Good day, ladies and gentlemen, and welcome to the First Quarter 2020 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 that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. David Shaffer, President and CEO.

Thanks, Julie. Good morning and thank you for joining us. On the call with me this morning is Mike Schmidtlein, our Chief Financial Officer. Last evening, we posted on our website slides that we will be referencing during the call this morning. If you didn't get a chance to see this information, you can go to the webcast tab in the Investors section of our website at www.enersys.com. I'm going to ask Mike 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 June 30th, 2019, which was filed with the US Securities and Exchange Commission. In addition, we will also be presenting certain non-GAAP financial measures. For an explanation of the differences between the comparable GAAP financial information and the non-GAAP information, please see our Company's Form 8-K, which includes our press release dated August 7th, 2019, which is located on our website at www.enersys.com. Now let me turn it back to you, Dave.

Thanks, Mike. I'll begin on Slide 3. EnerSys reported first quarter fiscal 2020 adjusted earnings of $1.30 per diluted share, an 11% increase versus the prior year first quarter adjusted earnings of $1.17 per diluted share. Adjusted earnings were adversely impacted by one of our customers deferring a large order of high profit margin business to future quarters, along with our ability to increase our Motive Power production output to meet strong demand as we are still recovering from the ERP implementation challenges at our Richmond, Kentucky manufacturing facility. Net sales for the first quarter were $780 million, an increase of 16% over the prior year quarter, primarily associated with our December 2018 acquisition of Alpha. Please turn to Slide 4. I'd now like to update you on some of our key markets. Our Motive Power Americas business continues to be strong as demand for our TPPL products continues to outstrip our manufacturing capacity. Overall backlog in the Americas is up over 30% year-on-year. And the orders were up 9% during the quarter compared to the prior year. Thin plate pure lead orders grew over 200% year-on-year in Motive Power Americas alone. Just like the Americas, thin plate pure lead, or TPPL, NexSys pure lead Motive Power sales were strong in EMEA, fueling a market share gain for EnerSys. Since our last call though, orders in EMEA are softening from our traditional Motive Power OEM factory customers. Historically we have seen stronger replacement battery sales when new forklift trucks slowdown to offset some of this softness. Also, we expect to return to a lower Q2 seasonal pattern in EMEA. Last year, our Q2 in EMEA was lifted by a fire at a competitor's factory. Motive Power in Asia is slowing in China, given the current trade climate, with the rest…

Thanks, Dave. For those of you following along on our webcast, I am starting with Slide 8. Our first quarter net sales increased 16% over the prior year to $780 million due to a 22% increase from acquisitions and decreases of 3%, 2% and 1% from volume, currency and price, respectively. On a regional basis, our first quarter net sales in the Americas were up 32% to $517 million, while EMEA's net sales were down 4% at $203 million and Asia has decreased 12% in the first quarter to $60 million. Americas enjoyed 39% from acquisitions, less a 6% volume decline, and a combined 1% decrease from price and currency. EMEA had a 3% volume increase, less 5% in negative currency and a 2% price decline. Asia had 8% volume and 4% currency declines. On a product line basis, net sales for Motive Power were down 1% year-over-year at $344 million, while reserve power was up 35% to $436 million. Reserve power at a 10% volume decrease and a 2% currency loss, offset by 47% in acquisitions. Motive power generated 3% from volume, less a 2% decrease in price and 2% in foreign currency loss. Please now refer to Slide 9. On a sequential basis, first quarter net sales were down 2% compared to the fourth quarter of fiscal 2019, driven by 4% volume decline, net of 2% from acquisitions. On a geographical basis, Americas was up 2%, while EMEA was down 11%, and Asia was down 1%. On a product line basis, Reserve Power was down 3% while Motive Power was down 1%. 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, my…

Thanks Mike. Julie, we can now open the line for questions.

[Operator Instructions] And your first question comes from Noah Kaye with Oppenheimer.

Thanks, good morning and thank for taking the questions. First, maybe we can get some clarity on that large deferred order you mentioned. First, how do we think about large in terms of magnitude of revenue and then maybe your level of confidence that that's kind of just delayed and not canceled? Any color there would be helpful.

Yes. I spoke to the team directly just as early as yesterday, and there is a high degree of confidence. That order is between $5 million and $10 million and the team is highly confident that it will stay in the year. I don't think we've got much of it programed in for -- Mike, we didn't put much of that in Q2, did we, just to be safe?

