EnerSys Q1 FY2020 Earnings Call

Good day, ladies and gentlemen, and welcome to the First Quarter 2020 EnerSys 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. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. David Shaffer, President and CEO.

Thanks, Julie. Good morning and thank you for joining us. On the call with me this morning is Mike Schmidtlein, our Chief Financial Officer. Last evening, we posted on our website slides that we will be referencing during the call this morning. If you didn't get a chance to see this information, you can go to the webcast tab in the Investors section of our website at www.enersys.com. I'm going to ask Mike to cover information regarding forward-looking statements.

Thank you, Dave, and good morning to everyone. As a reminder, we will be presenting certain forward-looking statements on this call that are based on management's current expectations and views regarding future events and operating performance, and are subject to uncertainties and changes in circumstances. Our actual results may differ materially from the forward-looking statements for a number of reasons. Our forward-looking statements are applicable only as of the date of this presentation. For a list of factors which could affect our future results, including our earnings estimates, see forward-looking statements included in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations set forth in our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30th, 2019, 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 August 7th, 2019, which is located on our website at www.enersys.com. Now let me turn it back to you, Dave.

Thanks, Mike. I'll begin on Slide 3. EnerSys reported first quarter fiscal 2020 adjusted earnings of $1.30 per diluted share, an 11% increase versus the prior year first quarter adjusted earnings of $1.17 per diluted share. Adjusted earnings were adversely impacted by one of our customers deferring a large order of high profit margin business to future quarters, along with our ability to increase our Motive Power production output to meet strong demand as we are still recovering from the ERP implementation challenges at our Richmond, Kentucky manufacturing facility. Net sales for the first quarter were $780 million, an increase of 16% over the prior year quarter, primarily associated with our December 2018 acquisition of Alpha. Please turn to Slide 4. I'd now like to update you on some of our key markets. Our Motive Power Americas business continues to be strong as demand for our TPPL products continues to outstrip our manufacturing capacity. Overall backlog in the Americas is up over 30% year-on-year. And the orders were up 9% during the quarter compared to the prior year. Thin plate pure lead orders grew over 200% year-on-year in Motive Power Americas alone. Just like the Americas, thin plate pure lead, or TPPL, NexSys pure lead Motive Power sales were strong in EMEA, fueling a market share gain for EnerSys. Since our last call though, orders in EMEA are softening from our traditional Motive Power OEM factory customers. Historically we have seen stronger replacement battery sales when new forklift trucks slowdown to offset some of this softness. Also, we expect to return to a lower Q2 seasonal pattern in EMEA. Last year, our Q2 in EMEA was lifted by a fire at a competitor's factory. Motive Power in Asia is slowing in China, given the current trade climate, with the rest of Asia largely stable. Finally, as noted last quarter, we successfully launched our NexSys iON lithium Motive Power batteries at ProMat in Chicago. Although NexSys iON will not contribute meaningfully to fiscal '20 sales, we have several important customer programs in development that should help us further increase market share and expand addressable markets, starting in fiscal '21. Our transportation business in the Americas continues to improve, although our Odyssey product family remains constrained on thin plate pure lead production capacity. Orders for the heavy truck OEM segment continue to grow with our high-performance TPPL batteries in start-stop and non-idle requirements. The entire industry has felt some softness in the distributor network, given the high inventories after a warm winter. Recently though, orders are improving as hot weather kills batteries. In EMEA, transportation - the Odyssey brand continues to grow in popularity owing to its superior performance, although once again, TPPL production availability is constraining growth. I will cover our plans on TPPL production capacity later in these prepared remarks. Our telecom business globally continues to be soft. We feel strongly that normal spending patterns have been disrupted, pending significant investments in modern high-speed networks, including 5G. In particular, one of Alpha's largest historic customers continues to hold capex, which has significantly stressed our business. The team remains confident that this deferred spending is creating pent-up demand. In the Americas, normal telecom order patterns have also been impacted by merger activities of two of our major wireless customers. Since our last call, there has been a significant level of new quotation activity, including full DC power systems and small cell site powering. These small cell site quotes have included 5G sites as well as traditional CATV customers powering outdoor wireless sites, which is part of their Quad Play offering. The sizable dimensions of the RFQs reinforce the heavy DC power consumption of these very high-speed networks. We are benefiting from significant orders from an outdoor DC power system, which included a per-cell enclosure, TPPL batteries and Alpha Electronics. This is a testament to our strategy of providing full DC power system solutions. This contract is an important foothold in an account poised for significant growth. Although 5G investment may be later than we envisioned, we are taking advantage of this time to refine the portfolio and supply chain. The other areas of our legacy reserve power and Alpha business included data center backup, industrial and renewable, are performing largely in accordance with expectations in all three regions. Finally, we are pleased to report that we have added several key industry experts in advanced battery chemistries serving the aerospace and defense markets. These additions have significantly improved our credibility within the industry and have poised us for significant growth. We are in the final stages of several important contracts yet to be announced that will have a meaningful impact on our A&D business. Please turn to Slide 5. I will now provide an update