Good day, ladies and gentlemen, and welcome to the Quarter Two 2019 EnerSys Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, President and CEO, David Shaffer. You may begin, sir.

Thank you, Demetrius. 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 slides on our website that we will be referencing during the call this morning. If you didn't get a chance to see this information, you can go to the Webcast tab in the 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 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 September 30, 2018, which was filed with the U.S. Securities and Exchange Commission. In addition, we will also be presenting certain non-GAAP financial measures. For an explanation of the differences between the comparable GAAP financial information and the non-GAAP information, please see our company's Form 8-K, which includes our press release dated November 7, 2018, 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. We are pleased to announce second quarter earnings of $1.17 per share, which is at the higher end of our guidance range of $1.14 to $1.18. Sales increased 7% year-over-year, driven by strong organic growth. Our Motive Power business continues to do well in all regions. In Reserve Power, the Americas was again very strong. The strength is coming from telecommunications, broadband, transportation, aerospace and defense, which have all continued to order significant quantities of our Thin Plate Pure Lead or TPPL products. EMEA Reserve Power sales are down year-over-year in part because we have dedicated EMEA TPPL manufacturing capacity to supply strong demand in the United States. In Asia, sales are down year-over-year due to China Tower. Year-over-year quarterly gross profit increased by approximately $1 million as a result of strong organic sales growth and selling price recovery more than offsetting higher freight costs and headwind related to higher commodity costs. In an effort to offset continued raw material cost pressure, our selling price recovery actions average approximately 85% of total commodity cost inflation during the most recent quarter. During our third quarter, we will experience an inflection point where net commodity cost pressures become a tailwind instead of a headwind. Please turn to slide 4. I want to briefly review our global businesses. As mentioned, we experienced a strong 7% organic growth rate in our second fiscal quarter. Recent Reserve Power sales and order trends continue to be robust in the Americas, driven mainly by increased orders for our industry-leading Thin Plate Pure Lead batteries across all segments. The details of this growth are similar to the comments we provided during our quarterly call in August. In the second quarter, the Americas Motive Power business continues to be strong and…

Thanks, Dave. For those of you following along on our webcast, I am starting on slide 7. Our second quarter net sales increased 7% over the prior year to $660 million due to a 7% increase in volume, with 2% increase from pricing and a 2% decrease from currency. On a regional basis, our second-quarter net sales in the Americas were up 14% to $389 million and Europe's net sales were up 3% to $204 million, while Asia decreased 13% on the second quarter to $68 million compared to the prior year. The Americas enjoyed a 12% increase in volume and 3% from pricing and 1% from currency. Europe had a 6% volume increase and 3% in negative currency. In Asia, volume decreased 14%, while pricing increased 1%. On a product-line basis, net sales for Motive Power were up 7% year-over-year at $347 million and Reserve Power was also up 7% to $313 million. Both Reserve and Motive Power had a 7% volume increase, a 2% increase in price, and a 2% currency loss. Please now refer to slide 8. On a sequential basis, second-quarter net sales were down 2% compared to the first quarter of fiscal 2019 driven by a 1% currency decline and a 1% decrease in volume. The Americas region was down 1%, while Europe was down 3%, and Asia was flat. On a product-line basis, Motive Power was even, while Reserve Power was down 3%. 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…

Thanks, Mike. Demetrius, we will now open up the line for questions. Demetrius?

And our first question comes from Michael Gallo with C.L. King. You may proceed. Michael W. Gallo - C.L. King & Associates, Inc.: Hi. Good morning.

