Q2 2020 Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to stand by and thank you for your patience.
Dictation of an improvement in those markets.
It's still that opportunity is still there it will be admittedly more challenging.
Given the results that we've had in the second quarter, which we didnt have on October 2nd.
Okay.
Okay, and then Jay I guess following up on that Youre your visibility into.
That capex release from that customer that that you called out earlier.
Have you started to see.
Quarter.
Those orders start to flow.
Or is that something we still need to say.
I the confidence is approved.
For certain I had dinner with.
Some of the key.
Our Tcs late last night, and just talked about that very topic. So I don't know that it's going to come back to the same levels. It was.
Maybe a year prior.
To the to the transaction, but.
We expect a significant improvement year on year.
Going.
Versus where it this year has been dreadful I mean, it's been very draconian the cuts safe may and so we think that things are certainly going to improve.
And.
But I don't know that they're going to reach the historic levels. They were prior to the transaction Gray line and I was just going to point out those historic levels were occurring in the quarters ended June and September .
2000.
90, but our 18 excuse me in so the comp that we would have is a much weaker first or fourth fiscal quarter that was January through March of last years 2019. So.
But but they're they reach their zenith at least in the interim in those quarters, which are narrow nearly 18 months behind that's that's a cap that accountant in general I think the feedback is fairly consistent that the broad band companies are continuing to invest theres several initiatives.
That we talked about at the.
The Investor day remote phy.
The.
The.
Remote phy being one of the Quad play the wireless and then and then clearly we think there and we said this all along we think we've created some pent up demand with some of these capital hold so.
Theres that theres, a good degree of optimism, but we have to deliver results and.
Thats the focus and.
We're very much working I would say as we noted in the prepared remarks.
The integration of the two companies kind of those cultural pitfalls you worry about when you put two companies together I would say all of that's behind US and now, it's just blocking and tackling getting orders and shipping orders and Thats. Our head is down and Thats what were focused on.
Sure I think in the interest of sharing the ball I'll just have one more question.
Take offline, but.
I think near were prepared marks you'd said that the north star.
Cost synergies, primarily from logistics will start to flow in the next fiscal year.
Can you sort of help us understand.
That a bit more in terms of is there a lag between when it started kind of achieve route efficiency and when that gets recognized.
You know in Cogs accounting and therefore in margin so help us understand.
Any kind of timing factors to think about.
As you work to achieve these synergies.
All right I'd be happy to to try that so norstar had its own portfolio and its own customers and largely for the next two quarters, while we will be transitioning.
Two enersis.
Products. So that we can make those four are you as customers rather than have or European factories make those products for those you us customers, that's going to take at least six months into.
The next major factor is the high speed line, which was originally slated to go into Warrensburg, Missouri is now going to rich good our two Springfield, Missouri.
The second of the two plants that norstar has that won't be up in production.
Until April of next year. So the start of next fiscal year. So.
By and large at many of the the synergies the big synergies that we were looking at which is the freight the additional capacity that being able to put this high speed line in Springfield, rather than tearing two line down a warrensburg youre going to see some of that.
Benefit not fully recognize until next April in the near term there are obviously, some synergies mostly cost synergies for.
The executive officers norstar that it will no longer be with the business because we don't need two Ceos.
Dave wasn't willing to give up the seats.
That yet anyway, but.
So thats, where you will see in the near term synergies off the norstar transaction.
Okay. That's very helpful. I'll turn it over thank you.
Sure.
Thank you. Our next question comes from John Franzreb of Sidoti and company.
Hi, guys just asked regarding the $20 million in lost revenue.
It's safe to assume thats going to competitors and how confident are you that you can regain that business.
But John .
My focus throughout the course of this has been market share and.
That's it is key and and you're right I think a lot of that in the very early days went to competitors is it just takes us a while to turn the battleship in a sense. We've got to in terms the product mix, where we load products a lot of this motive power business is book and ship as quick turns.
Stuff so.
We have we just weren't able to respond fast enough, but Mike My my focus is bad keeping market share getting it back in those instances and then I've really lean on Mike to do all the insurance related activities. So we sort of split the duties. So I would say in a sense.
The 20 million.
As immediately lost share.
Confidence, especially with the progress, we're making on the thin plate pure less.
Where it's been it's been fantastic, we're adding another shift in one of our operations to keep up with orders and the Norstar acquisition is going to increase the number of blocks. We can push through so there's a lot of moving piece to this on the preservationists share, but certainly we could turn fast.
Enough.
To to protect that 20 million.
And the other thing John to remember, if you're just thinking about it.
From a sequential standpoint, we've had.
Because of the ERP implementation struggles we've been struggling with a $10 million to $20 million Miss really starting with the quarter, our fourth fiscal quarter last year. So as I mentioned, we feel like that ERP implementation is behind us from an output standpoint, only to be hindered by the fact that.
We lost formation capacity so.
The I think the sequential change may or may not be.
I don't think is permanent because as Dave said, we were quickly transitioning to maintenance free products from the traditional flooded products as well.
As we get that capacity online that will be able to pick up more the slack and in some respects the.
The demand that was be if it will be fulfilled by customer by competitors.
It pretty much filled up there what was available capacity because it's been a pretty good market. So there's not really anyone out there per se that his head.
Tremendous opportunities I would say to make great expansion, but there has been a loss and that's what we're focused on getting back as soon as possible as our market share.
Okay fair enough and regarding alpha.
