Good day, ladies and gentlemen, and welcome to the Second Quarter 2018 EnerSys' Earnings Conference Call. At this time, all participants are in a listen-only-mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the call over David Shaffer. You may begin.

Thanks, Mitchell. 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 we will be referencing during the call this morning. If you didn't get a chance to see this information, you may want to 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 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 based on management's current views regarding future events and operating performance, and are applicable only as of the date of such statements. 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 quarter ended October 1, 2017, which was filed with the U.S. Securities and Exchange Commission. In addition, we will also be presenting certain non-GAAP financial measures. For an explanation of the differences between the comparable GAAP financial information and the non-GAAP information, please see our Company's Form 8-K, which includes our press release dated November 8, 2017, 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. On Wednesday, we announced our second quarter results of $1.05 per share which was in the middle of our guidance range of $1.03 to $1.07. On a year-over-year basis sales were higher by 7% with organic growth of 1%. Gross profit and operating earnings percentages were both down due primarily to a $10 million headwind from increased commodity costs minus selling price recovery. Our price recovery from rising costs was 80% on led and then excess of 70% on all commodities. However, we were able to offset some of this increased commodity costs pressure by having our costs savings initiatives outpace the increase spending for Lean, Digital Core installation and new product development. Please turn to Slide 4. There were several offsetting factors that impacted our regional operating earnings and percentages in the second fiscal quarter versus last year second quarter. In the Americas, the second quarter operating earnings percentage was lower by 240 basis points from a record quarterly high of last year and due to sustain commodity costs pressure as well as increased spending for engineering, SAP and human resources information systems, salesforce.com and Lean consulting. Europe, Middle East and Africa's year-over-year operating earnings percentage remain stable at 9% despite commodity headwinds and continued lower volume and reserve power primarily and its aerospace and defense business. In addition, EMEA was able to obtain the highest selling price recovery percentage of any region and along with their continuous cost reduction programs were able to almost entirely offset these headwinds. More recently EMEAs reserve power and particularly A&D orders have been up year-over-year. So we anticipate organic volume for these businesses will be positive in our third quarter versus our Q3 last year. In Asia, the operating earnings percentage increase year-over-year to 5.4%…

Thanks Dave. For those of you following along on our webcast, I'm starting with Slide 9. Our second quarter net sales increased 7% over the prior year to $617 million due to a 1% increase in volume, 4% increase from pricing and a 2% increase from currency. On a regional basis, our second quarter net sales in the Americas were up 5% to $341 billion and Europe's were up 10% to $198 million, while Asia increased 10% in the second quarter to $78 million. The Americas enjoyed a 2% increase in volume and 3% from pricing. Europe had a 6% pricing increase and 5% in positive currency, offset by a 1% decrease in volume. In Asia, volume increased 6% while pricing increased 4%. On a product line basis, net sales from a motive power were up 9% to $325 million, while reserve was up 5% to $292 million, motive power at a 4% increase in the price and a 2% volume increase and a 2% currency benefit, reserve power at a 4% increase in price and 1% increase in foreign currency. Please now refer to Slide 10. On a sequential quarterly basis, second quarter net sales were down 1% to the first quarter of fiscal 2018 from the 3% decline in volume offset by 2% currency improvement. The Americas region was down 4% while Europe was down 1%, while Asia was up 13%. On a product line basis, motive power was up 2% while reserve power was down 4%. 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 all highlighted items. Please refer to…

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

[Operator Instructions] Our first question comes from Noah Kaye of Oppenheimer. Your line is open.

Good morning, Dave and Mike. Thanks so much for taking my questions. Certainly a nice job on getting that recovery especially in EMEA. These lead prices have just taken off continually and I know it's not been easy, but you clearly have managed much better sequentially. You mentioned the major CapEx investment in automation, first, could you quantify that a bit? And second, what did you see incrementally in terms of order or customer activity in trucking or advanced auto that helped you make that decision just so we can better understand that.

At Investor Day we spoke about wanting to take a more aggressive share position in the over-the-road and premium automotive transportation sectors. So we're a little bit behind schedule because the scope of our automation initiative to increase our capacity for that sector actually expanded. So what we initially had approved in the budget for the year with the board was more modest in scope, but there's been some real momentum building in this area. And we're going to be up against some capacity constraints. So we dramatically expanded the dimension of the project to the point where we actually had to get board approval last week. And that's been accomplished. And so as we noted in the prepared remarks, it's going to be a while before we have this on line, but we think it's going to dramatically reduce our line speeds and put us just a much higher number and put us in a much better position with our conversion costs to compete for larger portions of those markets. So behind schedule in a sense, but for the right reasons because it's bigger than we originally thought.