on the progress we have made on our strategic initiatives. As you know, last December we closed on our acquisition of Alpha Technologies Group, creating the only fully integrated AC and DC power supply and energy storage solution provider for broadband, telecom and energy storage systems. A truly powerful combination that has already been validated by our customers as noted prior. The integration continues to go well, driven by EnerSys' and Alpha's aligned cultures, focused on making high-quality products that customers can rely on. We are above our targets of achieving our annual synergies, and in the past quarter, we have accelerated alignment with legacy EnerSys and Alpha teams to develop a module power conversion system. Using only a limited set of modules, we will be able to cover all Alpha and EnerSys legacy products and allow accelerated developments of new products such as fast-charging and energy storage systems. The architecture will allow scaling to volume manufacturing and we will be able to achieve significant cost reductions with increased reliability. The integration of Alpha's and EnerSys' lithium-ion programs is also progressing as well. A sample telecom system we've developed combines the lithium-ion modules and battery management systems from the Motive Power program with Alpha's racks, telecom rectifiers, and controller systems. We are extending this further to offer such advanced features as autonomous peak power shaving, demand response, and energy arbitrage capabilities. With these additions and higher voltages, we will be able to transition the technology to energy storage products for commercial and industrial applications. The lithium battery program is critical to our Alpha photovoltaic energy storage system as well. This offering is an important niche in the fast-growing renewable backup and peak shaving market. Our second major strategic priority is to significantly increase thin plate pure lead manufacturing capacity to reduce lead times and to meet the exciting and rapidly growing demand, which far outstrips our current manufacturing footprint. In June, we officially announced our plans to expand TPPL capacity over the next three years with more than $100 million in additional capex spending, which will increase our current TPPL manufacturing capacity by 75%, and we expect an incremental 15% increase in TPPL manufacturing, resulting from our continued focus on Lean principles. Combined, the Company expects that the two efforts to increase TPPL capacity by over $500 million annually. We also announced our plan to continue our commercialization efforts for GreenSeal Bi-Polar battery technology, which is licensed from advanced battery concepts. We remain very excited about adding this technology to our portfolio of products. Please turn to Slide 6. I will now provide an update on our Operational Excellence initiatives. As noted last quarter, our ERP implementation in Richmond went poorly. The challenges from the ERP change in addition to high market demand and the addition of NexSys Pure TPPL to the portfolio has stressed our entire Motive Power Americas' sales and supply chain networks. As such, in Q1, we delivered 95% of our targeted revenue in Motive Power Americas. Our Motive Power Americas customers have always depended on EnerSys to reliably deliver. I approved and encouraged many extraneous expenses in the quarter, which included loaning our batteries, expedited freight, and overtime to help improve our deliveries. This not only created pressure on our Q1, but will also increase our cost of sales in Q2 by approximately $3 million due to FIFO. Mike will provide more details in his prepared remarks. I was disappointed that we could not get all of the issues behind us in Q1, but I'm encouraged that our recent performance in the factory has shown marked improvement. As noted prior, increasing TPPL production capacity remains a top strategic priority. I am pleased to report that our Lean program in TPPL factories has already increased output by over 10% versus the prior year, which equates to approximately $50 million per annum in revenue. We expect this to further improve to a 15% year-on-year improvement by year-end. Overall, the Lean improvements have been inconsistent factory to factory, but the benefits are clear and we continue to make progress. Our Richmond facility has fully embraced the Lean program, but much of the benefits were masked by the ERP implementation. Finally, our new high-speed line for TPPL has successfully passed all final acceptance testing and is en route from the US from the UK. We expect the line to be fully installed by this late fiscal year and expect significant throughput and productivity improvements, once stabilized. As noted prior, the line has been delayed due to our low inventory levels on TPPL. Looking ahead to the second quarter of fiscal 2020, we are focusing on continued growth in Motive Power Americas, continued progress in transportation, lower revenue due to normal seasonal patterns in EMEA and continued disrupted telecom spending globally. As noted prior, Q2 will also include $3 million in costs associated with our disrupted Motive Power Americas supply chain as well. Mike will provide more specifics on our Q2 guidance in his portion of the call. In summary, we are well-positioned to capitalize on the exciting growth opportunities ahead, which will include a massive global 5G infrastructure build-out over several years and continued growth in broadband to include the expansion of existing DOCSIS infrastructure by broadband companies. Furthermore, Quad Play bundling of TV, Internet, home security, and voice services by the major telecommunications providers is driving incremental spending on backbone infrastructure, benefiting EnerSys. Taken in totality, we remain extremely confident that capital spending by our customers will drive significant incremental sales in our sector and the combined EnerSys and Alpha product offerings are uniquely well positioned to benefit from the eventual surge in the capital spending cycle. We also will benefit from increased global market share for our Odyssey brand in transportation and our NexSys maintenance-free products in Motive Power, as well as the fully integrated DC power systems, which combine Alpha and EnerSys batteries. We look forward to providing you with the additional color on the state of the business, our competitive positioning, and our growth strategies during our Investor Day that is scheduled for October 2nd at the New York Stock Exchange. With that, I'll now ask Mike Schmidtlein to provide further information on our results and Q2 guidance.

