Q1 2021 EnerSys Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the coupons 2021 Enersis earnings call. At this time all participants are in listen only mode. After the speakers presentation. There will be a question answer session to asked a question burden, especially the press star one your telephone if you require further assistance. Please press star one zero.
Now, let's use recipes Congress comps are favorite shape for president and CEO you may begin sir.
Thanks, Kevin.
Good morning, and thank you for joining us for our first quarter 2021 earnings call.
On the call with me this morning, as Mike Schmidtlein, our Chief Financial Officer.
Stephen we posted slides on our website that we will be referencing during the call. This morning, if you didn't get a chance to see this information you can Jones a webcast have in the Investor section of our website at Www Dot Enersis Dot 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 in views regarding future events in operating performance and are subject to uncertainties and changes in circumstances or actual results may differ materially from the forward looking statements for a number of reasons are forward looking.
Statements or applicable only as of the date of this presentation for a list of factors, which could affect our future results including earnings estimates.
See forward looking statements included an item to 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 July 220, 20, 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 in the non-GAAP information. Please see our company's form 8-K, which includes our press release dated August 12, 2020, which is included on our website at Www Dot Enersis Dot Com now, let me turn it back.
Thanks, Mike.
I would like to spend the first few minutes of this morning's call providing an update on the state of the business now Kobin continues to present a challenge in the current environment later on I will provide more insight into each of our business segments.
As you know the krona virus continues to significantly impact economic activity around the world.
As we discussed on our year end call in June following the initial outbreak and subsequent shelter in place actions in March and April local state and governments forced the closure of electric forklift and class eight over the road truck OEM customers, which had an immediate and significant effect on order rates, our Q1 results right.
Flecked these temporary shutdowns, particularly in the motive business, while all of these customers facilities of since reopened they have done so at a reduced capacity due to market demand and supply chain disruptions. Our factories have remained open throughout given we are essential critical infrastructure suppliers and community.
Occasions information technology Defense Energy transportation systems, and we have secured our global supply chain.
One of our primary areas of focus throughout the pandemic has been on the health and safety is of our employees worldwide and that focus won't change wherever possible. Our employees continue to work from home and every factory is operating in compliance with all applicable health and safety guidelines rules and regulations I am extreme.
Really proud of the continued adaptability of our employees in the face of this crisis as they remain committed to delivering for our customers.
In addition to prioritizing our employees health as we began experienced experiencing lower demand during the quarter, we leveraged our business model by aggressively flexing costs and operating capacities at our facilities.
Operations pushed extensive cost reduction actions in all areas with a combination of furloughs wage and salary freezes short time work vacation spend reductions. Another measures. In addition to the cost savings on travel and entertainment coming from the Lockdown SGN, a costs were down $10 million or eight.
Percent had remained constant with the prior years percentage of sales.
As you can see in the numbers are relatively variable cost structure and global footprint allows us to react quickly and appropriately to changing market conditions flexing costs up and down throughout various economic cycles, just as importantly reflects our capex and opex without impacting our revenue growth objectives or quality of.
Service, we will continue to adjust our cost further in response to demand shift in the months ahead.
We are working to enhance our balance sheet in order to one maintain the flexibility in resources necessary to see necessary to adapt to changing economy and to ensure we have the resources necessary to capitalize on opportunities as they arise as the market leader, we appreciate the strong position where.
We're in we will continue to invest in the business to expand our competitive edge work to increase market share from our competitors and ensure we continue to deliver a high quality products and services our customers have come to expect from Enersis.
Our liquidity is strong and positions us well in today's market, we put our robust cash flow to work in the first quarter by reducing net debt by 60 minutes $67 million, while generating $90 million in free cash flow and we will work hard to reduce our leverage further Mike will talk more about strong cash generation.
And balance sheet and his portion of the call.
In the face of customer disruptions and ongoing headwinds caused by the coded 19 outbreak during the quarter.
We're pleased to report Q1 fiscal 2021 adjusted earnings of 92 cents per diluted share.
China was the first economy to bounce back in Q1 after being hardest hit in Q4.
RPM countries are having controlled reopenings, albeit with a reduced demand that was presenting itself pre cobot, specifically EMEA has been softening from our traditional motive power OEM customers. Despite these challenges EMEA demand for higher margin motive power TPPL products continues to improve.
In the U.S. after several weeks of staggered openings throughout the country, we've seen business and energy systems and specialty rebound while motive continues to lag. Despite all of these challenges our team performed and we continue to deliver for our customers.
Please turn to slide three.
I'd now like to update you on some of our key markets before I do as a reminder, we've changed our reportable business segments from being based on geographic regions to lines of business. These segments, our energy systems motive power in specialty.
We believe this change will better address the global nature of our customer base and allow us to better Taylor global products and services for their needs.
Our energy systems business performed relatively well and led to the pandemic during the quarter as telecom carriers continue investing in their networks to increase capacity and reliability.
In the Americas, the completion of the T. Mobile merger has resulted in improved orders and revenue growth with batteries power systems enclosures and services all positively impacted.
