reserve power was solid, consistent with the trends we've seen in prior quarters despite the dip at the end of the calendar year. From an end market standpoint, we are seeing positive results from telecom, broadband, transportation and aerospace and defense all of which – which have continued to order significant quantities of our Thin Plate Pure Lead or TPPL products. EMEA reserve power sales were down year-over-year, due to the continued reduced telecommunication spending in Europe, a tough comparable in Q3 F 2018 and in part because we have been reallocating EMEA TPPL manufacturing capacity to supply strong demand in the U.S. In Asia, reserve power sales remained down year-over-year, primarily due to the previously announced market reduction in China, due to China Tower shift from lead acid to refurbished lithium batteries. I want to focus a little more about each of our business lines and geographic regions. In the third quarter, the Americas Motive Power business continued to be strong driven by continued demand for our NexSys PURE TPPL maintenance-free battery technology and an increase in market share. Maintenance-free batteries are increasingly the preferred choice of a more and more of our Motive Power customers. We continue to see strong Motive Power sales growth in EMEA, fueled by a recurring theme in the industrial battery market technology. It is clear that customers are receptive to solutions other than just lithium products currently being offered and are including NexSys PURE in their purchasing decision for a maintenance-free solution that also affords them most of the attributes of lithium batteries. We are uniquely positioned to be the only supplier in the market to offer multiple maintenance-free solutions. In addition to the success we are witnessing with NexSys PURE, we will launch the whole range of NexSys iON Motive Power lithium maintenance-free batteries in the U.S. in April at the ProMat trade show. The growing demand for lithium forklift batteries prompted our accelerated development and spending on all the variants for Class I, II and III electric forklift trucks. Customers response to our upcoming products has been fantastic, demonstrated their significant interest in EnerSys' lithium-ion battery technology. They want to buy from EnerSys because we are trusted supplier whose commitment, quality and global aftermarket service reach are unmatched. Moving on to EMEA's Reserve Power Business, year-over-year organic sales declined in the third quarter as European clients have not yet commenced their eventual 5G infrastructure build-out. We expect to focus on the long-haul truck transportation market and increase our market share in the data center UPS market until 5G picks up. Consistent with the past couple of quarters, Asia's Reserve Power organic sales in the third quarter declined as China Tower followed the government mandate usage of used lithium batteries, leading to an underutilized capacity at our Chongqing plant in China. Several quarters ago, we outlined a plan to rectify this discrepancy by exporting more products from our Chongqing plant to the U.S. However that strategy has been hampered by U.S. tariffs on Chinese-produced batteries. With no insight for tariffs, we are adjusting our strategy to sell more of our products manufactured in our Chongqing plant to some of our non-U.S. telecommunications customers that don't require our TPPL product. Following the retirement of Myles Jones, President of Asia, we have consolidated all management responsibility for EMEA and Asian operations under Holger Aschke. Holger has had an extensive background in Reserve Power and is the best person in the company to streamline our expected change to line of business segment reporting next year. In the U.S., Aerospace and Defense Business, we continue to see solid growth trends, supported by continued product innovation and strong industry demand. As mentioned on our previous calls, there are additional large long-term contract opportunities in the U.S., Aerospace and Defense Business that we are hopeful of securing in the near future. We believe one of these opportunities for over $10 million per year in sales, we should be able to secure the next few months due to the qualification time required to meet initial shipments of the product in early calendar year 2020. Moving on to EnerSys' third quarter gross margin and cost containment. Since the end of fiscal 2017, we experienced consistent commodity cost increases, which in turn suppressed our gross margin. We aggressively implemented selling price recovery actions to offset the raw material cost pressure. And are pleased that during the quarter, we experienced a key inflection point where net commodity cost pressures transitioned to a tailwind. This will lead to gross margin expansion and incremental earnings growth going forward all else held equal. In addition, we continue to cut costs in our EMEA region to ensure they meet their minimum profitability goal of 10% operating earnings. These win tail realigning our manufacturing footprint and overhead in non-TPPL factories to create greater efficiency and increased profitability. We are contemplating further meaningful actions with the intent to remove our lowest-earning elements of EMEA business and free up management to concentrate on the Alpha integration and on the core business. Please turn to slide five. We continue to provide investors with metrics pertaining to key initiatives and cost assumptions that we introduced at our Investor Day in February 2017. Our premium product as a percentage of sales continues to rise and was 43% of sales in our third fiscal quarter. Also for the first time since fiscal 2017, our price increases surpassed commodity cost growth. We anticipate this trend to continue in the first half of fiscal 2020 and assist in gross margin expansion. Please turn to slide six. I will now provide an update on the progress