Thanks, Dave. For those of you following along on our webcast, I am starting with Slide 8. Our first quarter net sales increased 16% over the prior year to $780 million due to a 22% increase from acquisitions and decreases of 3%, 2%, and 1% from volume, currency, and price, respectively. On a regional basis, our first quarter net sales in the Americas were up 32% to $517 million, while EMEA's net sales were down 4% at $203 million, and Asia has decreased 12% in the first quarter to $60 million. Americas enjoyed 39% from acquisitions, less a 6% volume decline, and a combined 1% decrease from price and currency. EMEA had a 3% volume increase, less 5% in negative currency and a 2% price decline. Asia had 8% volume and 4% currency declines. On a product line basis, net sales for Motive Power were down 1% year-over-year at $344 million, while Reserve Power was up 35% to $436 million. Reserve Power had a 10% volume decrease and a 2% currency loss, offset by 47% in acquisitions. Motive Power generated 3% from volume, less a 2% decrease in price and a 2% foreign currency loss. Please now refer to Slide 9. On a sequential basis, first quarter net sales were down 2% compared to the fourth quarter of fiscal 2019, driven by a 4% volume decline, net of 2% from acquisitions. On a geographical basis, Americas was up 2%, while EMEA was down 11%, and Asia was down 1%. On a product line basis, Reserve Power was down 3% while Motive Power was down 1%. Now a few comments about our adjusted consolidated earnings performance. As you know, we utilize certain non-GAAP measures in analyzing our Company's operating performance, specifically excluding highlighted items. Accordingly, my following comments concerning operating earnings, my later comments concerning diluted earnings per share, exclude all highlighted items. Please refer to our Company's Form 8-K, which includes our press release dated August 7th, 2019 for details concerning these highlighted items. Please now turn to Slide 10. On a year-over-year basis, adjusted consolidated operating earnings for the first quarter of fiscal year 2020 for EnerSys increased by about $10 million to $78 million, with the operating margin decreasing by 20 basis points. Lower commodity costs were insufficient to counterbalance the volume and price declines, as well as the inefficiencies from our ERP implementation in Richmond, Kentucky. Comparatively, our first quarter operating earnings fell by 40 basis points to 10%. Operating expenses, excluding highlighted items, were 15.9% of sales for the first quarter, up from 14.5% in the previous year. Operating expenses recorded on a GAAP basis in Q1 included pre-tax charges of $9 million, primarily consisting of $2.4 million in restructuring and $5.3 million in Alpha amortization charges. Excluding these charges, our Americas business segment reported an operating earnings percentage of 11.9%, down 70 basis points from 12.6% in the first quarter of the previous year. The decline was attributed to lower volume, the ERP implementation, and the slightly dilutive results from Alpha. Sequentially, the Americas first-quarter margin decreased by 20 basis points from the 12.1% margin in the fourth quarter, mainly due to lower volume. Americas operating earnings dollars increased by approximately $12 million compared to the prior year, remaining flat from the previous quarter. EMEA's operating earnings percentage decreased to 7.7% from last year's 8.2% and last quarter's 10.2%. Operating earnings dollars fell by $2 million compared to the previous year and by $8 million from the prior quarter, mainly due to lower pricing and mix. Additionally, EMEA experienced a reduction