EnerSys (ENS) Q4 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to Fourth 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 and instructions will follow at the time. [Operator Instructions] As a reminder, this conference is being recorded. I would like to introduce your host for today’s conference, Mr. David Shaffer, President and CEO. Sir, please go ahead.

Thanks, Michel. Good morning and thank you for joining us. On the call with me this morning is Mike Schmidtlein, our CFO. Last evening, we posted on our website slides we will be referencing during the call this morning. If you didn’t get a chance to see this information, you 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 7, management’s discussion and analysis of financial condition and results of operations set forth in our annual report on Form 10-K for the fiscal quarter ended March 31, 2019 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-8K which includes our press release dated May 29, 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. EnerSys reported fourth quarter fiscal 2019 adjusted earnings of a $1.43 per diluted share which was in the middle of our prior guidance range of a $1.41 to a $1.45. This compares to the prior fourth quarter adjusted net earnings of a $1.24 per share representing a 15% year-over-year increase. Adjusted earnings were positively impacted by improved price and product mix, discrete tax benefits and the add back of Alpha’s amortization partially offset by higher operating expenses and lower sales volume related to the ERP implementation drag at our Richmond location, which I will discuss in more detail in a moment. Net sales for the fourth quarter were $797 million an increase of 17% over prior year quarter and sequentially it was largely due to our December 28 acquisition of Alpha. Before going into each of our business lines I want to briefly discuss the ERP system conversion at our Richmond, Kentucky plant which negatively impacted our results during the fourth quarter. On January 1, 2019 the Richmond facility went live and we subsequently experienced a production interruption as product identification and configuration issues delayed both manufacturing and shipping resulting ultimately an approximately 15 days of lost production. The identification and configuration issues were largely remediated by March and the plant exited the quarter at record monthly shipment levels. Unfortunately, the late quarter production increase in Richmond was unable to make up for the shortfall earlier in the quarter leading to a record backlog of motive power orders along with continued long lead times. With the new system in place, our team is working extremely hard to make up for that lost productivity and to meet the strong overall demand we're seeing for our products. Please turn to slide 4; motive power is doing well in all regions driven by continued strong demand for our products. However, during the fourth fiscal quarter, the Americas organic sales were lower due to the ERP implementation issues. Orders in the United States have been buoyed by customer battery placement programs for electric forklift trucks and share gains. Our EMEA and Asia regions experienced double digit organic sales increases compared to the prior year and we have record order backlog attributed mainly to strong global motive power markets and the growth of our NexSys Pure TPPL product which we believe is taking market share from our competitors. In the fourth quarter, our global reserve power organic business was up organically in the Americas and EMEA year-over-year and was able to offset the decline in Asia reserve power sales caused by a tough comparable related to China Tower. EMEA reserve power sales increased year-over-year. Thanks to demand for telecom products in the Middle East and Africa combined with higher UPS orders for data centers more than offsetting continued weak telecom demand in Europe. In the Americas, reserve power legacy business was up year-over-year mainly driven by sales in UPS and the long-haul transportation markets. Aerospace and defense sales declined in the Americas, although we view this as a timing issue. As we look forward to our first fiscal quarter of 2020 we mentioned that motive power orders are strong around the world and we believe the trend will continue. I also expect good execution in EMEA and Asia. In the Americas, the orders in backlog are there for a great quarter, but the quarterly results will be hampered by the FIFO effect related to poor Q4 execution at the Richmond facility following the ERP system conversion. Reserve power is experiencing weaker demand as several of our U.S. telecom customers deferred their normal spending patterns on legacy networks, some of which is captured under their maintenance expense and not just CapEx. This decline in spending aligns with comments made by other vendors to the U.S. telecom market. The driving factor of this spending pullback was the significant decline in telecommunication orders which many industry experts believe is occurring as the telecom network operators and OEMs paused spending on their copper base wire networks while they strategically formulate their spending plans for the massive 5G infrastructure build out predicted by most industry observers. Unfortunately, the timing of such expenditures remains uncertain. Please turn to slide 5. In April we showcased a whole range of maintenance free motive powers – motive power batteries including NexSys iON and NexSys Pure at the ProMat trade show in Chicago. Reception was nothing short of extraordinary as our booth received historic level of customer attention and well over a 1,000 solid sales leads. Our strategy to provide a comprehensive energy experience rather than simply discussing chemistry created a high degree of differentiation among our competitors and we’re doing it through a one stop shop concept which is clearly resonating with our target audience. Customers want maintenance free solutions and EnerSys is extremely well-positioned to meet that need. We have the enviable position of being the only supplier in the market to offer multiple maintenance free power storage chemistries optimized for motive power. Building on the momentum of our NexSys Ion product, our wireless charging technology was called game changing by several of our customers at [indiscernible] further highlighting our focus of innovation and responsiveness to our customer’s needs. We look forward to expanding on this initial success and we'll update you on our progress in the quarters of ahead at quarters ahead. Please turn to Slide 6. I will now provide an update on the progress we have made on our strategic initiatives. As you know on December, 7 we closed on our acquisition of the Alpha Technologies Group creating the only fully integrated AC and DC power supply and