Well, the order in question actually is shipping in Q2. The question is whether we get a -- there are several orders from this customer, and the question is whether the next one pushes out, right, Q2 to Q3? So our assumption was it would. So that is not a net plus in our expectations for Q2.

Right, just bumps another order in. But this has been a very reliable customer of ours for a long time and there is a high degree of confidence about that business. It was a bit unfortunate. I think it's that. And then as I noted in my prepared remarks, the other big challenge on Q1 that kind of put us at the bottom of the guidance was, we only got about 95% out the door that we had hoped to. I think if either one of those, we could have stayed in the midpoint or higher. But with both of those things happening at the same time in the quarter, that's what put us at the bottom end of the guidance range. But the confidence is high that that business is staying with us.

Right. And then I guess just sticking with the Motor part of the business first. You commented on the EMEA softness. Your EMEA OEM business can't be more than 5% to 10% of total Company sales, I assume, although you can -- please correct me if that's not the case. But just how pronounced in magnitude is the slowdown that you see? And if orders there are slowing, obviously it's not ideal and you've been doing this already. But can you shift some of that product around to make up for just the lack of inventory in the U.S.?

Yes, when I was over in Europe, it was very consistent, the total amount of batteries we made. But what would fluctuate is which channels we sold it through. And as I noted in my prepared remarks, typically, when we see softening new forklift truck orders, we tend to see better replacement orders. That said, the guys are getting ready for a different climate. We've been very busy with the OEM, the factory direct shipments for last year or so. But there is clearly a softening there. But to your point, it tends to -- we don't see the highs that the new forklift truck sales guys see in terms of battery sales and we don't see the same lows that they do. And the volume there has been fairly predictable and consistent. Mike I mean from...?

Yes, it has and it -- just to calibrate that, Noah, it's higher than you expect. It's anywhere from 15% to 20% of total revenue.

Right.

OE, OEM in EMEA is 15% to 20% of total Company revenue?

I'm sorry, the total EMEA Motive Power, so...

Yes, that's not all factory directs. So Noah's number is probably not too far off.

And then, your commentary in guidance obviously doesn't reflect any kind of real recovery from some of the telecom customers. We have heard from some of the companies that at least spending has kind of stabilized at current levels, right. I mean so just any kind of sense of, directionally is there any incremental weakness here or are we just kind of the same holding pattern. And any thoughts or insight you might have on to when that starts to come back?

So, kind of the first point and I probably should have put this as a reminder in our prepared remarks, is we don't have a single customer that's above 5%. So we'll just kind of go through this part of the business. The cable customer that we had mentioned that's frozen capex is having a significant impact on Alpha's business. But overall, we're not exposed to any single customer broadly. We're very diversified from the markets we serve, from the regions we serve, from the sectors. So -- but that's said, the Alpha team is feeling this loss or lack of spending acutely, but we remain confident, Noah, that this is creating pent-up demand. You can only defer spending for so long. Networks, you have to spend money to keep them fully functioning. So, that's a timing issue. I'm pleased to report, frankly, that since we spoke last on this call, we've gotten three RFQs in, just three RFQs, which have a total combined value of over $0.5 billion. Now I'm not promising you Noah that we're going to win this business, but we haven't seen this sort of activity in a very, very long time on the telecom side. I spoke to Drew and some of his key captains this week, and there seems to be an improving sentiment for our second half versus what we've seen to-date. So that does seem to be improving. I think as we had mentioned prior, we've seen softness from some of the Cellex and some -- from the old wireline portions of the network, that businesses has been softer, but we're really starting to pick it up on the wireless side. And we're seeing a lot of projects now which are interesting because there -- nobody is going to spend money today on things that aren't 5G compatible. So we see a lot of initiatives that are sort of evolutionary where they're starting as an LTE, but it's upgradable to 5G. We also see a lot of hardening of the network in certain areas. So, that situation is slowly improving and the optimism is starting to build, so that's coming. Like I said, those RFQs were very exciting. We haven't seen numbers like that in a long time. Mike, is there anything else you wanted to add?

No, I think we've heard more recently some net positive things in our telecom business, in particular. So hopefully, we'll see improvements.

Yes, I agree. Okay Noah, is that -- is there anything else?

Yes. No, just apologies to my colleagues, but I got to sneak one more in here. This is the last earnings call I guess before your Investor Day. So can you just give us a high level of what you're hoping to achieve with the Day? What we should be looking for?

