David M. Shaffer - EnerSys Michael J.

Schmidtlein - EnerSys

John E. Franzreb - Sidoti & Co.

LLC Ben Hearnsberger - Stephens, Inc. Brian P.

Drab - William Blair & Co. LLC Michael W.

Gallo - C.L. King & Associates, Inc.

Thank you, Brian. Good morning, and thank you for joining us.

On the call with me this morning is Mike Schmidtlein, our Chief Financial Officer. Last evening, we posted 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 the webcast tab in the Investors section of our website at www.enersys.com. I'm going to ask Mike Schmidtlein to cover information regarding forward-looking statements.

Thank you, Dave, and good morning to everyone. As a reminder, we will be presenting certain forward-looking statements on this call that are based on management's current expectations and 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 date of such statements.

For a list of factors, which could affect our future results, including our earnings estimates, see forward-looking statements included in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, set forth in our Quarterly Report on Form 10-Q for the quarter ended October 2, 2016, which was filed with the U.S. Securities and Exchange Commission.

In addition, we will also be presenting certain non-GAAP financial measures. For an explanation of the differences between the comparable GAAP financial information and the non-GAAP information, please see our company's Form 8-K, which includes our press release dated November 9, 2016, which is located on our website at www.enersys.com.

Now, let me turn it back to you, Dave.

Thanks, Mike. On Wednesday, we announced our second quarter results of $1.15 per share, which was above our guidance range of $1.06 to $1.10.

You will notice on slide 3, we had another very good quarter, and once again achieved an all-time record for as adjusted gross profit percentage of 28.5%. We also achieved the second quarter records for as adjusted operating earnings percentage, as well as earnings per share of $1.15.

Our organic growth was mainly driven by the reserve and motive power businesses in Asia. The increase year-over-year profitability was due primarily to lower commodity costs, higher volume, positive mix, tax effects and for earnings per share from lower shares outstanding.

Please turn to slide 4. I now want to focus on our current business activities and third quarter guidance.

During the second quarter, the global motive power business continued to experience positive organic sales volumes in all regions, and our premium products continue to resonate with our customers. The second quarter organic growth is very similar to what we experienced in our first quarter of fiscal year 2017 and in fiscal year 2016.

Global orders for motive power batteries continue their steady growth pattern. Asia continues to be our highest growth area benefiting from the conversion of internal combustion for trucks to electric.

In Europe, Middle East and Africa, we are increasing the percentage of our motive power sales that are value added products, which include thin plate pure lead, IRONCLAD, gel, high-frequency chargers and battery management systems. Year-to-date, premium product sales were up year-over-year by 24%.

This has allowed EMEA to manage or maintain their operating earnings by the weak telecommunications demand in the emerging markets. We announced plans to exit our South Africa joint venture due to weak economic conditions, limited growth in the mining industry and increased imports.

We will continue to serve South Africa with our global manufactured products, just as we do for the rest of Africa. Please turn to slide 5.

Moving to reserve power. In the Americas, I am pleased to report that we have received a large order for cabinet enclosures that should ship mostly in the fourth quarter of fiscal year 2017.

These orders should be just the first year of what we anticipate will be a multi-year build-out. During the second quarter, we also received orders and generated sales for our ODYSSEY over-the-road trucks from our new fleet customer.

We anticipate that full-year sales to this customer could approach $15 million. We are currently working with other truck fleet operators, and I anticipate that additional fleets will begin to use our batteries for their engine start in auxiliary power unit, or APU needs during fiscal year 2018.

Also, we are closing in on opportunities to further expand ODYSSEY sales into the retail sector. Over the past year, our aerospace and defense organization has been concentrating on product development and testing with our current and potential customers.

These efforts have been rewarded by a significant pickup in orders, and interest in our space ammunitions products. I would expect to see double-digit growth in this business in fiscal year 2018.

In our EMEA region, reserve power organic sales in the second quarter versus last year's second quarter were down slightly. Telecommunications orders continue to be down year-over-year, primarily due to the reduced sales to the emerging markets.

UPS orders continue to do well, and benefit from the recent European Union decision on Safe Harbor personal data privacy and storage. In our Asia region, the second quarter year-over-year operating earnings were up approximately $4 million as we continue to see higher volume in reserve power products in China and Australia.