However, we experienced a slower than expected quarter in cable television broadband as customers allocated their immediate attention on adding network capacity in subscriber circuits by consuming available excess power.
The additional demand on these networks will inevitably require investment in more power in the quarters ahead as safe as safety margins are consumed to ensure network resiliency.
Please turn to slide four.
Fiveg is emerging as a bright spot in all signs point to things moving full steam ahead with the network build outs, particularly in the US a TNT is improving for us as they deployed fiveg infrastructure from macro Unramped sites and we're excited to announce a strategic collaboration with Corning to speed Fiveg deployment.
Deployment by simplifying the delivery of fiber and electrical power to small cell wireless sites. This collaboration will leverage corning's industry, leading fiber cable and conductivity expertise and emphasis is technology leadership and remote powering solution and has been endorsed by one of our largest telecom customers.
We're excited by this opportunity and all of the actions we are seeing on the Fiveg front.
Data, new PS markets are holding of generally well with some cobot drag but that has been stabilizing during the reopening process TPPL demand remains exceptionally strong and supply issues have been resolved.
In EMEA and rest of World Energy systems sales were down in the telecom segment as operators delayed their DC power investments similar to what we saw in us last year.
Certainty with Wal wait to supply UK and European operators is a contributor to the slowdown. However, it opens positive opportunities for Enersis in EMEA as we are well positioned with the other large equipment manufacturers.
Telecom customers as a whole seem committed to their increase calendar year 2020 capital expenditure plans telecom batteries power systems and closures and services should see greater positive impacts of this trend in fiscal 2021, particularly with Fiveg nationwide deployment ramping up in fiscal 2020.
The two acceleration.
We remain confident that our strategy to provide full turnkey DC power solutions, including lithium batteries is on the Mark for this uptick in network infrastructure investment.
Please turn to slide five.
Our motive power business faced strong headwinds in Q1 with many forklift truck manufacturers closed for several weeks and the reopenings occurring at less than full capacity to match demand.
Although industrial manufacturing is still constrained in the Americas, and we're seeing dampened demand for class one sit down rider trucks class to lift trucks used primarily in distribution and fulfillment centers have held up better with the shift in consumption to E commerce, our overarching focus and motive power remains.
Promoting the maintenance free experience, whether nexus pure and soon to be released Nexus I'm products.
In Europe, the motive power sales team continues to push TPPL, which finished slightly up from the prior year and now represents almost 11% of total sales the key Oems in EMEA have all reopened that activity is down as the factories adjust to lower market demand factory loading in our legacy European mode.
Power motive power factories is a significant headwind.
As we discussed on our last call one of our large competitors excite had declared bankruptcy for the third time they have since been acquired by a private equity firm in a complicated process, regardless as result of our returned to full capacity at our Richmond, Kentucky plant. We've continued to respond to any customers concerned about exits.
Future ability to perform.
Our technology teams made significant progress on our motive power product roadmap in the quarter in spite of coated our next generation of TPPL Nexus pure products soon to be launch include enhance carbon and battery management systems that deliver motive power customer experience that surpasses most competitors, including there.
Lithium our Nexus ion is on track to launch this quarter and will deliver an industry leading experience for the most demanding of motive applications and customers. These programs have been delayed and have yet to deliver any contribution to our financial results. We have qualified the system to ISO to six two.
Six to functional safety the first system in industrial marks be qualified to the standard.
As mentioned earlier in all of our segments, we have been keenly focused on reducing our operating expenses to compensate for the loss of throughput and also to reduce cash spend by tight control of inventory receivables collections in payables management.
These actions actions helped mitigate the impact of the motive power slowdown and can be can be seen in our strong cash flow results. Please turn to slide six.
The third segment of our business specialty performed exceptionally well during the first quarter, particularly in light of the ongoing impact of cobot on OEM demand. We've continued to increase enersis as market share the transportation sector by leveraging our technology platform with TPPL Usdone.
Question beat our internal free cobot expectations in the quarter do an due to an increase in retail market demand and carried that momentum forward by coming out of the block strong in July we will continue to monitor the success of new retail programs over the coming months, but are excited by the way. This business is take.
Taking off as we continue to bring on additional thin plate pure OLED capacity.
Despite our success in the U.S. EMEA transportation volumes were down in Q1 and May remain lower than have 20, as a result with cobot the cobot pandemic scaling back production at Oems.
Defense provided positive news in the specialty segments in Q1, showing strong demand and munitions after being awarded several new contracts during the quarter since the Investor day in late 2019, Enersis is one over $50 million in funded munitions awards on multiple programs. The majority of these programs have capitalized.
On our industry, leading thermal battery technology that provides lighter weight and extended operating times for applications in air and missile defense Air to ground weapons and Hypersonics. These programs all fall into the US Army is big six funding priorities and line Enersis is enabling technology with a challenging future requirements of the U.S.
Department of defense.
Expect that demand in orders to increase in coming months in mirror the volume in order timing of F. why 20.
I will now provide additional updates on the continued progress we're making on our thin plate pure led expansion.
