Ladies and gentlemen, thank you for standing by and welcome to the Third Quarter 2020 EnerSys 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] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Shaffer, President and CEO. Please go ahead, sir.

Thanks, Sydney. Good morning and thank you for joining us. On the call with me this morning is Mike Schmidtlein, Happy Kansas City Chiefs Fan and also 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'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 December 29, 2019, which was filed with the U.S. Securities and Exchange Commission. In addition, we will also be presenting certain non-GAAP financial measures. For an explanation of the differences between the comparable GAAP financial information and the non-GAAP information, please see our company's Form 8-K, which includes our press release dated February 5, 2020, which is located on our website at www.enersys.com. Now let me turn it back to you Dave.

Thanks, Mike. Before walking through our third quarter fiscal 2020 results, I'd like to remind you of a couple of important events that took place in the back half of September each of which had an impact on our third quarter results. Please turn to slide 3. The fire that started in the formation area of our Richmond, Kentucky plant on September 19 had a significant impact on our third quarter. As we discussed during our quarterly call in November immediately following the incident our team developed a plan to mitigate the fire's impact at Richmond by completing site cleanup, emergency building structural repairs, installing temporary power and rerouting formation equipment in order to expand capacity at our EMEA facilities. Through our employees' hard work and dedication, we are pleased to have achieved pre-fire output by December, albeit with a couple of our North American plants providing formation capacity and we did so keeping our customers as priority. Unfortunately, the disruption resulting from the fire caused us to lose approximately $30 million in sales during the quarter, which was almost double what we initially anticipated in our guidance. Looking toward the immediate time frame, we are already well into the rebuilding phase and expect to complete construction by the end of the first fiscal quarter of 2021, which will eliminate the need to use the other EnerSys' factories formation capacity. In addition, we continue to remain confident in our ability to recover nearly all lost equipment, inventory, facilities and profits through insurance coverage. Secondly, at the beginning of Q3, we closed on the acquisition of NorthStar Battery, which aligned nicely with our strategy to increase sales of premium products putting EnerSys in a position to accelerate our sales of higher-margin TPPL. NorthStar has two production facilities in Springfield, Missouri where…

Thanks, Dave. For those of you following along on our webcast, I am starting with slide 11. Our third quarter net sales increased 12% over the prior year to $764 million, due to a 20% increase from acquisitions and decreases of 5%, 2% and 1%, from volume, price and currency, respectively. On a regional basis, our third quarter net sales in the Americas were up 25% to $503 million, while EMEA's net sales were down 7%, at $202 million. And Asia decreased 3% in the third quarter to $58 million. Americas enjoyed 32% from acquisitions less 4% decrease from volume, a 2% decrease in price and a 1% decrease in currency. EMEA had a 4% increase from acquisitions, but incurred a 9% volume decrease and a 2% negative currency. Asia had 2% price, and 1% currency declines. On a product line basis, net sales for Motive Power were down 10% year-over-year, at $316 million, while reserve power was up 36% to $448 million. Reserve power had 2% volume, 2% price and 1% currency declines, offset by 41% in acquisitions. Motive Power had a 1% decrease in price. And a 1% foreign currency decline, while the volumes were down 8%, due to the fire at our Richmond Kentucky plant and weakness in our EMEA and Asia Motive Power markets. Please now refer to slide 12. On a sequential basis, third quarter net sales were flat compared to the second quarter of fiscal 2020, driven by a 3% volume decline offset by comparable growth from acquisitions. On a geographical basis, Americas was down 4%, while EMEA was up 11%, and Asia was up 7%. On a product line basis, reserve power was up 5%, while Motive Power was down 6%. Now a few comments about our adjusted consolidated earnings performance. As you…

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

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

Thanks. Good morning. Dave, you mentioned in your prepared remarks that telecom spend is soft currently, but you seem to point to expectations for meaningful uptick in 5G activity late this calendar year, early next year. And I was wondering if you could just give us some color on the customer dialogue and quoting activity you're seeing. Maybe how have those conversations and that activity changed over the past quarter?