Based on the above trends and information, our earnings per share guidance for our third quarter is between $1.12 and $1.16. We anticipate a sequential increase in our sales volume and reduction in operating expenses to be offset by increasing lead costs, and a seasonal increase in manufacturing variances.

On Wednesday, we announced that our board of directors approved a quarterly dividend of $0.175 per share, payable on December 30. Please turn to slide 6.

We are beginning to benefit from our lean initiatives. As we discussed earlier, our initial goal is to permanently reduce our cost of goods sold by a minimum of 2% or $35 million by the end of our fiscal year 2019.

These savings will be driven by eliminating waste, increasing productivity and reducing costs. In addition, we will expand our projects to include opportunities for savings in operating expenses.

We have already identified enough projects that should easily get us to and beyond our goal. Looking beyond our current projects, one of our longer-term key areas of focus is to drive organic growth through cycle time compression.

However, it is important to note that the margin improvements will not be linear. As we dig deeper into our lean initiatives, our operating expenses may rise on a short-term basis in advance of the savings.

Please turn to slide 7. Just as a quick reminder that our next Investor Day will be held on Tuesday, February 28, 2017, at the New York Stock Exchange.

In closing, I am very pleased with our second quarter performance. In this slow growth economic environment, we remain focused on the continued expansion to higher-margin product mix, while we continue to reduce costs in Europe, Middle East, and Africa.

Our second half of fiscal year 2017 will get a boost from the large cabinet enclosures order and the increasing sales of our ODYSSEY battery. Finally, as I previously noted, we are confident that operating margins will expand as we eliminate waste and compress our cycle times.

I remain excited about EnerSys' future and the short-term and long-term market opportunities we are pursuing. And now, I'll ask Mike Schmidtlein, to provide further information on our results and guidance.

Thanks, Dave. For those of you following along on our webcast, I'm starting with slide 8.

Our second quarter net sales increased 1% over the prior year to $576 million due to 2% increase in volume and 1% from acquisition, offset by a 2% decrease from currency translation. On a regional basis, our second quarter net sales in the Americas were up 1% to $325 million, while Europe's were down 5% to $181 million, and Asia increased 23% in the second quarter to $71 million.

In the Americas, a 1% increase in acquisitions and 1% from pricing offset a 1% currency decline. Europe had a 1% decrease in volume and a 1% decline in price, along with 3% in negative currency.

In Asia, volume increased 17%, and the recent ICS acquisition contributed 4% growth, while pricing increased 1% and currency improved 1%. On a product line basis, net sales for motive power were up 1% to $299 million, while reserve power also increased 1% to $277 million.

Despite a 1% currency headwind, motive power enjoyed a 2% volume gain, while reserve power enjoyed a 1% volume increase and 2% from the ICS acquisition offset by a 2% negative currency translation. Please now refer to slide 9.

On a sequential quarterly basis, second quarter net sales were down 4% to the first quarter from 4% less organic volume on 2% fewer working days in Q2. The Americas region was down 1%, while Europe was 8% lower and Asia was down 4%.

On a product line basis, motive power was down 2% and reserve power was down 6%. Now, a few comments about our adjusted consolidated earnings performance.

As you know, we utilized 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 9, 2016 for details concerning these highlighted items. Please now turn to slide 10.

On a year-over-year quarterly basis, adjusted consolidated operating earnings increased approximately $4 million to $70.9 million with the operating margin up 60 basis points. The increase in operating earnings from the prior year reflects primarily higher volume and lower commodity costs.

On a sequential basis, our second quarter operating earnings dollars were down $4 million on lower revenue and higher lead costs with the operating margin down 10 basis points. Operating expenses, when excluding highlighted charges, were up to 16.1% for the second quarter compared to 15.5% in the prior year.

The full year's operating expenses for fiscal 2017 should be comparable to fiscal 2016 at approximately 15%. Excluded from operating expenses recorded on a GAAP basis are charges of $5.4 million, primarily related to the EMEA restructuring or exit charges.

Excluding those charges, our Americas business segment achieved an operating earnings percentage of 15.5% versus 15.3% in the second quarter of last year, primarily from the impact of higher sales and lower commodity costs. On a sequential basis, Americas second quarter increased 10 basis points from the 15.4% margin posted in the first quarter due to lower manufacturing costs.

Europe's operating earnings percentage of 9.4% was up slightly from last year's 9.0%, but down from last quarter's 10.1% on lower volume. The operating earnings percentage in our Asia business improved in the second quarter of this year to 5.1% operating profit from a 0.1% income in the second quarter of last year, but is down from last quarter's 5.7%.

