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|06/01/16 05:06 PM||Edited Transcript of ENS earnings conference call or presentation 1-Jun-16 1:00pm GMT - |
|06/01/16 04:30 PM||EnerSys Q4'16 Earnings Conference Call: Full Transcript -
Good day, ladies and gentlemen, and welcome to the EnerSys (NYSE: ENS) Q4 2016 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 you required an operator assistance during the program please press star than zero on your touch tone telephone. As a reminder, today's call is being recorded.
I would now like to introduce your host for this conference call, Mr. David Shaffer, President and CEO. You may begin.
David M. Shaffer: Director, President and Chief Executive Officer:
Thank you, Kevin. Good morning and thank you for joining us. On our call with me this morning is Mike Schmidtlein, our Chief Financial Officer. On Thursday, we posted on our website slides we will be referencing during the call this morning. If you didn't get a chance to see this information, you may want to go to our web cast tab in the investor section of our website at www.enersys.com.
At this time I'd ask Mike Schmidtlein to cover it information regarding forward-looking statements.
Michael J. Schmidtlein: Chief Financial Officer:
Thank you, Dave and good morning to everyone. As a reminder, we will be presenting certain forward-looking statements on this call that are based on management's current expectations and are subject to uncertainties and changes in circumstances. Our actual results may differ materially from the forward-looking statements for a number of reasons. Our forward-looking statements are based on management's current views regarding future events and operating performance, and are applicable only as of the dates of such statements.
For a list of the factors which could affect our future results, including our earnings estimates, see forward-looking statements included in Item 7, Management's Discussion and Analysis of Financial Condition and Results through Operations, set forth in our Annual Report on Form 10-K for the fiscal year ended March 31, 2016, which was filed with the US 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 May 31, 2016, which is located on our website at www.enersys.com.
Now, let me turn it over to you, Dave.
David M. Shaffer:
Thanks, Mike. On Tuesday we confirmed our fourth quarter results of the $1.03 per share which was above our guidance of $0.98 to $1.02. You will notice on Slide 3, our year-over-year sales were lower in the fourth quarter this was due mainly to the impact of foreign exchange rates and a continued pause in reserve power spending in the Middle-East and Russia and in the Americas.
However, our gross profit percentage increased 110 basis points to 26.3% due primarily the lower commodity and manufacturing costs partially offset by higher warranty cost. Our operating profit decline 10 basis points to 11.5% as we won't able to flex expenses on reduced revenue. Operating expenses as a percentage of sales were higher due to our executive management transition, higher bad debt reserves and a slow reaction to cutting cost while reserve power in EMEA was falling. Therefore, our year-over-year earnings per share were down $0.12 to $1.03 per share.
Please turn to Slide 4. I now want to focus on our current business activities in the first quarter guidance. Our global motive power business has been good as we continue to experience positive organic volume in all regions not only in the fourth quarter, but also for the entire fiscal 2016 year. In the Americas we are seeing current orders up slightly year-over-year and it continued good mix towards our premium products.
Orders from E-retail industry are currently strong. In Western Europe we continue to focused on higher margin business which is resulted in small loss in volume. We are seeing very positive acceptance in Europe of our recently introduced Ironclad brand. Ironclad is the premium global brand for motive power applications. In Asia our current orders are up which is positive for young capacity utilization.
Now please turn to Slide 5. Moving to reserve power in the Americas we are seeing positive year-over-year current orders the growth is driven by Template Pure Lead batteries for uninterrupted power supply or UPS, cable television, auxiliary power units or APUs for trucks and our business. Telecommunications orders are remaining flat while our enclosure business continues to experience year-over-year decline in spending. We believe our future growth for area for will be batteries in the fleet trucks engine start and APU needs.
The addressable US market to be approximate 9 million trucks is although $1.5 billion. In April we launched the data save PPPL battery which will provide increased power density to support the migration to shorter run times at data centers. This shift to shorter UPS run times plays well into our premium product offerings.
In our EMEA region reserve power orders are down slightly year-over-year. Current orders for telecommunications in Western Europe are flat, while UPS orders were up nicely as this business continues to benefit from the recent European Union decision on Safe Harbor personal data privacy and storage. We have also launched the data set UPS product in EMEA and we are receiving our first orders. We are also experiencing moderate growth in our African reserve power business.
The Middle East and Russia business orders continue to be fall. Due to the organic volume decline in the EMEA reserve power business over the past year, we are taking actions to improve its profitability. In South Africa our mining business have been hit hard by the reduction in commodity prices. We considering an exit from our JV in South Africa.
