Ladies and gentlemen, thank you for standing by and welcome to the Q2 2020 EnerSys Conference Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]. I would now like to hand the conference over to your speaker today, David Shaffer, President and CEO. Thank you. And please go ahead, sir.

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 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 am 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 operation, Set forth in our Quarterly Report on Form 10-Q for the fiscal quarter ended September 29, 2018, 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 November 6, 2019, which is located on our website at www.enersys.com. Now let me turn it back to you, Dave.

Thanks, Mike. Before covering our second quarter of Fiscal 2020 results, I'd like to touch on a few important events that took place during the quarter that will help set the stage for the rest of our remarks. Please turn to Slide 3, In mid-September, we announced the acquisition of NorthStar from a Swedish private equity fund. In addition to a small [indiscernible] business in Stockholm, NorthStar has two production facilities in Springfield, Missouri, where it manufactures and distributes energy storage products, nearest in design and performance to EnerSys Thin Plate Pure Lead or TPPL products. The newest of the two factories also has additional floor space immediately available for our new TPPL high speed production line. As you may recall, we were going to have to take up two manufacturing lines to install the high speed line at our Warrensburg] facility. We will now be able to preserve $100 million of revenue capacity at Warrensburg on top of NorthStar's additional capacity and will no longer require an inventory build in advance and installation. This acquisition fits perfectly with our previously discussed strategy to increase sales of premium products as it will able EnerSys to dramatically accelerate our TPPL sales. The manufacturing processes and quality standards of NorthStar are very similar to EnerSys TPPL production and it will require modest -- only a modest investment to convert the NorthStar factories to build our ODYSSEY, NexSys and SBS products over the coming quarters. The proven expertise and training of the NorthStar production teams will dramatically accelerate our growth versus ordering and installing additional equipment, building on greenfield sites and training new employee teams. Lastly, NorthStar has blue-chip customers in Europe and given that Enersys currently imports significant amounts of products from Europe into the US market, this transaction will allow a…

Thanks, Dave. For those of you following along on our webcast, I'm starting with slide 7, Our second quarter net sales increased 15% over the prior year to $762 million due to a 22% increase from acquisitions and decreases of 4%, 2% and 1% from volume, currency and price respected look. On a regional basis, our second quarter net sales in the Americas were up 35% to $525 million while EMEA's net sales were down 10% at $183 million and Asia decreased 20% in the second quarter to $54 million. Americas enjoyed 38% from acquisitions, less 1% decreases from volume price and currency, EMEA had a 4% volume decrease, less 5% in negative currency and a 1% price decline. Asia had 17% volume and 3% currency Declines. On a product line basis, net sales for Motive Power were down 3% year-over-year at $335 million while Reserve Power was up 36% to $427 million. Reserve Power had a 7% volume, 1% price and 2% currency declines offset by 46% in acquisitions. Motive Power had a 1% decrease in price and a 2% foreign currency decline while volume was flat. Please now refer to slide 8. On a sequential basis, second quarter net sales were down 2% compared to the first quarter of fiscal 2020 driven by a 1% volume and currency declines. On a geographical basis, Americas was up 2% while EMEA was down 10% and Asia was down 9%. On a product line basis, Reserve Power was down 2% while Motive Power was down 3%. Now a few comments about our adjusted consolidated earnings performance. As you know, we utilized certain non-GAAP measures in analyzing our company's operating performance, specifically excluding highlighted items. Accordingly, my following comments concerning operating earnings and my later comments concerning diluted earnings per share exclude…

Jean, can we open the line for questions.

[Operator Instructions]. Our first question comes from Noah Kaye of Oppenheimer. Please proceed with your question.

Thanks, good morning. First, sort of for housekeeping and modeling, what kind of loss operating and income contribution should we assume on that $20 million of revenue that's not expected to come from Richmond.

I think in broad strokes, it's going to be about a $7 million to $8 million operating dollar hit and so let's call it $0.15 of EPS impact on the quarter. Now, we do expect recovery of that, it won't show up in revenue, but it will show up in an operating earnings element, I'm not sure where on the P&L it's going to show up, probably above gross profit, but that will show up likely in the fourth quarter as we get the recovery from our business interruption insurance.