That's a great question, Noah and good morning. The specifics are getting much cleaner and tighter in terms of the electrical load and sort of the mechanical requirements. So the -- like the enclosure sizes, weight specs, electric loads, everything is getting much more precise than we had. I think there's been still a lot of debate within the various carriers about the spectrum they're going to use and the equipment they're going to use in the different metropolitan and rural areas. So it's only tightened up, let's say within the last 90 days as to precisely what they're looking for and the vision of what and how they are going to deploy these small cell sites. So, it's exciting. It's later than I think all of us wanted. But I have a high degree of confidence that with the Alpha acquisition, as I noted in the prepared remarks, we think there's going to be a general lift on energy storage because of the increase in data. But with Alpha and ICS Purcell, we've really positioned ourselves to enjoy a much higher share of the spend than we've had historically. So that's -- I would say, it's no answer. It's really the precision of what they're asking for and the detail in the RFQs that we're receiving.

Okay. That's helpful. Can we -- turning to another part of the business, can we dig a bit more into the EMEA softness? How much of that 9% volume decline was maybe a function of diverting some of your product to the Americas versus just general OE order softness versus any share loss? Can you kind of parse that out for us a little bit?

My best insight I can give you Noah is that, the key issue was the tough comp created by a competitor who was struggling to recover production after they had a serious event. And so historically, that business similar to the U.S. the market share data we provided in one of the slides has been predictable and stable. I don't think it's a broad difference. I think it would be a similar growth pattern. And so as that competitor has rolled back into the market and started to claw back their share, we're going back to normal levels. So I think that's the key issue that we're seeing the big change there. And what's important – and this kind of goes to the nature of your question, we have constrained our European sales team from pushing NexSys because we've allocated most of the available production capacity to the North American market. And so there's a big push on now that we realize these synergy freight savings that Mike noted with the transoceanic savings, that's going to create available capacity in our TPPL European factories. And the pressure is on Holger and the team to bring back more NexSys and ODYSSEY volume in that region. And that's the way we'll enjoy. Now it takes time to do this Noah. None of this is going to happen overnight. We have to homologate the products. We have to get all of the approvals engineers' sign-offs, quality sign-offs as we move products, customer approvals. We need certain certifications. So – we need certain permits for new equipment from states. So there's a lot of things we have to do and we have to do well. But we are – I think Mike and I both can say with a very high degree of confidence, we know the business is out there. We just need to match our commitments of supply and demand extremely well. We don't want to disappoint anybody by over committing and moving too fast. But I think as Mike said, the strategy the deal logic has held up extremely well. And the other thing I'd like to say about the NorthStar, I couldn't be happier with the folks in Springfield that have joined the family, the level of cooperation communication. A big shout-out to those teams. And the high-speed line installation has gone unbelievably smooth to date knock on wood. And I'm very impressed too with the groups over there. So things are going on that front exactly according to plan.

And that actually ties into the NorthStar question I was going to ask, which is – I think Michael alluded to this in his comments that there are some permitting and certification steps that need to be taken as you're looking to upgrade those plants to produce TPPL. Can you just give us a little bit more color on your expectations for how that plays out? And obviously you said, you think in total there can be a doubling of revenue capacity by the end of – by I guess it's March 2022, calendar 2022 or March calendar 2021, I'm sorry. Maybe you can just kind of help us think through what has to happen from blocking and tackling and how long that's going to take.