Could you discuss any sense of the how pronounced seasonality isn't that business and the summer months versus the winter months now we're kind of.
Revenue drop off do you have kind of seasonal basis and that business.
Well I would say in the.
18 to 24 months that I have seen.
The highest quarters have been nearly a 180 million per quarter.
And the lows are in the one in a quarter million per quarter. So now some of that is seasonal some of it had to do more with the overall patterns of one of our big broadband customers, but thats.
I would say seasonally you probably would expect a 25 to 40 million decline from the peak summer quarters too.
This quarter I think we will see because of pent up demand and what some of these capital budgets get released at the start of the calendar year. Our hope is that our fourth fiscal quarter, we'll see a fairly.
Marked improvement from the quarter that were just about a third of the way through.
Okay, great. Thanks, guys I'll get back into queue.
All right.
As a reminder to ask a question you want me to press Star one on your telephone to withdraw your question, perhaps the pound key.
Gentlemen.
Our next question comes from Brian Drab of William Blair.
Hey, good morning, Thanks for taking my question.
Okay.
So first on the 20 million in lost sales.
If you take that into account and then looking looking forward you exclude northstars contribution.
Looking at the third quarter do you think that sales would still increased sequentially. So taking the 20 million out taking northstar out.
Yes, it does.
The combination of legacy and Alfred.
Grow sequentially into the third quarter or not.
Oh, it definitely would grow in the third quarter off the second quarter for the legacy business.
Okay. That's helpful and then.
Again just for.
To help modeling I think that in the.
At the analyst day that you expected north star to contribute about 80 million.
On the second half of the or is it would we think about that is about evenly split between third and fourth quarter of 40 million in the third 40 million in the fourth.
I think you probably need to say and.
I think right now because as we've now gotten better information on them.
Actually more like 70 million for that business for the second half of the year keep in mind because of antitrust rules, we had very limited access to.
The company prior to that but but the 80 million expectation I have now is about 70 and I would say that's more like a 30 40 Q3 Q4.
Okay.
Got it and then.
Just to be clear on the insurance recovery in how you report that.
When you receive that insurance recovery payment that would be included or excluded from adjusted EPS.
So.
Because it's difficult to highlight revenue that you didnt get none of that loss has been or will be adjusted.
So we're going to take the hit in our as adjusted results because we can't really highlight out revenue, we didnt have as it so thats.
So quickly and assuming we have a one quarter lag the benefits from those proceeds.
We will come into our as adjusted.
And as reported results so.
The net result is if we if we say is 20 million his contribution as seven to 8 million in at 15 cents EPS for round numbers I'm, taking that hit the Q3, if I get full recovery from the ensure on a timely basis in Q4, all things being equal that 15 cents.
Show up not in my topline, but in my E. S line in Q4.
And it will be out okay got it thank you.
I would be in as adjusted result.
Thanks, and then I'm going to go back and just see if you give any comment on this if.
Thanks to the revenue forecast if you look at the fourth quarter.
Historically before alpha.
Join so it just seems like six 2016 17 18 fiscal years.
The average increase sequentially from the third quarter to the fourth quarter had been about 7%.
It is there anything you can comment on whether you maybe see a similar sequential improvement.
From third quarter fourth quarter in this fiscal year.
So I think thats still within reach that sequential step book on the legacy businesses.
And.
Actually probably in a little bit stronger than that but.
As you know we are somewhat reluctant to go more than one quarter out because our order book generally on stretches out in the upcoming two months. So you're asking me to project things I don't have a whole lot of substantives information for but yes, I don't see any reason, we can at least matched that sequential.
Step up in organic volume.
Okay, Thanks and.
And if history is repeating itself I think I am probably the last person here on the comments on as the second question, sorry, I sneak in one more.
Can you just remind me what the main impact has been from tariffs.
Shifting from where it aware, China, the U.S. and et cetera, and which.
Products or components are hitting the most.
It's been a combination Brian it set.
On the electronics portion of the business.
A lot of the contract manufacturers in the World is not just asked a lot of the contract manufacturers on the electronics piece is over there and we've been as we've talked about we've been moving stuff around as best we can and then we do have one particular battery range.
That we still import from China, that's the only one of any substance and the challenge there is.
The comp the competitive landscape doesn't really allow us to do one so thats, where our brought US exposure has been in Mike's got all that detail, yes, So as Dave said initially.
On the legacy business. It was our the contract manufacturers that made most of the component tree for Chargers weather and Thats, mostly motive power charges, but so some energy systems power charters and that we were largely able to negate within a quarter or.
Two of the tears originating because we had fortunately, both Chinese and Thailand based contract manufacturers and we simply rerouted the Chinese product to.
Europe , and we took the tie produced product into the U.S.. So we get the charger issue behind us.
That left in in General one line of business or one set of batteries that are made in our Chongqing facility.
In.
China that are sold into the us market.
Unfortunately, our competitors aren't producing there similar batteries in China, So thats presented a challenge where the markets not going to be receptive to a price increases. So this is one that we've been meeting and we've just been going down the list trying to figure out how we can change either produced substantial transformation.
Country outside of China.
We're looking at how we can bring the product in earlier in the value added stream to do some of the value added.
They're getting some of the other components that don't have to necessarily be put into China have those brought in and separately and putting us. It it is somewhat challenging.
But b that as it may.
Alpha also has that one of their products, where they have a transformer. That's made in China were looking at whether we can get that produced in India or other locations. So for the second half the year I foresee about $10 million.