As you know last September we acquired Norstar battery, which aligns perfectly with our strategy to increase sales of premium products by putting enersis in a position to accelerate our sales of higher margins than pipe Carolyn.
At this point the integration of Norstar is largely complete as we pursue seamless operations marketing and product delivery.
The transition and integration of Norstar created significant manufacturing variances most acutely in our specialty business in Q1. This will improve as we bring on new customers and plant loading is smoothed with harmonize tooling and processes.
Installation of the new high speed line was proceeding extremely well until technicians and engineers from our UK supplier, we're recalled home and March due to covert concerns, but we're now back on track with US based contractors and continue to expect commissioning this month and much higher production capacity in our second half.
Despite beginning the quarter in the midst of one of the worst economic disruptions in history, we're pleased and proud of how pleased and proud of how our team adapted to the new environment has set us up for success in the future are distributed footprint served us well, we worked quickly and strategically to ensure.
Sure the health and safety of our employees reduce our cost footprint to align with lower production demand and invest in new and innovative technology that will further enhance our competitive advantage throughout the cycle.
We have responded to the challenge looking forward, while we expect the motive power business to perform in line with macro trends. We're extremely excited about accelerating fiveg buildouts and the significant opportunity in both transportation and defense demand for our TPPL product remains strong as customers continue to seek a maintenance free slow.
In addition to meet their critical power needs and we solve their capacity challenges in order to meet this demand in the months in years ahead.
As we have shown throughout our history Enersis is the long time leader in the power storage market, because we not only understand how to operate when the market is strong but also during times of economic uncertainty.
We are built for this moment, which we see as an opportunity not a risk while some of our smaller competitors they face financial or strategic challenges are highly diversified business. Both in geography, and customer end markets will help us insulate us from an economic downturn, while our leaner cost structure and strong product demand.
We'll ensure robust cash flow generation for the business and for our shareholders. We will continue to enhance our strong and flexible balance sheet, allowing us to successfully navigate this market. While also capitalizing on opportunities that will drive long term growth with that I'll now ask Mike to provide further information.
On the first quarter results.
Thank you.
As Dave mentioned, we have changed his segment reporting in our financial statement three lines of business rather than three geographic areas.
Those three lines are motive power energy systems.
Specialty.
This change reflects not only recent management changes, but more importantly, how we view our evolving business model with global customers products and markets.
Now for those of you following along on our webcast I am starting with slide eight.
Our first quarter net sales decreased 10% over the prior year to $705 million due to 11% decrease from volume a 1% decrease in pricing along with a 2% decrease from currency net of a 4% increase from acquisitions on a line of business basis, our first quarter net sales in may.
Motive power were down 24% to $263 million, while energy systems net sales were flat at $353 million and specialty increased 8% in the first quarter $289 million.
Motive power suffered a 21% decline in volume due to the pandemic with smaller additional decreases in FX and pricing.
Energy systems had a 6% increase from acquisitions offset by decreases of 1%, 2% and 3% in pricing currency in volume respectively.
Specialty at a 12% at 12% from the Norstar acquisition less 4% in volume declines.
On a geographical basis net sales for the Americas were down 5% year over year to $491 million with 7% volume declines that have a 4% increase from acquisitions, along with minor pricing in FX pressure.
EMEA was down 22% to $159 million on 24% volume declines in Asia was down 8% to $55 million, primarily due to a 7% of pressure rising from volume and currency combined.
Please now refer to slide nine.
On a sequential basis first quarter net sales were down 10% compared to the fourth quarter fiscal 2020, driven by a 9% volume and 1% price declines.
On a line of business basis motive power declined 26% in specialty declined 22% primarily from the coded impacts while energy systems was up 12% as the work from home demands helped our volume on a geographical basis Americas was down 9% EMEA was down 20%.
While Asia was up 21%.
Now 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 August 12, 2020 for details concerning these highlighted items.
Please now turn to slide 10.
On a year over year basis, adjusted consolidated operating earnings in the first quarter decreased approximately $17 million to $61 million with an operating margin down 130 basis points, an additional $3.7 million business interruption recovery in Q1 from our September 2019 fire and.
It's been Kentucky, along with lower commodity costs were not have enough to offset the volume declines in higher manufacturing costs.
On a sequential basis, our first quarter operating earnings declined 40 basis points to 8.7%.
Operating earnings when excluding highlighted items were at 16.1% for the first quarter compared to 15.9% in the prior year as we reduced our operating spending by $10 million excluded from these operating expenses recorded on a GAAP basis in Q1, our pretax charges of approximately 8 million primarily relate.
It's a 7 million and alpha and norstar amortization charges.
Excluding those charges or motive power business segment achieved an operating earnings performance of 10.4%, which was 50 bips lower than the 10.9% in the first quarter of last year due to the 21% volume decline mentioned earlier.
Driving a $10 million drop in operating earnings on a sequential basis motive power as first quarter operating earnings decreased 230 basis points from the 12.7% margin posted in the fourth quarter due primarily to volume.