Hi, Michael. Michael W. Gallo - C.L. King & Associates, Inc.: Yes, I just wanted to kind of delve in a little bit more on the third-quarter outlook. Obviously, you've had the lag on lead price recovery and you have some tariff impacts in the third quarter. But I guess I wanted to, just taking a step back and looking at your organic volume trends which were again sort of universally strong this quarter, looking at lead price recovery, that should be better in the third quarter than it was in the second quarter, it would seem that your guidance for kind of flat earnings on an adjusted basis year-over-year, it would seem like you should be able to do somewhat better than that given all those factors. So how much is the specific impact related to tariffs, and do you expect that will be zero in the fourth quarter? And then as we think about the – as we get to the fourth quarter, and this is a question for Mike, I know you talked about the potential for 100 basis points further improvement in gross margins. I assume that's for step-up accounting assuming the transaction closes at Alpha at the end of the year. Should we think about that 100 basis points as something that you can still generate assuming the acquisition closes, or is that just a pre-acquisition kind of thing?

Okay. So, a lot of questions there. I guess the first one I'll try to talk about is with regard to our third quarter. So, there are a couple of items I'd have to give you a little bit of flavor of just so you understand. For example, the hedges that we have for lead – and we traditionally will place under forward contracts anywhere from 15 million to 20 million pounds of lead every month. And year-over-year, or I'll say year-to-date this year, that's created a $12 million headwind for us. And as you know, when you place forwards when lead costs are rising, it's a benefit or a deferral, and when you place forwards and the spot rate subsequently declines, it's a – it prolongs the reprieve from that commodity cost decline. So, a year ago at this time we had about a $4 million benefit from our hedges and this year, we've got a $12 million headwind. So that's part of the dynamics that you are seeing there. So, it has – probably if you're just looking at spot rates it started to break in July. That's where we were trying a quarter ago to kind of tell you it's – the benefits don't actually – you don't actually see them until our fiscal – this month. The month of fiscal November will be the first time we're going to start seeing year-over-year benefits there. We do expect Q3 pricing – so we've gone – for the last year, we've been about 70% recovery on pricing. We got up to about 85% recovery in Q2. And my projection is for Q3 we should be at about 100%. And then hopefully thereon, in Q4 et cetera, we're able to hold pricing while we then finally see a real substantial decline in lead costs. And I will also say my expectation for Alpha in the first quarter of their – our combination which will likely be only our fourth fiscal quarter, my comments with regard to gross profit did not include them but I will tell you that their gross profit rates are in the 27% to 28% which is about where – they're going to be pretty close. And because of just where we will be in that transaction, I'm expecting that quarter we essentially at least currently are saying that that's probably going to be fairly net neutral in the first quarter. We won't have any of the synergies in place really. We'll have some additional costs as we try to effectuate some change. So, I'm not projecting a whole bunch of impact from Alpha in my references to gross profit in Q4. We're essentially EnerSys only. But I feel fairly confident if I were to include Alpha in that gross profit rate it's probably not going to move the needle considerably. Michael W. Gallo - C.L. King & Associates, Inc.: Thank you.

And our next question comes from Noah Kaye with Oppenheimer. You may proceed. Noah Kaye - Oppenheimer & Co., Inc.: Thanks, and thanks for taking the questions. Dave, you touched on a number of things you're doing around the global manufacturing and supply chain. Some of that seems like in response to just demand trends and some due to some of the changes in trade regs. Can you just kind of give us a high-level view of what's really driving these changes and what portion of it is really geared towards just being able to meet accelerating demand in some of your end markets?

Sure. So, let's just take a few pieces at a time. From an operations supply chain standpoint, the job one, two, and three right now is to increase our Thin Plate Pure Lead capacity. And the frustration with that for all of us is that the time it takes to add that machinery to the factories to build that, it just takes many, many quarters. It's frustrating and it's very expensive. And so that's – we've laid out a plan, we did that at Analyst Day, that we're going to need to run at a clip – this is obviously pre-Alpha – at around $80 million to $85 million a year in CapEx to create that Thin Plate Pure Lead growth. It's gone better than we had originally planned. The TPPL, it's just frankly – we're ahead of schedule in converting our product mix into the premium products. And so, we have to expand that capacity. There's investments happening in our Warrensburg facility. We've got additional investments happening in France and in the U.K., we're trying globally. One of the particular challenge for the team is the size of the batteries that we're making in Thin Plate Pure Lead are getting bigger. So, the bigger mix is putting strains on other parts of the manufacturing process. So, those investments are not just in the assembly lines. We talked about the high-speed line in the past. But we have to make investments upstream of that as well, especially given the new, bigger mix size. One thing that's been particularly frustrating, Noah, and it's a high-quality problem, but we had planned to build a stockpile of batteries, so that we could break into the production to start to install the new high-speed line. We can't seem to get ahead. So far, our…

