EnerSys

Ladies and gentlemen, thank you for standing by and welcome to the Q2 2020 NRCSIS 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. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star and zero. I would now like to hand the conference over to your speaker today, David Shafer, President and CEO. Thank you, and please go ahead, sir.

Thanks, Dede. Good morning, and thank you for joining us. On the call with me this morning is Mike Schmidlein, 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 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 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, C, forward-looking statements included in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operation, set forth in our quarterly report on Form 10Q for the fiscal quarter ended September 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 8K, which includes our press release dated November 6, 2019, which is located on our website at www.enersys.com. Now let me turn it back to you, David. Thanks, Mike.

Before covering our second quarter of fiscal 2020 results, I'd like to touch on a few important events that took place during the quarter that will help set the stage for the rest of our remarks. Please turn to slide three. In mid-September, we announced the acquisition of Norstar from a Swedish private equity fund. In addition to a small assembly business in Stockholm, Northstar has two production facilities in Springfield, Missouri, where it manufactures and distributes energy storage products nearest in design and performance to Enersys Thin Plate Pure Lead, or TPPL, products. The newest of the two factories also has additional floor space immediately available for our new TPPL high-speed production lines. As you may recall, we were going to have to take out two manufacturing lines to install the high-speed line at our Warrensburg facility. We will now be able to preserve $100 million of revenue capacity at Warrensburg on top of Northstar's additional capacity and will no longer require an inventory build in advance of installation. This acquisition fits perfectly with our previously discussed strategy to increase sales of premium products as it will enable Enersys to dramatically accelerate our TPPL sales. The manufacturing processes and quality standards of Northstar are very similar to Enersys TPPL production, and it will require only modest investment to convert the Northstar factories to build our Odyssey, Nexus, and SBS products over the coming quarters. The proven expertise and training of the Northstar production teams will dramatically accelerate our growth versus ordering and installing additional equipment, building on greenfield sites, and training new employee teams. Lastly, Northstar has blue chip customers in Europe, and given that Enersys currently imports significant amounts of products from Europe into the U.S. market, this transaction will allow a rebalancing of factory loading and a dramatic reduction in inventory, freight, duty, and currency risks. We are extremely excited to welcome the Northstar team to the Enersys family and will provide ongoing updates regarding integration, synergy capture, and capacity expansion as we move forward. Mike will provide more color on the financial aspects of the acquisition during his portion of the call. The second significant event of the quarter was the fire that took place in the formation area of our Richmond, Kentucky plant on September 19th. First and foremost, there were no injuries to any employees or responders for which we are very thankful. We are confident and our ability to eventually recoup the vast majority of the product and equipment replacement and business interruption costs through our insurance policies. However, for our third quarter, we will lose approximately $20 million in sales as reflected in our guidance. The third major event was our investor day at the New York Stock Exchange in early October, which, by the way, the presentation is available on our investor section of our website. Thanks to all of you that attended or listened to the event, which we believe could not have been timed any better. EnerSys is reaching a key inflection point in its transformation as we build off of the two recent acquisitions we've completed, the modernization of our products to a modular system solution, an expansion of our addressable markets, and the use of lean to drive down waste from our enterprise. We believe we laid out an evolutionary yet realistic roadmap during the investor day that reinforces the opportunities ahead of us and the process with which we expect to capitalize on them. Please turn to slide four for details of our second quarter EPS results of $1.23. Please turn to slide five. Now I'd like to update you on some of our key markets which are progressing largely in line with prior calls. our Motive Power Americas business was strong in the second quarter as demand for our TPPL products remains robust. We believe our ongoing efforts to expand production, including the acquisition of Northstar, will enable further growth in TPPL. Overall in the Americas, organic sales were up 12% during the quarter compared to the prior year. In the first half of FY20, TPPL orders grew over 130% year-on-year, and represent 11% of Motive Power America sales. As discussed on our last call, orders in EMEA are softening from our traditional Motive Power OEM factory customers. We also saw a return to lower second quarter seasonal patterns in EMEA, which we hadn't seen the year before due to limited industry supply. EMEA demand for Motive Power TPPL products continues to accelerate. Motive Power in Asia continues to slow, particularly in China, given the current trade climate, with the rest of Asia largely stable. During the Investor Day, Sean O'Connell, president