Asia's sequential operating decline reflects lower volume. Please move to slide 11.

As previously reflected on slide 10, our second quarter adjusted consolidated operating earnings of $70.9 million was an increase of 7% in comparison to the prior-year with the operating margin increasing 60 basis points to 12.3%. Excluded from our adjusted net earnings for the second quarter was approximately $5 million in after-tax highlighted charges, the largest being the exit charge as we exit from our South African joint venture.

Please see our press release issued yesterday for details of these items. Our adjusted consolidated net earnings of $50.4 million increased 13% from the prior year or $6 million and improved 90 basis points to 8.8% of sales.

The $6 million increase reflects $4 million higher operating earnings, a lower tax rate and $1 million in currency improvement. Our adjusted effective income tax rate at 24% for the second quarter was lower than the prior quarter of 26%, and the prior year second quarter rate of 27% due to discrete items.

We believe our tax rate for the third quarter of fiscal 2017 will be approximately 25%, and for the full-year, we expect a 25% rate on our as adjusted earnings. However, these assumptions anticipate no significant changes in tax rates or legislation in the countries we operate in.

EPS increased 18% to $1.15 on higher net earnings with 2.1 million fewer shares outstanding. The lower average diluted shares resulted primarily from share buybacks last fiscal year.

We expect our third fiscal quarter of 2017 to have approximately $44 million of weighted average shares outstanding. Please now turn to slides 12 and 13.

As usual, we have provided information on a year-to-date basis similar to that of our second quarter on the prior pages. These two pages are for your reference, and I don't intend to cover the year-to-date results.

Please now turn to slide 14. Now, some brief comments about our financial position and our cash flow results.

Our balance sheet remains very strong. We have $440 million on hand in cash and short-term investments as of October 2, 2016, with over $473 million undrawn from our credit lines around the world.

We generated $114 million in cash from operations in our first fiscal half of 2017. Our credit agreement leverage ratio is at 1.4 times, and will likely drop further by year-end barring any significant acquisitions.

Capital expenditures were $21 million in the first half of fiscal 2017 compared to $34 million in fiscal 2016. We expect to generate adjusted diluted net earnings per share between $1.12 and $1.16 in our third quarter fiscal 2017, which excludes an expected net charge of $0.13 a share coming from continuation of our exit in South Africa, and our restructuring and acquisition activities.

We anticipate our gross profit rate in our third fiscal quarter to be approximately 27% and our interest rate expense to be approximately $5.7 million. In conclusion, we believe we remain well-positioned to take advantage of future opportunities.

Now, let me turn the call back to Dave.

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

Good morning, everybody.

Hi, John.

I'd like to start with – one of your last thoughts there, Mike. When you talk about sequentially the gross margin dropping to roughly 27% from the 28.5% that you just recorded, what's the biggest driver in the decremental gross margin?

So, the biggest driver in that decline is going to be the sequential increase in the cost of lead from the second quarter. The first and second quarters had relatively comparable lead costs.

We'll see Q3's increase of about $4 million, which is going to be about 75 basis points pressure. So if all other things were equal, that 28.5% would move down to about 27.75% thereabouts.

The 28.5%, which was a record, I think, is a reflection of the improvements we've made in the mix of our higher margin products, our premium products. I think, it reflects the fact that we've intentionally tried to go after better business rather than more business in regions like Europe.

I think it reflects the fact that our India activity, which had been losing money in the last year pretty heavily, is getting closer to breakeven. So we've been making progress there.

So all of those things should help us to kind of counter the negative in lead, and I will say, as you go in other quarter sequentially with most of that lead costs being known, but not all of it, I would expect probably another $4 million to come on top of it. So we got another 75 bps of pressure next quarter, followed by an additional 75 bps, thereafter.

So once we get out to Q4 and even into Q3, what's going to keep us in that 27-plus range is going to be some of the cost benefits that we anticipate from our lean initiatives. I think those are the two quarters, the second half of the year, where you'll start to see some of those benefits.

I think, John, the other issue is that, we have seen some movements in LME lead prices, as Mike just alluded to, and there is some lag in our recovery with our pricing actions. So that's historic.

We never can seem to recover as fast as lead can go up, so that's part of the sequential story as well.

Got it. Perfect.

That was great, guys. And Dave, you mentioned that in motive, Asia's growth has been, I guess, better than expected.