Energy systems operating earnings percentage of 8.0% was down from last year's 8.5%, but up from last quarter's 4.1% OE dollars decreased $2 million from the prior year, primarily from higher manufacturing costs, but they increased over $15 million from the prior quarter on.
39% organic volume increases from the work from home demands and other seasonal fluctuations.
Specialty operating earnings of 6.5% was down from last year's 12.5% and down from last quarter's 11.7%.
Oh, $80 decrease $4 million from the prior year, primarily from higher manufacturing cost in decreased nearly $8 million from the prior quarter on 21% organic volume declines primarily related to covert.
Please move to slide 11.
As previously reflected on slide 10, our first quarter adjusted consolidated operating earnings of $61 million was a decrease of 21% from the prior year. Our adjusted consolidated net earnings of $39 million was $17 million lower than the prior year the decline in adjusted net earnings.
Consistent with the decline in operating earnings.
The recovery on our business interruption claim from the Richmond fire continues to progress although slowed by room remote work mandates for those involved in the claim.
We received $5 million in April which was reflected in our fourth quarter results.
We received another $4 million in May which was recorded in this first quarter of fiscal 2021, and we have received another $1 million in July which along with any future receipts will be recorded in Q2 or beyond those receipts reflect approximately 60% of our claim as we continue to.
Pursue recovery on or interruption law.
Our adjusted effective income tax rate of 21% for the first quarter was higher than the prior years rate of 18% and higher than the prior quarters rate of 18% discrete tax items caused most of these variations.
Fiscal 2000, Nineteens full year tax rate was 17%, while our fiscal 2020 tax rate was just below 18%, which is consistent with our expectations for fiscal 2021.
EPS decreased 29% to 92 cents on lower net earnings we expect our second fiscal quarter of 2021 to remain near the 42.9 million shares weighted average shares outstanding in the first quarter. As a reminder, we still have nearly $50 million of share buybacks authorized.
But have no immediate plans to execute any repurchases with perhaps three of the exception of the modest annual repurchases made to offset employee stock plan dilution.
Our recently announced dividend remained unchanged.
Please now turn to slide 12.
Our balance sheet remains strong and well positioned for us to navigate the current economic environment.
We now have nearly $384 million of cash on hand in our credit agreement leverage ratio is 2.2 times, which allows over $500 million of additional borrowing capacity, we expect our leverage ratio to remain at or below 2.5 times in fiscal 2021.
We generated over $90 million and free cash flow in the first quarter. Our Q1 cash generation was very strong as expected and our receivables collection remained robust with days sales outstanding Consta with that of March capital expenditures of $26 million were at our expectations for the core.
I hope we.
We ended our capex expectation for fiscal 2021 to approximately $65 million from an earlier expected reduced spend of only $50 million, we remain committed to our major investment programs those being the lithium battery development continued expansion of our TPPL expand.
Action, including the Norstar integration the completion of our high speed line and the transition of norstar products for the European market to our French factory.
Most of the spending on our high speed line has already been made.
Even with these investments we have also retain the agility to flex our manufacturing footprint as needed as I mentioned earlier, we are maintaining our dividends to shareholders.
We anticipate our gross profit rates remain near 25% in Q2 fiscal 2001, as lower revenue and lower utilization in some of our factories will likely counter the benefits of lower commodity in energy prices.
With regards to tariffs, we anticipate a cash and earnings call back of up to $5 million sometime in Q2 from exemptions. We have already received with regard to resuming guidance. We are awaiting a better understanding of the motive power recovery, along with a reduction to the uncertainty of future pandemic.
Restrictions by public authorities.
As David described we continue to expect a continuation of a lower demand and motive markets. While other markets remain constant or May rise. We continue to believe we have taken the necessary steps to position ourselves to not only withstand this challenge but emerged stronger as was the case a decade ago, we believe potential.
So market share enhancements may mitigate lower total market demand and we remind you of the fact that during the last recession, we de Levered and increased our market share I, Let me turn it back today.
Thanks, Mike Kevin We will now open the line for questions.
Ladies and gentlemen, if your question or comment at this time. Please press Star then the one key on your touched on telephone if your question and answer you were still yourself from the Q. Please press the pound.
Our first question comes from Oppenheimer.
Good morning.
Thanks for taking the questions appreciate the new segment reporting and the redesigned website looks good so well done there.
Do we start with the TPPL capacity ramp and how that may start to impact the financials.
You start at the high speed line commissioning this month and it sounds like the Northstar integration.
Molla geisha into Anderson TPPL products.
Is really well underway here or should we say just ramping at this point maybe provide some color on that.
That implies you could be in October with about $400 million yourselves incremental TPPL revenue do I have that right.
Thanks, now and.
This this transition and you referenced to bring and everybody. The same standards has put a big drag in the last couple of quarters and you see it acutely you see that manufacturing variance drag in the specialty segment, that's definitely going to start to improve.
As we ramp up new customers.
Your point as well taken.
The production I'm headed out there I think.
End of this month and down.