energy storage solution provider for broadband telecom and energy storage system. With several months of integration now under our belts we are certainly made the right decision to bring Alpha into the EnerSys family. The cultures of both companies are very much aligned as Alpha and EnerSys have always placed the greatest priority on making high quality products that our customers can rely on. This dedication to the customer through product innovation and exceptional service is apparent in everything we are doing as a combined company. Second cross-selling has already begun from the day our organization joined forces, our sales teams have been able to offer a uniquely differentiated value proposition in which customers have already shown considerable interest. Our conversion in fiscal year 2020 to a global line of business approach allows us to formulate and coordinate solutions worldwide. As I mentioned, the combined companies are the only supplier of complete power systems and are a one-stop shop. This concept is resonating with customers because they are experiencing problems with multiple suppliers. Our expanded product portfolio including gateways and line powering positions EnerSys for broader participation in 5G, small cell site powering infrastructure investment. Lastly, we are also on target towards achieving $25 million in annual synergies. Equally important for the cost savings, I remain very optimistic that the strength of EnerSys’ global sales network will favorably impact Alpha’s international sales expansion. While combining our offerings and teams has been relatively seamless, the success of our integration has been masked by the fact that one large telecom and one large broadband customer are currently curtailing spending negatively impacting Alpha’s year-over-year comparisons. We are very confident that all of this delayed spending will come back leading to a strong pent-up demand in the interim. Our rationale for acquiring Alpha remains unchanged. 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 preferences it requires capital expenditures and reserve power systems to support the new infrastructure. 5G and energy storage systems to – 5G and the energy storage systems continue to be large yet longer term opportunities. Ongoing DOCSIS 3.1 infrastructure spending by selected broadband players is in place. The DOCSIS 3.1 protocol allows for speeds of 1 gigabyte or higher on broadband networks. Subscriptions for this service will grow over time thereby driving demand for our power solutions. Pictures of Alpha’s gateway and line powering products can be found on slide 7 and slide 8. I will discuss later in my remarks some of the huge market opportunities for Alpha’s products. But first I want I would like to discuss our strategic priority of increasing TPPL capacity in order to reduce lead times and better meet the growing demand for these products. Through the lean principles such as managing for daily improvement or MDI we expect to expand capacity by an additional 15% or $90 million within three years. Our key metric for Lean today is our production output in our three capacity constrained TPPL factories. We continue to focus on implementing lean principles to increase manufacturing efficiency and reduce cost. In addition, between 2019 and 2021 we plan to invest more than $100 million to expand TPPL manufacturing capacity. By the end of 2021 we expect this investment to expand TPPL capacity by approximately $450 million of revenue or roughly 75%. This investment will further increase premium product mix as well an important lever for product margin expansion -- our profit margin expansion. This level of investment will allow us to aggressively market our ODYSSEY batteries in the Americas and in Europe within the transportation markets which covers freight companies and aftermarket automotive retailers. This alone could easily utilize the majority of the new manufacturing capacity over the next five years. To provide an update on our strategic initiatives we’re planning a fall Investor Day at the New York Stock Exchange. Please turn to Slide 9. As we wrap up our fiscal 2019 and look to the new fiscal year. I thought it would be helpful to provide a snapshot of what we're seeing in the broader industry which continues to dynamically evolve. From a product standpoint the industry is sending a clear signal that maintenance-free is the future of industrial batteries. Our NexSys Pure and NexSys iON energy storage products provide the modular solutions customers are claiming for – clamoring for and we are uniquely positioned to provide them in an easy one stop shop offering. From a competitive standpoint, EnerSys is far and away the company best positioned to compete in both the near and long term. Many of our competitors are struggling financially as they cannot compete with our premium product offering. Their outdated and commoditized product offerings failed to meet the needs of customers. This is a clear advantage, should led – this clear advantage should lead to improved market share for EnerSys in the U.S. and EMEA. From an industry trend standpoint, we are well positioned to capitalize on large industry drivers including 5G and broadband. We recently spoke to three experts who indicated the 5G build out in the U.S. and Canada could eventually lead to 5.5 million small cell sites. If we capture only 25% of that market that would translate to 1.4 million small cell sites we could supply leading to an additional sales in excess of a billion dollars during the five year rollout, just on small cell sites. On broadband, as previously referenced, expanding existing DOCSIS 3.1 infrastructure by broadband players will fuel additional product sales into this important market. The net takeaway is that there is little doubt that significant capital spending by our customers will occur. The combined EnerSys and Alpha offerings is uniquely positioned to be a major beneficiary of this anticipated capital spending cycle. Looking forward, we believe our future is clear, EnerSys will continue to be the dominant company in the industrial power systems business. Everything we do is designed to further our competitive advantage. Everything we do is design to further our competitive advantage as we continue to deliver tremendous change in EnerSys by upgrading our digital core, implementing lean principles, integrating a world class organization in Alpha, developing new lithium ion product offerings, innovating through cutting edge industrial wireless charging and expanding the TPPL product family. It is not easy and we have felt some short-term growing pains, but in the end it is quite clear that we're doing the right things to position the company and its shareholders for long-term success. Now, I'll ask Mike to provide further information on our results and Q1 guidance.