of our Motive Power Americas group, spent considerable time highlighting our efforts to increase Enersys' relatively small share in the premium transportation sector. As you know, we have a technology platform with TPPL that we've adopted into a number of vertical markets, and transportation is one of them. The transportation business in the Americas continues to improve as we sign up new customers for our Odyssey TPPL products in the premium automotive, long-haul trucking, and agricultural spaces. In EMEA transportation, the Odyssey brand continues to be highly sought after due to its superior performance. Similar to prior quarters, our global telecom business continues to be soft. It is clear that normal spending patterns have been disrupted as the market awaits significant investments in modern high-speed networks, including 5G. In particular, one of Alpha's largest historic customers continues to restrict CapEx, which has delayed near-term revenue pressure. the team remains confident that this delayed spending is creating pent-up demand, which we will be unleashing as the broadband networks continues to be stressed from streaming services consumption that requires more system build-out. Our last note is that the Sprint T-Mobile deal has received approval from the FCC, and while it is currently being challenged by many states' attorney general, a confirmed merger should drive greater spending. Moving on to another exciting part of our business, we are pleased to have reached critical mass in the very attractive aerospace and defense sector. While these programs have taken time to get to this point, once you're specified in, it tends to be for the long term, and we're excited about the progress we've made and the position we're in. Enersys has been gaining market share, and we anticipate our share will continue to grow. Please turn to slide 6. I will now provide an update on the continued progress we are making on our strategic initiatives. A year ago, we closed on our acquisition of the Alpha Technologies Group, creating the only fully integrated AC and DC power supply and energy storage solution provided for broadband, telecom, and energy storage systems, a truly powerful combination that has already been validated by our customers. The integration is essentially complete, Made successful by Enersys' and Alpha's aligned cultures focused on making high-quality products that our customers can rely on. By the end of FY20, we should have captured $25 million in annual synergies, which is well ahead of our initial target. In addition, by the end of FY21, we estimate the total synergies will reach $35 million, which exceeds the original target by $10 million. The integration of ALPHA's and NRSA's lithium ion programs is also progressing well. As I mentioned on our last call, a sample telecom system was developed, combines our lithium ion modules and energy storage management systems from the mode of power with ALPHA racks, telecom rectifiers, and controller systems. We're extending this further to offer such advanced features as autonomous peak shading, 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 program is critical to our Outback subsidiary's photovoltaic energy storage system, and this offering is an important niche in this fast-growing renewable backup to mitigate unstable grid, utility-driven power outages like those reported in the California wildfires last and other natural disaster-prone areas and peak shaving markets. Our second major strategic priority is to significantly increase TPPL manufacturing capacity to reduce lead times and to meet the exciting and rapidly growing demand that far outstrips our current manufacturing footprint. It will take approximately six months and approximately $40 million of CapEx spending for the North Star facilities to be able to manufacture EnerSys' product types. In addition, over the next two years, we will likely spend an additional $40 million capex at our existing Enersys facilities to further expand their capacity during their capacity outflow. Our current TPPL manufacturing capacity of approximately $600 million should double during the next couple of years. The new high-speed line shipping containers are beginning to arrive in Missouri, and the installation and the testing should be completed by the end of FY20. Finally, on the new products, we have launched our 12-volt motor power TPPL block with carbon additive. This product will significantly enhance energy throughput. Although the additional carbon does not pose a significant process or cost impact to production, it allows us to achieve further margin improvements by offering a lower total cost of ownership, or TCO, for our maintenance-free customers. The new TPPL mode of systems will have an integrated battery management system allowing for a similar customer experience as lithium while helping to extend the life of the energy storage product. In summary, we have the people, the products, and the infrastructure in place to capitalize on the exciting growth opportunities ahead, including a massive global 5G infrastructure build-out and continued growth in broadband, increased global share for our Odyssey brands and transportation, and our new product sales, including Nexus maintenance-free for motive power and our fully integrated DC power systems and services for telecoms. After three years of living and breathing this power solutions industry as CEO, I can say with complete certainty that the needs for energy and energy storage in industrial markets will continue to grow, and Enersys is uniquely positioned today to participate in that growth for many years to come. With that, I'll now ask Mike to provide further information on our results, additional financial details on the North Star acquisition, and third quarter guidance.

