EnerSys

Good day, ladies and gentlemen, and welcome to the first quarter 2020 Interest Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. David Shaffer, President and CEO.

Thanks, Julie. Good morning and thank you for joining us. On the call with me this morning is Mike Schmidlein, our Chief Financial Officer. Last evening, we posted on our website slides that we will be referencing during the call this morning. If you didn't get a chance to see this information, you can go to the webcast tab in the investor section of our website at www.annersys.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 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 two, management's discussion and analysis of financial condition and results of operations, set forth in our quarterly report on Form 10-Q for the fiscal quarter ended June 30, 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 August 7, 2019, which is located on our website at www.enersys.com. Now let me turn it back to you, Dan. Thanks, Mike.

I will begin on slide three. Enersys reported first quarter fiscal 2020 adjusted earnings of $1.30 per diluted share, an 11% increase versus the prior year first quarter adjusted earnings of $1.17 per diluted share. Adjusted earnings were adversely impacted by one of our customers deferring a large order of high profit margin business to future quarters, along with our ability to increase our motive power production output to meet strong demand as we are still recovering from the ERP implementation challenges at our Richmond, Kentucky manufacturing facility. Net sales for the first quarter were $780 million, an increase of 16% over the prior year quarter, primarily associated with our December 2018 acquisition of Alpha. Please turn to slide 4. I'd now like to update you on some of our key markets. Our Motive Power Americas business continues to be strong as demand for our TPPL products continues to outstrip our manufacturing capacity. Overall backlog in the Americas is up over 30% year-on-year and the orders were up 9% during the quarter compared to the prior year. Thin Plate Pure Lead orders grew over 200% year-on-year in Motive Power Americas alone. Just like the Americas, Thin Plate Pure Lead, or TPPL, Nexus Pure Lead Motive Power sales were strong in EMEA, fueling a market share gain for Enersys. Since our last call, though, orders in EMEA are softening from our traditional Motive Power OEM factory customers. Historically, we have seen stronger replacement battery sales when new forklift trucks slow down to offset some of this softness. Also, we expect to return to a lower Q2 seasonal pattern in EMEA. Last year, our Q2 in EMEA was lifted by a fire at a competitor's factory. Motive power in Asia is slowing in China given the current trade climate, with the rest of Asia largely stable. Finally, As noted last quarter, we successfully launched our Nexus Ion lithium-motive power batteries at ProMat in Chicago. Although Nexus Ion will not contribute meaningfully to F20 sales, we have several important customer programs in development that should help us further increase market share and expand addressable markets starting in fiscal 21. Our transportation business in the Americas continues to improve although our Odyssey product family remains constrained on thin plate pure lead production capacity. Orders for the heavy truck OEM segment continues to grow with our high performance TPPL batteries in start-stop and non-idle requirements. The entire industry has felt some softness in the distributor network given the high inventories after a warm winter. Recently though, orders are improving as hot weather kills batteries. In EMEA, transportation, the Odyssey brand continues to grow in popularity owing to its superior performance, although once again, TPPL production availability is constraining growth. I will cover our plans on TPPL production capacity later in these prepared remarks. Our telecom business globally continues to be soft. We feel strongly that normal spending patterns have been disrupted pending significant investments in modern high-speed networks, including 5G. In particular, one of Alpha's largest historic customers continues to hold CapEx, which has significantly stressed our business. The team remains confident that this deferred spending is creating pent-up demand. In the Americas, normal telecom order patterns have also been impacted by merger activities of two of our major wireless customers. Since our last call, there has been significant level of new quotation activity, including full DC power systems and small cell site powering. These small cell site quotes have included 5G sites as well as traditional CATV customers powering outdoor wireless sites, which is part of their quad play offering. The sizable dimensions of the RFQs reinforce the heavy DC power consumption of these very high-speed networks. We are benefiting from significant orders from an outdoor DC power system, which included a per-cell enclosure, TPPL batteries, and alpha electronics. This is a testament to our strategy of providing full DC power system solutions. This contract is an important foothold and an account poised for significant growth. Although 5G investment may be later than we envisioned, we are taking advantage of this time to refine the portfolio and supply chain. The other areas of our legacy reserve power and alpha business included data center backup, industrial, and renewable are performing largely in accordance with expectations in all three regions. Finally, we are pleased to report that we have added several key industry experts in advanced battery chemistries serving the aerospace and defense markets. These additions have significantly improved our credibility within the industry and has poised us for significant growth. We are in the final stages of several important contracts yet to be announced that will have meaningful impact on our A&D business. Please turn to slide five. I will now provide an update on the progress we have made on our strategic initiatives. As you know, last December we closed on our acquisition of Alpha Technologies Group, creating the only fully integrated AC and DC power supply and energy storage solution provider for broadband, telecom, and energy storage systems, a truly powerful combination that has already