in volume on a sequential basis. The operating earnings percentage for our Asia business declined by 110 basis points to 1.1% of operating profit in the first quarter of this year from a 2.2% profit in the first quarter of last year, although it improved from a 2.1% loss in last year’s first quarter. Asia's operating earnings dollars decreased by about $1 million from the prior year but rose by $2 million from the prior quarter, despite lower volume attributed to a better mix. Our first-quarter adjusted consolidated operating earnings totaled $78 million, reflecting a 14% increase from the previous year. Adjusted consolidated net earnings reached $55.9 million, which is $6 million more than the previous year. This improvement in adjusted net earnings was driven by the $10 million gain from the Alpha transaction. The adjusted effective income tax rate for the first quarter was 18%, lower than last year's rate of around 19% but higher than the 13% rate in the prior quarter, with most variations caused by discrete tax items. The full-year rate for fiscal 2019 was 17%, below our forecasted range of 18% to 20% for fiscal 2020. Alpha contributed adjusted operating earnings of $17 million, or 11.4%, on revenue of $151 million in the first quarter. After accounting for interest, taxes, and dilution from shares issued to the seller, Alpha contributed $0.20 accretively, excluding $4 million in after-tax amortization of intangible assets recorded in purchase accounting. Earnings per share, including Alpha, rose by 11% to $1.30 due to higher net earnings. We anticipate having around 43 million weighted average shares outstanding for the second fiscal quarter of 2020, which includes approximately 1.2 million shares issued in the Alpha transaction, offset by 0.8 million shares repurchased between February and June of 2019. Lastly, we still have nearly $75 million in share buybacks authorized. Please now turn to Slide 12. The Alpha transaction continues to progress as planned with synergies being realized, as expected. The rationale behind our acquisition remains strong. However, Alpha's revenue has significantly declined year-over-year due to current spending patterns of certain major broadband and telecom companies. We still have nearly $262 million in cash available, and our credit agreement leverage ratio of 2.0 times following the transaction is still well-positioned. In the first quarter of fiscal 2019, we generated $30 million in cash from operations, and capital expenditures were $17 million. We project full-year capital expenditures to be around $90 million to $100 million for fiscal 2020. We expect our gross profit rate for the second quarter of fiscal 2020 to range between 25% and 26%, which is consistent with Q1. The advantages of lower lead costs will likely be offset by increased manufacturing costs from Richmond. These costs, estimated at approximately $3 million per quarter related to Richmond, were incurred in Q4 and again in Q1, but will affect our profit and loss statements in the subsequent quarters. Regarding the impact of tariffs, the first and second quarters are each facing about $0.05 per share in pressure from that issue. While we are still evaluating the impact for the second half of the fiscal year, we currently anticipate similar cost pressures in H2. Tariffs, alongside increased freight costs, have affected our margins by 100 basis points. We expect to achieve adjusted diluted net earnings per share between $1.20 and $1.24 in the second quarter of fiscal 2020, excluding an anticipated net charge of $0.22 per share mainly related to charges from the Alpha amortization and our ongoing restructuring efforts.