Could you just talk a little bit about that? My impression has always been that was kind of the hardest region to crack for the motive side of the business?

Yeah. It's actually going fairly well for us.

So I mean, WIT Statistics demonstrate that, that region seems to be coming back to life a little bit better, which is exciting. And even though the economic situation in China, which we feel like is improving a bit, we still see a lot of lift from the conversion from gas to electric within the China market.

And outside of China in the Asia market, we're seeing fairly stable situation, similar to what we're seeing in the U.S., and actually Europe's pretty good in motive right now. So really the gas-to-electric conversion is sustaining us in China, and we look for better things as the China markets continue to improve.

And we made a fairly significant investment in a new factory there, which we hope to take better advantage of as the market and the situation does improve there. India, not much of a motive power market today, but we feel well-positioned to take advantage of that as that market begins to mature.

And then, just as a reminder, John, Japan, Korea, a fairly significant motive power markets, fairly significant part of the WIT Statistic. Given the xenophobic nature of those regions, we've never really had much success in those markets.

So you sort of have to just keep in mind that we don't participate, unfortunately, in Japan and Korea.

Dave, how big of a potential is motive Asia 3 to 5 years down the line?

Yeah, I'm cautiously optimistic. I think as the Chinese market can get back to what were historic rates, layer that on top of – on the gas-to-electric conversion and then put in the perspective of our untapped factory capacity in Yangzhou, I'm cautiously optimistic that there is some upside, especially in the Chinese market for EnerSys, motive power.

Okay, guys. I'll get back into queue.

Thank you.

Thank you.

I think we lost Michael.

Hey. Thanks for taking my question.

I wanted to ask about the Purcell order. Is that in the telco space?

It is in the telco space. And we haven't seen any major network deployments like we did a couple of years ago in terms of 4G rollout.

But there is still some projects out there, specific filling in areas, adding some additional capacities to networks, and we're excited. And we think that this is going to breathe some life into on that group.

I really like that group of folks, and I'm very encouraged and happy for our team out there to enjoy the success, and keep them busy for at least the foreseeable future.

Okay. So, it'd be fair to say that, it's a helpful order.

Probably not big enough to backfill the slowdown we've see in that business, but it's a step in the right direction.

It's a perfect summation.

Dave also, I think you kind of alluded to some higher operating expenses in advance of lean. Can you kind of detail what some of those costs are?

How they impact the margin?

It's not just lean, but it's a lot of the change oriented initiatives we have going. So lean initiatives and IT both are going to potentially have an impact on OpEx in advance of the savings yield.

And so those will be consulting fees, it will be bringing on licenses for software in advance of actually using them to their full extent, transition in nature. But we are very confident and optimistic about all of these programs, otherwise, we wouldn't be doing them.

But we wanted to flag to you, we are very keenly-focused on operating expenses, but we wanted to flag to you that, there may be some short-term headwinds. We think they're manageable, and we'll just discuss that at every one of these calls to make sure you're aware of what's going on.

Okay. I know we're going to have some gross margin impact from lead, can you size the potential margin impact from some of these incremental costs on the OpEx side?

Right. Well, Ben, it's Mike.

So the costs that, Dave was talking about is probably incrementally about $1 million – $1 million to $1.5 million a quarter. So – and as you know, our operating expenses, when you add them up full-year, about $360 million.

So they're going to come in far below, they're probably about 0.5% (25:35) for those, incrementally. So, they exist.

They should help us to drive cost savings elsewhere, although not initially. But they should allow us to grow to be faster, be more responsive, and all of those benefits should show up elsewhere within our P&L.

Okay. That's helpful.

I guess, lastly on the ERP rollout, where do we stand, and do you need that system in place to accomplish your lean goals?

I think that, what's important is that, the two initiatives work in concert with each other. I don't know that it's entirely dependent to achieve.

The lean, frankly, is more about flows and process and waste. So they're not – they certainly don't – they are a bit mutually exclusive.

But one thing we have to be careful of is making sure that, the design and the rollout is done in unison. So we've got our new CIO and our new COO meeting on a regular basis to make sure that these two rollouts are not fighting each other along the way.

And so far, I have to say, I'm extremely pleased with what I've seen. On the IT side, things are improving.

We took a fairly significant charge last quarter as we reset our direction. We have a new engagement partner.

