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…

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…

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…

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…

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.