Yes. So, the latter part of manufacturing – so let's say after we've made the cells is the same between our NexSys Pure and our NexSys iON. So, let's just start after the batteries. And that would be light assembly-type businesses that's very similar to what Alpha does. It's taking cabinets, electronics, batteries and packaging these together. And so that part of the business is well understood and it's very CapEx-like. The CapEx numbers for Alpha are $3 million-ish is the number we used the other – last week. So, it's a CapEx-like model. It's very different than what we're accustomed to. So, now going back to the cell level, today we manufacture the lead batteries ourselves. That's a very capital-intensive endeavor. And as we said, we need to spend $80 million plus over the next few years to expand our Thin Plate Pure Lead manufacturing capacity. In parallel to that, the manufacturing of the lithium-ion cells – we've assessed that make versus buy that we're going to find manufacturing partners, probably in Asia, that will make the cells that we require to the EnerSys specifications. So, the capital risk will be with our manufacturing partner in that scenario. But obviously, we surrender some of the profitability in that situation. There's going to be a markup or a manufacturing fee that we have to give to that lithium provider. We recognize that. But our volume simply isn't high enough to substantiate us spending billions of dollars to build our own lithium-ion factory right now. And what I think is important, and it's a message I deliver, is as we provide systems, complete DC power systems, then the impact of that manufacturing fee we're paying for those lithium cells will be diluted down in the overall impact we have and the value we deliver to the customer. So that's sort of the parallel. So, it comes together after the cell is made. And after that point, whether it's lithium or whether it's our TPPL, it's not a big difference. Noah Kaye - Oppenheimer & Co., Inc.: Right. And to your last point, the cell costs as part of the total solution for what you're going to be marketing is much smaller than, say, cells in an automotive battery pack. Correct?

Absolutely. Yes. Noah Kaye - Oppenheimer & Co., Inc.: Okay. If I could just sneak one last one in. Just curious on initial reception from some of your and Alpha's customers to the announcement last week.

I would say very positive. Noah Kaye - Oppenheimer & Co., Inc.: Okay. Any elaboration?

We've spoken to – well, I don't want to say too too much. But we've spoken to – the feedback I've gotten from Drew and his team on particular conversations they've had with their customers. I've spoken to our sales leaders around the world to see what feedback they've received from customers – big wireless customers or telco customers – and there's been a very consistent message that what we plan on doing by delivering a complete DC power system on a single PO with one throat to choke and following that up with a very credible EF&I service capability is well received by the market to date. Noah Kaye - Oppenheimer & Co., Inc.: Okay. Thanks very much for the color. I'll jump back.

Okay.

And our next question comes from John Franzreb with Sidoti. You may proceed. John E. Franzreb - Sidoti & Co. LLC: Good morning, guys.

Hi, John.

Hey John. John E. Franzreb - Sidoti & Co. LLC: I'd like to shift the discussion maybe to the geographic mix here. In your comments, you mentioned that you'll win share from competitors in the Americas. Dave, I wonder if you could expand upon that. Also, in Europe, you mentioned that telecom spending was soft. You talked about timing of spending in Europe. And lastly in Asia, you've had two consecutive weak quarters, thanks to the shifting China Telecom's mandate to spend on lithium recycling. When does that business bottom out, and when do you get new sales from the re-addressed markets that you're kind of shifting to?