We just had our SAP Executive Steering Committee, yesterday. We got an update from the team, and I'm very pleased with where things stand.

And in terms of lean, we're not really started, yet. But in terms of the initial assessment, the opportunities, we think, are very tangible to achieve that $35 million sustainable and structural reduction in costs that we've targeted for the next – last couple of quarters.

And just to add to that, Ben, I think the – we have, call it, half a dozen or more entities in North America we need to rollout the SAP ERP system to. So the timing of which, we will probably continue to go with some of the smaller ones as we gain confidence in our build out, which allows us to focus the lean initiatives on our larger facilities, which would give us the biggest bang for our buck in the lean initiative.

And that's where you really want to have that lean initiative done. Let's say that's two years from now when you're doing that implementation on SAP.

Now, you've gotten some of those things in front of you, and hopefully your building materials are going to incorporate some of the labor savings or any other changes that you're going to make in the product or processes from – as a result of those.

And Ben, I just want to remind you, and I think it's inherent in the roll-up history of EnerSys that, as we've assessed internally with our own folks and we've brought in outsiders to assess the opportunities, we have some significant confidence that we can do what we do today better, faster, and certainly with less waste. And I personally, I'm a believer that the faster that we can compress that cycle time from the day from which we make a quotation to the day at which we can actually ship the product, if we can do that – and certainly, we don't want to cheat, we don't want to do it by simply layering in too much inventory.

But the faster that we can compressed those cycle times, we think, is going to have a meaningful impact on our traditional organic growth rates, and to help us take share just by getting it out faster. So we're very optimistic about that point.

That's really helpful. Thanks for taking my questions.

Okay.

Hi, good morning. Just wondering, if you could first just step through the latest WITS data for us.

Typically, you're able to give...

Yeah, Brian.

...the rolling three months in the different regions.

Yeah. Trailing three months versus prior year, we'll break some out, the United States, 20%; the total Americas, 18%.

So pretty exciting and demonstrates that the momentum is holding in that region. In Western Europe, 17%, similar.

Eastern Europe, 24%. So some recovery there, with the total European number of 18%.

In the Middle East and Africa, smaller market, 1%. So the EMEA – Europe, Middle East, and Africa subtotal – totaled 17%.

In Asia, spiking up. China, as we noted earlier, we're starting to see some recovery.

China is up 19%. And the total Asia figure, 13%.

So worldwide, 3 month trailing versus prior year, we're seeing a 16% increase in the unit orders. Now, the one thing I have to remind you of is that, these unit figures – these are unit figures, will include fleet replacements.

So as they decommission older trucks and bring in newer trucks, we will see increased truck volume reflected in these results that don't necessarily mean that there's increase in the amount of materials being handled or an increase in the amount of batteries sold. So, it's not a one-for-one, but it certainly demonstrates that the material handling markets are staying healthy.

Can you just clarify, if there is a fleet replacement, wouldn't each unit come with a new battery?

Not necessarily. It's – oftentimes, trucks come with multiple batteries.

And then how the trucks are repurposed and how batteries are reconditioned, it's absolutely not a one-for-one in terms of new trucks and new batteries.

Okay. And then I think this is a question that I know I've asked over the years, and you've gotten many times over the years, but can you just reconcile some of these growth that you're seeing, 20% in the U.S., 80% in Europe, in this specific niche of the industrial world relative to kind of the industrial recession that we're seeing in general?

Again, just be cautious, these growth rates do include that fleet replacement stuff.

Yeah.

So that's going to be...

Outside of the – I guess – and I know you've mentioned the fleet replacement, but maybe if you can just talk a little bit more about that, because I'm trying to understand how there's a global fleet replacement. What drives that?

I mean, you're talking about hundreds of different customers operating fork trucks.

I think the cost of money is a factor. The lease terms are a factor.

The technology and the desire of the customers to get a more modern vehicle that's more efficient is part of the drivers that can impact these WIT Statistics. And then I think that, and I've mentioned this prior, that the statistics we're quoting you are for electric forklift trucks, Class I, II, and III.

So also inherent in these numbers are conversion from gas to electric. I think that's another key driver for this.

And then I think where these electric forklift trucks are used, Class I, II, and III, these are in retail areas. They're in distribution centers.

They're in automotive parts, automotive assembly factories. So the markets where we are seeing good activity in electric forklift trucks aren't necessarily as exposed to a strong dollar export.