we have made on our strategic initiatives. As you know on October 29, we announced our agreement to acquire Alpha Technologies Group, creating the only fully integrated DC power and energy storage solution provider for broadband, telecom and energy storage systems. We closed this transaction on December 7th, and have been aggressively integrating our two companies. As you might expect due to the timing of our acquisition, Alpha essentially had little effect on our adjusted Q3 numbers due to the transitioning process. Based on everything we've seen so far, I am more confident than ever that bringing Alpha into the EnerSys family was the right strategic move, promising very exciting revenue and earnings growth opportunities in the future. Our sales team is excited to offer a uniquely differentiated value proposition that customers have already shown a receptivity toward and we are seeing opportunities to expand in several industries that Alpha supports, including data providers in both the telecom and broadband industries that are investing heavily to accommodate data and overcome latency requirements in the future. Power and power solutions and services are essential for all future infrastructure investments and as broadband companies change their business models to accommodate changing user preference, it requires capital expenditures and reserve power systems to support new infrastructure. While 5G and energy storage systems continue to be longer term, albeit massive opportunities, strong current investments in DOCSIS 3.1 broadband upgrades remain a positive impact on demand for our combined product offerings. When we announced the Alpha acquisition, we initially forecasted that net gross profit dollars from customers we might lose versus the business we would in-source from Alpha's prior external purchases would have a zero net effect. However, I'm pleased to say that we have not lost any order so far from existing EnerSys' customers as a result of the Alpha acquisition and as expected we received a warm reception from Alpha's existing customers. Customers looking to put in a DC power system want to source both the system and the power storage product installation from one provider with one purchase order, which is especially true with lithium-based systems. The combined EnerSys-Alpha offering allows customers to do that. Unfortunately, given the lack of excess TPPL capacity, we have not been able to add new orders. Going forward, we expect to hold on to most of our old business while also in-sourcing more as we gain incremental manufacturing capacity. The last point I'd like to make on Alpha is that we have targeted $25 million in annual synergies. We're pleased to report that we have already started implementing changes and are on track to achieve our synergy capture plan. Just as important as the cost savings based on early discussions with the Alpha team, I remain very optimistic that the strength of EnerSys' global sales network will favorably impact Alpha's international sales expansion. I have a few other items before wrapping up. In addition to consolidating Asian operation with EMEA under Holger we have promoted Shawn O'Connell to President Motive Power Americas. Andrew Zogby who is the former President of Alpha Technologies has been appointed President Energy Systems Americas. We are excited with the team we have in place to execute on our strategy. At the beginning of January, our Richmond facility went live on their SAP implementation. There is enough backlog in U.S. motive power to make up with the slow start in the year in U.S. telecom. However, since our largest motive power plant in the U.S. is in the midst of an SAP implementation, we don't foresee the ability for Richmond to ship extra motive power volume to make up for any of these telecom push-outs in the fourth quarter. Also, starting in fiscal 2020, EnerSys plans to change its reportable business segments from being based on geographic regions to align up business, which are motive power and energy systems. Energy systems include solutions related to telecommunications, uninterruptible power and other specialty applications. Lastly, I want to let you know that we've planned to host a midyear Investor Day to walk through where we are in our strategic plans to provide more granularity on Alpha and the opportunities it will present and to update our long-term financial objectives and targets. Stay tuned for more details on that important event. In summary, while I'm disappointed that our third quarter 2019 results were modestly below our prior EPS guidance and we expect some temporary challenges in the fourth quarter, I remain extremely excited about the future of EnerSys as the market demands more power and energy storage solutions. Most of our markets remain strong and we will expect our legacy EnerSys business operating earnings to improve sequentially by at least 50 basis points in the fourth fiscal quarter. We believe we are taking the necessary steps to better leverage our Chinese manufacturing footprint and increase TPPL capacity throughput to better serve our customers. Commodity costs will transition from a negative to a positive on a year-over-year basis in our fourth quarter and we look forward to continue success with next-generation maintenance-free products such as NexSys PURE and our soon-to-be launched NexSys iON lithium product. Lastly, we are pleased with the additional traction gained from the addition of Alpha, providing EnerSys with the perfect platform to offer a full turnkey power solution to many of our current and prospective customers in markets poised for significant multi-year growth. With the unique and comprehensive product and service offering supported by several major secular and regulatory-driven trends we are well positioned to compete and drive long-term shareholder value. Now I'll ask Mike to provide further information on the results and Q4 guidance.