Tariff costs.
Which is not tremendously different from the run rate that we experienced as you know tariff rates have been increasing throughout the year. So we even though we've taken some of the things off the list, even though we've been fairly successful at applying for in receiving exclusions on some of the product. The fact that the tariff rates have been increase.
And as we've moved along its kind of made it looked like it looks like we're just dog paddling and not really making a lot of progress. So 10 million first half 10 million second half with regard to tariffs, but we are still working on.
The two main.
Two remaining big hitters in trying to find alternative sourcing there.
So that's hopeful I did see haven't been able to verify we did see a press release come out about potentially a change or an abatement right.
Cancellation of some of these tariffs that may go on in the upcoming quarters.
So im cross my fingers on that one as well and then my comment on freight is the other component that we've seen got going up and and that's one that we can control and our ability to produce product in the.
Geographical area that we sell it in is going to be a great cost savings for us. So we don't have all those Ali.
Product on the water going back and forth.
Norstar products that were made in Springfield, Missouri going into.
To be sold into European Telecom customers, we won't need to do that product that we made in France or the UK coming into the United States for the telecom market, we won't need to do that so those are where we're going to see up the bulk of some of our savings that we think makes the norstar transactions so appealing.
To us.
Okay. Thanks, very much has a lot in great detail appreciate it.
Thanks.
Mr. Schafer you May now proceed with any further remarks.
Thanks, Dave and I want to thank everyone today for taking your time to attend our call. We look forward to providing further updates on our progress on our third quarter 2020 call in February .
Please have a good day everyone.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Ladies and gentlemen, thank you for standing by and welcome to the Q2 2020.
Enersis Conference earnings Conference call at this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session.
To ask a question during the session you will need to press star one on your telephone.
Please be advised that today's conference is being recorded.
If you require any further assistance, please press star and zero.
I would now like to hand, the conference over to your Speaker today, David Shaffer, President and CEO . Thank you and please go ahead Sir.
Thanks, Steve.
Good morning, and thank you for joining us on the call with me. This morning as much fed line our CFO .
Last evening, we posted on our website slides that we will be referencing during the call. This morning, if you didn't get a chance to see this information you can go to the webcast tab in the Investor section of our website at Www Dot Enersis dot com and going to ask Mike to cover information regarding forward looking statements.
Thank you David 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 are forward looking statements are applicable only as of the date of this presentation Burleson factors, which could affect our future results, including our earnings estimates.
See forward looking statements included an item to managements discussion and analysis of financial condition results of operation set forth in our quarterly report.
On Form 10-Q for the fiscal quarter ended September 29, 2019, which was filed with the U.S. Securities and Exchange Commission.
In addition, we will also be presenting certain non-GAAP financial measures for an explanation of the differences between the comparable GAAP financial information into non-GAAP information.
Please see our Companys form 8-K, which includes our press release dated November six 2019, which is located on our website at www Dot Enersis Dot Com, Let me turn it back to you Dave.
Thanks, Mike.
Before covering our second quarter of fiscal 2020 results I'd like to touch on a few important events that took place during the quarter that will help set the stage for the rest of our remarks. Please.
Please turn to slide three.
In mid September we announced the acquisition of Northstar from a Swedish private equity fund.
In addition to a small assembly business in Stockholm, Norstar has to production facilities in Springfield, Missouri, where it manufactures and distributes energy storage products, numerous and design and performance to enter system in place pure led or TPPL products.
The newest of the two factories also has additional for space immediately available for our new TPPL high speed production line.
As you May recall, we're going to have to take up to manufacturing line to install the heights high speed line at our Warrensburg facility, we will now be able to preserve $100 million of revenue capacity at warrensburg on top of Northstars additional capacity and will no longer required and inventory build in advance of.
Installation.
This acquisition fits perfectly with our previously previously discussed strategy to increase sales of premium products as it will able enersis too dramatically accelerate our TPPL sales.
The manufacturing processes and quality standards of norstar are very similar to Enersis TPPL production and it will require modest only modest investment to convert the norstar factories to build our Odyssey Nexus and Sps products over the coming quarters.
The proven expertise and training of the norstar production teams will dramatically accelerate our growth versus ordering and installing additional equipment and building on greenfield sites and training new employee teams Lastly, Northstar has blue chip customers in Europe , and given that Enersis currently important significant amounts of products from Europe .
And in the U.S market. This transaction will allow a rebalancing of factory loading and a dramatic reduction in inventory freight duty in currency risks. We're extremely excited to welcome the North star team to the Enersis family and will provide ongoing updates regarding integration synergy capture.
The expansion as we move forward, Mike will provide more color on the financial aspects of the acquisition during his portion of the call.
The second significant event of the quarter was the fire that took place in the formation area of our Richmond, Kentucky plant on September 19.
First and foremost there were no injuries to any employees or responders for which we are very thankful. We are confident in our ability to eventually recoup the vast majority of the product and equipment replacement and business interruption costs through our insurance policies. However for our third quarter, we will lose approximately 20 million.
In dollars and sales as reflected in our guidance.
The third major event was our Investor day at the New York Stock Exchange in early October which by the way. The presentation is available on our Investor section of our website.
Thanks to all of you that attended or listened to the event, which we believe could not have been time any better.
Enersis is reaching a key inflection point and its transformation as we build off of the two recent acquisitions. We've completed the modernization of our products to a modular system solution and expansion of our addressable markets and the use of lean to drive down waste from our enterprise. We believe we laid out an ad.