Anyway to kind of understand what kind of revenue in auto trucking might be supported by this expansion?

I think what - let me get, I didn't put a number to that, but let me have that and we'll add some color to that in next quarter's prepared remarks to try to dimension that a little bit. We were so focused on getting the capital approved. I just didn't even think to bring that with me, but it's going to - the potential significant it's in the tens and tens of millions of dollars, but let us put a number on that. Mike, do you want to add?

Yes, I was going to say in just two years, we've added about another $20 million in revenue from that particular size, the group 31 size. So with the capability of a higher speed line that can dramatically increase the output of the singular line. We would anticipate enjoying $20 million to $40 million, obviously with these market conditions, but the line itself can - is capable of far more than that, albeit the market want immediately to turn on at that level.

Sure. That's very helpful. Thank you. And then on capital allocation, you did the accelerated share repurchase program, certain leverage remains quite manageable. We'd see kind of continuing ample dry powder for acquisitions. But can you comment on the M&A pipeline, maybe to what extent, what you're seeing out there in the M&A environment factored all your decision to focus on repurchases, and this is sort of a false dichotomy here. But just want to understand what you're seeing out there?

As usual we were very active on this front and in our most recent meeting with our Board of Directors, we identified I believe seven targets, which we were - we believe are actionable and are in some stage because of our market share, some of these require some anti-trust considerations, which can dramatically slowdown the process and make it a little bit aggravating. You might recall last fiscal year, we added a Vice President of Business Development, a gentleman who's got thirty years of energy storage experience with the sole focus of accelerating and making sure we have the resources on this. So we are - as our heritage suggests, we have been a roll up entity and we continue to believe that acquiring companies with the right technology in the right locations et cetera is the best way for us to move forward. So that strategy remains intact and that remains one of the highest priorities for our capital deployment. But having said that, given that we do throw off a significant amount of cash every year in the in the meantime and we have not had as a transaction of size in the last two to three years. Share buybacks make a good use of our cash and keeping that leverage ratio in a reasonable timeframe and as long as our share price, the value looks on intrinsic basis looks reasonable on our estimation and we will continue. So as we noted, in addition to the $100 million, which we executed in our second quarter, the full benefits of those shares which should be approximately 1.5 million shares when it's all setting done. That benefit will be in Q3. The Board authorized although we have not made any movements to execute nor can we until this first ASR is concluded which won't officially be over until January 5, unless the bank that's handling it, notifies us that they include on an earlier basis. But there is another one out there if management elects to move forward with it. But again M&A is still our primary focus so - and ASRs are secondary option.

Thank you very much. I'll come back, but I will jump to the queue for now. Thank you.

Our next question comes from Brian Drab of William Blair. Your line is open.

Good morning. Hi Dave. Hi Mike.

Hi, Brian.

Could I just start with the housekeeping item of the WITS data? Maybe Mike do you have the trailing three months for us? And could you let us know exactly, if you do have it, which month is the ending month on the period?

So the ending month on the period that I have is September, which is I believe the most recent one. And the trailing month would show for the total Americas, a decline from some pretty high comps a year-ago of minus 3% on total Europe, they're up 10%, when you include Middle East and Africa from - EMEA remains at 10% for that region. Asia is up 29% for a worldwide growth on a trailing three months to the prior year of 12%.

Okay. And just to be clear all of those numbers were trailing three months.

Yes, so we think was trailing three months. So September, August, July compared to the prior year.

Okay. And then could you talk a little bit about the disparity between those overall very strong with numbers to continue to be very strong and what are the recent factors that drop the difference between those growth rates and you know the volume growth that you reported in 2Q in the motive segment?