In addition, we have nearly completed an SG&A restructuring program to reduce reserve power cost in our EMEA region by reducing positions which should lead to $3 million of reduced expenses in fiscal year 2017. We remain committed to achieving 10% or better operating earnings in this region.
In Asia region we continue to receive significant telecommunications orders in China which will increase the capacity utilization at our -- facility and increased manufacturing efficiencies. In Australia, we continue to benefit from the Fiber To The Home multi-year project. In India, we identified the issues that have led to the increase in warranty costs and have taken steps to correct the problem. Based on the above trends and information, our earnings per share guidance for our first quarter is between $1.08 and $1.12.
In our first quarter we expect the flat to higher sequential volumes in addition to lower commodity, manufacturing, warranty and operating costs will increase profitability. On Tuesday we also announced that our Board of Directors approved the quarterly dividend of $17.5 per share payable on June 24.
Now please turn to page 6, in April we completed the asset purchase of Enser the cobalt base by thermal battery manufacturer for the defense and procession guided weapons systems industry. We believe that the Enser purchase provides EnerSys with additional technologies and expanded range of large defense customers and expanded range of products to large defense customers and opportunities for synergies within our lithium business. Our focus in fiscal year 2017 and beyond is to improve our operational efficiency. Over the next few years I will focused we will focused on manufacturing excellence and cost reductions.
I have Todd Sechrist, our Chief Operating Officer to drive the global team to deliver within 3 years reduced operating cost at least 2% of our cost of good annually.
I wanted to provide an update on Nickel Zinc and OptiGrid please turn to page 7. A few of the large customers that installed and tested nickel-zinc batteries and results are very favorable. We are waiting for our customers to finish their testing and approve our product. Once they give us to go ahead we can execute an industrialization plan for nickel-zinc that will be ready to start next year and take a full 18 months to complete.
Please turn to Side 8. In fiscal year 2016 we received orders for 11 OptiGrid storage systems totaling $7 million. The growth of this product has been delayed by permitting, testing, and government inspections. We feel that most of the reasons for delay are close to being result and we have high confident that over the next two years we should secure orders for 30 additional OptiGrid systems.
In closing we have many positive opportunities in the market that we serve. Among those are the fleet truck market. Market share gains in our TPPL products for the UPS industry increased note service tax per vehicle battery orders and increased telecommunications orders in China driven by their 4G build up. I remain excited about EnerSys's future in the short term and long term market opportunities we are pursuing.
Now I will ask Mike Schmidtlein to provide further information on our results and guidance.
Michael J. Schmidtlein:
Thanks, Dave. For those of you following along on our webcast I am starting with Slide 9. Our fourth quarter net sales decreased 3% over the prior year to $611 million due to 2% decreases in volume and currency translation offset by a 1% increase from acquisitions.
On a regional basis, our fourth quarter net sales in the Americas were down 4% to $330 million while Europe decreased 12% to $205 million and Asia increased 40% in the fourth quarter to $77 million.
In the Americas, 2% decreases in organic volume and currency cause the decline. Europe had a 10% decrease in volume and 1% declines in both price and currency. In Asia, volume increased 30% and recent ICS acquisition contributed 19% growth while pricing drop 2% along with the 7% decline in currency translation. On a product line basis, net sales for motive power were flat at $313 million, while reserve power decrease 6% to $299 million.
Despite the 2% currency headwind motive power enjoyed 2% volume gain while reserve power incurred a 6% volume decrease, 1% from reduced pricing and 2% negative currency translation which over some to 3% from the ICS acquisition.
Please now refer to Slide 10. On a sequential quarterly basis, fourth quarter net sales were up 7% in the third quarter due to 7% higher organic volume. The Americas region was up 8% while Europe was up 4% and Asia was up 9%. On a product line basis, motive power was up 4% and reserve power was up 10%.
Now few comments about our consolidated earnings performance. As you know we unitize certainly non-GAAP measures and 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 in our press release dated May 31, 2016 for details concerning these highlighted items.
Please now turn to Slide 11, on a year-over-year quarterly basis adjusted consolidated operating earnings decreased approximately $3 million with the operating margin down 10 basis points. On a sequential basis our fourth quarter operating earnings were up $11 million on higher volume and margins increased to 110 basis points on the higher volume, and lower commodity costs. The decrease in operating earnings in the prior year reflects primarily lower volume and higher warranty costs.