Thanks, Dave. For those of you following along on our webcast, I'm starting on slide 10. Our fourth quarter net sales increased 17% over the prior year to $797 million due to a 20% increase from acquisitions and 1% increases from both pricing and volume minus the 5% decrease from currency. On a regional basis our fourth quarter net sales in the Americas were up 33% to $508 million, while Europe's net sales were flat at $228 million and Asia decreased 19% in the fourth quarter to $61 million compared to the prior year. The Americas enjoyed 36% from acquisitions and 1% from pricing less the 2% volume decline and a 2% decrease from currency. Europe had a 11% volume increase less 10% a negative currency and a 1% price decline. In Asia volume decreased 14% and currency declined 5%. On a product line basis, net sales for motive power were down 3% year-over-year at $347 million while reserve power was up 39%, $449 million. Motive power had a 2% volume increase and a 1% decrease in price and a 5% currency loss. Reserve power generated 42% from acquisitions and a 2% increase in price netted by 5% in foreign currency loss. Please now refer to slide 11 on a sequential basis fourth quarter net sales were also up 17% compared to the third quarter fiscal 2019 driven by 16% from acquisitions and a 2% volume gain less a 1% price decline. The Americas region was up 26% while Europe was up 5% and Asia was slightly up. On a product line basis, motive power was down 1% while reserve power was up 36%. Now, a few comments about our adjusted consolidated earnings performance. As you know, we utilize certain non-GAAP measures in analyzing our company's operating performance, specifically excluding highlighted items. Accordingly, my following comments concerning operating earnings 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 May 29, 2019 for details concerning these highlighted items. Please now turn to slide 12. On a year-over-year basis adjusted consolidated operating earnings in the fourth quarter for the legacy EnerSys business decreased approximately $4 million to $69 million with the operating margin down 30 basis points due to the Richmond implementation impact. By legacy EnerSys business, I am referring to the pre-acquisition entity, assuming the Alpha transaction hadn't occurred. As such the nominal increase from organic volume for the prior year along with $3 million in pricing and $3 million in lower commodity costs was not enough to offset the inefficiencies incurred in our Q4 SAP implementation in Richmond, Kentucky and the increases in operating expenses. However, on a sequential basis our fourth quarter operating earnings were comparable. Legacy operating expenses when excluding highlighted items were at 15% of sales for the fourth quarter compared to 14.2% in the prior year. Fiscal 2019 operating expenses of $386 million for the full year were 14.6% of sales that percent was flat with the prior year. Excluded from legacy operating expenses recorded on a GAAP basis in Q4, our pretax charges of approximately $35 million primarily related to the $7.2 million in settlement of the EU anti-competition claim and $24.1 million in restructuring which includes our exit from three locations in EMEA. Excluding those charges our Americas business segment achieved an operating earnings percentage of 12.7%, which was 30 basis points lower than the 13.0% in the fourth quarter of last year. Higher freight and challenges in implementing SAP in Richmond created the decline. On a sequential basis the Americas fourth quarter decreased 80 basis points from the 13.5% margin posted in the third quarter due primarily to the previously mentioned SAP implementation. Americas OE dollars were down approximately $2 million from the prior year and down $4 million from the prior quarter. Europe's operating earnings percentage of 10.2% was up from last year's 9.7% as well as last quarter 7.9%. OE dollars increased $1 million from the prior year and increased $6 