Okay, that's helpful. I guess sort of second question with Investor Day a month ago, you guided for 1% to 2% volume growth for the fiscal year. I think year-to-date organic volumes are down roughly 3% to 4%. You have this headwind on volume from Richmond coming in 3Q, so can you talk about sort of levels of confidence in that 1% to 2% volume growth target for the year and what you're assuming to kind of get a strong reversal in the back half.

So let's start with recognizing in the first half of the year where we had those 3 - negative 3% organic growth. We had the ERP implementation in Richmond that was dragging our results down fairly significantly, we believe that implementation and the impact it's had is largely behind us. So, we don't expect that. The fire that was all of about 8 days or 9 days old when we had our Investor Day, as we said, we still didn't know how that was going to impact the results, although we felt confident that the bottom line results would be recovered but we weren't sure how that geography was going to show up on our results. So, I think if you were to hold it against what we said on Investor Day, you'd have to add that $20 million back to your topline if you try to figure a growth rate out. So, if you look at the second half of the year and if you think you have the ERP implementation at Richmond behind you and we talked about the $20 million interruption on the sales and if you set that aside and say that's -- I kind of get that as a reconciling item, then you would say, okay, the things that we've also struggled with have been some of our telecommunications and broadband customers who have -- one has had a significant merger that has been fought through the FTC and the FCC, which has got preliminary approval and we've had another major broadband company that's been holding its CapEx, which we believe is going to be released very soon. So, if you have some expectation of an improvement in those markets, it's still -- that opportunity is still there, it will be admittedly more challenging given the results that we've had in the second quarter, which we didn't have on October 2nd.

Okay and then just I guess following up on that, your visibility into that CapEx release from that customer that you called out earlier, have you started to see [indiscernible] those orders start to flow or is that something we still need to see.

The confidence has improved for certain. I had dinner was some of the key -- our key sales leads last night and just talked about that very topic. So, I don't know that it's going to come back to the same levels it was maybe a year prior to the transaction, but we expect a significant improvement year-on-year doing -- versus where this year has been dreadful. I mean it has been a very Draconian the cuts they've made and so we think that things are certainly going to improve, but I don't know that they're going to reach the historic levels they were prior to the transaction [indiscernible].

I was just going to put out those historic levels were occurring in the quarters ended June and September of 2018, and so the comp that we would have is a much weaker first -- fourth fiscal quarter that was January through March of last year's 2019, but they reached their zenith in the interim in those quarters which are now nearly 18 months behind.

Yes, [indiscernible] in general, I think the feedback is fairly consistent that the broadband companies are continuing to invest, there are several initiatives that we talked about at the Investor Day remote five -- remote five being one in the quad play, the wireless and then -- and then clearly, we think there, and we said this all along, we think we've created some pent-up demand with some of these capital hold. So, there is a good degree of optimism but we have to deliver the results, and that's the focus and we're very much working -- I would say, as we have noted in the prepared remarks, the integration of the two companies, kind of those cultural pitfalls you worry about when you put in two companies together, I would say all of that is behind us and now it's just blocking and tackling, getting orders and shipping orders, and that's -- our head is down and that's what we're focused on.

Sure. I think in the interest of sharing the ball, I'll just ask one more question [indiscernible] but I think in your prepared remarks, you said that the NorthStar cost synergies primarily from logistics will start to flow in the next fiscal year. Can you just sort of help us understand that a bit more in terms of, is there a lag between when you started to kind of achieve route efficiencies and when this gets recognized in COGS accounting in their foreign margin. Just so it will help us understand any kind of timing factors to think about as you work to achieve these synergies.

All right. I'd be happy to try that. So NorthStar had its own portfolio and its own customers and largely for the next two quarters while we will be transitioning to EnerSys products so that we can make those for our US customers rather than have our European factories make those products for those US customers. That's going to take at least 6 months [indiscernible]. The next major factor is the high-speed line which was originally slated to go into Warrensburg, Missouri, is now going to Richmond -- to Springfield, Missouri and the second of the two plants that NorthStar has, that won't be up and in production until April of next year, so the start of next fiscal year, so by and large many of the synergies -- the big synergies that we are looking at, which is the freight, the additional capacity that being able to put this high speed line in Springfield rather than tearing two lines out of Warrensburg, you're going to see some of that benefit not fully recognized until next April. In the near term, there are obviously some synergies, mostly cost synergies for the executive officers of NorthStar that will no longer be with the business because we don't need two CEO's and Dave wasn't willing to give up his seat, so...

