Q3 2021 EnerSys Earnings Call
Ladies and gentlemen, thank you for standing by this call will begin shortly until that time your line and again the planes and home. Thank you for your patience.
[music].
Ladies and gentlemen, and thank you for standing by and and welcome to the Q3, 'twenty and 'twenty One Enersys earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation and they're gonna be a question and answer session to ask a question you will need to press star one and there's telephone and just be advice to today's call is being recorded.
And if you need any assistance during the call press Star Zero and I would now like to hand, the confirmed and so back to your speaker today, Mr. David Shaffer, President and CEO. Thank you and go ahead Sir.
Thank you Don good morning, and thank you for joining us for our third quarter 2020, 'twenty and 'twenty one earnings call on the call with me. This morning is Mike Schmidt line, our CFO last evening, 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 go to.
The webcast tab and the investors section of our website at Www Dot Enersys dot com I'm going to ask Mike to cover information regarding forward looking statements. Thank.
Thank you David and good morning to everyone and 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 for a list of factors, which could affect our future results, including our earnings estimates see forward looking statements included in item two management's discussion and analysis of financial condition or results of that.
Operation.
Set forth and our quarterly report on form 10-Q for the fiscal quarter ended January three 2021, which was filed with the U S Securities and Exchange Commission. In addition, we will also be presenting certain non-GAAP financial measures for an explanation of the differences between the comparable GAAP financial information and the non-GAAP information Please see our company.
These form 8-K, which includes our press release dated February 10, 2021, which is located on our website at www Dot Enersys Dot Com and let me turn it back to you David Thanks, Mike.
Our third quarter reflected strong demand for our products and services with order trends accelerating during the period the.
And the strength of our business was even more impressive considering the ongoing headwinds created by the COVID-19, pandemic, which continued to disrupt economic activity around the world.
We have been able to maintain cohesion throughout the enersys workforce. Despite a number of positive symptomatic and close contact cases, among our employee base.
Those cases can lead to disruption and daily production schedules as workers are sent home in order to comply with COVID-19 protocols.
Enersys continues to emphasize continues to emphasize social distancing and hygiene and the use of masks and reminding our employees to follow the same guidelines and their personal activities.
Which has helped to mitigate the impact compared to many companies, but we have not been immune.
Despite the ongoing challenges caused by COVID-19, the demand for Enersys products was clear during the period as we reported strong third quarter fiscal 2021 adjusted earnings of $1 27 per diluted share, which included a 10 cent benefit from the settlement of our claim related to the September 29.
And and fire and our Richmond, Kentucky facility.
<unk> <unk> per share and foreign currency losses energy systems benefited from telecom, driven and five G growth and the Americas and our motive power business saw marked revenue and earnings improvement over the second fiscal quarter. Our specialty segment continued its positive momentum and our third quarter bolstered by our growing trees.
<unk> backlog.
Please turn to slide three.
I'd now like to provide a little more color on some of our key markets, but before I begin I would like to comment on how many of our customers across all of our lines of business have signaled and increasing demand and alerted us to be ready there seems to be pent up demand, which should accelerate near term growth.
Our largest segment energy systems has struggled in recent quarters from slow broadband orders. The msos have focused on increasing node capacity for their work from home and demand.
Those msos have now resumed strong orders for our products, which increased their networks power capacity.
Even more encouraging and <unk> participation and recent wireless spectrum auctions and Theyre Annunciation of their intention to carry their <unk> and <unk> traffic on their own networks validates the broadband growth assumptions of our Alpha acquisition strategy.
Telecom <unk> growth is also accelerating and the Americas confirming their commitment to invest and their networks to increase capacity and reliability. Our <unk> small cell powering project collaboration with Corning is progressing even better than we had hoped.
And this quarter, we believe that network investment and <unk> has for the first time surpassed the existing <unk> network spend. It is also encouraging to see data center markets improving and.
In addition to our traditional businesses renewable energy markets continue to expand with incredible opportunities for storage applications. The New administration has clearly focused on this emerging market.
We plan to respond by updating our product offering using the same modular approach from our other lines of business, we will share more specifics with you and how we will participate and renewable energy storage and EV charging and coming calls.
When you consider forklifts, where currently the leader and charging electric vehicles globally and this technology is easily transferred.
Lastly, we are beginning to see the positive impact of the global alignment of the energy systems organization as we leverage regional expertise and key accounts development.
Please turn to slide four.