million from the prior quarter in EMEA primarily from lower lead cost and volume. The operating earnings percentage in our Asia business declined 460 basis points in the fourth quarter of this year to a 2.1% operating loss from a 2.5% profit in the fourth quarter of last year and was down from last quarter's profit of 1%. Asia’s OE dollars were down approximately $3 million and $2 million from the prior year and prior quarter respectively on lower volume and FX. The 14% increase in operating earnings when including Alpha reflects the impact of a full quarter's results as well as the exclusion of $5.5 million of amortization of intangibles from operating expenses in Q4. Please move to slide 13. As previously reflected on slide 12 our fourth quarter adjusted consolidated operating earnings was $69 million on the legacy EnerSys business was a decrease of 6% in comparison to the prior year. Our adjusted consolidated net earnings of $54.5 million was $2 million higher than the prior year. The improvement in adjusted net earnings is a result of lower taxes. Our adjusted effective income tax rate of 13% for the fourth quarter was lower than the prior year's rate of approximately 20% and lower than the prior quarter’s rate of 17%. Discrete tax items caused most of these variations. Fiscal 2019’s full year tax rate was 17% which is below our 18% to 20% range of expectations for fiscal 2020. Alpha contributed adjusted operating earnings of $14 million or 10.2% of revenue on a $136 million, overall after considering interest taxes and dilution of shares issued to the seller, Alpha was $0.15 accretive after excluding $3 million in other restructuring inventory write offs and acquisition costs along with $4 million in after-tax amortization on the intangible assets recorded in the purchase accounting. EPS including Alpha increased 15% to a $1.43 on higher net earnings and higher shares outstanding. We expect our first fiscal quarter of 2020 to have approximately $43.7 million of weighted average shares outstanding, which includes the nearly 1.2 million shares issued in the Alpha transaction, net of the 0.4 million shares repurchased in Q4. As a reminder we still have nearly $94 million of share buybacks remaining from our board of directors authorizations. Please now turn to slides 14 and 15. As usual, we have provided information on a year-to-date basis similar to that of our fourth quarter on 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 16. The Alpha transaction is progressing as planned with synergies being realized as expected. The logic of our acquisition has largely been acknowledged by our customers and vendors. We still have nearly $300 million of cash on hand in our credit agreement leverage ratio of 2.0 times after the transaction is still well-positioned. We generated a $197 million in cash from operations in fiscal 2019. Capital expenditures were $70 million for the year. We expect full year CapEx spending of approximately $90 million to $100 million in fiscal 2020. We expect to generate adjusted diluted net earnings per share of between a $1.30 and $1.34 in our first quarter of fiscal 2020, which excludes an expected net charge of $0.24 per share primarily from charges related to the Alpha amortization our continuing restructuring programs. We anticipate our gross profit rate in our first fiscal quarter of 2020will be approximately 26% which is comparable to Q4. The benefits of lower lead costs will likely be negated by higher manufacturing costs in Richmond. Most of the costs related to Richmond were incurred in Q4 but hit our P&L in the following quarter. As we move forward with the integration of Alpha and our upcoming change in segment reporting to a line of business focus we will no longer segregate the legacy EnerSys business from Alpha in my remarks on this call. We will of course keep you updated on our progress with Alpha and our turnkey solutions for our reserve power markets. Now let me turn it back to you Dave.