Thanks David. For those of you following along on our webcast, I'm starting on Slide 7. Our third quarter net sales increased 3% over the prior year to $680 million due to a 4% increase from acquisitions and a 2% increase from pricing, minus a 3% decrease from currency. On a regional basis, our third quarter net sales in the Americas were up 14% to $402 million, while Europe's net sales were down 3% to $218 million and Asia decreased 25% in the third quarter to $60 million compared to the prior year. The Americas enjoyed 8% from acquisitions a 5% increase in volume 3% from pricing and a 2% decrease from currency. Europe had a 2% volume increase less 5% in negative currency. In Asia, volume decreased 23% and currency declined 4%, while pricing increased 2%. On a product line basis, net sales for motive power were up 6% year-over-year $351 million, while reserve power was up 1% to $329 million. Motive power had a 7% volume increase a 2% increase in price, less a 3% currency loss. Reserve power generated 8% from acquisitions and a 2% increase in price netted by a 6% decrease in volume and 3% in foreign currency loss. Please now refer to Slide 8. On a sequential basis third quarter net sales were up 3% compared to the second quarter of fiscal 2019 driven by 4% from acquisitions and a 1% currency decline. The Americas region was up 3%, while Europe was up 7% and Asia was down 11%. On a product baseline basis, motive power was up 1% while reserve power was up 5%. 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 earnings and expenses 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 February 6, 2019 for details concerning these highlighted items. Please now turn to Slide 9. On a year-over-year basis adjusted consolidated operating earnings in the third quarter for the legacy EnerSys business decreased approximately $2 million to $69 million, while the operating margin was down 30 basis points due to the dilutive impact of rising commodity costs on margins and earnings. By legacy EnerSys business, I'm referring to the pre-acquisition EnerSys entity assuming that the transaction hadn't occurred. As such the nominal increase in organic volume from the prior year along with $12 million in pricing was not enough to offset $10 million in higher commodity costs and increases in freight costs. However on a sequential basis, our third quarter operating earnings were up $2 million primarily from lower commodity costs. Operating expenses when excluding highlighted items were at 14.5% of sales for the third quarter compared to 14.6% in the prior year. We expect fiscal 2019 operating expenses to be in the 14.5% range. Excluded from operating expenses reported on a GAAP basis are net charges of $21 million, primarily related to $8 million as restructuring and $13 million in professional fees related primarily to the Alpha transaction. Excluding those charges, our Americas business segment achieved an operating earnings percentage of 13.5% which was 110 basis points higher than the 12.4% in the third quarter of last year. Higher volume and pricing more than offset the impact of higher lead costs. On a sequential basis, the Americas' third quarter increased 50 basis points from the 13.0% margin posted in the second quarter due primarily to higher pricing and lower commodity costs. Americas OE dollars were up approximately $7 million from the prior year and up slightly from the prior quarter. Europe's operating earnings percentage was 7.9% was down from last year's 10.7%, but higher than last quarter's 6.8%. OE dollars decreased $7 million from the prior year, but increased $3 million from the prior quarter in EMEA, primarily from lower lead costs. The operating earnings percentage in our Asia business declined 310 basis points in the third quarter this year to 1.0% operating profit from 4.1% income in the third quarter of last year. And was down from last quarter's 3.4%. Asia's OE dollars were down approximately $3 million and $2 million from the prior year and prior quarter respectively both on lower volume. The $1.1 million reduction in operating earnings with Alpha includes the impact of $1.1 million in amortization, which we have estimated on the intangibles on the opening balance sheet for Alpha. Please now move to slide 10. As previously reflected on slide 9, our third quarter adjusted consolidated operating earnings was $69 million on the legacy EnerSys business was a decrease of 3% in comparison to the prior year. Our adjusted consolidated net earnings of $51.8 million was $1.5 million lower than the prior year. The results reflect the better volume pricing, cost savings and tax rates, but were offset primarily by $10 million in higher commodity and higher freight costs and $1 million in FX headwinds. Our adjusted effective income tax rate of 17% in the third quarter was slightly lower than the prior year's tax rates of 18% and lower than the prior quarter's rate of 19%. Discrete tax items cause most of these variations. We continue to expect our fiscal 2019's full year rate to be between 18% to 20%. The reduction of net earnings when including Alpha reflects the after-tax impact, not only of additional amortization of $1.1 million, which I mentioned earlier, but also $1.1 million of interest on the borrowings for that transaction. These charges create the force and decline in our as adjusted EPS when -- including Alpha compared to the $1.21 legacy EnerSys earnings. EPS decreased 3% to $1.21 on lower net earnings and higher shares outstanding. We expect our fourth fiscal quarter of 2019 to have approximately 44.1 million weighted average shares outstanding, which includes the nearly 1.2 million shares issued in the Alpha transaction. As a reminder, we have not exercised the $100 million of share buybacks authorized by our Board of Directors in November 2017. Please now turn to slides 11 and 12. As usual we have provided information on a year-to-date basis similar to that of our third quarter on the prior pages. These two pages are for your reference and I don't intend to cover the year-to-date results. Please now turn to slide 13. Our balance sheet following the Alpha transaction remained strong and provides EnerSys continued flexibility going forward. We still have nearly $400 million of cash on hand and our credit agreement leverage ratio of 1.9 times after the transaction is still well-positioned. We've generated $166 million in cash from operations in the first three quarters of fiscal 2019. Capital expenditures were $53 million for the year-to-date. We expect full year spending on CapEx of approximately $80 million in fiscal 2019. We expect to generate adjusted dilutive net earnings per share of between $1.38 and $1.42 in our fourth quarter fiscal 2019 in our legacy EnerSys business which excludes an expected net charge of $0.30 primarily from charges related to the Alpha transaction and our continuing restructuring program. The Alpha business should produce an extra $0.06 of earnings, but the dilution from the 1.2 million shares issued from Alpha will cut that accretion in half to add $0.03 overall for $1.43 combined midpoint. We anticipate our gross profit rate in the fourth fiscal quarter 2019 to be between 25% and 26%. The Q3 step-up sequentially in our gross profit of 50 basis points was below the 100 basis point improvement of our guidance. While our pricing achieved expected results, the impact of 1% lower volume and higher freight and other manufacturing costs resulted in that miss. We now expect these higher costs to continue into the fourth quarter along with continued softness in our telecom market, resulting in gross profit improvements in Q4 of no more than 50 basis points on our legacy business. As we move forward with the integration of Alpha and our anticipated change in segment reporting to a line of business focus, we will attempt to distill the legacy EnerSys business and Alpha for a one final quarter. Commencing with the start of our fiscal 2020, we will not attempt to make such bifurcation due to the level of integration we anticipate. Now, let me turn the call back to Dave.