been validated by our customers as noted prior. The integration continues to go well, driven by Enersys and Alpha's aligned cultures focused on making high-quality products that customers can rely on. We are above our targets of achieving our annual synergies, and in the past quarter, we have accelerated alignment with legacy Enersys and Alpha teams to develop a modular power conversion system. Using only a limited set of modules, we will be able to cover all Alpha and Enersys legacy products and allow accelerated developments of new products such as fast charging and energy storage systems. The architecture will allow scaling to volume manufacturing and we will be able to achieve significant cost reductions with increased reliability. The integration of Alpha's and Enersys' lithium ion programs is also progressing as well. A sample telecom system we've developed combines the lithium ion modules and battery management systems from the Motive Power program with Alpha's racks, telecom rectifiers, and controller systems. We're extending this further to offer such advanced features as autonomous peak power shaving, demand response, and energy arbitrage capabilities. With these additions and higher voltages, we will be able to transition the technology to energy storage products for commercial and industrial applications. The lithium battery program is critical to our Outpak photovoltaic energy storage system as well. This offering is an important niche in the fast-growing renewable backup and peach shaving market. Our second major strategic priority is to significantly increase thin-plate pure lead manufacturing capacity to reduce lead times and to meet the exciting and rapidly growing demand, which far outstrips our current manufacturing footprint. In June, we officially announced our plans to expand TPPL capacity over the next three years with more than $100 million in additional capex spending, which will increase our current TPPL manufacturing capacity by 75%, and we expect an incremental 15% increase in TPPL manufacturing, resulting from our continued focus on lean principles. Combined, the company expects that the two efforts to increase TPPL capacity by over $500 million annually. We also announced our plan to continue our commercialization efforts for Green Seal bipolar battery technology, which is licensed from Advanced Battery Concepts. We remain very excited about adding this technology to our portfolio of products. Please turn to slide six. I will now provide an update on our operational excellence initiatives. As noted last quarter, our ERP implementation in Richmond went poorly. The challenges from the ERP change, in addition to high market demand and the addition of Nexus Pure TPPL to the portfolio, has stressed our entire Motive Power Americas sales and supply chain networks. As such, in Q1, we delivered 95% of our targeted revenue in Motive Power Americas. Our Motive Power Americas customers have always depended on Enersys to reliably deliver. I approved and encouraged many extraneous expenses in the quarter, which included loaner batteries, expedited freight, and overtime to help improve our deliveries. This not only created pressure on our Q1, but will also increase our cost of sales in Q2 by approximately $3 million due to FIFO. Mike will provide more details in his prepared remarks. I was disappointed that we could not get all of the issues behind us in Q1, but I am encouraged that our recent performance in the factory has shown marked improvement. As noted prior, increasing TPPL production capacity remains a top strategic priority. I am pleased to report that our lean program in TPPL factories has already increased output by over 10% versus prior year, which equates to approximately $50 million per annum in revenue. We expect this to further improve to a 15% year-on-year improvement by year-end. Overall, the lien improvements have been inconsistent factory to factory, but the benefits are clear and we continue to make progress. Our Richmond facility has fully embraced the lien program, but much of the benefits were masked with the ERP implementation. Finally, our new high-speed line for TPPL has successfully passed all final acceptance testing and is en route from the U.S. from the U.K. We expect the line to be fully installed by this late fiscal year and expect significant throughput and productivity improvements once stabilized. As noted prior, the line has been delayed due to our low inventory levels on TPPL. Looking ahead to the second quarter of fiscal 2020, we are focusing continued growth in Motive Power Americas, continued progress in transportation, lower revenue due to normal seasonal patterns in EMEA, and continued disrupted telecom spending globally. As noted prior, Q2 will also include $3 million in costs associated with our disrupted Motive Power Americas supply chain as well. Mike will provide more specifics on our Q2 guidance in his portion of the call. In summary, we are well-positioned to capitalize on the exciting growth opportunities ahead, which will include a massive global 5G infrastructure build-out over several years and continued growth in broadband to include the expansion of existing DOCSIS infrastructure by broadband companies. Furthermore, quad-play bundling of TV, Internet, home security, and voice services by the major telecommunications providers is driving incremental spending on backbone infrastructure benefiting Enersys. Taken in totality, we remain extremely confident that capital spending by our customers will drive significant incremental sales in our sector and the combined Enersys and Alpha product offerings are uniquely well positioned to benefit from the eventual surge in the capital spending cycle. We also will benefit from increased global market share for our Odyssey brand and transportation and our Nexus maintenance-free products and motive power, as well as the fully integrated DC power systems, which combine alpha and NRSYS batteries. We look forward to providing you with the additional color on the state of the business, our competitive positioning, and our growth strategies during our investor day that is scheduled for October 2nd at the New York Stock Exchange. With that, I'll now ask Mike Schmidlein to provide further information on our results and Q2 guidance. Thanks, Dave.