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

Thank you. [Operator Instructions] Our first question comes from the line of Noah Kaye with Oppenheimer. Your line is open. Please go ahead.

Good morning. Thanks for taking the questions. Appreciate the details you provided on the Richmond interruption. Can you talk about where you're at globally in your ERP implementation across the business and what gives you confidence that you'll get continuity of operations going forward?

Thanks Noah for the question. You know we’ve -- the Alpha acquisition has gave us an opportunity to evaluate where we go next with our strategy and we're taking a little bit of time right now we're coming off a tough implantation down at the – at the Richmond plant. So it is the right time for us to take a breath and evaluate the next phases and it’s really a question of the sequence and what are the priorities and we're in the midst of that evaluation right now and it will be you know it's going to be a long journey. It was always going to be a long journey and we're – we should have the clarity we hope to in the fall be announcing kind of the next phases and where we go with our digital core investments. I think most of it will be tied, the way it feels right now Noah is it'll be more focused on the distribution side of the business and the configurations part, especially with a lot of the modular new products and a lot of the Alpha systems. We're getting a lot of traction with the customers from the system side. So I suspect more of our emphasis is going to be there versus going into the traditional manufacturing factories and plugging away on an MRP system. So we don't have that exact color right now, but we'll certainly give you that update in the fall.

Okay. Great. Appreciate that and look forward to it. You know you highlighted the increased CapEx to build out the TPPL capacity and I guess a related question to – to this idea of continuity and flexibility is how do we think about the future flexibility of those factories to serve different end markets? We can see that you know with many different verticals and all the different SKUs you know you're manufacturing a lot can move around in any of your individual markets you know in any given time period. How do we think about what these investments will provide not just in terms of added revenue, but maybe the flexibility to serve different markets?

Well, it's a solid question and it was a driving influence with specification of our new high speed automated line actually. So, to your point we have to have an envelope on these machines that can carry the full spectrum of products. You bring up a good point, the history of this technology started way back in aircraft batteries a long time ago and – but one of the key drivers for our growth over the years in terms of operating performance has been the expansion of that core technology into new markets and the block sizes are getting bigger and bigger, and that's been one of the big challenges for the factories over the last year or so, has been this rotation into these bigger blocks especially as we get into more and more motive power. So, it's very clear that we have to specify new equipment going forward that can accommodate the full spectrum of the – of the range and that's – that's what's driving a lot of our decisions right now. And we also want to have plant redundancy most of our customers want at least two factories that are tooled for these high runner products. So, these are it's an astute question and it's very clearly one of the things that's driving the capital investment, we have to build flexibility, we're building modularity into the products and we have to build that same flexibility into our assembly equipment.

Okay. Thank you for that color. And maybe one more if I could. Again in your remarks you mentioned the customers you’re serving with the Alpha EnerSys integrated offerings are having problem with other suppliers, can you maybe speak to that a little bit more in terms of what challenges are being encountered and how you think you're differentiating.

So, Drew gave me a call last night, was after still call last night was after – who’s still late on the West Coast but he gave me a call last night before the call and he had just left a meeting with one of the large wireless customers and that's Drew Zogby, he is the President of the Energy Systems Business and he came over with the Alpha transaction and so and the feedback from Drew was we're working on a big project which we're excited about and it's a combination of a per sell enclosure Alpha, Cortex, Rectifiers and EnerSys batteries and the ability for that customer to provide a single purchase order with a single configuration part number just dramatically eases that. And then we even have the ability to do full engineering furnish and install as well related to the site so that such a -- it's so much harder when they have to coordinate multiple purchase orders try to coordinate what fits -- when is it going to all arrive and then -- when there is problems or if there is problems there is a lot of finger point typically most people are trying to assess out who's to blame for whatever is going on and what we're offering is really one throat to choke and it's -- especially in today's telecom world where there's been so many headcount reductions and that tends to be the future I don't think I see any lead up in that. The big telcos just don't have the expertise they used to. So they're going to rely on more and more of their suppliers and so we feel like the strategy and the combination is positioning us extremely well before and really we wanted to get this set up and ready so that when the 5G investment starts in earnest which can really take a leading position and simplify the lives of our customers. That's the whole – that's a major driving part of the whole strategy.