Thanks, Dave. For those of you following along on our webcast, I am starting with slide seven. Our second quarter net sales increased 15% over the prior year to $762 million due to a 22% increase from acquisitions and decreases of 4%, 2%, and 1% from volume, currency, and price, respectively. On a regional basis, our second quarter net sales in the Americas were up 35% to $525 million in While EMEA's net sales were down 10% at $183 million, and Asia decreased 20% in the second quarter to $54 million. Americas enjoyed 38% from acquisitions, less 1% decreases from volume, price, and currency. EMEA had a 4% volume decrease, less 5% in negative currency, and a 1% price decline. Asia had 17% volume and 3% currency declines. On a product line basis, net sales from Motive Power were down 3% year over year at $335 million, while Reserve Power was up 36% to $427 million. Reserve Power had a 7% volume, 1% price, and 2% currency declines offset by 46% in acquisitions. Motive Power had a 1% decrease in price and a 2% foreign currency decline, while volume was flat. Please now refer to slide 8. On a sequential basis, second quarter net sales were down 2% compared to the first quarter of fiscal 2020 driven by a 1% volume and currency declines. On a geographical basis, America's was up 2% while EMEA was down 10% and Asia was down 9%. On a product line basis, reserve power was down 2% while motive power was down 3%. Now a few comments about our adjusted consolidated earnings performance. As you know, we 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 November 6, 2019, for details concerning these highlighted items. Please now turn to slide nine. On a year-over-year basis, adjusted consolidated operating earnings in the first quarter increased approximately $8 million to $75 million with the operating margin down 25 basis points. Lower commodity costs were not enough to offset the volume and price declines along with the inefficiencies incurred in Richmond, Kentucky. On a sequential basis, our second quarter operating earnings declined 20 basis points to 9.8%. Operating expenses, when excluding highlighted items, were at 16.1% of sales for the second quarter compared to 14.3% in the prior year. Excluded from operating expenses recorded on a GAAP basis in Q2 are pre-tax charges of $16 million, primarily related to $6 million in restructuring and $5 million in alpha amortization charges. Excluding those charges, our America's business segment achieved an operating earnings percentage of 11.8%, which was 120 basis points lower than the 13.0% in the second quarter of last year. Lower volume in the Richmond interruptions created the decrease. On a sequential basis, the Americas second quarter decreased 10 basis points from 11.9% margin posted in the first quarter due to primarily the lower volume. Americas OE dollars were up approximately $12 million from the prior year from our acquisition and flat from the prior quarter. Europe's operating earnings percentage of 7.3% was up from last year's 6.8%, but down from last quarter's 7.7%. OE dollars decreased $1 million from the prior year and decreased $2 million from the prior quarter in EMEA, primarily from lower pricing and volume. On a sequential basis, EMEA also had lower volumes. The operating earnings percentage in our Asia business declined 430 basis points in the second quarter of this year to a 0.8% operating loss from a 3.5% profit in the second quarter of last year, and we're down from last quarter's 1.1% profit. Asia's OE dollars were down approximately $3 million from the prior year and down $1 million from the prior quarter on lower volume. Please move to slide 10. As previously reflected on slide 9, our second quarter adjusted consolidated operating earnings of $75 million was an increase of 12% in comparison to the prior year. Our adjusted consolidated net earnings of $52.7 million was $3 million higher than the prior year. The improvement in adjusted net earnings is the result of the $11 million contributed by the alpha transaction. Our adjusted effective income tax rate of 18% for the second quarter was lower than the prior year's rates of 19%, and