All right. John, we had a very poor connection. So, could you repeat the first part of your question? John E. Franzreb - Sidoti & Co. LLC: Sure. The first part was, in the Americas, you are taking share from competitors. Can you elaborate on that?

Yes. Because of our limitations on Nexus Pure supply chain with our Thin Plate Pure Lead, we've asked our salespeople to target competitors' customers. So as most of what we've been selling incrementally has come at the expense of competition. So that would be the lion's share. In addition to that, we do see one of our competitors has coughed up a little bit of blood lately in terms of their ability to take care of their customers, and we've picked up some traditional business as well, and that's not just in the U.S. So those would be the two major reasons we've taken share in the U.S. and elsewhere, frankly. And as we mentioned on a prior call, just as a reminder, in the EMEA region, we've been benefiting from one of the competitors who had a very serious fire in their factory. That's helped us in the EMEA region as well. That competitor should be coming back online later this fiscal year. But Motive Power business is good. And then, with regards to – I did hear the last piece, the Asia piece – with regards to the China Tower mandates, we've heard to date that their endeavor to re-use lithium iron phosphate cells from buses has not gone well, and I believe that that customer is at a crossroads. They have to decide what to do next. And frankly, I want to get us to the position where we find something else to do, and that's the message I've delivered to our folks. Because even when we had the volume, it was fairly empty calories. And I spent a lot of time in China, and China is a magnificent place with a tremendous amount of opportunity, and it's not always easy for sales people especially to get their heads around doing something different. But it's my strong advice to that team over there that they continue to focus in other areas. Mike?

And John, I'd say on the Asia results, we have made some progress. Our manufacturing site in India, which we've now dedicated rather than be Reserve Power, it's Motive Power, where we have a much stronger demand in Asia. They've certainly turned around and having a steady demand for their product, which is consumed by the EnerSys sales channel primarily in the Asian region has helped them. So, we've had what I'll call a boat anchor that was costing us $4 million to $5 million a year that we think we're going to be – and we are now for the last quarter or two getting to breakeven. But as Dave pointed out, we've got two factories in China that have a capacity problem because of China Tower. And we've done a number of things, including as we've talked in our attempting some (45:25) collaboration on steel manufacturers in Asia to find opportunities perhaps to partner with them on lead acid initiatives as well. So, as Dave said, we're trying to redirect to where the market is. Right now, it's not a telecom lead acid story, so we've got to find where it is, because China's a big enough place and they use those batteries and we are making progress there.

John, as I said in my prepared remarks, all the best laid plans. So, as we were attempting to repurpose that freed-up capacity, that planning started before the tariffs, before lead acid batteries were added to the harmonization codes. So now any plans that we had previously made to export batteries from China to satisfy the booming U.S. market have to be retooled. But we endeavor, we move forward, but lest I be too harsh on the team over there, certainly we have to recognize that we've seen some recent movement in the rail. China is building a lot of subways and rail stations right now, so we've had some pretty good wins there early stages. But indeed, but if China Tower comes or goes, we need to do something different, and that's the plan going forward. John E. Franzreb - Sidoti & Co. LLC: Okay. Fair enough. And Mike, in your comments, I believe you mentioned 14.5% SG&A margin for the full year. Is that kind of inclusive of Alpha, or no?

No, that would exclude Alpha's operating expenses. But again, their profile isn't completely different from ours, and I think in light of – if you were trying to look at one period, it's probably not going to change that number dramatically, because of the relative size of their spend versus ours, and the fact that they are pretty close in the percentages to begin with.

Right.