Sure. And again I think what's important to me is that we do this in a way that we don't get too far out over our skis with our customers. So I'll just give you example. So if we make a certain battery type in Warrensburg and we are way slammed on capacity constraints there and we need to get that moved to Springfield one of the factories it has – it takes literally, probably two months to get that SKU minimum, up tooled and running in the new factory get it signed off too. And two months is extremely aggressive. So it's – and then that frees up additional capacity in Warrensburg, lets them dig out a little bit. And then it's just similar. So it's on a case-by-case basis. We have most of the things tooled. So it's going to be a smooth ramp-up. By the end of the next fiscal year, we should be in a great position because part of the ramp-up Noah is as we've noted, the high-speed line is going to eat a lot of plates. I mean, it's going to need a lot of plates. It's going to be hungry and we're having to increase the plate-making capacity in Springfield to match that. And a lot of that equipment is longer lead time. And so really we just can't snap our finger. I know some of the mills literally have eight-month lead times. So, it's going to take a while, but we should emerge at the end of calendar year 2021 or fiscal year 2021 with well over $1 billion, I think close to $1.2 billion of capacity in TPPL which is unbelievable. And we're excited about it. And again, so you should see over the coming quarters, a smooth ramp as we bring on new customers and we match that with our ability to execute at the factory level.

And Noah the challenge is not just for the Springfield plants to be able to take product that may have previously been made by other EnerSys TPPL factories, but also for European TPPL factories to take on some of the product that was being made in Springfield in Missouri in the middle of the United States and they were shipping that to Europe. So, there's some product qualifications, a little bit of tooling updates they have to go on, on that side of the pond as well. So...

Correct. Good point, Mike.

All right. Thank you very much for the color.

Thanks.

Thank you. [Operator Instructions] And our next question comes from Brian Drab with William Blair. Please proceed with your question.

Hi. Good morning. Thanks for taking my question. First one, just following on that TPPL capacity line of questioning, when does the first incremental TTPL capacity start to come online? Because my understanding was when you made the NorthStar acquisition that it would be like six months before we start to see that coming online and that would be in kind of the late spring, early summer time frame. Is that still the case? Or are we talking about a longer term now?

I think -- no, I think that's really right on the March still is when you're going to start to see it, and it will grow beyond that. So, it'll be probably next -- let's say, one to five quarters you're going to see a fairly consistent increase as new equipment is brought online, as new SKUS new accounts are brought online. It's -- that's the kind of ramp you should see.

Got it, okay. Thanks. And then I joined this about 10 minutes late unfortunately. And I'm wondering did you talk about that transatlantic freight savings? That seems to be the easiest win in terms of NorthStar synergies. And did that start to show up in the December quarter? Or do we get that in the March quarter? Or -- I know that Mike you had talked about there's tens of millions of dollars in potential savings there.

Yeah. Again, that's -- as we did talk about a little bit that goes with some of these toolings approvals, the ability to move things around. So, I think you'll start to see the benefit of that probably -- I would say, within two quarters you should start to see that making an impact on the result. As we get -- I know one of the accounts, for example, it's a big car company, truck company and we have to go through their approval process. It's like an ISO audit in our French factory. And it just takes a little time. So, those are the things the teams are going through. And so, I would say yeah. I would say within two quarters you should start to see the impact of those savings more meaningfully.

So, when I look at the -- like the $145 million midpoint of the March quarter guidance, there's not a ton of freight savings or really NorthStar synergies in there yet but to come beyond the March quarter really?

Right. And so Brian, in the upcoming fourth quarter, so NorthStar will be a similar drag, probably a little higher than what we saw. We had $0.05 in our third quarter that we attributed negative to NorthStar when you add the interest expense for the transaction. We'll probably have slightly more than that maybe up to $0.10 of drag that's been built into our guidance. So that's -- and that's kind of the last quarter before we think we'll see NorthStar taking on products that were previously, let's say, made in our Warrensburg, Missouri facility. This is when the high-speed line will start to see some output and provide some benefit. Hopefully, it's also the time where some of the products currently made in NorthStar's Springfield Missouri facility can be taken over by our European facilities and the qualification for those customers is completed. So, we hope that that happens in -- somewhere in Q1 or Q2 of fiscal 2021.