flat with the prior quarter's rate of 18%. Discrete tax items caused most of these variations. Fiscal 2019's full year rate was 17%, which is at the low end of our 17% to 19% range of expectations for fiscal 2020. Excluded from the quarter's adjusted effective tax rate was a $21 million benefit from a deferred tax asset recorded to reflect recent Swiss tax law changes. Future increases in Swiss notional rates will be offset by deductions of the amortization from this deferred tax asset." Alpha contributed adjusted operating earnings of $18 million, or 12.6% on revenue of $146 million. Overall, after considering interest taxes and dilution of shares issued to seller, Alpha was 23% accretive after excluding $4 million in after-tax amortization on intangible assets recorded in purchase accounting. EPS, including Alpha, increased 5% to $1.23 on higher net earnings. We expect our third fiscal quarter of 2020 to have approximately $42.8 million or $8 million of weighted average shares outstanding, which includes the nearly 1.2 million shares issued in the Alpha transaction, net of the 1.0 million shares repurchased in February to August of 2019. As a reminder, we still have nearly $50 million of share buybacks authorized. We have included our year-to-date results on slides 11 and 12 for your information, but I do not intend to cover these in detail. Please now turn to slide 13. The alpha transaction continues to progress as planned and synergies realized as expected. The logic of our acquisition remains intact. However, alpha's revenue remains down year over year from current spend patterns at certain major broadband and telecom customers. We still have nearly $425 million of cash on hand, and our credit agreement leverage ratio is 2.1 times higher. We generated $105 million in cash from operations in the first half of fiscal 2020. Capital expenditures were $43 million. We expect full-year CapEx spending of approximately $90 to $100 million in fiscal 2020. We utilized nearly $185 million of the cash on hand to purchase North Star on September 30th, the first day of our third fiscal quarter. We expect our leverage to remain at or below 2.5 times in the second half with the addition of Northstar. We anticipate our gross profit rate in the third fiscal quarter of 2020 to remain near 26%, which is comparable with half one of our fiscal year. The benefits of lower lead costs will likely again be negated by Richmond's interruptions. These costs of approximately $3 million per quarter were incurred in Q2, but will hit our P&L in the following quarter. In regards to the impact from tariffs, our first and second quarters have had approximately $0.05 per share in costs for each quarter. Although we are still assessing the impact on our second fiscal half, We currently expect similar cost pressure in H2. Tariffs, along with higher freight costs, have impacted our margins by nearly 100 basis points. The North Star acquisition will provide relief to freight costs beginning next fiscal year as transoceanic shipments from European factories to the U.S. will decline dramatically. We expect to generate adjusted diluted net earnings per share between $1.12 and $1.16 in our third quarter of fiscal 2020, which excludes an expected net charge of $0.49 per share, primarily from charges related to the integration costs for Northstar, amortization costs from Alpha, and our continuing restructuring programs. The fire at our Richmond, Kentucky facility that occurred late in our fiscal second quarter will impact negatively the third quarter revenues by $20 million or more as the equivalent of three or more weeks of output have been lost. While we should get partial or complete recovery from our business interruption coverage, there will likely be a lag in recognition of this recovery of at least one quarter. which we believe is the primary difference between our guidance and the consensus EPS. The second possible difference is that our guidance reflects approximately $1 million in interest expense from our North Star acquisition, while its operating results in our guidance are broadly neutral. Now let me turn the call back to Dave.