We're going to look at all the new equipment, it's not just the high speed line, but it's all the plate, making the fee that we should be in a great position to bring on new and more customers. Starting as you mentioned in our second half. So that's going to ramp up at snack, we're not going to turn on the spec and pick up $400 million overnight. It.
It's going to take time for that the ops team to to bring it on and sales guys, but I'm very proud of our sales guys.
Hopefully you heard in the prepared remarks.
They've done a great job.
Working with the ops team to get things teed up and cued up.
In my 30 years at this business, it's been hard to get capacity and.
Our demand and supply in sync I think we're doing a better job of that right now so we're very excited.
About that and I've been getting videos everyday of the new equipment as it comes online.
It is frustrating that covered.
Slowed us down but the team has responded and I'm very excited about our second half. So yes, we're going to start to ramp that that that piece of our business up.
Starting in our second our third quarter, Mike and no I guess you throughout the $400 million of additional capacity.
I think thats, a decent number to use in terms of what that line is capable of doing when it's running at full.
Production levels, what what you might want to factor in his weather.
There might be cannibalization from other factories.
So it may not be it a total $400 million because some of the other TPPL factories might have been able to make some of that product as well so.
Now I have one of the things it's been interesting in the course of this code crisis is how hard it spend the higher Paypal.
It's crazy its upside down you look at the unemployment statistics and and every plant manager I have is scream and about there how hard it is to get people in into the factories right now so.
There is it's it won't be a won't be perfect theres theres, but that the hard part is over.
Equipment looks great and and the customers are aligned cuda. So we're excited.
Okay I appreciate that color. Thanks, and then you talked a bit as you went through the new segments.
About demand patterns I wonder if you could just to expand a little bit more.
Certainly anything that you saw in July in terms of.
Notable order pattern changes.
Improvements.
Deceleration.
I would certainly be interested in your.
Your observations.
In the telecom broadband space.
We knew that the telecom side of the business was picking up and we saw that you're in the fiscal first quarter, but do you think broadband.
It's already starting to come back as the safety margins are consumed.
And what might that mean or for this quarter.
Well I'll, let Mike give you the.
The order numbers here and trends four week eight week averages.
In aggregate here.
It's it's mostly a motive story I think hopefully you heard that it's relative to our business plan our budget for the year and inside emotive. It's a mix story, so like the us food.
Markets, they are holding up pretty well and that's an important part of the key drivers for the motive business.
Warehouse construction, that's still going strong with all the E commerce.
And then it was really assess trying to sort out.
And.
The difference between supply and demand.
Issues.
What how much of this was forced closures from government actions and how much is is long standing.
Impact to the business said and I wish I had that clarity that side were holding off on the guidance a little bit in general I can tell you every things getting better.
Order rates are improving Mike will give you those numbers here in the second.
And then to your point on on the cable television customers I can't tell you when I know there scramble and right now to to to handle all of the work from home.
New users people ask upgrade their their bandwidth speeds.
They're they're going they're going really well.
Right now their initial focus is is bringing on all those new subscribers, but as you point out there soaking up every ounce of safety margin. They haven't that's just our initial focus and we expect things are going to continue thats, a great business and it's been a great business for a very long time and we.
Continue we have we still have great expectations for that so Mike you want to talk specifically about the orders.
Well just to give you a kind of abroad look at it.
When we look at our order pattern in looking at kind of the them. The more current orders those being the ones collected over the last four and then eight weeks averaged and then the later ones 12 in 16 weeks. So motive power has got an improving story, where as the 12 and 16 week averages were more like down 20.
8%, there now down 10%. So that is a deceleration of the decline that we saw year over year energy systems because of some of the strength of some of the work from home.
Projects that the networks were doing to add capacity has stayed relatively flat, albeit there are some puts and takes within that portfolio of winners and losers in terms of who's who's doing well and not doing well our specialty business, which was this was where some of those trucks over the road truck Oems were shut down early in.
In our fiscal quarter, and then reopened so thats a good news story, whereas it was about a minus 5% order intake.
For those earlier periods is now a positive 5% year over year. So.
I would say and and broadly, whereas we were as a total company about minus 10% in 12 or 16 week averages. We're now down to about minus 5%. So we're certainly narrowing the gap and it's an improving situation based on order intake and then no I'd just remember.
For our second quarter insist important remember that Wi Fi flow lot of our manufacturing variances. So.
[music].
As much as we tried and I'm really happy with the with the job. The teams have done you can never flex instantly.
And so you're going to we're going to carry forward some pretty good.
No not good pretty bad manufacturing variances from the first quarter incurred.
Into the into the second quarter, but I think what's really important to note is that the order rates are definitely recovering and and really and I said in my remarks, we think it's our geographic and market diversification that that sort of helped us and Mike is set for many.
Years.
About the strength of our balance sheet and our business model commodities go go down typically in these recessionary periods and you see that in our cash flow numbers that really.
As Mike predicted that fared well so.
We're feeling cautiously optimistic.
But that said, we do have pressures.
Europe was going slow on motive before coated and we've got some we've got some challenges to to adapt to there but in general the environment is improving.