Not yet.

Anyway, but, so that's where you will see in the near term, see synergies off the NorthStar transaction.

Okay, that's very helpful. I will turn it over. Thank you.

Thank you. Our next question comes from John Franzreb of Sidoti & Company.

Hi guys, just regarding the $20 million in lost revenue, is it safe assume that's going to competitors and how confident are you that you can regain that business.

Well, John, my focus throughout the course of this has been market share and that's -- it is key and you're right, I think a lot of that in the very early days went to competitors, it just takes us a while to turn the battleship in a sense. We've got to -- in terms of the product mix, where we load products, a lot of this Motive Power business is book and ship, its quick turn stuff. So we have -- we just weren't able to respond fast enough, but my focus has been keeping market share, getting it back in those instances, and then I've really leaned on Mike to do all the insurance related activities. So we've sort of split the duties, so I would say, in a sense the $20 million is immediately lost share. I'm confident, especially with the progress we're making on the Thin Plate Pure Lead where it's been -- it's been fantastic, we're adding another shift in one of our operations to keep up with orders and the NorthStar acquisition is going to increase the number of blocks we can push through. So, there is a lot of moving pieces to this on the preservation of share, but certainly we couldn't turn fast enough to protect that $20 million.

And the other thing, John, to remember if you're just thinking about it from a sequential standpoint, we've had, because of the ERP implementation struggles, we've been struggling with a $10 million to $20 million miss really starting with the quarter -- our fourth fiscal quarter of last year. So, as I mentioned, we feel like that the ERP implementation is behind us from an output standpoint, only to be hindered by the fact that we lost formation capacity. So, I think that the sequential change may or may not be -- I don't think it is permanent because as Dave said, we were quickly transitioning to maintenance free products from the traditional flooded products as well as we get that capacity online, that'll be able to pick up more of the slack. And in some respects, the demand that was being -- if it was being fulfilled by [indiscernible] by competitors, it's pretty much filled up there what was available capacity because it's been a pretty good market, so there is not really anyone out there, per se, that has had tremendous opportunities I would say to make great expansion, but there has been a loss, and that's what we're focused on getting back as soon as possible our market share.

Okay, fair enough. And regarding Alpha, could you just give me a sense of the how pronounced the seasonality is in that business in the summer months versus the winter months and what kind revenue drop off do you have on its seasonal basis in that business?

Well, I would say in the 18 to 24 months that I have seen, the highest quarters have been nearly $180 million per quarter and the lows are in the $1.25 million per quarter. So now, some of that is seasonal, some of it had to do more with the overall patterns of one of our big broadband customers, but that's -- I would seasonally you probably would expect a $25 million to $40 million decline from the peak summer quarters to this quarter and I think we will see because of pent-up demand and when some of these capital budgets get released at the start of the calendar year, our hope is that our fourth fiscal quarter, we'll see a fairly marked improvement from the quarter that we're just about a third of the way through.

Okay, great, thanks guys. I'll get back into queue.

[Operator Instructions]. Our next question comes from Brian Drab of William Blair.

Hey, good morning. Thanks for taking my questions. So first on the $20 million in lost sales, if you take that into account and then looking forward if you exclude NorthStar's contribution. Looking at the 3rd quarter, do you think that sales would still increase sequentially, so taking the 20 million out, taking NorthStar out, does the combination of Legacy and Alpha grow sequentially into the 3rd quarter or not.

Oh, it definitely would grow in the 3rd quarter off of the second quarter for the Legacy business.

Okay, that's helpful. And then again just for help modeling, I think that in the -- at the Analyst Day that you expected NorthStar to contribute about $80 million in the second half of the year, would we think about that is about evenly split between 3rd and 4th quarter about 40 million in the 3rd and 40 million in the 4th.