Operating expenses when excluding highlighted charges, where at 14.7% of sales for the fourth quarter compared to 13.5% in the prior year. The full year's operating expenses for fiscal 2016 were 15.0% compared to 13.9% in fiscal 2015, while operating expenses remain flat in US dollars at $348 million it did climb as a percentage of sales. This 110 basis point increase results primarily from higher bad debt expense and employee compensation charges. You would expect our first quarter's operating expenses to be comparable to our fourth quarter.
Our Americas business segment achieved an operating earnings percentage of 15.1% versus 12.4% in the fourth quarter of last year primarily from the impact of lower commodity cost. On a sequential basis Americas fourth quarter increased to 150 basis points from the 13.6% margin posted in the third quarter due to lower commodity cost and higher volume. Europe's operating earnings percentage is 10.5% was below last year's record of 13.0%, but better than last quarter's rate of 8.4% primarily from higher volume and better mix. The operating earnings percentage in our Asia business declined in the fourth quarter to this of this year to a 0.9% operating loss from 1.1% income in the fourth quarter of last year and 2.3% income in the prior quarter.
Asia's operating loss of $0.7 million for the fourth quarter reflected continuing headwind in our Indian unit primarily from a warranty charge. We believe corrective action have been taken in India, and our Asia region should operate in mid-single digit incomes in fiscal 2017.
Please move to Slide 12. As previously reflected on Slide 11, our fourth quarter adjusted consolidated operating earnings of $70.5 million with the decrease of 4% in comparison to the prior year with the operating margin decreasing 10 basis points to 11.5%. Excluded from our adjusted net earnings for the fourth quarter was approximately $36 million of highlighted charges the largest being the impairment charge of $32 million net of tax. We see our press release issued yesterday for details of these items.
Our adjusted consolidated net earnings of $45.6 million decreased 15% from the prior year or $8 million to 7.5% of sales or 100 basis point reductions, while our book tax rate increased from 23% to 27%. The $8 million decrease reflects the $3 million of lower operating earnings, our higher tax rate and $10 million of negative foreign currency headwind. EPS decreased 10% to $1.03 on lower net earnings with 2.4 million fewer shares outstanding. The lower average diluted shares resulted primarily from share buybacks, we expect our first quarter of fiscal 2017 to have approximately 44.0 million of weighted average shares outstanding.
Our adjusted effective income tax rate of 27% for the fourth quarter was higher than the prior quarter and prior year's fourth quarter rates due to discrete items. We believe our tax rate for the first quarter of fiscal 2017 will be between 25% and 27% and for the full year we expect to 25% rate on our as adjusted earnings. However this assumption anticipates no significant changes in tax rates or legislation in the countries we operator in.
Please now turn to Slide 13 and 14. As usual we have provided information on a full year basis similar to that of our fourth quarter on prior pages. These two pages are for your reference and I don't intent to cover the full year results.
Please now turn to Slide 15, now for some brief comments about our financial position and cash flow results, our balance sheet remains very strong we now have $397 million on hand in cash and short term investments as of March 31, 2016 with nearly $472 million undrawn from our credit lines around the world. We generated $308 million in cash from operations in fiscal 2016. Our leverage ratio remains at 1.5 times despite spending over $208 million in share buybacks and dividends in fiscal 2016.
Capital expenditures were nearly $56 million in fiscal 2016 compared to $64 million in fiscal 2015. We expect to generate adjusted diluted net earnings per share between $1.08 and $1.12 in our first quarter of fiscal 2017, which excludes an expected net charge of $0.04 per share from our restructuring programs and acquisition activities. We anticipate our gross profit rate in the first fiscal quarter to be between 26 and 27%, and our interest expense to be approximately $5.8 million. In conclusion, we believe we remain well positioned to take advantage of future opportunities.
Now let me turn the call back to you, Dave.
David M. Shaffer:
Thanks Mike. Kevin, we can now open up the line for questions.
Question & Answer
Ladies and gentlemen if you have a question or comment at this time please press the star than the 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. Our first question comes from Ben Hearnsberger with Stephens.
Thanks for taking my question. I've got a question on the sustainability of the margins you're putting up in the Americas business. Given all the puts and takes there and what you're seeing in the commodity market, how should we think about that line over the next year?
David M. Shaffer:
Ben, this is Dave. Thanks for the question. I think we've talked about in the past, our motive power business continues to be strong, ...Full story available on Benzinga.com|