Solutionary, yet realistic roadmap during investor day at reinforces the opportunities ahead of us and the process with which we expect to capitalize on them.
Please turn to slide four for details of our second quarter EPS results of $1.23.
Please turn to slide five.
Now I'd like to update you on some of our key markets, which are progressing largely inline with prior calls.
Our motive power Americas business was strong in the second quarter as demand for our TPPL products remains robust.
We believe our ongoing efforts to expand production, including the acquisition of Norstar will enable further growth in TPPL overall in the Americas organic sales were up 12% during the quarter compared to the prior year.
The first half of F. Why 20, TPPL orders grew over 130% year on year and represent 11% of motive power Americas sales.
As discussed on our last call orders in EMEA are softening from our traditional motive power OEM factory customers. We also saw a return to see lower second quarter seasonal patterns in EMEA, which we hadn't seen this year the year before due to limited industry supply.
EMEA demand for motive power TPPL products continues to accelerate.
Motive power in Asia continues to slow, particularly in China, given the current trade climate with the rest of Asia largely stable.
During the Investor Day, Sean O'connell, Vice President of our motive power Americas Group spent considerable time, highlighting our efforts to increase enersis is relatively small share in the premium transportation sector.
As you know we have a technology platform with TPPL that we've adopted into a number of vertical markets and transportation is one of them.
The transportation business in the Americas continues to improve as we sign of new customers for Odyssey TPPL products in the premium automotive long haul trucking in agricultural spaces in EMEA and transportation. The obviously brand continues to be highly sought after due to its superior performance. So.
Similar to prior quarters, our global Telecom business continues to be solved it is clear that normal spending patterns have been disrupted as the market await significant investments in modern high speed networks, including Fiveg.
In particular, one of outfits largest historic customers continues to restrict capex, which has delayed near term revenue pressure.
The team remains confident that this delayed spending is creating pent up demand, which we will be unleashing at the broadband as as the broadband networks continues to be stress from streaming services consumption that requires more system buildout.
Our last note is that the sprint T. Mobile deal has received approval from the FCC and while it's currently being challenged by many states Attorney General a confirmed merger should be drive should drive greater spending.
Moving onto another exciting part of our business. We're pleased to have reached critical mass in the very attractive aerospace and defense sector.
While these programs and taking time to get to this point once you specified in it tends to be for the long term and we're excited about the progress we've made in the position we're in.
Enersis has been gaining market share and we anticipate our share will continue to grow.
Please turn to slide six I will now provide an update on the continued progress were making on our strategic initiatives.
A year ago, we closed on our acquisition of the Alpha technologies group, creating the only fully integrated AC and DC power supply and energy storage solution provided for broadband telecom and energy storage systems, a truly powerful comic con combination that has already been validated by our customers. The integration is.
Essentially complete made successful by Enersis and alphas aligned cultures focused on making high quality products at our customers can rely on.
By the end of F. why 20, we should have captured $25 million, an annual synergies, which is well ahead of our initial target. In addition by the end of fight 21, we estimate the total synergies will reached $35 million, which exceeds original target by 10 million.
The integration of outflows and Enersis lithium ion programs is also progressing well.
As I mentioned on our last call a sample telecom system was developed combines our lithium ion modules and the energy storage management management systems from the motive power with Alpher wraps telecom rectifiers and control systems. We're extending this further to offer such advanced features as autonomous peak shaving.
Demand response in energy arbitrage capabilities with these additions and higher voltages, we will be able to transition the technology to energy storage products for commercial and industrial applications.
The lithium program is critical to our Outback subsidiaries photovoltaic energy storage system and this offering is an important niche in this fast growing renewable backup to mitigate unstable grid utility driven power outages like those reported in the California wildfires.
And other natural disaster prone areas and peak shaving markets.
Our second major strategic priority is to significantly increase TPPL manufacturing capacity to reduce lead times and to meet the exciting and rapidly growing demand that far outstrips, our current manufacturing footprint.
It will take approximately six months and approximately $40 million capex spending for the norstar facilities to be able to manufacture enersis is product types.
In addition over the next two years, we will likely spend additional 40 million capex at our existing enersis facilities to further expand their capacity during their capacity outflow. Our current TPPL manufacturing capacity of approximately 600 million should doubled during the next couple of years.
The new high speed line shipping containers are beginning to arrive in Missouri and the installation of the testing should be completed by the end of F. why 20.
Finally on the new products, we have launched our 12 volt motive power TPPL block with carbon added this product will significantly enhance energy throughput, although the additional carbon does not pose a significant process or cost impact production. It allows us to achieve further margin improvement by offering a low low.
Lower total cost of ownership or Tcl for our maintenance free customers. The new TPPL motive systems will have an integrated battery management system, allowing for a similar similar customer experiences lithium while helping to extend the life of the energy storage product.
In summary, we have the people the products and the infrastructure in place to capitalize on the exciting growth opportunities ahead, including a massive global fiveg infrastructure, Buildout and continued growth and broadband increased global share for our Odyssey brands and transportation and.
New product sales, including Nexus maintenance maintenance free.
For motive power and are fully integrated DC power systems and services for telecom.
After three years of living and breathing this power solutions industry as CEO I can say with complete certainty that needs for energy and energy storage and industrial markets will continue to grow and others. This is uniquely positioned today to participate in that growth for many years to come with that I'll now ask Mike to provide.