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

Great. [Operator Instructions] Our first question comes from the line of Michael Gallo of C.L. King. Your line is now open.

Hi, good morning.

Good morning Mike.

Hi Michael.

Dave just a question on the slower U.S. telco spend that you saw in the quarter and seems to be some carryover. Just wondering if you can get to any -- more specificity on what exactly is going on there. Do you think there was any impact from some of the Huawei noise in terms of pulling -- guys pulling out or changing equipment? And how much of this is just a sort of temporarily getting ready for 5G as opposed to perhaps some product lines et cetera that may not be needed as much as they go to 5G? Thanks.

Right. I think that the feedback I'm getting is consistent with what we're reading in the media. So the guys are telling me what they're hearing from our customers and their peers at our various customers, is consistent with what we're reading. I think that, some of the big telecom carriers have gotten a little bit sideways in some of their media strategies. And so they're trying to remedy some of that with some aggressive cost actions. And then I think the other thing, and we're hearing this consistently, is the CFOs of these carriers want to -- they know 5G is coming, they know 5G investment's coming, but they want to kind of manage their cash flows, so they're trying to free up positive cash flow through their legacy operations so that they can have the necessary cash to start spending on CapEx investment with 5G. So as they're going through this, it's physically -- I was just telling Tom before the call, I used to be the telecom sales guy for EnerSys years and years ago and most of the people that I work with and I'm not that old, so they're all gone. They're all taken these bailout packages and early out. So physically, we always get -- every year since I was doing it, we always get a big year-end pop. For these guys, its use it or lose it type of thinking. They either spend their money on their budget, so they don't get budgeted the next year. And this year we just didn't get the orders, it was strange. And it's physically the people that we're accustomed to dealing with aren't there. Now, that said, things are going to settle out, activity level is very good. All my guys are saying, its coming, its coming, its coming. But it was very disruptive to our normal order patterns. It's going to have some carryover effect into Q4 and you see that in the numbers. And ideally, because we got great backlog on motive power, we could have kind of made up for that, simply by digging into the backlog on motive. But right now, we're in the midst of a fairly big SAP cutover at our biggest motive power factory and we just didn't want to get too aggressive given all the challenges that team has already. We didn't want to put any more rocks in their knapsack for the Q4. So it's a little frustrating. It feels very temporary. The teams are very positive and we think it's largely, as most of the CEOs of these broadband carriers have identified, higher-speed networks, additional broadband capabilities and lower latency as their growth engines for the future. And that's how they intend to make more money, is to provide services, things we haven't even dreamed of yet that are going to be enabled by getting broadband speeds up and latency down. And we feel good and this is what's really critical about the Alpha acquisition, whether it's a microwave network, a fiber-optic network, a coaxial network, a 5G or 4G wireless network, all of those require DC power products and with the addition of Alpha we feel well positioned wherever the spending is going to happen to be positioned for. And just as a reminder, with the Alpha acquisition we're well over a-third now of our revenue, is telecom- broadband-based. So we have introduced some volatility into our stock, because that business is lumpy. It's very hard to predict. Motive is more kind of directly tied to GDP. Telecom, my whole career, it's always been tough to get a wrench on, because you just don't know when AT&T or Verizon or T-Mo is going to decide to crank out their 5G. And then, when they do start, it comes and spurts. They'll do a city. They'll digest inventory. So we have to be ready for that volatility, but we're very, very bullish especially with Alpha now that we've got -- we're well positioned to capture those investments.

Good. Helpful color Dave. And then just as a follow-up to that. I mean, the motive business, it looked like had a really strong quarter. What are you seeing on the motive side of things which is probably an area with kind of slowing economies around the world, but I would say people were probably been less concerned about than telco?

Yes. It's a good question. We're -- I say this every quarter and I just can't say anything different this quarter motive outside of China is -- it's probably green on every dashboard. We're getting great feedback from the customers. I think people think it might slow down a little bit. We're talking to some of our dealer principals and OEM partners in the U.S. But everyone's expecting more of the same in the U.S. market. Europe's been going great for us. We don't anticipate any changes there. And I think what sort of saved our bacon this year in Asia specifically China is the electrification initiatives we always talk about. I think had it not been for that we might have seen a much worse performance, because we just don't -- we aren't seeing strength in the Chinese economy. But the market share numbers are up. We're getting good feedback on that. The people love the new products. I tell you we can't get those out fast enough, maintenance-free is definitely the future in motive and we think we got a good jump start on the competition. And I said in the prepared remarks, what we feel really good about is that we're going to offer the same customer experience, the same maintenance-free experience, the same use of high rate wireless charging web Internet of Things. We can offer that same experience with lead or with lithium. And frankly, if the guys do their jobs right on the pricing I don't care where the gross margin comes from. So that's the objective. You'll see it at ProMat. You'll see the -- what the guys have done in terms of the interface with the batteries, the cloud the use of data in a cloud environment to start to better serve and create a better experience. We're embracing all the technology in this next-generation products and we think that's going to help us take even more share in the motive power space.