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

And your first question comes from Noah Kaye with Oppenheimer.

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

I spoke to the team directly just yesterday, and there is a strong level of confidence. That order is estimated to be between $5 million and $10 million, and the team is very confident it will remain in this year. I don't believe we have much of it scheduled for Q2, right Mike? We were cautious about that, weren’t we?

The order in question is scheduled to ship in Q2. The concern is whether the next order from this customer will be delayed from Q2 to Q3. Our assumption was that it would be delayed, so we do not expect this to positively impact our Q2 outlook.

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

Right. Sticking with the Motor part of the business first, you mentioned the softness in EMEA. I assume your EMEA OEM business represents no more than 5% to 10% of total Company sales, but please correct me if I’m wrong. How significant is the slowdown you’re seeing? If orders are declining there, which is obviously not ideal given your ongoing efforts, can you redistribute some of that product to address the inventory shortfall in the U.S.?

Yes, during my visit to Europe, the overall production of batteries remained steady. However, the sales channels varied. Typically, when there is a decline in new forklift truck orders, we observe an increase in replacement orders. That being said, our team is preparing for a different market environment. Over the past year, we have been actively engaged with OEMs and direct factory shipments, although there is clearly a slowdown occurring. In relation to battery sales, we don’t experience the peaks that new forklift truck sales do, nor do we face the same lows. The volume has been quite stable and predictable.

Yes, it has been higher than expected, ranging from 15% to 20% of total revenue.

Right.

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

One important point to note is that we have no customer accounting for more than 5% of our revenue. When discussing this segment of the business, the cable customer with frozen capital expenditures is significantly impacting Alpha's operations. However, overall, we are well diversified across different markets, regions, and sectors. That said, the Alpha team is feeling the effects of reduced spending, but we remain optimistic that this will lead to pent-up demand. Spending can only be deferred for a limited time, as maintaining networks requires investment. Since our last call, we have received three requests for quotes, totaling over $0.5 billion, which indicates an uptick in activity on the telecom side that we haven't seen in a long time. Discussions with Drew and his team suggest that sentiment for the second half of the year appears more positive than what we've experienced so far. While we've noticed some weaknesses in certain sectors, particularly in older wireline areas, the wireless side is gaining momentum with various exciting projects. These initiatives are focused on 5G compatibility, with many starting as LTE but designed to be upgradable. Additionally, we are observing improvements in network resiliency in specific regions. The situation is gradually enhancing, and optimism is on the rise, making the recent RFQs particularly thrilling. Mike, do you have anything to add?

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

Yes, I agree. Okay Noah, is there anything else?

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

It's crucial for us and our investors to grasp the long-term strategy, particularly in relation to the Alpha acquisition and its impact on our business. We have a solid foundation as a consistent cash generator over many years, with our investors benefiting from approximately $90 million to $100 million annually in buybacks and dividends over the last decade. While this has been a stable business, we're now enhancing it with technology that will drive growth. We believe this presents a unique combination for investors, and we aim to communicate our growth focus clearly. 5G is certainly a vital part of this strategy, but it's important to recognize our relatively small market share in the transportation sector. We've had significant successes as heavy trucks transition to start-stop or non-idle solutions, indicating that there's still plenty of life in our lead story. Additionally, the Bi-Polar technology we will discuss can further extend the viability of lead. There are many positive developments to share. Most importantly, this represents a unique investment opportunity for shareholders to not only enjoy steady cash flow but also to engage in some significant and exciting growth prospects.