That's very helpful. If I could sneak in one more.
The timing is really interesting of yours are reporting the new segments in their margins.
In a quarter that is probably as.
Unusual and.
Lacking continuity as probably any experience.
And so the margins that we see this quarter or not really kind of normalized margins for the business.
Segment, but is there anything you can share with us in terms of how we should think about a normalized.
Margin profile for each of the segments or any margin targets for these segments that you can share.
Well I can also only say looking back historically that the the margins at the gross profit line and really even the operating earnings lines are typically fairly similar as you know as a company we tend to be in a gross profit percentage at about 25% of.
Sales.
And as you look at these segments, that's about where they track too.
The and most of them have 15 to 16 or 17% operating expenses at the moment, although those are declining.
Those numbers are probably more representative of last fiscal year than what the orders this year. So.
With the objective that everybody us to deliver at least 10% of operating earnings and the only caveat I would give you is that the specialty business, especially as you think about a year ago. We only had the norstar acquisition in it for the second half of the year. So it's got a little bit of a drag as Dave mentioned.
In the near term compared to prior year Q1, or Q2 comparison, but once you get to Q3 and four when we do expect that high speed line to start having a positive contribution I think you'll see an improvement there, but but given its smaller size at about 90 million per quarter, it's always going to have a little bit.
More volatility from some of these inputs than than the bigger segments.
But brett by and large at least when you are starting your modeling I would probably.
Keep everybody in that 25% gross profit rate because they're not that much different in the aggregate I agree and.
And I'm glad Mike pointed it out I really want to distress that I don't want anyone to make any bad assumptions about pricing or gross profits on the specialty side. That's that's entirely manufacturing variance story and integration story and should should improve in the coming quarters.
Thank you I appreciate the color.
Thanks question Sorry next question comes from Brian Drab with William Blair.
Good morning.
Congrats on the solid performance in the tough environment.
Can you maybe just comment.
Further on on operating expenses, the Kate came in I know you're doing a lot of good cost cutting and theres lean activities that were initiated pre cope it.
There's about 6 million.
Below my.
First quarter estimate an opex and I'm just wondering if you could.
Help me model that going forward.
Some of that start to flex back and volumes pick up.
I guess I would say, though that.
I look at Brian now Mike No no no no is on for a while it's Brian.
All right.
[laughter].
The trends of William Blair.
[laughter] the.
What I look at our operating expenses I would tell you that I think our selling expenses flexed.
Very well, we spent a lot of energy, making sure that that gets rightsized and so its flexing well the gionee expense is not quite as.
Flexible because it has most of the overhead like David myself.
And we flex a little bit, but we're getting older. So we're not very flexible the and engineering has done a reasonable job, but but I guess the two things I would tell you that have kind of been a big move or is the the travel restrictions and not having.
Collectively made out of AR 13000 employees, there's probably about 1000 of them that tend to move and get on airplanes and if.
None of them are traveling it does have a collective impact on and lowers your spend and the other part that caught me a little bit by surprise was the reduction in some of our.
Payments to our medical providers as some of the medical services were restricted over the pandemic, particularly in the early periods in it.
People can't get access to their their healthcare providers. The bills go down so weve.
And I wasn't really I didn't really anticipate that but it's been fairly it noticeable as well, yes, Brian that I talked to the guys pretty much every day on this topic of.
Really.
What this I mean that the silver lining in this is it shows how effective technology. Some of these new Microsoft My hats off to the Microsoft team, we're using their 365 suite of products and it's just done extremely well for us, but very stable push a button I can be speaking the some of the China.
And so we need to do more of that I think weve actually broken some gold medals recently so.
We hope to not bring it all back if but I can't give you a number yet I don't know.
So not even that's all really helpful, but not even directionally could you say when do you think for the second quarter of Opex dollars are up or down.
Thank you are going to see I mean in general.
I realize we Didnt give you guidance, but I would say in general you should expect Q2 to look pretty similar to Q1, yes I agree okay.
Okay. Thanks, and then can you talk a little bit more about the retail success that you mentioned in transportation.
I think the one that you've announced the partnership you have announced as with Autozone.
How many other partnerships now have you signed and.
How.
Kind of broad as your presence in that that market at this point.
It's improving so we've done at least three more.
Let's say material deals.
And that piece of the business is going as planned.
Couple of the areas you know autozone as is principally focused on premium retail if you remember we decided.
2% to that addressable a 2% of that market was our adjustable market and then the other piece and we mentioned this in where we are starting to has some success is focusing away from the Oems.
On on the class eight and putting more of our emphasis on the service and the replacement side thats going well to the Oems where that was not a good story frankly, the would this forced closures if we were only selling.
To the truck Oems, we were going to have a lot worse quarter than we did so that diversification is helping us and definitely going in the right direction.
Okay, Great and then just the last one.
Can you talk a little bit more about what you're seeing in Fiveg you mentioned, a TNT specifically you made some other comments around good momentum there but are you seeing.
T mobile ryzen dish.
These companies starting to spend more and release more orders for Fiveg and where do you stand in terms of.