For those of you following along on our webcast, I am starting with slide 8. Our first quarter net sales increased 16% over the prior year to $780 million due to a 22% increase from acquisitions and decreases of 3%, 2%, and 1% from volume, currency, and price, respectively. On a regional basis, our first quarter net sales in the Americas were up 32% to $517 million, while EMEA's net sales were down 4% at $203 million, and Asia decreased 12% in the first quarter to $60 million. Americas enjoyed 39% from acquisitions, less a 6% volume decline and a combined 1% decrease from price and currency. EMEA had a 3% volume increase, less 5% in negative currency, and a 2% price decline. Asia had 8% volume and 4% currency declines. On a product line basis, net sales for Motive Power were down 1% year over year at $344 million, while Reserve Power was up 35% to $436 million. Reserve Power had a 10% volume decrease and a 2% currency loss, offset by 47% in acquisitions. Motive power generated 3% from volume, less a 2% decrease in price and 2% in foreign currency loss. Please now refer to slide nine. On a sequential basis, first quarter net sales were down 2% compared to the fourth quarter of fiscal 2019, Driven by 4% volume decline, net of 2% from acquisitions. On a geographical basis, America's was up 2%, while EMEA was down 11%, and Asia was down 1%. On a product line basis, reserve power was down 3%, while motive power was down 1%. Now a few comments about our adjusted consolidated earnings performance. As you know, we utilize certain non-GAAP measures in analyzing our company's operating performance, specifically excluding highlighted items. Accordingly, my following comments concerning operating earnings, my later comments concerning diluted earnings per share, exclude all highlighted items. Please refer to our company's Form 8 , which includes our press release dated August 7, 2019, for details concerning these highlighted items. Please now turn to slide 10. On a year-over-year basis, adjusted consolidated operating earnings for the first quarter for fiscal year 2020 for NRCSIS increased approximately $10 million to $78 million with the operating margin down 20 basis points. Lower commodity costs were not enough to offset the volume and price declines along with the inefficiencies incurred in our ERP implementation in Richmond, Kentucky. On a sequential basis, our first quarter operating earnings declined 40 basis points operating expenses when excluding highlighted items were at 15.9% of sales for the first quarter compared to 14.5% in the prior year. Excluded from operating expenses recorded on a GAAP basis in Q1 are pre-tax charges of $9 million, primarily related to $2.4 million in restructuring and $5.3 million in alpha amortization charges. Excluding those charges are America's business segment achieved an operating earnings percentage of 11.9%, which was 70 basis points lower than 12.6% in the first quarter of last year. Lower volume and the ERP implementation, along with the inclusion of alpha's slightly diluted results, created the decrease. On a sequential basis, the America's first quarter decreased 20 basis points from the 12.1% margin posted in the fourth quarter due primarily to the lower volume. America's OE dollars were up approximately $12 million from the prior year from our acquisition and flat from the prior quarter. EMEA's operating earnings percentage of 7.7% was down from last year's 8.2%, as well as last quarter's 10.2%. OE dollars decreased $2 million from the prior year and decreased $8 million from the prior quarter, primarily from lower pricing and mix. On a sequential basis, EMEA also had lower volume. The operating earnings percentage in our Asia business declined 110 basis points in the first quarter of this year to 1.1% operating profit from a 2.2% profit in the first quarter of last year, but was up from last year's last first quarter's 2.1% loss. Asia's OE dollars were down approximately $1 million from the prior year, but up $2 million from the prior quarter despite lower volume on Better Mix. Please move to slide 11. As previously reflected on slide 12, our first quarter adjusted consolidated operating earnings of $78 million was an increase of 14% in comparison to the prior year. Our adjusted consolidated net earnings of $55.9 million was $6 million higher than the prior year. The improvement in adjusted net earnings is a result of the $10 million contributed by the alpha transaction. Our adjusted effective income tax of 18% in the first quarter was lower than the prior year's rate of approximately 19%, but higher than the prior quarter's rate of 13%. Discrete tax items caused most of these variations. Fiscal 2019's full year rate was 17%, which is below our 18 to 20% range of expectations for fiscal 2020. Alpha contributed adjusted operating earnings of 17 million, or 11.4% on revenue of $151 million in the first quarter. Overall, after considering interest taxes and dilution of shares issued to the seller, Alpha was 20 cents accretive after excluding $4 million in after-tax amortization on intangible assets recorded in purchase accounting. EPS, including alpha, increased 11% to $1.30 on higher net earnings. We expect our second fiscal quarter of 2020 to have approximately 43 million of weighted average shares outstanding, which includes nearly 1.2 million shares issued in the alpha transaction net of the 0.8 million shares purchased in February to June of 2019. As a reminder, we still have nearly $75 million of share buybacks authorized. Please now turn to slide 12. The alpha transaction continues to progress as planned, with synergies being realized as expected. The logic of our acquisition remains intact. However, Alpha's revenue is down significantly year over year from current spend patterns of certain major broadband and telecom players. We still have nearly $262 million of cash on hand and our credit agreement leverage ratio of 2.0 times after the transaction is still well positioned. We generated $30 million in cash from operations in the first quarter of fiscal 2019. Capital expenditures were $17 million. We expect full-year CAPEX spending of approximately $90 to $100 million in fiscal 2020. We anticipate our gross profit rate in the second fiscal quarter of 2020 to be between 25% and 26%, which is comparable with Q1. The benefits of lower lead costs will likely again be negated by higher manufacturing costs from Richmond. These costs of approximately $3 million per quarter related to Richmond were incurred in Q4 and again in Q1 but hit our P&Ls the following quarters. In regards to the impact from tariffs, our first and second quarters have approximately five cents per share in each from that pressure. Although we are still assessing the impact in our second fiscal half, we currently expect a similar cost pressure in H2. Tariffs, along with higher freight costs, have impacted our margins by 100 basis points. We expect to generate adjusted diluted net earnings per share between $1.20 and $1.24 in our second quarter fiscal 2020, which excludes an expected net charge of 22 cents per share, primarily related from charges of the alpha amortization and our continuing restructuring programs. Now let me turn the call back to Dave.