I had mentioned in the past plane building, shipbuilding, some of these industries that have been there, oil and gas that have been hit hard with strong dollar or commodity issues. These really aren't the markets for electric forklift trucks.

The other thing I've mentioned in the past is that, electric forklift trucks are used in the developed economies. So the United States, Western Europe, Japan, Korea, these are the big markets.

China is becoming a very increasingly important electric forklift market. But the developing markets where we're seeing a lot of commodity price struggling, those aren't big electric forklift truck markets.

So we're not seeing the same drags as you would see in a global GDP or global industrial production statistic, the exposure to the BRICS. It's not – these are narrower in scope, and we think that all of those factor into why we continue to see fairly healthy growth in the electric forklift market.

And I think as retailers and distributors want to get their product to their customers with goals of same-day, you're seeing distribution centers being built out to try to enhance that delivery system.

That's a great point, Mike. And so the velocity at which goods are moving and goods are turning is a great positive impact for material handling equipment.

Got it. Okay.

That's all really helpful. Thanks for going through that.

Another – I mean, sticking kind of at a high level, you have a new Chief Technology Officer on board. I'm wondering if you could give us a better sense for what the priorities are for him and for that team?

That's great. Well, we couldn't be happier with the start that Jörn's made.

Right now, he's spending a lot of time assessing our current technical capabilities and meeting the teams. And again, I mentioned earlier that our history is a rollup company.

And as such, we have a tremendous amount of technical talent and capability but it's distributed globally. It's not very uniform, and we don't think we're getting perfect utilization out of our current technical resources.

So one of the key areas of Jörn right now is to get the team, get to know everybody, assess our capabilities and then start to think through how we can do a better job of utilizing existing resources. The other reason, we brought out Jörn is to make sure that we take advantage of markets that emerge in the future that would be incremental opportunities for EnerSys.

Well, we haven't seen tremendous conversion or threats to our existing markets today, but we do see some markets on the horizon, where we think we're going to need to change our product portfolio to take advantage. I'll just give you one example.

It's not all the examples, but one example is the grid storage market or all of the energy storage opportunities related to traditional AC powering of homes or of commercial sites or industrial sites. We've been talking about this for some time.

It's been a little bit of a Moby Dick. We've been chasing the white whale now for a decade.

My personal assessment that these markets are really starting to materialize. The opportunities are starting to materialize, and we think that the lithium has a real future in these markets.

And so that's one of the reasons we brought in Jörn, who has deep experience in these areas, to make sure that we're well-positioned to take advantage of it. Just a reminder, we have several lithium facilities today, so we understand the markets.

But today, we're limiting it in scope really to our aerospace and defense businesses. But as these industrial opportunities emerge, we want to make sure that we're well-positioned to capture that growth.

So it's not as much of a defensive move as it is an offensive move. And the thing that I preach to our team every day is that, we have to be somewhat agnostic to the chemistry.

And really what needs to drive our product road map are the products that we think provide the customer the lowest total cost of ownership. And that total cost of ownership is not only the price of the product, but it's also the longevity of the product.

It's about the service before and after the sale. It's just about the ease of doing business with the supplier.

So that's what we're focused on. And right now for our traditional markets, we've demonstrated to many of our customers that our thin plate pure lead products do provide the lowest total cost of ownership.

One of the greatest drivers of our earnings growth over the past several years has been our ability to push this technology into an increasing number of the markets we serve. We're going to stay on that path.

But again, as new markets for energy storage start to get more tangibly real, we want to be well-positioned for that growth as well.

That's really great detail. And I'll just sneak in; what percent of revenue is that premium products today?

Did you say 24%?

We've always said around 24%, 25%, but I think we need to reset that number. It's going to be 30-plus today.

We've had some nice movement with our European team. So yeah, it's – we're doing the right things there.

We've changed some compensation schemes with some of the sales folks. So, yeah, that number continues to go in the right direction.

Thanks for all the detail.

Thank you.

Hi. Good morning.

Sorry. I was...

Hi. Welcome back, Michael.

Just a follow-up question. Obviously, with the change in the administration, it's possible that in 2017, there's a tax holiday that might allow you to bring some cash back.

So I was wondering, I guess, one, how much cash is outside the U.S. today, and how you would think about utilization of that cash or potentially bringing it back?

Certainly, it seems you've been doing some acquisitions certainly on the international side of the business versus returning it to shareholders, if you could bring it back, say, at a 10% tax rate. Thanks.