So most of my comments were without Alpha. And just for the benefit of our analysts, we likely will have a 45 to 60 day executory period as we get through antitrust approvals in at least three countries. So, we don't own the business right now, we don't have complete access to their employees, and we are quite frankly limited in our ability to be too proactive in the planning, which is consequently why we're not prepared at this point to give you an update on forecast with Alpha included. I think that will happen in that late January, early February conversation. At that point, we will own them, we believe, and have a much better feeling for where we have opportunities and synergies. And we'll refine the synergy estimate that we provided to you last week. So, I'd probably ask for a little bit of patience there. But essentially, they are running right now at about a 13% EBITDA rate. We're at about a 13% EBITDA rate. And so, their gross profit 27%, 28%, 29%, as you know, when lead is not really beating us up, we're at 27% to 28% ourselves. And with cost savings, I think we're going to be – it's a very complementary fit, and you're not going to see too much change. And I will say, we've got to spend a little bit more time, the purchase accounting rules for writing up inventory to market value. We've got to figure out what that's going to do. We have to do the opening balance sheet to assess intangible assets between goodwill, and trademarks, and customer lists, and some of which you amortize and will hit your P&L, some of which you don't amortize. Currently, we would expect that our future depreciation and amortization is probably going to be pretty close to our CapEx numbers, which is kind of our same situation. We're probably going to be throwing off D&A combined at about $80 million to $85 million, and that's probably going to be our CapEx spend for the foreseeable future too. But stay tuned for more specifics on our next call.

And John, there's one point I want to make. I think it's relevant to the OpEx discussion pro forma going forward. Alpha, as we've gone through our process, we've heard from their customers directly. Alpha delights their customers. They do a fantastic job. They've been committed to technology. They've been committed to helping their customers solve problems. It's my commitment to those customers, and I can speak for the whole Board of Directors, we will push technology, we will push waste elimination, we will push cost improvements every day in every way to maintain and hopefully extend the delight that Alpha brings to their customer base. There is no way we're going to step backwards. It's only the push forwards. We love what they do and we want them to do it more and we're wanting to move faster. John E. Franzreb - Sidoti & Co. LLC: Perfect. And just on legacy EnerSys on slide 5, the cost reduction savings of $7 million, was that in Q2 isolation, or was that six-month cumulative? Are we running ahead or behind a year ago?

All right. So, John, you... John E. Franzreb - Sidoti & Co. LLC: And also – go ahead.

Well, finish your question and then I'll respond. I'm sorry. John E. Franzreb - Sidoti & Co. LLC: Okay. And also, I was going to ask about the SAP systems. When does that expense kind of go away?

All right. So, John, you noted earlier that the LME lead average of $1.12 is actually a year-to-date average and our year-over-year increase is actually for the six months, the $30 million. So just for clarity for the rest of the folks. However, the cost reduction savings of $7 million is a gross number and it is the gross savings, but we do spend a fair amount of costs, I'll call it about $2 million, with the resources both outside of the company and the nearly 30 employees that are part of the lean initiative internally that would net that back down. So, we've identified and achieved $7 million of savings, but you've got to pull $2 million, $2.5 million off of it to get the costs that it took to get there. And then on your SAP question. SAP for us, what I sometimes call the valley of despair between starting and finishing that project, we got a little bit of a complication now with the Alpha transaction. They largely are, but not entirely, an SAP user, so we have to incorporate that into our designs and execution. And as we look at how this business gets incorporated into our organization, and start thinking about how we're going to think about ourselves in the future, and I will say although the decision hasn't been made yet, is whether we start thinking more in terms of lines of business rather than geographical regions. Because truly things like the reserve power players are truly global in their footprints, and even motive power is similar. So, still a lot of work there, but we still are quite pleased with the transaction. John E. Franzreb - Sidoti & Co. LLC: Okay, guys. Thanks for taking my questions. I appreciate it.

And our next question comes from Brian Drab with William Blair. You may proceed. Brian P. Drab - William Blair & Co. LLC: Hey, good morning, thanks for taking the questions. I wanted to make sure that I'm understanding something just from a high level. You talked about the third quarter guidance, and I know you're not giving fourth quarter guidance right now, but I'm going to ask a question about the fourth quarter just directionally. It sounds like neutral impact from Alpha, forward contracts not as large a headwind, lower lead price rolling through, volume should increase with the typical seasonality, so earnings should step up pretty significantly I would think sequentially from third to fourth quarter. Can you just tell me where I'm wrong there, and make any comment?