Great. Thank you for that. I'll jump back in queue.

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

Yes. David, I just want to continue on that last point you made. From what I recall Purcell had some sizable customer concentration and that became something of an issue. This Alpha has similar customer concentration or not?

I think, John the issue is the industry has best of concentration. So whether it's wireless or whether it's broadband there's just dominance in these industries. So you can avoid it. So you know Verizon and AT&T and Sprint, T-Mo that's it there's really three customers. And I apologize for getting a little echo here. And then on the broadband side Comcast and Charter are dominant. And so when any one of those customers decides to take a little break on spending or to lock down their balance sheet a little bit, we're going to feel it, and that's the nature of the business. So yeah, I would say it's not so much Alpha is it just the industry, but we brought the cast as broaden as it is possible and we try to maintain relationships and approvals at all the various carriers through broadband comp.

Okay. So thank. That’s helpful. So last quarter you kind of thought that the telco spending would recover in the second half of this fiscal year. Is that still the case or not?

It’s feeling more getting more confident every day on that phone call last night was helpful in that regard. And as we alluded to in the prepared remarks, we just think that there are certain of these types of investments especially on the maintenance and operations, the operating budgets of these companies that you can – you can forestall some of these things like battery replacements, but you can use – eventually you're going to have to get them done. We're confident that recovery is going to occur. It's really too account and I don't want to name names, but it’s pretty well publicized, one in the broadband space, one in the wireless space that have their own reasons for locking down some spending. I think a large of it my sense is, is that everybody is trying to get their strategy and their balance sheets ready for the inevitability of major investment is 5G. So, I like to think of it as the calm before the storm, but I can't give you a definitive answer on when the 5G is going to start in earnest.

Okay. Fair enough. And then regarding first quarter guidance I just want make sure I understand some things regarding Richmond and the motive side of the business. How much revenue was deferred from Q4 into Q1 in that business or was that revenue actually lost and how much you said some of the costs are going to be incurred in Q1? And is that – is that embedded in your guidance or you be excluding those costs associated the ERP rollout in your guidance maybe you can quantify that number also?

Hey, John, would you try picking up handset hands that -- maybe that will help us on the echo.

Okay. I’ll give a shot. Okay. How is that?

All right, a little better. Okay. So the – teeth answer to the latter part of your question our guidance includes that knock on impact from Richmond and incurred in Q4 as it rolls out into our Q1. The total number on the revenue is a big number a 25 type million of which we would anticipate some you know -- we have the ability to probably pick up $10 million to $15 million of it in the upcoming quarter. Now how much if any of that has been lost I think you would be hard to argue that we didn't lose some of those quarters that went elsewhere. But we you know it's -- for us it's while we hate to lose an order it's more that that customer’s next order comes back our way is that much more important item for us and we are hopeful that that our customers will hang with us and understand the situation. I would say that there is about $3 million as I said in my remarks that a drag on impact that is Q1 that is reflected in our guidance.

Okay. Thanks a lot, Mike. I’ll get back into queue.

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

Hi. Good morning. Thanks for taking the questions. The first question is it looks like you've given us an estimate on the content per small cell site for Alpha and I just want to drill down on that a little bit, is the estimate roughly $1,000 per small cell site for Alpha content.

Yeah, yeah, that's a good. That's a good rough out number. And you can see there’s two ways that you know it's there and that's what we try to depict there. One of the gate – the gateway solution is really tied to HFC, hybrid fiber coaxial networks. And then the line powering solution which is the other picture we show is using a kind of a traditional copper twisted pair way of bringing power to the small cell site. We have both and we really like the situation where they're using the existing HFC networks to provide powering to the small cell sites. We think that's a great win and we hope and we encourage many of the wireless telcos to use those HFC networks for back call for real estate for power.