That's very helpful. Thanks so much.

All right.

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

The total RFQs are over $0.5 billion. Can you discuss whether these are mainly related to Alpha or also to EnerSys legacy? Are these specifically for 5G? I'd appreciate more details on this.

I would say there are three components to these RFQs. The first is for a DC power system for 5G builds outside of the United States. This is exciting because it's a 5G opportunity not in the US market, and it is significant. The team is currently working on the quotes, which involve a per cell enclosure using EnerSys batteries, specifically traditional thin plate pure lead batteries, and Alpha Cordex Rectifiers or similar products. This is one of the major opportunities, it's substantial, and while we expect aggressive pricing, we haven't encountered this kind of opportunity in quite a while.

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

No, that’s not North America. That’s actually Rest of World. One of the opportunities is from the neutral host companies that are starting to build out 5G small cell site networks. This presents a chance to power small cell sites, which aligns with what we've been discussing for the past few quarters. It fits perfectly with the Alpha deal, and one of the main reasons we pursued this transaction in the mid-term was to take advantage of that. Additionally, some of the traditional coaxial network companies are becoming more active in the wireless sector. Currently, they typically provide wireless service over Wi-Fi, and when outside of Wi-Fi coverage, they often have wholesale leasing arrangements with wireless carriers. I think some of these companies are interested in setting up their own network equipment. This Quad Play approach by traditional cable companies is another intriguing opportunity for us. What excites me is that all this has emerged in the past 90 days with three significant requests for quotes. Again, there’s no guarantee that we will win any or all of this, but we feel optimistic that things are beginning to improve.

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

Yes, the sentiment is positive. I spoke with Drew and some key team members this week, and just yesterday we received $1.5 million in purchase orders for small cell site powering equipment, which was encouraging. I would say the pipeline is building and we're moving in the right direction.

Thank you. As for my final question for now, could you discuss, at least generally, what you anticipate for Motive revenue and Reserve revenue in the second fiscal quarter?

Yes. What I mentioned in the prepared comments is that we expect continued strength in the Motive Power Americas. The backlog has increased by 30% year-over-year in Q1, and orders are up by 9%. The business is performing well, although we experienced some execution issues and did not fully meet our Q1 guidance. Nevertheless, the outlook remains positive. I pointed out that the transportation sector is seeing strong orders from heavy truck OEMs, and this segment is holding up well. It’s important to note that the distributors for truck batteries faced a warm winter across the US, but with summer arriving, heat can negatively impact batteries, while cold weather often reveals issues. We remain optimistic about this sector. In Europe, we are noticing a slowdown in factory shipments for Motive Power, but we anticipate that the replacement battery side will help mitigate some of this. However, we have some uncertainties concerning the situation in China, so we are not overly optimistic about Motive in that market. The telecom sector is improving, and the traditional reserve power business remains stable. The key factors to watch are the timing of 5G deployment and the pent-up demand resulting from capital expenditure delays by one of our major CATV customers. These will be the main themes for Q2.

Well, I guess how does that aggregate for, is Motive up then sequentially in the second quarter in aggregate?

Mike? So, just kind of net-net from a line of business standpoint Q2...

I’m curious if you expect to see a sequential increase in revenue for Motive, as well as for reserve revenue. Can you clarify which direction we should expect, up or down? Thank you for the insights.

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

Okay. I apologize for pressing you on this, but I understand you don't provide revenue guidance. However, this is why there are significant differences between what analysts anticipated and what you reported this quarter. I'm doing my best to align with your expectations.

I would say that the total company's top line will likely remain relatively consistent sequentially, as has been the case for at least the last six years, with Q2 and Q1 often showing similar performance. There have been a few years where one quarter outperformed the other, but this year appears to follow the same pattern. I think our legacy business will deliver results that are similar to previous periods, with a typical push between motive and reserve, though neither is expected to change significantly from one quarter to the next. The Alpha business performed well in Q1, and I anticipate that its revenue in Q2 will closely resemble what we experienced in the fourth quarter of last year. Overall, I expect our legacy business to show sequential performance in line with Q1 results, while the Alpha business should reflect a performance consistent with its Q4 results.