Deedee, can we open up the line for questions?

Certainly. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Noah Kay of Oppenheimer. Please proceed with your question.

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

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

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

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

Okay. And then, Jay, I guess following up on that, your visibility into that CapEx release from that customer that you called out earlier, have you started to see such a quarter those orders start to flow, or is that something we still need to see?

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

Right. And I was just going to point out those historic levels were occurring in the quarters ended June and September of 2020. or 18, excuse me, and so the comp that we would have is a much weaker first or fourth fiscal quarter, that was January through March of last year's 2019. But they reached their zenith, at least in the interim, in those quarters which are now nearly 18 months behind.

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

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

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

Okay, that's very helpful. I'll turn it over.

Thank you.

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

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

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

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

Okay, fair enough. And regarding Alfa, Could you just give me a sense of how pronounced the seasonality is in that business in the summer months versus the winter months? What kind of revenue drop-offs do you have on a seasonal basis in that business?

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

Okay. Great. Thanks, guys. I'll get back into queue. All right.

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. One moment. Our next question comes from Brian Drab of William Blair.

Hey, good morning. Thanks for taking my questions. So first on the 20 million in lost sales, you know, If you take that into account and then looking forward, you exclude Northstar's contribution. Looking at the third quarter, do you think that sales would still increase sequentially? So taking the $20 million out, taking Northstar out, does the combination of legacy and alpha grow sequentially into the third quarter or not?

Oh, it definitely would grow in the third quarter off the second quarter for the legacy business. Okay.

That's helpful. And then, again, just for help modeling, I think that at the analyst day that you expected Northstar to contribute about $80 million in the second half of the year. Would we think about that as about evenly split between third and fourth quarter, about $40 million in the third, $40 million in the fourth?

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

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

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

Thanks. And then I'm going to go back and just see if you give any comment on this. Back to the revenue forecast. If you look at the fourth quarter, you know, historically, you know, before Alpha joined, so let's just use like 2016, 17, 18 fiscal years, kind of the average increase sequentially from the third quarter to the fourth quarter had been about 7%. Is there anything you can comment on whether you maybe see a similar sequential improvement from third quarter to fourth quarter this fiscal year?

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

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

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

Yeah, so as Dave said, initially... You know, on the legacy business, it was the contract manufacturers that made most of the componentry for our chargers, and that's mostly motive power chargers, but some energy systems chargers. And that we were largely able to negate within a quarter or two of the tariffs originating because we had, fortunately, both Chinese companies and Thailand-based contract manufacturers, and we simply rerouted the Chinese product to Europe, and we took the Thai-produced product into the U.S. So we got the charger issue behind us. That left, in general, one line of business or one set of batteries that are made in our Chongqing facility in China. China that are sold into the U.S. market. Unfortunately, our competitors aren't producing their similar batteries in China, so that's presented a challenge where the market's not going to be receptive to price increases. So this is one that we've been meeting, and we've just been going down the list trying to figure out how we can change, either produce substantial transformation in a country outside of China. We're looking at how we can bring the product in earlier in the value-added stream to do some of the value-added changes. there, getting some of the other components that don't have to necessarily be put into China, have those brought in separately and put in the U.S. It is somewhat challenging, but Be that as it may, Alpha also has one of their products where they have a transformer that's made in China. We're looking at whether we can get that produced in India or other locations. So for the second half of the year, I foresee about $10 million of tariff cost, which is not significant. tremendously different from the run rate that we experienced. As you know, tariff rates have been increasing throughout the year. So even though we've taken some of the things off the list, even though we've been fairly successful at applying for and receiving exclusions on some of the product, the fact that the tariff rates have been increasing as we've moved along has kind of made it look like we're just dog paddling and not really making a lot of progress. So First half, $10 million. Second half, with regard to the tariffs. But we are still working on the two remaining big hitters and trying to find alternative sourcing there. So that's hopeful. I did see, haven't been able to verify, we did see a press release come out about potentially a change or an abatement, a cancellation of some of these tariffs. that may go on in the upcoming quarters. So, you know, I'm crossing my fingers on that one as well. And then my comment on, you know, freight is the other component that we've seen going up. And that's one that we can control. And our ability to produce product in the geographical area that we sell it in is going to be a great cost savings for us so we don't have all these, you know, products on the water going back and forth. North Star products that were made in Springfield, Missouri going into, you know, to be sold into European telecom customers. We won't need to do that. Product that we made in France or the U.K. coming into the United States for the telecom market, we won't need to do that. So those are where we're going to see, you know, the bulk of some of our savings that we think makes the North Star transaction so appealing to us. Okay. Okay. Thanks very much.

That was a lot of great detail. Appreciate it.

Thanks. Mr. Schaefer, you may now proceed with any further remarks.

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

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