Question on our results additional financial details on the Norstar acquisition and third quarter guidance.
Thanks, Dave for those of you following along on our webcast I am starting with slide seven.
Our second quarter net sales increased 15% over the prior year to $762 million due to a 22% increase from acquisitions and decreases a 4%, 2% and 1% from volume currency and price respectively.
On a regional basis, our second quarter net sales in the Americas were up 35% to $525 million, while amuse net sales were down 10% at $183 million in Asia decreased 20% in the second quarter to $54 million.
America's enjoyed 38% from acquisitions list, 1% decreases from volume price and currency EMEA at a 4% volume decrease less 5% a negative currency and a 1% price decline.
Asia had 17% volume and 3% currency declines.
On a product line basis net sales were motive power were down 3% year over year at $335 million, While reserve power was up 36 note, 36% to $427 million.
Reserve power had a 7% volume, 1% price in 2% currency declines offset by 46% in acquisitions motive power had 1% decrease in price and a 2% foreign currency declines while volume was flat.
Please now refer to slide eight.
On a sequential basis second quarter net sales were down 2% compared to the first quarter fiscal 2020 drew by a 1% volume and currency declines.
On a geographical basis Americas was up 2%, while while EMEA was down 10% in Asia was down 9%.
On a product line basis reserve power was down 2% well motive power was down 3%.
A few comments about our adjusted consolidated earnings performance as you know, we utilize certain non-GAAP measures and analyzing our companies 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 November six 2019 for details concerning these highlighted items.
Please now turn to slide nine.
On a year over year basis.
Adjusted consolidated operating earnings in the first quarter increased approximately $8 million to $75 million with the operating margin down 25 basis points.
Lower commodity costs were not enough to offset the volume and price declines along with the inefficiencies incurred enrichment Kentucky.
On a sequential basis or second quarter operating earnings declined, 20% 20 basis points to 9.8%.
Operating expenses when excluding highlighted items were at 16.1% of sales for the second quarter compared to 14.3% in the prior year.
Excluded from operating expenses recorded on a GAAP basis in Q2, our pretax charges of $16 million, primarily related to $6 million in restructuring and $5 million now for the amortization charges.
Excluding those charges, our Americas business segment achieved an operating earnings percentage of 11.8%.
Which was 120 basis points lower than the 13.0% in the second quarter last year.
Lower volume in the Richmond interruptions created the decrease.
On a sequential basis, the America's second quarter decreased 10 basis points from 11.9% margin posted in the first quarter due primarily to lower volume.
America's OEE dollars were up approximately $12 million from the prior year from our acquisition and flat from the prior quarter.
Europe's operating earnings percentages, 7.3% was up from last quarter, 6.8% was down from last.
Our last years, 6.8% to down from last quarter, 7.7%.
Oh $80 decreased $1 million from the prior year and decreased $2 million from the prior quarter in EMEA, primarily from lower pricing and volume on a sequential basis AMEA also had lower volume.
The operating earnings percentage in our Asia business declined 430 basis points in the second quarter of this year to a 0.8% operating loss from a 3.5% profit in the second quarter last year and were down from last quarters, 1.1% profit.
Asia's OE dollars were down approximately $3 million from the prior year end down $1 million from the prior quarter on lower volume.
Please move to slide 10.
As previously reflected on site and slide nine our second quarter adjusted consolidated operating earnings of $75 million was an increase of 12% in comparison to the prior year.
Our adjusted consolidated net earnings is it $52.7 million was $3 million higher than the prior year.
Improvement in adjusted net earnings as a result, the 11 million contributed by the Alpha transaction.
Adjusted effective income tax rate of 18% for the second quarter was lower than the prior years rates of 19%.
In flat with the prior quarters rate of 18% discrete tax items caused most of these variations.
Fiscal 2019 full year rate was 17%, which is at the low end of our 17% to 19% range of expectations for fiscal 2020.
Excluded from the quarters adjusted effective tax rate was a 21 million dollar benefit from a deferred tax asset recorded to reflect recent Swiss tax law changes future increases in Swiss notional rates will be offset by did not deductions of the amortization from those to.
For tax assets.
Alpha contributed adjusted operating earnings of $18 million or 12.6% on revenue of $146 million over.
Overall after considering interest taxes and dilution of shares issued two seller alpha was 23% accretive after excluding $4 million an after tax amortization on intangible assets recorded in purchase accounting.
EPS, including Alpha increased 5% to $1.23 on higher net earnings.
We expect our third fiscal quarter 2022 have approximately $42.8 million are 8 million a weighted average shares outstanding.
Which includes the nearly 1.2 million shares issued in the Alpha transaction net of the 1.0 million shares repurchase.
In February to August of 2019, as a reminder, we still have nearly 50 million.
Dollars of share buybacks authorized.
We have included our year to date results on slides 11, and 12 for your information, but I do not intend to cover these in detail. Please now turn to slide 13.
The Alpha transaction continues to progress as planned and synergies realized as expected the logic for acquisition remains intact. However, alphas revenue remains down year over year from current spend patterns at certain major broadband and telecom customers.
We still have nearly $425 million of cash on hand, and our credit agreement leverage ratio is 2.1 times, we trended generated $105 million in cash from operations in the first half of fiscal 2020.
Capital expenditures were $43 million, we expect full year capex spending of approximately $90 million to $100 million in fiscal 2020.