Thank you.

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

Thanks. Good morning for -- good morning and thanks for taking the questions. Putting the [Indiscernible]. Maybe could we first parse out the gross margin hit from the higher freight costs versus the lower volume absorption in the quarter? And I guess, as we've seen freight rates coming down in some areas particularly domestically, how much of the hit in the quarter was due to kind of a suboptimal supply chain? And how long do you think it is before you can mitigate the higher freight costs?

All right, Noah, it's Mike. So that -- the force at miss that we identified for the legacy EnerSys' business so that would be our $1.25 of guidance, which as a reminder we had to make the assumption because we didn't know the timing of antitrust approvals that we wouldn't have any Alpha to speak of in our third quarter. And then we ended up with some. So we had to do a bifurcation, which for those of you who may not have seen it. The final page of our webcast has that bifurcation of Alpha from the core business. So for your question, no, I'm just talking on the legacy EnerSys side at the moment. So we missed our top line by 1%. So let's call that $7 million the biggest highlighted runner on that of the $7 million about half of it was the telecom miss that we had. So that was about a $0.04 hit in and of itself. In addition there were a couple of pennies it was about $1.2 million, $1.25 million of additional freight costs above what our expectations were for the quarter. And to put this into context, historically we've had our freight costs run about 3.5% of sales and it's got a fairly steady trend over time. We had already forecasted because we saw the rising costs about a 3.8% rate for the quarter and it came in well over 4.2%. So that was a big hit. So those were the two headliners in terms of what hit gross profit dollars and therefore the miss, the 100 point gain I was expecting in the quarter versus the 50 points in actuality.

Okay. That's very helpful as was the bifurcation on -- in the presentation. With Alpha, Dave, I think you -- very constructive comments on the integration so far. Can you maybe elaborate little bit on what you're doing in terms of progress to align the sales forces there? And possibly the manufacturing, because clearly there's a fair amount of overlap in synergies to be had there?

Correct. So from the first day, we aligned all of the operations of Alpha under Patrice who is our Senior Global VP of Operations and Supply Chain. So, from the very first day all of that Alpha operations team was brought under Patrice. And Patrice is aggressively working with Gordon and the rest of the team to do exactly what you said, which is to optimize the entire footprint. And I know the way Patrice thinks and he doesn't -- to him there's no difference between an Alpha side or a Purcell side or an ICS side or an EnerSys side. They're all EnerSys sites in his mind. So they're aggressively working through what the optimized footprint is and they have to take into account the new products. And they've been added since the first day. And they're doing great and I'm pleased with that. So that's one of the things we did structurally, which was a bit risky right because I think a lot of people during an acquisition like that would have gone much more slowly with integrating the different elements of the businesses, but we saw getting these synergies sooner rather than later. We did something similar and this is important to me with the engineering team. So one of our board members who I respect tremendously, identified what he thought would be the key success of this transaction was the ability of these engineering groups to collaborate, and I'm pleased to say that under our Chief Technical Officer, we're moving very, very quickly. And when we do have the Analyst Day, we're going to have some of the newly jointly collaboratively developed products for the reserve power markets or traditional markets. And it's really fascinating what they've been able to do. So that's going well and then with the sales teams we're headed down. Mike and I are headed down to a meeting in Tampa in a couple of weeks or maybe next week and we're really sitting down with the whole telecom team and hashing through. We've already made some headcount adjustments. That was done last week. It was meaningful. Those things are always difficult, but it was certainly inevitable, and so we're moving quickly on all fronts, engineering, operations, sales and then we just had the whole international sales team for leadership guys for Alpha here at corporate and I just spoke to that group recently. And I think it was you or someone else one of the other investor analysts community identified that growing Alpha internationally is a real opportunity and this team couldn't agree more than the folks I met with. So just find out two days ago. We just got a big $0.5 million order and new Alpha business. They've never had before taking advantage of an existing EnerSys frame agreement with one of the large carriers in the certain markets. So those are the sort of revenue synergies that are out there, but we're working the cost and the revenue synergies simultaneously. And the other thing I want to say is culturally, it always worries the CEO, how well the teams are going to blend, how receptive the new team members are going to be to the strategy to the leadership style to the business systems? I can say with complete confidence that today it's been very, very good and it's getting increasingly hard for me to tell the difference between legacy EnerSys and legacy Alpha. It's going -- integration is going extremely well. Q – Noah Kaye: That's great color Dave. And so if I can just ask one follow-up question because I got to ask as the analyst, right. You guided to within two years $18 million to $19 million or so cost alone synergies. Where do you think you'll be at from kind of a run rate perspective as you enter fiscal '20? A – David Shaffer: I can say that what we told you -- the plan that we laid out before I think was a $25 million after two years in aggregate and as you said, some of that was cost and a little bit of that was revenue. I would say Mike's going to kick me under the table here. But I'll say we're ahead of schedule right now, but the only thing he authorized for me to say is that we're well on pace. So things are going according to plan and it's more of this revenue synergy stuff he had. So let's just say for now because it's really early innings. Let's just say for now that there's no indication that we're off of the plan that we rolled out for you at the time of the transaction. Q – Noah Kaye: Okay. Thanks very much. Appreciate it.