So, I guess a couple of comments on – so we've already given you our guidance for Q3, I know compared to the consensus that's a little bit lower. It's a timing issue we believe in terms of how some of these lead cost pass through. So, that's why I would give you a little more specificity with 100 basis points step-up in Q3 and another 100 basis points in Q4. You would expect Q4 would have a gross margin pickup that's even higher, but you need to keep in mind that some of our business primarily in Europe, where we do pass-through mechanisms because of the spot rate started to decline last July, a few months ago, you'll start to see them have a little bit of revenue contraction as those lower lead costs get reflected in billing rates. So that's why it kind of keeps that slightly lower. So those are kind of the headline numbers for gross profit rates. When I look at the consensus for – so I think on average the analysts were a little ahead of us in Q3. I think, when I look at Q4, I think you're not far enough along, and I think -- I feel pretty confident right now that the consensus full year number for the analysts is -- we'll be able to beat handily. And I'm going to throw out at least a dime on that at the moment. Brian P. Drab - William Blair & Co. LLC: Okay. That's really helpful. Thanks. And you made one comment about Alpha that I wanted to just dig in a little deeper on. You mentioned that you also supply some of their competitors, so could you even roughly quantify how much of your revenue comes from Alpha's competitors who might look for another battery supplier?

Yes, it's a very manageable sum. I think the absolute worst case number is in the zip code of $40 million. And we've spoken to a lot of those folks and I think it would be unlikely that we would see that. Brian P. Drab - William Blair & Co. LLC: Okay. Got it. And then, I don't know if this is a number you could share, but curious what the percentage of revenue associated with lithium is now? I guess excluding Alpha, it sounds like you're gaining some traction with some of the lithium products.

So, when you exclude what we do in Aerospace and Defense, and you just look at our traditional industrial mode of power, telecom, those sorts of businesses, we really haven't started yet. The product development cycle takes some time, so we're literally in the midst of launching the first variant as we speak. And the line, as I said in my prepared remarks, we really won't have the full line ready until the spring, early summer. There's a big trade show in Chicago that we're trying to get everything launched for. It wasn't originally our plan. The original plan was to launch it more slowly, more piecemeal, because I really think we didn't want to eat as much OpEx as we've been having to eat lately. But we listen to the customers. I think we're doing the right thing. We're spending a lot more money than we had originally planned but we want to get those products out sooner and have a full line card come this spring for the launch. And the feedback, I just got a text this morning from the CTO and we just got some customer approvals. So, things are moving forward very much according to plan that we laid out in Investor Day and I can only tell you everything at Alpha and what we're doing there, all it can do is accelerate what we had already laid out with regards to ESS and using lithium. And I made this comment in my prepared remarks, but it's very, very important, is that by having complete control of the system, the enclosure, the energy conversion, the controllers, the lithium battery BMSs, we're going to be able to do some very differentiated things by having one set of firmware and software to control the entire system. And that is what's most exciting to me in the long run. That won't happen overnight, but the Alpha transaction will only accelerate everything we've talked about in the past. Brian P. Drab - William Blair & Co. LLC: Okay. Got it. Thanks, Dave. And then, Mike, do you mind – this is my last question – do you mind giving us the WITS data for the three months? I guess it would be the three months ending October, if you have it for Americas, Europe, the regions.

Yes. Give me a second. Okay. I've got it in front of me. So, trailing three months, the Americas three month compared to the prior year was up 3% for the Americas, and in Europe – or I'll go to EMEA, it was up 14%, in Europe it was 15%, and Asia was up 15% for a total worldwide of 15%. Brian P. Drab - William Blair & Co. LLC: Thank you very much.

Okay.

Ladies and gentlemen, this concludes our Q&A portion of today's conference. I would now like to turn the call back over to your host, Mr. David Shaffer for closing remarks.

I want to thank everyone for taking your time to attend the call today. Have a great day.