Well, it's a great question and it's one that we've been looking at. And we're looking at the taxation situation not just because of the possibility now of the opportunity perhaps to bring funds back into the U.S.

at, say, a 10% rate versus maybe attracting as high as 35-plus percent if we were to do it. And then we have – to your first part of your question, out of our $440 million of cash on hand and in short-term investments, $400 million of that lies overseas.

Not all of it in foreign currencies, but it's still, for U.S. tax purposes, it has not been brought into the U.S.

So, there's great opportunity for us to bring these funds home. We likely wouldn't bring all of them home, because there are opportunities to spend that money, and there is a certain level of operating cash that we need for those units across the world.

But we're certainly looking at it. But we're looking at it, we were already looking at the situation just because of some of the BEPS initiatives across most of the EU countries, the base erosion profit sharing initiatives and the country-by-country reporting requirements that are starting to show up across the EU.

So all of those have caused probably not just us, but every big company that operates globally to be assessing their tax situation, and we certainly are. And certainly, if we were looking at a potential to bring money home for a 10% tax rate, we would certainly be considering it.

I think, Michael, just beyond the repatriation of the tax holiday issue, just operating in an environment of lower taxation and lower regulation is something that EnerSys is really looking forward to.

Okay. Great.

And then just – I might have missed it earlier, did you say how big the enclosure order was? And is this – are you kind of back where you think this business is going to come back on a more consistent basis to kind of where it was when you bought it, or is this – I know there can be some lumpiness in this business.

Is this a one-off where you got an order this quarter and then you may or may not see anything for a little while in that business again?

No, I think it's certainly not going to bring us back to the heyday. And you did miss that.

We touched on that earlier. It's not going to bring us back to the full run rate, but it is going to have, I think, a meaningful impact.

That business is not material to the overall EnerSys volume, but for that particular business, this is going to have a meaningful impact, we hope for many quarters to come, because this is a multi-year project.

And keep in mind, this is a unit that has had some impairment charges on its intangible assets the last two fiscal years. So, we're optimistic that that can take that off the table and put this from having that distraction occurring.

Okay. Thank you.

Thank you. Mike, how much of the $35 million in cost savings that you've kind of highlighted has been realized in the second quarter of this year?

So, in the second quarter this year, I would say, it's small. It's probably $1 million or $2 million, collectively.

These are things that kind of start small, and they take up to 12 months to kind of hit their stride. So I think you're going to see, starting from very modest Q2, increasing benefits in Q3 and then to Q4.

So, I think in light of the pressure that we've described on lead, our ability to stay in the 27-plus percent rate of our gross profit is going to be a demonstration to you that these cost savings are coming through.

Okay. And Dave, could you just give us an update on your thoughts on the potential 5G rollouts and how EnerSys will participate in that and the timing of that?

Yeah. Tom forwarded some nice articles for me to kind of dimension some of the timing.

They're in trials. I mean, they're early, early days.

The trials are already happening in this now. 2017, there's going to be some trials.

Most of the stuff I'm reading is Europe is going to be kind of a 2020 to 2025 type of rollout, and then in U.S. maybe a couple years sooner than that.

And then, I think what we talked about in the past is, we think that we're extremely well-positioned for the backhauling portion of the increase in the network load. So this 5G is going to dramatically increase the amount of ones and zeros that are flying through the air.

And as all that data concentrates, it has to be brought back to the web. We think that we're well-positioned on the backhaul portion.

In terms of the actual distributed, and we've said in the past ubiquitous, small radius sites associated with the 5G, it's really unclear as to what battery technology, if batteries are going to be included in that portion of the network topology. So I don't have a good answer for you there.

But the one thing we do know is that, when it comes to the fiber optic portion of the networks, the backhaul portions of the networks, we feel well-positioned with our products and our relationships globally.

If the technology went to a lithium-based chemistry versus lead, do you have a roadmap? Is that part of bringing Jörn in maybe to participate that?

Do you have the capacity to do it as things stand? Could you talk about it a little bit?

It is Part of the roadmap is what we're calling, and we'd be talking about in February, our small cell, small site enclosures with integrated lithium batteries. That is part of a roadmap.

Okay. Didn't mean to get too far ahead of your February presentation.

It's all right.

Thanks for taking my questions.

No worries.

Well, I just want to thank everybody for taking their time today to attend our call, and everyone have a great day.