We utilize nearly 185 million of the cash on hand to purchase North Star on September Thirtyth. The first day of our third fiscal quarter, we expect our leverage to remain at or below 2.5 times in the second half with the addition of norstar.
We anticipate our gross profit rate in the third fiscal quarter 2020 to remain near 26%, which is comparable with half one of our fiscal year.
The benefits of lower led costs will likely again be negated by Richmond's interruptions, because these costs of approximately $3 million per quarter were incurred in Q2, but we'll hit our personnel in the following quarter.
In regards to the impact from tariffs are first and second quarters of had approximately five cents per share in cost per each quarter. Although we are still assessing the impact on our second physical half. We currently expect similar cost pressure in age too.
Tariffs along with higher freight costs have impacted our margins by nearly 100 basis points.
The North Star acquisition will provide relief to freight costs, beginning next fiscal year as transoceanic shipments from European factories to the us will decline dramatically.
We expect to generate adjusted diluted net earnings per share.
Between $1.12 and a $1.16 in our third quarter fiscal 2020.
Which excludes an expected net charge of 49 cents per share primarily from charges related to the integration costs for norstar.
Amortization costs from Alpha and are continuing restructuring programs.
The fire at our Richmond, Kentucky facility that occurred late in our fiscal second quarter will impact negatively with third quarter revenues by $20 million are more as the equivalent of three or more weeks of output have been lost while we should get partial or complete recovery from our business interruption.
Coverage, there will likely be a lag in recognition of this recovery of at least one quarter, which we believe is the primary difference between our guidance and the consensus EPS. The second possible difference is that our guidance reflects approximately medley $1 million and interest expense from our North Star acquisition.
While it's operating results in our guidance are broadly neutral.
Now, let me turn the call back today.
PT can we open up line for questions.
Certainly as a reminder to ask a question you want me to press Star one on your telephone.
I would draw your question.
Okay, how key please standby, while we compile join a roster.
Our first question comes from Noah Kaye of Oppenheimer. Please proceed with your question.
Thanks, Good morning.
Sort of for housekeeping modeling.
What kind of lost operating income contribution should we assume on that $20 million.
Revenue, that's not expected to come from.
From Richmond.
I think in broad strokes, that's going to be about a seven to 8 million dollar operating.
Dollar hit and so let's call it 15 cents EPS impact on the quarter.
Now.
We do expect recovery of that it won't show up in revenue, but it will show up in and operating earnings of element I'm not sure where on the PML, it's going to show up probably above gross profit, but that will show up likely in the fourth quarter as we get the recovery from our business interruption insurance.
Okay. That's helpful.
I guess sort of second question with Investor day, a month ago.
Guided for 1% to 2% of volume growth for the fiscal year I think year to date organic volumes are down roughly 3% to 4%.
You have that headwind.
Volume from Richmond coming in Threeq Q. So can you talk about sort of level the confidence in that 1% to 2% volume growth target for the year.
And what you're assuming to kind of.
Our strong reversal in the back half.
So, let let's start with recognizing in the first half the year, where we had those three negative 3% organic growth we had.
The ERP implementation in Richmond that was dragging our results down fairly 'cause significantly we believe that implementation in the impact. It's had is largely behind us. So we don't expect that.
The the fire that was all of about eight or nine days old when we had our investor day.
As we said, we still Didnt know how that was going to impact the results. Although we felt confident that the bottom line results would be recovered, but we weren't sure how the geography was going to show up on power.
Results. So I think if you would have to hold that against what we said on investor day, you'd have to add that $20 million back to your topline if you're trying to figure growth rate out. So if you look at the second half the year and if you think you have.
The ERP implementation that Richmond behind you.
And.
We talked about 20 million interruption on the sales and if you set that aside and say assets.
Kind of get that as a reconciling item then you would say okay that the things that we've also struggled with have been a some of our telecommunications and broadband customers who have one has had a significant.
Merger that has been fought through the FTC and the FCC, which has got a preliminary approval.
And we've had another major broadband the company that's been holding is Capex, which we believe is going to be released very soon so if you.
I have some expectation of an improvement in those markets.
It's still that opportunity is still there if you will be admittedly more challenging.
Given the results that we've had in the second quarter, which we didnt have on October 2nd.
Okay.
Okay, and then Jay I guess following up on that Youre.
Our visibility into.
Capex for leads from that customer that that you called out earlier.
Have you started to see some quarter.
Those orders start to flow.
Or is that something we still need to say.
I had the confidence has improved.
I had dinner with.
Of the key.
Our key sales leads last night, and just talked about that very topic. So I don't know that it's kind of come back to the same levels and was.
Maybe a year prior.
To to the transaction, but.
We expect a significant improvement year on year.
Going.
Versus where it this year has been dreadful I mean, thats been very draconian the cuts they've made and so we think that things are certainly going to improve.
And.
But I don't know that they're going to reach the historic levels. They werent prior to the transaction Gray line and I was just going to point out those historic levels were occurring in the quarters ended June and September of 2000.
19, but the EUR 18, excuse me and so the comp that we would have is a much weaker first our fourth fiscal quarter that was January through March last years 2019. So.
But but they are they reach their xena at least in the interim in those quarters, which are now nearly 18 months behind.
That's a cap that account now in general I think the feedback is.
Fairly consistent that the broad band companies are continuing to invest theres several initiatives that we've talked about at the.
Investor day remote phy.
The.
The.
Remote phy being one of them.