And Brian I think we need to point out that the key reason we did the NorthStar transaction was the make versus buy we discussed. It was the ability to get there faster with lower risk. And that's -- it's a very -- it's looking better than we could have ever hoped. The one thing we should point out -- and in my prepared remarks, you heard there's been two areas of recent softness. One is the Class 8 over-the-road OEM market has slowed down and obviously telecom. Well, those were two key areas that NorthStar's traditional revenue was from. So, they're feeling it just like we're feeling it in those two places. EnerSys is much broader in terms of the markets we serve the accounts. So, it tends to be more muted. I think it's more acute with them some of those revenue pressures. But we remain extremely optimistic about our ability to bring on new accounts, penetrate more deeply into the transportation sector. And we just -- my bigger concern, as I said with Noah, is bringing on new customers at a rate we can handle, not trying to go too fast because you only get one chance to make a good first impression.

So, if you -- just the last question I guess and I'll pass it on. But the NorthStar business, they were doing something like roughly $150 million in revenue, $15 million in EBITDA annual run rate. And have those pressures that you just mentioned Dave been the reason that they're reporting a loss now? Or is it the kind of the acquisition-related costs and incremental interest expense that resulted in that?

I think it's both.

Okay. But they'd reporting a loss without those -- the incremental interest expense--

I think it's both. I don't have the exact amortization numbers in my head. Mike would--

Well, I think you have the -- you've calibrated correctly about where we had expected those numbers to be. And they softened as those markets were softening. And we knew that those markets were softening as we were going in to close the transaction. But as Dave said, we were never buying NorthStar for their existing book of business, we were buying them for the capacity they had provided us for TPPL, so we could bring on other markets. So, while it was not envisioned, let's say, six months ago, we were becoming more aware of the softness as we were experiencing the same thing in our markets. So, where you see the drag that I just referenced as let's say $0.08 to $0.10 in our fourth fiscal quarter that probably wouldn't have been there if their markets had remained stable. But they do have the interest expense applied to them. So, that's part of the drag. But that's part of the return that -- the costs they have to cover to make the returns.

At least again a big part of the story is telecom-related. The T-Mo-Sprint deal has dragged on way too long and that's impacted their normal spending patterns. NorthStar has gotten caught up into that. And -- but again, I think similar to that broadband story, it's just a question of when not if they're going to spend the money. They have to spend the money. And we feel extremely well-positioned. The product is well regarded and it fits very much into our core lines of business with Drew's team. So we're very optimistic that business is still out there.

My last question is do you think that 5G-related spending has a material impact on your fiscal 2021 results or not?

I think that -- in 2021 okay I would just say...

I'm looking at your next fiscal year like your next fiscal year starting spring summer. Calendar 2020 fiscal 2021, does 5G have a material impact on your revenue?

Yes. I would say because this year, it's been a net negative, I would say probably. Next fiscal year, I haven't seen the final numbers from Drew's team, but I think that the expectation is things are going to start to pick up towards the -- probably our fourth quarter is when we're likely to start to see. Steve, is that consistent?

Yes.

Okay. Okay. So that's probably Q4.

Yes. That's pushed out your -- from what you're expecting previously really. Like you said, a year ago this time the feeling was maybe it starts right spring and summer of 2020.

Right.

So that it's all -- it's being pushed out.

Yes. That's what it feels like right now. It could -- I mean we've got some trials coming up in the spring. So it just depends on how well things go. It's -- there's so many issues for these guys to deal with right now between frequency spectrum audits, handset issues, class penetration issues. There's still so much work to do from their perspective. And -- but we're well positioned and we'll be there when they're ready.

Okay. Thank you.

Thank you. And I'm not showing any further questions at this time. I'll now turn the call back to David Shaffer for any further remarks.

Well thank you Sydney. And I want to thank everyone for attending the call today. We look forward to providing further updates on our progress on our fourth quarter and the year-end 2020 call in May. Have a good day everyone.

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