And our next question comes from the line of John Franzreb of Sidoti. Your line is now open. Q – John Franzreb: Good morning, guys.

Hey, John.

Shifting geographically to Europe. Could you just give us a little color about the product and facility rationalizations you have going on there time line and maybe the end markets they address? And secondly, 4G to 5G rollout hasn't begun yet. What are you hearing from the customer base there in regards to the timing of that upgrade?

All right, John it's Mike. I'll cover the restructuring piece and then let Dave add some color, if he desires and then he can pick up on the 4G, 5G rollout. So, the restructuring that we announced in this quarter pertained to a couple of facilities. One was in Zwickau, Germany. It made a Ni-Cd product that probably is being produced on that site for nearly 75 to 100 years. It was going to require us a major investment to meet tightening standards for the amount of cadmium in the air and other – to exit the business, we sold it to a sub a vendor of ours. And so that, even though it was kind of a breakeven or low profitability rate, so exiting it wasn't so much of a pickup for future results, but it does allow us to avoid spending another $10 million for business that really is on a downward trend. So that was the story of the Ni-Cd business at Zwickau. However, we still will produce – or the product that's produced at that site by the new owner, we still have a distribution agreement. So we will still be able to get some of the details and the margins from those sales in the future on that Ni-Cd business. The second one was a joint venture that we formed in Asia, with local manufacturer there. Again, this was a marginally profitable business for us. But between those two and when we look at the bandwidth of our EMEA operation, and we look at the fact that we're asking them to take on Asia, oversight as well we realized that we had to trim down the list of locations where these folks are spending their time and effort. So – and we'll continue to look at that. There's the potential for other sites in EMEA that we may look at that kind of a cost rationalization and perhaps try to exit it from our portfolio. So anything else on the EMEA piece on the restructuring.

I'll pick it up. And John, if you could mute your line, I think there's a little bit of feedback there and then you can come back in. But the – we're not done. And I alluded to that in my prepared remarks is that we've got to get rotate out of these low growth lower-margin businesses for no other – no better reason than to just free up the bandwidth of the team to focus on these next-generation opportunities. It's a big opportunity and I think you started to alluded to this is our ability to put integrated DC power systems together using the Alpha energy conversion, Alpha systems along with the EnerSys batteries package that in a system. We've had some success, especially in the developing markets places like Africa. They just rely on the vendor to deliver a full turnkey solution. So that is the absolute focus. We think we've got times especially in Europe, because we think the Europeans are well behind the Americans in terms of 5G. I would say at least two years behind is what we're hearing. So the initial focus for us right now is to continue to reshape the business over there, cut costs and obviously to retool the product portfolio and take advantage again like I mentioned earlier, take advantage of frame agreements that we already have in place to push these fully integrated systems through our well-established channels and brands.