I think that what's important for us and for our investors to understand, and for us to communicate effectively is the long-term strategy and the view in light of the Alpha acquisition and how that's changing the nature of the business and how -- I think we're layering on top of a business that has been a fairly consistent cash generator for a lot of years, so our investors have been exposed to a business that has probably averaged -- Mike, what $90 million or $100 million a year over the last 10 years in terms of buybacks and dividends. It's been a stable business but we're layering on top of that now this technology piece, which is going to expose us to growth as well. So we think it's a unique combination for investors. And we want to tell that story clearly and we want to be very precise in the areas we're going to grow. I think 5G, which we just talked about, is certainly an important part of it. But I don't want you to underestimate how small our market share is in the transportation sector. And as we've talked about a lot, as these heavy trucks go to start-stop or non-idle requirements, we've just been extremely successful. So there is a lot of life left in the lead story as well. The Bi-Polar which we'll talk about can even extend the life of lead even further. So there is a lot of great things to talk about. But most importantly, it's really this unique investment opportunity for investment shareholders to not only have sort of a steady cash flow business, but start to layer some real significant, and frankly, exciting growth opportunities as well.

That's very helpful. Thanks so much.

All right.

And your next question comes from Brian Drab of William Blair.

The RFQs that are totaling, is more than $0.5 billion. Can you just talk about whether those are related to primarily Alpha or both to Alpha and EnerSys legacy. Is it -- are those specifically 5G? Just a little more color on those?

I would say -- let's take it, there's kind of three pieces to these RFQs. The first one is for a DC power system for 5G builds outside of United States. So it's actually -- it's kind of exciting, because it's 5G and it's not the US market. And that's sizable. And that -- and the guys are working on the quotes now, that's a per cell enclosure. It's EnerSys batteries, traditional thin plate pure lead batteries, and then Alpha Cordex Rectifiers or the like. So that's one of the opportunities. It's big, it will be aggressive pricing. But again, we haven't seen this sort of opportunity in a long time.

Can you say if that one is North America or is it outside North America?

No, no, that's not North America. That's actually Rest of World. So that's one of the opportunities. Another one of the big opportunities is, it's kind of these neutral host folks that are starting to build out 5G small cell site networks. And this is a powering opportunity to power small cell site. So exactly what we've been talking about for the last couple of quarters, really right in the wheelhouse of the Alpha deal, very much an Alpha play, and one of the key reasons that we did this transaction kind of in the mid-term is to leverage that. And then the other one, and I've mentioned this in my prepared remarks, and this is one that I may be underestimated a little bit, but some of the traditional coaxial networks folks are getting more aggressively into the wireless arena. And you know they -- today, they typically offer the wireless service over a Wi-Fi connection. And then when you leave Wi-Fi coverage, they tend to have wholesale leasing arrangements with wireless carrier as well. I think there is an appetite for some folks to start to do that on their own to put in some of their own network equipment. And so this Quad Play by some of the traditional cable companies is also an interesting opportunity for us. And what's just been exciting to me is, this has all happened in the last 90 days, these three big pops of RFQs. Again, Brian, no guarantee that we're going to win any of this or all of this, but we feel pretty good that things are starting to loosen up.

Okay, thanks. Great. And then can you just talk about what the pipeline of leads that might lead to more of this kind of activity? Like, how is that pipeline building? And would you expect potentially the next 90 days, you start to see more RFQs like this?

Yes. I think the sentiment and I talked to, like I said, Drew and some of the key guys this week, the sentiment is positive. I know that just yesterday we got $1.5 million worth of purchase orders for some small cell site powering things, which was a nice little pop. So yes, I would say the sentiment is -- the pipeline is building, we're going in the right direction.

Okay, thanks. And then, I guess maybe the last question for now. Can you just -- maybe you've given some indication here and I missed it, but for the second fiscal quarter, can you just talk directionally at least about Motive revenue and Reserve revenue, and what you're expecting for the quarter?