Okay. And I was under the impression that maybe there would be more components required on some cases than what you're depicting in those pictures. You know like the down converters, the power supplies, but…

Okay. So, you're right. That's a – Brian, it’s a good point that the down converter is at the small cell site, but there's an up converter in an enclosure with DC rectifiers and battery, somewhere at a node, somewhere else. That's not depicted. But yeah you're – you're right, there's more to that line powering than you see. In terms of the gateway remember what's happening there is the towers coming through the coax. So, it’s actually pulling the power through the coax, so as they add more and more loading onto the coax that's going to require either more or larger XM3 UPS systems and Alpha cell batteries which again we have a very good market share in that outside plant powering for those coaxial network. So, yeah, there's much more to the story, but – and the numbers we’ve quoted were very specifically and narrowly on just the small cell site stuff, but to your point there's a lot more to the story than just that.

But Brian, this is Mike. You know one of the attractive features of the product offering is it doesn't take that much to get in the business and so it is that the fact that there isn't that much more to add until you build up significant mass to have that up converter and the power supply. So, they can get into this game with less cost and maybe other solutions.

Right. So, we had – we had three small cell site industry experts address our combined sales meeting and that my takeaway Brian is that of course you always need three things, you need real estate, you need a place to put the small cell site, you need power, you have to power the small cell site and you need backhaul. You need to get the data from that radio back to the network. And we think that the especially the gateway solutions where they're using those small cell sites on existing HFC networks is perfect. And to Mike's point you can pop those in very quickly, so if a wireless carrier wanted to roll out 5G in a geographic area that has a lot of HFC network already there like my neighborhood. I can't walk you know more than a few feet without seeing an Alpha box on a pole somewhere that it provides an opportunity for the carriers to deploy very rapidly. So we're excited about the products and the positions we have and we like the fact that we're getting things organized before the 5G spending starts in real earnest.

Okay. Thanks. And then you mentioned the 25% share estimate to, I mean, is that a rough ballpark if you look at that as a conservative…

Just a conservative number we threw out there.

Yeah.

Just trying to make the point – just trying to make the point at what the addressable market is. We like our position in both line powering and gateway powering at small cell sites.

Okay. Got it. And then just one more quick one right now. You mentioned that the $25 million in cost synergies is on track.

Yeah.

Can you comment more specifically on what has been realized or what are we seeing in the numbers so far and what do you think you'll -- that we'll see in the numbers in fiscal 2020 versus fiscal 2021 of that total realized gain?

Well, you know the total target was in the $25 million to $26 million range. Brian and our estimates for this year range from $10 million to $16 million depending on whether you are talking calendar or fiscal period. You can see or I will inform you that the sequential step up from our Q4 period ended March 31 to our Q1 period ended June 30 has stepped up by $4 million. So there is a little bit higher volume in that timeframe, but it also reflects some of those synergies are taking hold. So you know if you were to put it in a range that range right now is in the $10 million to $16 million so if I drew it in line and said it somewhere $13 million to $14 million for this year with the other half going into next year and one of the opportunities we have because we assumed we would lose some existing customers and we deflated our total estimate with the assumption that we would have some lost sales and we really haven't seen that yet. So there is upside potential to do better than that. Albeit those higher sales the not lost sales are should be fairly immediately but the sales where we're connecting our products and selling them elsewhere where in the world are our benefits that that that's what takes at least a year to catch hold.

Okay. Mike and then just to really clarify it at this point. So if you say $10 million to $16 million first of all so $16 million sounds like that's how we should think about it if it a fiscal year that we're thinking about. And then is this a run rate that you would exit the year having achieved or is that actual the $16 million reduction in costs in fiscal 2020?

So certainly that should be the exit rate that we achieve and it would be you know so I would expect as I said we’re somewhere between $10 million to $16 million in fiscal 2020.

Okay.

And exit -- by the time we exit next year we're at $25 million to $26 million. Now the timing of it for exactly when we hit that full stride is a little bit harder to predict but it should be pretty close by next year to getting that in the full year.

Okay. All right. Thanks very much.

Yeah.

Thank you. And I’m showing no further questions at this time and I would like to turn the conference back over to Mr. David Shaffer for any further remarks.

Well I just want to thank everybody for taking your time today to attend our call. Have a good day everyone. Bye-bye.

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.