Brian, we reference this in prior calls. It's never been a direct one for one correlation there. As a reminder a lot of our sales are replaced been in nature and so the with state are largely will reference the mix of new trucks to older trucks in some cases. So the other things we spoke about on prior calls is the longevity of batteries and most importantly the number of batteries sold per truck with a lot of the premier products in the high charging in the opportunity charging and fast charging systems. There's been a lot of positive things which has been good for our margins to sell these better products, but it slowly over time impact in the ratio of the battery and the correlation between the battery and the truck number. So we participate in some industry associations we have a fairly good handle on what our market share is, we don't have any major market share issues to report we think that that's very stable. So it's just not a one to one correlation so what we've often said to you in the past is it's just a very good indicator of kind of the overall economic activity in the material handling sector. But the age of the fleet the replacements, the longevity, the number of batteries, truck OEMs, rentals, rental fleets has a big impact on some of these with statistics. So it's not a clean shot, but we always provide that is just a good indicator of what the various markets are doing.

Yes, and I appreciate that you've talked about that and I've asked about it on past calls obviously it's just helpful to understand and here for example that there's no share shift in your view and some of the factors are more important in certain period. So thanks for going through that. And as you look 5G, you mentioned the backhaul opportunity and that's becoming - you're getting some clarity around the opportunity within 5G? Can you talk in a little more detail around how the 5G opportunity would be different for analysis relative to the opportunity that you had in 4G or 3G?

Sure. So the biggest difference as you know is the transmission radius of the antenna itself is much, much smaller. I'm not an expert by any means but there's going to be you know in a given square kilometer I will just use a number there are maybe 70 different small 5G antennas within a square kilometer area whereas in the past that may have just been one 4G cells site. So it's a dramatic increase in the points of radio transmission. So it's very difficult for the carriers to envision having a traditional backup power scheme at each and every one of these small antennas. So there's different schemes that they're looking at now to get when we used backhaul there is different portions of the backhaul getting from the antenna to a node that sort of the first leg of the backhaul and the two predominant methods we see of backhauling from the antenna to the nodes it is going to be fiber optics or it's going to be kind of a line of say microwave backhaul. At that node where that's going to be concentrated we envision that there's going to be energy storage and battery backup. One of the other schemes we're saying is that you may have one battery box that supports maybe 15 or 20 of the small radios antenna sites. So again that makes the battery a little bit bigger and that gets to what we've been working on in our Purcell group with that integrated DC power system and lithium system. And then there's other considerations where they may not have any battery backup at the sites themselves, but I think that's risky and we've spoken in the past that given the internet of things what we think is going to be unlocked with 5G ultimately with IoT and with driverless vehicles and so forth. We don't think there's any way that they can get away from backup power scenarios. So again, everything we've seen so far, we wanted to be conservative in our prepared remarks, we said that the energy storage spend would be as least as good as prior network build outs 3G, 4G. But if some of the numbers we've seen recently come true on 5G. It's just an explosive, a radically explosive potential increase in the number of ones and zeros that are going to be transmitted. So it's exciting and there's nothing about it where we think is bad news for EnerSys that we've seen so far.

Okay. Got it. Thank you. And then Dave, I don't know if you can give us even just a rough - very rough range in terms of what you think your cost per kilowatt hour would be on the cells that you mentioned that you're going to be buying for the modular you showed on Slide 8?

Yes. That's fairly confidential, so we don't want to help our competitors at all on that. So I'm going to let that one lie. I can make a general comment about lithium ion pricing is that and I think there's been a lot of press about this, so I'm not speaking out of school. But the rapid rate of decline in dollar per kilowatt hour prices we saw maybe a year ago has flattened out and in fact started to go the other way. I think there's some scarcity issues to contend with. We've seen some major announcements from the transportation companies and as such a lot of the current demand. And there's really a lot of supply out there for poor quality cells maybe too much, but for the high-quality cells there's a limited supply and we're obviously only going to work with very credible supplier partners and that limits the playing field. So the prices have started to go back up, but that's okay. And what we've said, and we remain committed to it. You see our modular designs what you should see is that we're going to have one customer experience. So when the customer uses EnerSys products it's always going to be the same experience and we're going to let the computer decide what goes inside that module. It can be lead, it can be Thin Plate Pure Lead or it can be lithium and we're just going to base everything on having a consistent and high-quality customer experience. And we're going to let the computer decide what is the best and lowest total cost of ownership for that particular customer's needs. And we think that's going to drive incredible economies of scale through the business that we've never seen before. And we're excited about it. And the feedback we've gotten from the customers and from the sales people has reinforced that we're on the right track. So the new CTO he's had a great first year. And if anything we're trying to move faster not slower.

Got it. And then just quickly, I'm trying to gauge the opportunity that you still have in your premium products as a percentage of sales and the 40% overall is a great number. I believe that it's a little bit lower than average in Europe. Could you just give any brief comment on the opportunity there?