Yes. No, I was in my -- directionally what I had said in the prepared comments was, we expect continued strength in the Motive Power Americas. And as we noted, the backlog is up 30% Q1 year-on-year, orders were still up 9%. That business is going strong and it's really there has been an execution issue. And as I had mentioned, we didn't fully execute to what we had guided to in Q1. But that said, that business, the outlook continues to be strong. I noted that the transportation sector, the orders are very strong from the OEMs, the heavy truck OEMs, that that business is holding up well. We think that -- and this is important, the distributors for those truck batteries, it was a really warm winter across the US. But it's getting to be a hot summer and the heat -- it's the heat that kills the batteries and it's the cold weather is when you find out about it. But -- and that's said, we're optimistic about that sector. We said that Motive Power in Europe, the factory shipments are slowing for sure. But we expect some of that will be buttressed by the replacement battery side. We've got some work to do. I think China, I think all of us are a little uncertain as to how that's going to land. So we're not super optimistic about Motive in China. As we just noted, telecom is improving. I think the rest of the traditional reserve power business is stable. I guess, the two big narratives there is timing on 5G and then the other piece is sort of this pent-up demand being created by this capex hold by one of our major CATV customers. I think those are the broad headlines for Q2.

Well, I guess how does that aggregate for -- I mean is motive up then sequentially in the second quarter in aggregate?

Mike? So, just kind of net-net from a line of business standpoint Q2...

Clearly, I'm just wondering is that modeling here what I'm -- it sounds like I would model a sequential improvement in revenue in Motive and potentially a sequential improvement in the reserve revenue. I was just wondering directionally which way to -- thanks again for all that color, I'm just trying to boil it down to what do we expect, up or down?

Well, I think the other piece, Brian, as Mike is kind of dig in through this. We don't usually give too much precision on revenue projections, but just directionally. The other piece to it, as I noted in my notes, last Q2 in EMEA, we were aided because one of our competitors had a significant fire. So we had a sort of an abnormally good Q2 last year, which makes for a little bit of a tough comp. This year, we've kind of put back into the revenue model directionally, the normal seasonality for all of the European business. It's just a very holiday heavy schedule. So that's another piece of the, kind of the overall revenue guidance for Q2.

Okay. Yes, sorry to press you on. I know you don't guide on the revenue, but I mean, that's of course why you get kind of -- like these big gaps between what the Street was expecting and what you put out this quarter. I'm just kind of line up with what you're expecting as much as I can.

And I would say top line total Company, it's going to be relatively comparable sequentially as you might expect. And as has been the pattern over the last -- at least half dozen years, Q2 and Q1 can be fairly similar, and there has been a couple of years where one is stronger than the other and vice versa. But they generally are fairly comparable this year, shapes up to be pretty much the same. I think our legacy business will have comparable results with a little bit of push as there always is between motive and reserve, but neither is going to change significantly sequentially. The Alpha business had a good Q1. It is going to have a revenue number. I think in Q2, that's going to look a little bit more similar to what we saw in our fourth fiscal quarter of last year. So when I look at these businesses I would say our legacy business is going to have a performance sequentially that it looks pretty consistent with what we had in Q1 and the Alpha business is going to have a performance pretty consistent with its Q4 performance.

And I think that's pretty precise size we wanted to give you or wish to give you.

Yes, that's great, correct.

[Operator Instructions] Your next question comes from John Franzreb with Sidoti & Company.

Good morning, guys. Maybe just to stick on the revenue theme here, pricing hurt results in the quarter. I imagine, largely it was a function of lead. Can you talk a little bit about what your pricing expectations will be in the coming quarter?

So the pricing degradation was primarily a European whereas the pass-through models are set fairly closely with the actual lead cost, which, as you noted, were declined, so most of that price degradation was there. The Americas, in general, pricing has been a little bit more consistent because there has been other things such as higher freight costs year-over-year that have been kind of keeping those higher. So I would say if I looked at it, Americas' pricing is broadly neutral, EMEA's has been down but should be stabilizing now, so you'd see less of that degradation. In both last quarter and this quarter, I think you'd see that the improvement in commodities has been better than any change in pricing. So commodities have outweighed the benefits or good things about commodities going down has outweighed any pricing degradation, where we've had the pressure that's not allowed our margins to expand beyond the range it's kind of been -- for a few quarters has been the introduction of the tariffs, which is largely a fiscal late 2019 and early 2020, and continuing on into 2020. The pressure that's added along with fairly historic freight rates and in addition to that, because of our demand on TPPL, we have so much product going across the oceans as our European factories that produce TPPL been supporting the American market as well. So those two items, the freight -- I'll call it freight and tariffs along with the ERP implementation that we've talked in ad nauseam about with Richmond have put about 150 basis points of pressure collectively on those margins.