Okay. I will get back into queue.

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

Hey, good morning. Thanks. Just first, clarifying on the gross margin, Mike you said 50 basis gross margin improvement is that sequential or year-over-year in the fiscal fourth quarter?

So the -- I was talking about a sequential movement in that one. We -- if you could bear with me for a moment, I'll try to give you that reference on a year-over-year basis?

That's okay. I just wanted to clarify if it's 50 sequential. That's all I needed. That's great on that one. And -- so I'll just move on to the next one quickly. Can you tell us what Alpha growth was on an LTM basis? What revenue growth was for them?

So for the...

For the December -- year ended December what was revenue growth?

So the revenue growth for the year ended December was about 5%. Keep in mind that that month of December started out with the first week taking a physical inventory in connection with the close. They had all kinds of different meetings to talk about the changes that we're going to be making or the ownership issues. And then you ran into the back end of the December holiday. So it was a fairly disruptive December for them, but it was about 5%, I would estimate on the growth for this year versus last.

For the full year it was 5% growth.

I'm sorry you want...

He was giving you month-on-month. Hold on.

Yes. I mean we did 20% LTM in June, 24% LTM in September. I'm just wondering what -- last 12 months was for the full year now?

Well I'm going to give you then -- what I do have available for me is the full fiscal year when it's reset to our fiscal time versus our -- the full fiscal year fast-forward to the end of March. So I've got one month of forecast and seven -- one quarter of forecast and seven quarters of actual data. And I would estimate that year-over-year they will see a 16% growth in their top line. And just so that it's fairly clear the period this upcoming quarter January through March is a relatively flat year-over-year quarter, so…

Yes. We're going to have to adjust to their cycle. They've got a little bit different cycle than we're accustomed to. So we'll get a feel for that. But the end of the calendar year is not their strongest period and they usually come out. And I would say it's the mid-part of the calendar year where they tend to see the most activity.

Okay. Great. And then Mike, would you mind just going through the typical WITS data for us by the regions quickly?

Sure. So the WITS data is not as strong as what we may have seen historically. But so the -- and I'm going to give the trailing three-month period versus the prior year trailing three months. The Americas was down by 6%. The Western Europe was up 5%. Eastern Europe up 12%, so Europe when you throw in the Middle East and Africa was up 7% overall, Asia was up 11% for a worldwide total increase of 5%.

And that's three months ended December, is that right?

That's correct.

Okay. And then just one last question. It sounds like the Alpha synergies are mainly coming in year two. I mean, Dave you talked about this. Is this largely just because the synergies are going to come from footprint consolidation largely and that's going to take time to assess what kind of program you're going to implement?

It's half year one, half year two. So the full run rate we'll achieve at the end of the second year. But we're going to have some impact. That's part of it. It's -- like I said, we've already done some headcount adjustments, which is going to have an impact year one, and then just optimizing the manufacturing footprint. Some of those things take a little bit longer. But yes, it was half-half. So it's what we had laid out from a phasing standpoint and we're going to say that we're still on track to achieve that.

Okay. Great. And can you give any comment as to where you think the total accretion from this business including synergies would be when you get to year two and if you said that before can you just remind us what kind of earnings power Alpha can add two years out on a run rate?

Well, let me just give you where I think they could be in year one and that was with a half year number. The growth rates on year two, we could argue about and I think those move the numbers fairly broad ranges. But our estimate was that that business have the capability to achieve 70% to 80-plus percent of EPS when you just look at their earnings divided by our shares outstanding. And when you combined them with our results and recognizing that the additional 1.2 million shares dilutes not only their earnings, but our legacy business you give back about $0.20 of that number. So, our expectation was about a 50% to 60% accretion in year one on the results for the combined company.

Percent or cent?

This was -- this is EPS $0.50 to $0.60.

All right.

Okay, thanks very much. I’ll follow-up more later. Thanks.

Okay.

And I'm showing no further questions at this time. I would now like to turn the call back to David Shaffer for closing remarks.

Thanks, Mark. And I want to thank everyone for taking your time today to attend our call. Have a good day.

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