We've got two major expansion initiatives. We're hitting some bottlenecks, so we've got two major expansions to increase our ability to push premium product deeper into the motive power sector and then to build off of the successes we've had in the over-the-road market. We're also starting to tool up new over-the-road trucking solutions that are more the European size. They don't use the same sizes as the Americans do and so we're tooling up new sizes there. Those should be available later this fiscal year, so those are two examples of where we think Europe can start to move the needle faster on premium products.

How much low are they in terms of the percentage at the moment?

I don't think I have that number.

Okay. All right. Thanks very much.

Thank you.

Our next question comes from Michael Gallo of C.L. King. Your line is open.

Hi, good morning.

Hi, Michael.

Hi, Mike.

Just on delve a little bit on the third quarter commentary. I think Mike, I heard you said in your prepared remarks, you expect the gross margins to be 25% or so. I was trying to bridge that back, even I think you've realized about $12 million a year-to-date on the cost savings? Obviously, you're implying a sequential pickup. So I would assume the revenue would have to up meaningfully, sequentially, given at least on the OpEx side. It would seem like you've gotten more savings to date than what you would get out of average the remaining two quarters, but just help to bridge the sequential improvement given the step down in gross margins Q3 versus Q2?

So you're correct. We are assuming a higher level of volume in Q3 versus Q2. Q2 as you know is covers a good part of the summer holiday season, particularly for Europe. So it's not unusual for us in the second half of the year to have a higher volume output than we did in the first half. So volume will be up. The margins will decline, which is the natural result of dilution as lead costs have gone up and will be higher in our third quarter than they were in the second quarter probably by at least a nickel per pound. So and while I think will make a little bit of progress on our pricing, I think we will still be looking at metrics that aren't so unsimilar from what we experienced in Q1 and Q2. So we will still continue to chase a higher price number, but because of the higher volume and a reasonable recovery rate on pricing that's what's allowing the earnings per share to increase by $0.09 per share from Q2 and Q3.

Okay, that's helpful. And then just follow up question for Dave on 5G. Dave, I know you talked in the past about the architecture for type of batteries. Any better feel for whether it likely goes lithium, whether Thin Plate Pure Lead, what will be in that opportunity perhaps or just your thoughts on the market, opportunity with regards to types of batteries and then obviously competitive intensity around that, which may vary depending on chemistry? Thanks.

Right, so let's look at kind of the three layers of where batteries are going to exist. So at the smallest sites, where let's say you have a pole mounted battery box that's supporting let's say 15 different 5G antennas. That - I think that's sort of a coin flip right now as to whether that's going to be lateral lithium. I don't really have a good answer for you, but the lithium being lighter weight can maybe help some of the cost reductions on the pole mounting, hardware that they use and maybe some of the space in the enclosure. So I don't have a good feel, but we have a solution we're developing that can be either lateral lithium. So if we go upstream a little bit to one of the nodes, maybe those nodes that are a microwave site or maybe that's a fiber node. Right now again I think that I suspect this is just my opinion is I don't see a real key driver for weight savings there because we've had pretty good success with our Thin Plate Pure Lead at these nodes with a good long life. We had a big build out, big fiber build out a few years ago with Thin Plate Pure Lead and those products have been out there ten years now and the customer is delighted with the performance, so I don't know and that's one of the big - one of the real big customer. So I don't know that there's going to be a lot of key drivers because those are ground mounted typically. I don't know that the way it's going to be there. And then finally you go upstream to where the big, big batteries are, and those are in some - called Data Centers…

Thank you.

[Operator Instructions] Our next question comes from John Franzreb of Sidoti & Company. Your line is open.

Yes, just going back to the gross margin profile. Based on current lead costs how long will take you to fully recapture the price higher costs equilibrium are we talking two quarter from now all things being equal. What's the timeline there?

So John, I guess the first assumption you have to make is if lead is today at $1.13 per pound I believe on the spot. Is the lead going to remain at $1.13 is it going to rise or is it going to decline? All three of which obviously going to have been significantly different outcomes, if it stays at $1.13 that I would tell you in two plus quarters you would see pricing catch up. It lead keeps going obviously then we're still going to be looking at continuing pressure on gross margins as a percentage of sales. And if Lead starts to decline you should see an improvement and you would be back to the kind of rates that we were enjoying in the last 18 months. So if it stabilizes at $1.13 I'm going with about two quarters.