Play the wireless and then and then clearly we think there and we said this all along we think we've created some pent up demand with some of these capital hold so.
There is that there is a good degree of optimism, but we have to deliver results and.
Thats the focus and.
We're very much working I would say as we noted in the prepared remarks.
The integration of the two companies kind of those cultural pitfalls you worry about when you put two companies together I would say all of that's behind US and now, it's just blocking and tackling getting orders and ship in orders and Thats. Our head is down and Thats what were focused on.
Sure I think in the interest of sharing the ball I'll just have one more question.
I think offline but.
You are prepared marks you said that the north star.
Cost synergies, primarily from logistics will start to flow in the next fiscal year.
Can you sort of help us understand.
That a bit more encouraged.
Is there a lag between when it started kind of achieve route efficiency and when that gets recognized.
Now in Cogs accounting in there on margin so help us understand.
Any kind of timing factors to think about as you work to achieve the synergy.
All right I'd be happy to to try to that so norstar had its own portfolio and its own customers and largely for the next two quarters, while we will be transitioning.
Two enersis.
Products, so that we can make those for our us customers rather than have our European factories make those products for those you us customers, that's going to take at least six months into.
The next major factor is the high speed line, which was originally slated to go into Warrensburg, Missouri is now going to Richmond, Our two Springfield, Missouri and the second of the two plants that norstar has that won't be up and in production.
Until April of next year. So the started next fiscal year. So.
By and large many of the the synergies the big synergies that we're looking at which is the freight the additional capacity that being able to put this high speed line in Springfield, rather than tearing two lines out a warrensburg, you're going to see some of that.
Benefit not fully recognized until next April .
In the near term there are obviously, some synergies mostly cost synergies for.
The executive officers of Norstar that are no longer be with the business because we don't need two Ceos.
Dave wasn't willing to give up the seats.
Not yet anyway, but.
So thats, where you will see in the near term see synergies off the North Star transaction.
Okay. That's very helpful. I'll turn it over thank you.
Sure.
Thank you. Our next question comes from John Franzreb of Sidoti and company.
Hi, guys just asked regarding the $20 million in lost revenue.
Is it safe to assume that's going to competitors. How confident are you that you can regain that business.
But John .
My focus throughout the course of this has been market share and.
Thats, its key and and you're right I think a lot of that in the very early days went to competitors is it just takes us a while to turn the battleship in the sense. We've got to in terms of the product mix, where we load products a lot of this motive power business is book and ship is quick turns.
So.
We have we just weren't able to respond fast enough, but Mike My my focus is bad keeping market share getting it back in those instances and then I've really lean on Mike to do all the insurance related activities. So we sort of split the duties. So I would say in a sense.
The 20 million.
It is immediately lost share.
Confidence, especially with the progress, we're making on the thin plate pure less.
Where it's been it's been fantastic, we're adding another shift in one of our operations to keep up with orders and the Norstar acquisition is going to increase the number of blocks. We can push through so there's a lot of moving piece to this on the preservationists share, but certainly we couldn't turn fast.
Yes.
To to protect that 20 million.
And the other thing John to remember, if you're just thinking about it.
From a sequential standpoint, we've had.
Because of the ERP implementation struggles we've been struggling with a $10 million to $20 million Miss really starting with the quarter, our fourth fiscal quarter last year. So as I mentioned, we feel like that ERP implementation is behind us from an output standpoint, only to be hindered by the fact that.
We lost formation capacity so.
The I think the sequential change may or may not be.
I don't think is permanent because as Dave said, we were quickly transitioning to maintenance free products from the traditional floated products as well.
As we get that capacity online that will be able to pick up more of the slack and you know in some respects the.
The demand that was be if it will be fulfilled by customer by competitors.
Get pretty much filled up there what was available capacity because it's been a pretty good market. So there's not really anyone out there per se that his head.
Tremendous opportunities I would say to make great expansion, but there has been a loss and that's what we're focused on getting back as soon as possible as our market share.
Okay fair enough and regarding.
Alpha.
Could you just give me a sense of the how pronounced seasonality is in that business and the summer months versus the winter months now we're kind of.
Revenue drop off do you have kind of seasonal basis and that business.
Well I would say in the.
18 to 24 months that I have seen.
The highest quarters have been nearly a 180 million per quarter.
And the lows are in the one in a quarter million per quarter. So now some of that as seasonal some of it had to do more with the overall patterns of one of our big broadband customers, but that I would say seasonally you probably would expect to 25 to 40 million decline from the peak.
Summer quarters too.
This quarter and I think we will see because of pent up demand and what some of these capital budgets get released at the start of the calendar year. Our hope is that our fourth fiscal quarter, we'll see a fairly.
Mark improvement from the quarter that were just about.
Third the way through.
Okay, great. Thanks, guys I'll get back into queue.
All right.
As a reminder to ask a question you want me to press Star one on your telephone to withdraw your question, perhaps the pound key.
On that.
Our next question comes from Brian Drab of William Blair.
Hey, good morning, Thanks for taking my question.
No.
So first on the 20 million in loss sales.
If you take that into account and then looking looking forward you exclude northstars contribution.
Looking at the third quarter do you think that sales would still increased sequentially. So taking the 20 million out taking northstar out.
Yes, it does.
The combination of legacy and Alpha.
Grow sequentially into the third quarter or not.
Oh, I definitely would grow in the third quarter off the second quarter for the legacy business.
Okay. That's helpful and then.
Again just for.