On what you think about the timing of Fiveg, having a material impact on your revenue.
We have discussions and programs going with all of those customers you just mentioned.
And but they're all they're all little bit different I mean at we as we've said.
Whether its macro sites, if it's a fiber build outs if its central office, adding power to essential office small cell site time, we've talked to you a lot about.
All of those areas of the network investment.
We will participate in we've put special emphasis on the small cell powering given that.
We we feel like in the long run Fiveg will require to get the benefits that the carriers are really looking for theyre going to need a small cells are the small cell site to sort of network topology. So we've put a lot of emphasis in that area. The Corning project, we announced.
Is very exciting I don't want to get out ahead of Corning in terms of dimensioning, but they've talked about it on their analyst call I know that we have visibility.
In the C suite.
Have a major carrier on this program.
So it's a very exciting opportunity for us.
Specifically, but we're seeing it we're seeing it across the board, it's really happening they all have a different spin on it.
Everybody's working in the different spectrum, some as lower mid band high band.
And we're trying to we're trying to participate everywhere. We we the dish opportunity is a little unique given.
And in some ways there starting from scratch so.
It's all every one of them as a different story, but every one of those accounts we have good momentum with.
Little little not not the same story in.
Europe definitely.
Not where we are.
In the us market, but maybe a year from now that piece of the business is going to start to pick up as well so very exciting and it's it's just which just starting now and in real Ernest for us.
In Europe is that covered related or is it more just the market or or your.
Competitors I think that would want situation.
I think the Wally situation is important I think that the these decisions on on which OEM.
Telecom equipment Oems to build their networks outweigh the is a very important decision UK in France.
So that's that's piece of the story as I said in my prepared remarks.
I think that.
Theres Theres theres political reasons or spectrum issues, so it's behind but it will come it's just it's just the nature.
And the evolution and then what we've said for many many quarters is our lives will only become more digitized coded I think is and this is something we talked about as management team all the time.
It's going to change how we view telecommuting, it's going to change, especially with some of our younger employees.
This work from home and all of these things are going to put more pressure on networks not less so.
Very.
And then in that sense, but.
Certainly the carriers are having their own challenges getting their crafts.
Out in the field they've had some absentee issue absenteeism issues to deal with.
So koby that we can't say.
We've been cobot proof in that part of our business by any stretch.
But in general.
Theres a lot of momentum building.
Okay. Thanks for all the detail.
All right.
Next question comes from John Franzreb with Sidoti and company.
Hey, David.
I'm going to combine this question into one.
Pressed for time here, but Steve can you expand on on the motive headwinds you touched on that.
Motive Europe's been weak for while.
E Commerce as good as food was good.
In light of what I'm seeing in some some other.
Call it.
Economic related equipment, such as the class a truck market, which orders with the best of the year end in July now how come we're not seeing that similar kind of rebound in the forklift market and also can you address what you think about the class eight OEM truck given that for the state and I just gave you.
Yes, that's that's that's good that's certainly improving.
Let's I mean, if you look the different pieces, where electric forklift trucks are used heavily.
Light vehicle production.
Car sedans that really got punched really hard with a lot of forced closures.
So so thats, an impact, but but how sustainable is that I don't know I don't have a good answer for you.
But that's a big place.
Warehouse construction, we mentioned looks really looks fine.
But in general if you look at that.
You know the non defense capital goods.
On it and that sort of abroad, if you take out the aircraft.
It's just hard for me right now to tell you how much of this is going to drag beyond our into our age to I guess will remind you.
That we don't have any.
Acute exposures in the oil and gas aviation leisure, but but economic activity is economic activity and as you've noted for years that our motive tends to ebb and flow with general induction industrial production statistics things like that so.
Mike do you have any.
Thank you want to add on that.
No out outside of I actually had seen the July with data, yet, but I am encouraged to hear John say that.
He said class eight right that was classes that that was a class eight truck that was kind of alluded to the fact that other economically sensitive.
Equipment vehicle equipment is rebounding sharply I was kind of curious why you're not seeing it in a forklift market.
Well I again, we as we noted we we've caught halfway back.
On our order pattern so.
And we'll see how far we get by the end of the by the end of this quarter.
But it is improving don't don't give me wrong. It's just it's still we we watch the same news you do and we still don't know of.
Theres going to be a second round of closures or anything so we're just being careful.
Okay, and if I kind of.
The Corning relationship how does that change the economics for you going forward.
The.
We think that the.
From a gross margin standpoint that will be an accretive business.
From a revenue standpoint, we think it potentially could be very material to our business.
We we've already invested in scores of engineers thats already a drag on the PNM now.
To do all the work in the approvals we were through the early phases of approvals now.
There's a lot of pressure from our big end user customers.
And and it does change things from an Enersis perspective, because the the wallet share is different than we've ever participated in before and it really embodies where I've wanted this part of the business today and we wanted to elevate we wanted to be able to provide.
They have fully engineered a turnkey system, which has the energy conversion.
The and closure.
The energy storage with the batteries.
It's exactly.