Our motive power business showed considerable improvement in the period compared to the second quarter delivering higher sequential revenue and operating earnings our order rates have surpassed the pre COVID-19 levels of a year ago. Despite per sporadic pandemic related restrictions, particularly in EMEA.
The hog and Germany restructuring is ahead of schedule and forecasted to beat its budget.
Although those true although those restructuring benefits have not yet impacted our earnings they will grow and magnitude throughout calendar year 2021, reaching nearly a $20 million annual run rate by the end of fiscal year 2022.
Another exciting development is the launch of our Nexus I and lithium motive power batteries. Several Oems continue to accelerate their adoption of this chemistry and our sales team is focusing efforts for Nexus iron products on the portions of the market with the most demanding duty cycles.
Please turn to slide five.
The third segment of our business specialty maintained its positive momentum with another strong quarter, which was slowed only by the ongoing impact of COVID-19 on our capacity ramp, thereby delaying our ability to meet surging demand our transportation backlog continued to grow as we added a significant.
And number of customers to the Odyssey channels and we currently are working with nearly every major player and the aftermarket distribution channel along with many key truck Oems and fleet operators.
<unk> gained further traction in the quarter. The high speed line is up and running and we are adding a second shift to our Springfield plant and bringing on additional oxide and pasty and capacity. We're also encouraged by several new awards, and our aerospace and defense business before.
Before wrapping up I'd like to take a minute to talk about some exciting advancements we've made on the technology front.
We mentioned our lithium launch from motive power our customers have begun to order our new next assignment products and initial customer feedback is very positive. We have also achieved our first OEM approval and continue to work with other material handling manufacturers.
The demand for fully integrated products has.
<unk> significantly increased for our energy systems group.
To ensure necessary product development and keeps up with the market's pace of change we are aggressively hiring engineers and our emphasis is on telecom home and industrial energy storage and Moreover, we are accelerating the development of high voltage electric vehicle fast charging stations using batteries to speed the process.
A considerable number of the building blocks and have already been developed for our material handling program, allowing extension into these new markets with substantial growth potential.
Our ability to stay on the cutting edge of new technology developments, while continuing continuing to leverage core lead acid products will further enhance our competitive edge and the quarters and years ahead.
Please turn to slide six and conclusion I continue to be humbled by our employees ability to deliver in the face of the ongoing global pandemic quickly adapting unforeseen challenges by remaining focused and delivering the products and services our customers have come to expect.
Our overall strategy remains unchanged one to accelerate higher margin maintenance free motive power sales with Nexus sign and that's just pure.
Two to grow the portfolio of products and our energy systems business, particularly and telecom with fully integrated DC power systems, and small cell site powering solutions, which will accelerate our growth from five three.
Three to increase transportation market share and our specialty business and finally to reduce waste through the continued rollout of our Enersys operating system.
As we continue to execute on each of these initiatives the strength of the Enersys platform and our position as the global leader and stored energy solutions will drive additional long term value for our shareholders for years to come with that I'll now ask Mike to provide further information on our third quarter results and fourth quarter guidance.
For those of you following along on our webcast. We have provided information on slides seven and for your reference I am starting with slide eight.
Our third quarter net sales decreased 2% over the prior year to $751 million due to a 3% decrease from volume and net of a 1% increase from currency on a line of business basis, our third quarter net sales and the motive power were down 4% to $304 million, while energy systems net sales were down two.
And 2% at $337 million.
While specialty increased 7% and the third quarter to $109 million.
Motive power suffered a five percentage decline in volume due to the pandemic net of a 1% increase and FX and energy systems had a 4% decrease from volume net of a 2% improvement from currency specialty at a 6% and volume improvements and 1% increase from currency.
There were no notable changes and pricing and we had no impact from acquisitions.
Geographical basis net sales for the Americas were down 1% year over year to $499 million.
With a 1% decrease from currency EMEA was down 4% to $194 million and a 9% volume decline net of and 5% improvement and currency.
While Asia was flat at $58 million.
Please now refer to slide nine on a sequential basis third quarter net sales were up 6% compared to the second quarter driven by volume improvements on a line of day business basis specialty increased 5% with Northstar continuing to contribute its capacity per transportation sales and motive power was up.
15% as it rebounds from the pandemic, while energy systems was down 1%.
On a geographical basis Americas was up 4% EMEA was up 13% and Asia was up 4%.
Now a few comments about our adjusted consolidated earnings performance as you know, we utilized certain non-GAAP measures and analyzing our company's operating performance specifically excluding highlighted items.
Accordingly, My following comments concerning operating earnings and my later comments concerning diluted earnings per share exclude all highlighted items.