Okay. All right. And in EMEA you had 6% price recovery and a 1% decline. I know that region has some of the undeveloped areas involved in it, but I guess I'm surprised by the magnitude of the price recovery. Could you just walk through what happened there?

Well keep in mind this is the region that has the bulk of our pass-through mechanism, so they mechanically work this through. So it's just a matter of protocol, so it's not unusual for them to have it. Whereas per se in our Americas region, we typically - we have none of that - very little of that type of pass through mechanism and we go through announced price increases. We give a grace period of which point that price increase will be effective for orders taken typically three to four weeks after we announce we are about to raise prices, which gives them a chance to load up on the front end and depending on when they take those orders those typically limit as to how far out those orders can go, but it gives the customer a little chance to push that, defer that process a little further out. So in Europe you tend to get pricing quicker. It tends to recede quicker because if lead goes down than our price will quickly follow. So each region is a little bit different, but for us seeing EMEA with the best price recovery in the circumstances is as expected.

Okay. And shifting to China, Dave you alluded to that China motive business was good. Last quarter China tower, I believe you called out as pull backs to lithium spending. I thought your expectations were that would be a one quarter phenomenon. Doesn't seem like that was the case and can you just kind of update us what's going on in the China telecommunications market as far as spending overall?

Yes. I am pleased to report that since our last call our orders have picked up markedly, so it did seem to me an overall spending slowdown by China towers. They were sorting out some of their strategy. One of the things that is unique about that situation over there is it's highly, highly transparent. So the way they do things, we have complete visibility as to what our share is of that business. So I can say with a very high degree of certainty that we didn't lose share during that slowdown in our H1 and we're very optimistic that things are improving in our second half as their order rates have recovered markedly.

Great. And one last question, in India it seems like the entrenched competitors are circling the wagons. It sounds like you're trying to develop a new strategy there. What kind of strategy can you employ with the two competitors that control 66% to 70% of the market?

Yes. I think it has to be technology based. It has to be systems oriented. I think that to try to go in a straight up knife fight with traditional products is just it's a hill too steep. So I think we're just going to have to really change up our value proposition and that's going to make us rethink some of the assets and so forth, but - and then clearly M&A and those kind of partnerships and joint ventures is something else we can consider strongly, as we move forward with that strategy in India. But the plan we embarked on years ago, the factory is staying pretty busy right now. On motive, that's been good. So we're not - that's not really the problem in terms of factory absorption. It's really just that's an incredibly attractive market from all the battery dynamics in terms of the population growth and the poor power quality. So it's just frustrating. But your assessment was right on. We're trying to rethink how to go about that plan of attack.

Okay. And I guess lastly on some of the incremental costs incurred in the quarter, beat the system, of course, I guess is where I really like to get some color on - when does that number peak or is it same stable at $2 million and when does it anticipate?

Okay, in terms of peak, Mike and I have tried to manage this. And Mike, if I say thing wrong, let me know. But we've tried to manage the teams to a certain run rate per quarter and I don't anticipate that run rate substantially increasing from where we've been the last two quarters. Mike is that correct or is there some I'm not remembering?

So the answer is - that is essentially correct. The rate of which we're spending or investing in this year will be fairly stable. But compared to where it was a year-ago, it's three times the amount.

Yes.

So we are referring in any given quarter compared to the prior year period about $4 million of additional investment as we expand our product offerings, expand our digital core and make other R&D investments.

Yes, the cost reductions have done well so far, this year and it's been essential for us to fight off these commodity pressures. So without it, we'd be in trouble. So in terms of when these pieces start to fall down a little bit, I would say we're going to be at these sorts of rates for at least the next fiscal year and then I know that the lean guys start to drop out. That's going to help a little bit. I think a lot of - a year from now, a lot of the consultant should be out of the building and we look forward to that. But some of these cloud-based subscription services are going to stick with us and as such we have to offset that with the savings and I'm very optimistic. As I said in my prepared remarks, we're starting to get some things in place, which show a very clear path towards sales and order process and cost savings initiatives, including those portals, where customers are starting to have the ability to order batteries directly into our system.

Great, perfect. Thanks for taking my questions.

There are no further questions. I'd like to turn the call back over to Dave Shaffer, for any closing remarks.

All right, thank you everyone for taking your time to attend our call and please have a great day.