Where it just in bodies.
Where we've been trying to get to with this business and we're very excited about it it really is.
And kind of what the future of Enersis is going to look like more and more.
Okay, and one quick one.
Is there any chance we can get an 8-K filing with the restatement a reclassification at the segment data.
Well you bring up a good point John in that if.
If we left it to the current.
Way, we would do our reporting it'd be the balance of the year before you had a full years worth of prior year restated for those segment changes.
What I can do in the short term in this is for any of the analysts or anyone who's on the call. They would like to have that information. This is two to restate last years, what were geographical lines of business back down into a our geographical area segmentation into a line of business you can cause.
Antech, Steve there, our Investor Relations VP and you can find his contact information on our website and he can provide you that breakdown.
Great. Thanks, a lot Mike I'll get back into queue.
Thanks.
Yeah.
Our next question comes from Greg, What's the capacity with Weber research.
Hey, guys. Thanks for squeezing me in Hayden.
Good.
So a.
Appreciate the new business line reporting.
I just wanted to start with the chart on slide three as curious if you guys had any like long term objectives, our goals for each of these segments.
And then also how how do you how do you see this pie chart evolving over the years.
I think you're going to see.
Higher growth in the specialty sector.
As we bring on more of this.
As we absorb more this thin plate pure OLED capacity, so I think you're going to see.
That.
That slice of the pie grow I think the motive power revenue story as we've alluded to is is not particularly.
A huge story, but we think the margins that really on the motive slice, it's really going to be more of a margin focus with some of our more advanced maintenance free products and then on the energy systems side, we should see some meaningful growth there as well as these fiveg.
Pieces grow so, yes, I would say the.
The energy systems, and the specialties should both grow.
And faster than mode of specialty growing the fastest.
Okay got it that's helpful. And then your answer on on margins before was was really helpful. So thanks for that.
Digging a little bit more on on specialty in particular the defense.
I would find it's really interesting work and just to the extent you're able to can you talk a little bit more about.
The new contracts and then new work you're doing and then also what kind of margins you typically see for that.
The margin profile in that business tends to be a highly accretive.
And.
So the.
And a lot of the awards, we've talked about our new contracts new orders that have yet to.
Show up in the revenue line and.
As a lot of engineering, obviously that goes into supporting these types of programs, but in general and then that's and then the specialty business.
Transportation wise to sub segment of transportation under there is an accretive business as well so.
Margin wise.
That that is.
The specialty in the long run I think is going to be.
Right at are higher than the other two business segments, but it's been drag.
Right now with this norstar acquisition and kind of lining up the strategy and and we are I mean, we can't we can't hide the fact that Cove and has slowed those plants down.
But but it's coming quickly and I would say Greg that some of these new awards. They are typically is a period on the front end for qualification, where you maybe doing some nonrecurring engineering and Thats not really that's done more on a cost basis too.
Validate the the product works in the application so so they're not a smooth.
Profit margin you may see it restricted on the front end and once it goes into full production as you would see the normalized margins that we would anticipate from the programs.
Got it alright, thanks, guys.
Alright, great again, ladies and gentlemen, if you have a question or comment at this time. Please press the star than the one key on your touched on telephone. Our next question comes from Greg Lewis with BTG.
Yes, Thank you and good morning, and thanks for taking my question realizing calls around a little bit late I just had one question.
Yes, I mean as I think about the over the last two weeks Theres. Some a lot of power outages across the east coast related to the tropical storm.
Thinking about potential opportunity whether for energy storage within you utilities or industrial power.
Summers.
Is there any way to think about won't like just giving you guys. You've been through these before does that kind of result in any kind of opportunities or step up and business. A couple of quarters down the road or is it something where these customers generally a good sense for what they are down one and just comment any kind of.
All around that would be appreciate.
It's a great question and.
In my experience what these outages do.
Is they prioritize network resiliency power resiliency at the C suite of the carriers in the telecom world with utilities, so it tends to bring heightened focus.
Things like why two K. was an area, where the condition of batteries that condition of networks.
Brought on a lot of business the big power.
Outages on the East coast years ago. This year, you know, we certainly paid attention to the number of storms that are being anticipated. So it's certainly brings heightened focus.
To the need.
For the kind that products that we provide so historically, we've definitely seen.
This the more attention being paid more capex being allocated to power resiliency.
After a storm like this one of things they've gotten better about in in.
In the old days oftentimes the title surge were just wipe out some of the equipment and would have to be replaced but I think all of the carriers are done a better job of of putting their base stations on platforms and things like that so it's really mostly now.
The question of of heightened focus and allocation of Capex dollars. So yes, it should be it should be a good thing for us.
Okay. Thank you very much.
Thank you for the question Thanks, Greg.
And I'm not showing any further questions at this time I turn the call back over to demonstrate for.
All right well. Thank you all for taking your time today to attend the call. We look forward, providing further updates on our progress on our second quarter 21.
2021 call in November have a great day, everyone Bye bye.
Ladies and gentlemen. This concludes todays presentation you may now disconnect have a wonderful thanks.