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

Ladies and gentlemen, if you have a question at this time, please press star then the number one key on your touch tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. And your first question comes from Noah K. with Oppenheimer.

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

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

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

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

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

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

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

Right. OEM in EMEA is 15% to 20% of total company revenue.

I'm sorry, the total EMEA motive power, so... Yeah, that's not all factory direct. So Noah's number is probably not too far off.

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

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

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

Okay, great. Is there anything else?

Yeah, no, just apologies to my colleagues, but I've got to sneak one more in here. This is the last earnings call, I guess, before your investor day, so can you just give us a high level of what you're hoping to achieve with the day, what we should be looking for?

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

That's very helpful. Thanks so much.

All right.

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

Hi, Dave. Hi, Mike. Hi, Brian. The RFQs that are totaling this more than half a billion, can you just talk about whether those are related to primarily Alpha or both Alpha and Enersys Legacy? Are those specifically 5G? Just a little more color on those?

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

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

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

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

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

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

Yeah. Now, I was in my, you know, directionally what I had said in the prepared comments was we expect continued strength in the motive power Americas. And as we noted, the backlog's up 30%. Q1 year-on-year orders were still up 9%. That business is going strong, and it's really there has been an execution issue. And as I had mentioned, we didn't fully execute to what we had guided to in Q1. But that said, that business, the outlook continues to be strong. I noted that the transportation sector, the The orders are very strong from the OEMs, the heavy truck OEMs. That business is holding up well. We think that, and this is important, that the distributors for those truck batteries, it was a really warm winter across the US, but it's getting to be a hot summer. And the heat, you know, it's the heat that kills the batteries, and it's the cold weather is when you find out about it. But that said, we're optimistic about that sector. We said that motive power in Europe, the factory shipments are slowing for sure, but we expect some of that will be buttressed by the replacement battery side. We've got some work to do. I think China... I think all of us are a little uncertain as to how that's going to land. So we're not super optimistic about motive in China. As we just noted, telecom is improving. I think the rest of the traditional reserve power business is stable. I guess the two big narratives there is timing on 5G, and then the other piece is sort of this pent-up demand being created by this CapEx hold by one of our major CATV customers. I think those are the broad headlines for Q2.

Like I said, how does that aggregate for, I mean, is Motive up then sequentially in the second quarter in aggregate?

Mike? It's just kind of net-net from a line-of-business standpoint. Q2...

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

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

Okay. Yeah, sorry to press you on it. I know you don't guide on the revenue, but that's, of course, why you get these big gaps between what the street was expecting and what you... put up, you know, this quarter. I'm just trying to line up with what you're expecting as much as I can.

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

I think that's pretty precise.

Yeah, thanks very much. Yeah, that's great. Great.

OK.

And again, ladies and gentlemen, if you have a question at this time, please press star and then the number one key on your touchtone telephone. Your next question comes from John with the company.

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

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

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

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

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

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

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

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

Five years from now? Wow.

I can show it to you if you want.

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

Great, great. Thanks for taking my questions. No problem. Okay.

Okay, and I'm showing no further questions at this time. I'm going to turn the conference back to Dave.

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

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