Modeling I think that in the.
At the analyst day that you expected northstar to contribute about 80 million.
On the second half of the or is it would we think about that is about evenly split between third and fourth quarter up 40 million in the third 40 million in the fourth.
I think you'd probably need to say nm.
I think right now because as we've now gotten better information on them.
I'm actually more like 70 million for that business for the second half of the year keep in mind because of antitrust rules, we had very limited access to.
The company prior to that but but the 80 million an expectation I have now is about 70 and I would say that's more like a 30 40 Q3 Q4.
Okay.
Got it and then.
Just to be clear on the insurance recovery and how you report that.
When you receive that insurance recovery payment part would be included or excluded from adjusted EPS.
So.
Because it's difficult to highlight revenue that you didnt get none of that loss has been or will be adjusted out. So we're going to take the hit in our as adjusted results.
Because we can't really highlight out revenue, we didnt have as I said, so consequently, and assuming we have a one quarter lag the benefits from those proceeds.
We will come into our as adjusted.
And as reported results. So the net result is if we if we say is 20 million his contribution as seven to 8 million in its 15 cents EPS for round numbers I'm, taking that yet the Q3, if I get full recovery from reinsure on a timely basis in Q4.
For all things being equal that 15 cents should show up none of my topline, but in my EPS line in Q4.
And there'll be an okay got it thank you.
Both be in as adjusted result.
Thanks, and then I'm going to go back and just see if you give any comment on this.
Thanks to the revenue forecast if you look at the fourth quarter.
Yes.
Basically before alpha.
Join so it just seems like six 2016 17 18 fiscal years.
The average increase sequentially from the third quarter to the fourth quarter.
And about 7%.
It is there anything you can comment on whether you maybe see similar sequential improvement.
From third quarter fourth quarter this fiscal year.
So I think thats still within reach that sequential step book on the legacy businesses.
And.
Actually probably im a little bit stronger than that but.
As you know we are somewhat reluctant to go more than one quarter out because our order book generally only stretches out in the upcoming two months, so you're asking me to project.
Things I don't have a whole lot of substantives information, but yes, I don't see any reason, we can at least matched that sequential step up in organic volume.
Okay, Thanks and.
And then if history is repeating itself I think I'm, probably the last person here on the comments on as the second question sovereign sneak in one more.
Can you just remind me what the main impact has been from tariffs.
Shifting from weren't aware, China, the U.S., and et cetera, and which.
Products or components are hitting the most.
It's been a combination Brian and set.
On the electronics portion of the business.
A lot of the contract manufacturers in the World. It's not just asked a lot of contract manufacturers on electronics piece is over there and we've been as we've talked about we've been moving stuff around as best we can and then we do have one particular battery range.
That we still import from China, that's the only one of any substance and the challenge there is.
The comp the competitive landscape doesn't really allow us to do much so thats, where our broadest exposure has been that Mike's got all that detail, yes, so as Dave said initially.
On the legacy business. It was our the contract manufacturers and made most of the component tree for Chargers weather and Thats, mostly motive power charges, but some some energy systems power, our charters and that we were largely able to.
Negate within a quarter or two of the tears originating because we had fortunately, both Chinese and Thailand, the use of contract manufacturers and we simply rerouted the Chinese product.
Europe , and we took the tie produced product into the US we get the charger issue behind us.
That left in in General one line of business or one set of batteries that are made in our Chongqing facility.
In.
China that are sold into the us market.
Unfortunately, our competitors aren't producing there similar batteries in China. So that's presented a challenge where the markets not going to be receptive to a price increases. So this is one that we've been meeting and we've just been going down the list trying to figure out how we can change either produced substantial transformation in.
Country outside of China.
We're looking at how we can bring the product in earlier in the value added stream to do some of the value added.
They're getting some of the other components that don't have to necessarily be put into China have those brought in and separately and putting us. It it is somewhat challenging.
But b that as it may.
Alpha also has that one of their products, where they have a transformer. That's made in China were looking at whether we can get that produced in India or other locations. So for the second half the year I foresee about $10 million of tariff costs.
Which is not tremendously different from the run rate that we experienced as you know tariff rates have been increasing throughout the year. So we even though we've taken some of the things off the list, even though we've been fairly successful it applying for in receiving exclusions on some of the product. The fact that the tariff rates have been increasing.
And as we've moved along as kind of made it looked like it looks like we're.
His dog paddling and not really making a lot of progress. So 10 million first half 10 million second half with regard to tariffs, but we are still working on.
The two main.
Two remaining big hitters in trying to find alternative sourcing there.
So that's hopeful I did see haven't been able to verify we did see a press release come out about potentially a change or an abatement right.
Cancellation of some of these tariffs that may go on in the upcoming quarters.
So im cross my fingers on that one as well and then my comment on freight is the other component that we've seen got going up and and that's one that we can control and our ability to produce product in the.
Geographical area that we sell it is going to be a great cost savings for us. So we don't have all those early.
Product on the water going back and forth.
You know the balk at some of our savings that that we think makes it norstar transactions so appealing to us.
Okay. Thanks, very much has a lot of great detail appreciate it.
X.
[noise] Mr. Schaefer you May now proceed with any further remarks.
And I want to thank everyone today for take your time to attend our call. We look forward to providing brother updates on our progress on our third quarter 2020 call in February .
Please have a good day.
[noise], ladies and gentlemen, that's conclude Chase conference call. Thank you for participating you may now disconnect.