I think you'd probably need to say -- and I am -- I think right now, because as we've now gotten better information on them, I'm actually more like $70 million for that business for the second half of the year and keep in mind because of antitrust rules, we had very limited access to the company prior to that, but with the $80 million expectation, I have now is about $70 million and I would say that's more like a 30-40 Q3, Q4.

Okay, got it. And then just to be clear on the insurance recovery and how you report that, when you receive that insurance recovery payment, that would be included or excluded from adjusted EPS.

So, because it's difficult to highlight revenue that you didn't get, none of that loss has been or will be adjusted out. So we are going to take the hit in our as-adjusted results because we can't really highlight out revenue we didn't have as I said, so consequently and assuming we have a one Quarter lag, the benefits from those [indiscernible] will come into our -- as adjusted and as reported results. So, the net result is if we -- if we say is $20 million, this contribution is $7 million to $8 million and it's $0.15 EPS for round I'm taking that hit in Q3, if I get full recovery from the insurer on a timely basis in Q4, all things being equal, that $0.15 should show up, not in my top line, but in my EPS line in Q4 and they'll be...

Okay, got it. Thank you.

With both the -- and as adjusted results.

Thanks. And then if I kind of go back and just see if you could give any comment on this -- back to the revenue forecast. If you look at the fourth quarter, historically before Alpha joined, so let's just use like 2016, 2017, 2018 fiscal years, the average increase sequentially from the third quarter to the fourth quarter had been about 7%. Is there any way you can comment on whether you maybe see similar sequential improvement from third quarter to fourth quarter in this fiscal year.

So I think that's still within reach, that sequential step up on the legacy businesses and I actually, probably, aim a little bit stronger than that, but as you know, we are somewhat reluctant to go more than one quarter out because our order book generally only stretches out the upcoming two months. So, you're asking me to project things I don't have a whole lot of substantive information, but yes, I don't see any reason we can't at least match that sequential step up in organic volume.

Okay, thanks. And if history is repeating itself, I think I'm probably the last person here in the call, unless someone has a second question, so I'm going to sneak in one more. Can you just remind me what the main impact has been from tariffs shipping from where to where, China to the US and et cetera, and which products or components are hitting you the most.

It's been a combination, Brian, it's -- on the electronics portion of the business, a lot of the contract manufacturers in the world, it's not just us, a lot of contract manufacturers on the electronics piece is over there and we've been -- as we've talked about, we've been moving stuff around as best as we can and then we do have one particular battery range that we still import from China that's the only one of any substance and the challenge there is the competitive landscape doesn't really allow us to do much, so that's where our broadest exposure has been and Mike's got all that detail.

Yeah, so as Dave said, initially, on the legacy business. It was our -- the contract manufacturers that made most of the componentry for our chargers, weather -- and that's mostly Motive Power chargers, but some energy systems power chargers and that we were largely able to negate within a quarter or two of the tariffs originating because we had fortunately both Chinese and Thailand-based contract manufacturers and we simply rerouted the Chinese product to Europe and we took the Thai-produced product into the US, so we got the charger issue behind us. That left, in general, one line of business or one set of batteries that are made in our Chongqing facility in China that are sold into the US market. Unfortunately, our competitors aren't producing their similar batteries in China, so that's presented a challenge where the market is not going to be receptive to price increases. So this is more on that we've been meeting and we've just been going down the list, trying to figure out how we can change, either produce substantial transformation in a country outside of China. We're looking at how we can bring the product in earlier in the value added stream to do some of the value added there, getting some of the other components that don't have to necessarily be put into China, have those brought in separately and put in the US. It is somewhat challenging but be that as it may, Alpha also has one of their products where they have a transformer that is made in China and we're looking at whether we can get that produced in India or other locations, so for the second half of the year, I foresee about $10 million of tariff cost which is not tremendously different from the run rate…

Okay, thanks very much. There is a lot of great detail. I appreciate it.

Mr. Schaeffer. You may now proceed with any further remarks.

And I want to thank everyone today for taking your time to attend our call. We look forward to providing further updates on our progress on our third quarter 2020 call in February. Please have a good day everyone.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.