And I think that's pretty precise size we wanted to give you or wish to give you.

Yes, that's great, correct.

Your next question comes from John Franzreb with Sidoti & Company.

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

The pricing decline was mainly in Europe, while the pass-through models are aligned closely with the actual lead costs, which have decreased, so most of that price decline is attributed to Europe. In the Americas, pricing has been relatively stable due to factors such as increased freight costs compared to the previous year, which have kept prices higher. Overall, I would say the pricing in the Americas is generally neutral, while EMEA has experienced a decline but should be stabilizing now, leading to less price degradation. In both the last and current quarters, improvements in commodities have been stronger than any pricing changes, meaning that the benefits from reduced commodity costs have outweighed the price deterioration. The pressure that has prevented our margins from expanding beyond the usual range for a few quarters can be attributed to the introduction of tariffs, which began in late 2019 and continued into 2020, along with historically high freight rates. Additionally, due to our demand for TPPL, we are moving a significant amount of product across the oceans since our European factories producing TPPL have been supporting the American market. These two factors, freight and tariffs, combined with the ERP implementation in Richmond, have collectively exerted about 150 basis points of pressure on our margins.

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

Got it. I'm a bit surprised that while the battery performance is strong, freight tonnage has decreased and Class 8 truck engine orders have fallen significantly. Can you explain why that is happening?

I understand why that's happening. The product lasts twice as long but doesn't cost twice as much. So it’s a market share issue. This is similar to our previous discussions about China transitioning from gas trucks to electric trucks, as many truck manufacturers are shifting towards start-stop profiles with a focus on non-idle requirements. The performance of thin plate pure lead is far superior to other available products, and we are gaining market share. Our current market share is quite small in that context. We believe that increasing our capacity will be critical, and we will focus on this at the Investor Day. We mentioned it at the last event, and it remains just as relevant now, if not more so, than it was two and a half years ago. We see capturing more market share in the transportation sector as a significant advantage for our shareholders.

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

No, I think we've added some talent in the aerospace and defense sector specifically to pursue thermal battery business, which focuses on primary lithium. This is an exciting market with many opportunities. We've got some contracts that we haven't announced yet, but we are close to finalizing those. Additionally, we've started to hire new talent on the Alpha side of the business, which is engaged in the solar sector, particularly with solar inverters and prepackaged home energy storage systems for commercial use. The regulatory changes in California are driving momentum in energy storage, and we've brought on talent from MIT to lead this initiative, which will become increasingly important. From the outset, the Alpha acquisition aimed to leverage the existing Alpha customer base and the associated cash flows. Next, we anticipated growth from 5G small cell power solutions. However, what excites me most is the potential in Grid 2.0, off-grid solar, and renewable integration for peak shaving; that's where the significant future profits will come from, and we are certainly making progress there.

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

Five years, that's impressive! It's interesting because if you can predict the future prices of lead and lithium, I can answer your question. This was crucial to our strategy with NexSys. Our focus has been on creating a maintenance-free experience, and we remain chemistry-agnostic. We believe we can deliver that experience with both thin plate pure lead and lithium. Initially, I thought the split would be 70% TPPL and 30% lithium in the long run, although some colleagues suggested it would be 50-50. Given the progress we're making on the TPPL side and if lead prices stay stable or drop, we might see a greater share of TPPL than I initially expected due to improvements in its performance. However, we want to be prepared for either outcome. Much of this will depend on the future costs of lithium cells and how much we benefit from the electric vehicle market. It's a challenging question to answer, but I want our shareholders to know that we are investing in both areas, leaving the market to determine the direction, while maintaining our margin expectations regardless of what we sell.

Great. Thanks for taking my questions.

No problem.

And I'm showing no further questions at this time. I'd now like to turn the conference back to Dave.

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

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