Right. And John, just kind of one more factor which is a little bit more discrete, but the ERP issues and a lot of the challenge we've had and I mentioned in my prepared comments, it's been disruptive for the whole sales and supply chain channel. It's impacted our mix and what we're selling to customers. And so some of the premium mix availability has been impacted with the challenges in the factory, which is going to show up in the pricing line as well, we expect that is going to resolve itself as we move forward.

Got it. And I guess with that thought I'm kind of surprised that -- obviously battery is doing so well, concerning freight tonnage is down and Class 8 truck engine orders have dropped significantly. Could you kind of walk me through why that's the case?

I think it's clear to me why that's the case. It's because the product, and I've said this many times, the product last twice as long but it doesn't cost twice as much. So I think the customers -- so it's a share issue. It's sort of a similar analogy as we talked about in the past where China is converting from gas trucks to electric trucks as more of these truck OEMs are moving to start-stop type profiles and they are more focused on these non-idle requirements. I think that the performance of the thin plate pure lead is so superior to the other products that are available that -- it's we're taking share. And we feel like that's -- and our market share is a rounding error in that in that world. And so, we just feel like the more capacity we can bring online and that's something we're going to focus on at the Investor Day, and we touched on it at the last one and it's as true today if not truer today than it was 2.5 years ago that we think that just taking more -- nibbling more share out of this business or out of the transportation sector is a great win for our shareholders.

Got it. And Dave, in your prepared remarks, it seems like the narrative has kind of improved around lithium products and offerings. I guess I'm reading into this, but first time I've heard in a while the storage market being part of the dialog, again. And it sounds to me like you've hired some talent and I'm assuming that talent is probably in the lithium side of the market for aerospace and defense. Is that the case or am I reading too much into it?

No. I think we've -- as I mentioned precisely and you noted, we've added some talent in the aerospace and defense sector specifically to go after some of the thermal battery business, and that's a primary lithium. That's a very exciting market, a lot of exciting opportunities. So -- and as I noted, we've got some contracts that we haven't announced yet that we're pretty close on, so that's coming. And then the other, as you noted, is sort of a separate thought and unassociated with the aerospace and defense piece is we've also started to hire some new talent on the Alpha side of the business where they have a foothold into the solar business with solar inverter and prepackaged home energy storage systems, commercial grade. And I think a lot of the dynamics, especially in California, a lot of the regulatory changes that are happening out there, the energy storage piece is starting to pick up some steam and we've hired some MIT grade talent to sort of lead that business and that's going to be an increasing part. As I said from the very beginning, the Alpha acquisition was about, it was three tiers. It was first and foremost, it was taken advantage of the legacy Alpha customer base and the cash flows there. Then kind of the next wave was going to be the 5G associated with the small cell side powering. But ultimately the thing I'm most excited about is these Grid 2.0, these off-grid solar these renewable integration, peak shaving, that's really where the big money is going to be in the future and we're certainly making progress there for sure.

Great. Could you just remind me how much in lithium sales you're doing today and what do you think a reasonable target would be five years from now?

Five years -- wow!

I can shorten it if you want.

You know, it's really interesting because if you can tell me what the price of lead and the price of lithium are going to be five years from now, I can answer your question. And that was critical to our strategy, John, with the whole NexSys. What we're focused on was creating a maintenance-free experience. And then we are chemistry-agnostic. So we've got -- we think we can provide that experience with both thin plate pure lead and lithium. And I would say originally where my head was at in the long run, let's not say five years, let's say in long run is -- I would argue with the guys around here, some guys would say it's going to be 50-50. I thought it was always going to be 70%, 30% TPPL and lithium. I think right now with some of the progress we're making on the TPPL side and if lead stays at or below where it is today, it might be more TPPL than I originally thought, because we really are improving the performance of the thin plate pure lead. But that's said, we want to be prepared for either. A lot of this is going to just depend on where do the cost of the lithium cells go and how much of that waiver are we going to ride with the electric vehicle market. So it's a very hard question to answer. But I want to just let our shareholders know that that's why we put money on red and we put money on black, and we'll let the market choose what it wants to do. I just have a margin expectation regardless of what we sell.

Great. Thanks for taking my questions.

No problem.

And I'm showing no further questions at this time. I'd now like to turn the conference back to Dave.

Well, Julia, I want to thank you very much, and I want to thank everyone who took the time today to attend our call. Have a great day, everyone.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.