Please refer to our company's form 8-K, which includes our press release dated February 10, 2021 for details concerning these highlighted items.
Please now turn to slide 10.
On a year over year basis adjusted.
Consolidated operating earnings and the third quarter increased approximately $15 million to $78 million with the operating margin up 210 basis points.
On a sequential basis, our third quarter operating earnings improved $12 million or 110 basis points to 10, 4%.
We settled a claim for excuse me, the Richmond fire, which was which resulted in a $6 million benefit and the quarter.
$4 million was a gain on the replacement of equipment reflected in operating expenses from the property policy. While 2 million was a final recovery on the business interruption policy and is credited to cost of sales.
Operating expenses when excluding highlighted items.
And at 14, 8% of sales for the third quarter compared to $16 4 million and the prior year as we reduce our spending by $15 million year over year and by 100 basis points sequentially.
Excluded from operating expenses recorded on a GAAP basis in Q3, our pretax charges of $22 million.
Primarily related to $6 million, and alpha and Northstar amortization and $12 million and restructuring charges for the previously announced closure of our flooded motive power manufacturing site and hug and Germany.
Excluding those charges our motive power business achieved operating earnings of 13, 3% or 330 basis points higher than the 10.0% and the third quarter of last year due primarily to the insurance claim recovery of $6 million described earlier.
On a sequential basis motive powers third quarter OE also increased 420 basis points from the nine 2% posted and the second quarter due primarily to sequential increases of nearly $5 million and recovery of business interruption and other proceeds from the Richmond and fire.
OE dollars for motive power increased nearly $9 million from the prior year, despite lower volume due to its lower operating expenses and $6 million and insurance recovery, while <unk> increased $16 million from the prior quarter on higher volume and $5 million from Moore and insurance recovery.
The interest Richmond fire damage, which has since been repaired or replaced and now a more capable safer facilities and operation.
Please see our 10-Q for more specifics on cash received and the related accounting.
Meanwhile, energy Systems' operating earnings percentage of seven 4% was up from last year's six 3%, but down from last quarter's eight 8% OE.
<unk> dollars increased $3 million from the prior year, primarily from lower operating expenses, but decreased $5 million from the prior quarter on lower volume and higher operating expenses.
Specialty operating earnings percentage of 11, 9% was up from last year's 10, 1% and up from last quarter's 11, 4%.
OE dollars ish.
Increased nearly $3 million from the prior year on higher volume and lower operating expenses will increase and $1 million from the prior quarter on higher volume.
Please move to slide 11.
As previously reflected on slide 10, our third quarter adjusted consolidated operating earnings of $78 million was an increase of $15 million or 23% from the prior year.
Adjusted consolidated net earnings of $55 million was nearly $11 million higher.
And the prior year.
Movements and the adjusted net earnings reflect the rise in operating earnings net $3 million and foreign currency losses, primarily on unfavorable rate changes on intercompany borrowings are.
Our adjusted effective tax rate of 17% for the third quarter was slightly higher than the prior year's rate of 16%, but in line with the prior quarter's rate of 17% to.
Discrete tax items caused most of these variations.
Fiscal 2019 full year rate was 17%, while our fiscal 'twenty and 'twenty rate was 18%, which is consistent with our current expectations for fiscal 2021.
EPS increased 22% to $1 27 on higher net earnings.
We expect our final quarter of fiscal 2021 to increase slightly.
Outstanding shares two and increased slightly from the third quarter as higher share price has increased dilution from employee stock programs. As a reminder, we still have nearly $50 million of share buybacks authorized but I have no immediate plans to execute any repurchases with perhaps the exception of the modest annual repurchase made to offset and.
Employee stock plan dilution, our recently announced dividend remains unchanged.
We have also included our year to day result.
Year to date results on slides 12, and 13 for your information, but I do not intend to cover these in detail. Please.
Please now turn to slide 14.
Our balance sheet remains strong and we are well positioned for us to navigate the current economic environment. We now have nearly $489 million of cash on hand, and our credit agreement leverage ratio is below 2.0 times, which allows over $600 million and committed additional borrowing capacity we.
Expect our leverage ratio to remain below 2.0 times for the balance of fiscal 2021.
We generated over $218 million and free cash flow through three quarters of fiscal 2021, our Q3 cash free cash flow generation was very strong at $41 million. Despite the drag of ryzen working capital from increased revenue cash.
Capital expenditures year to date to $54 million were at our expectations.
Our capital.
Expectations for fiscal 2021 of $75 million is.
Standard again slightly as the economic outlook improved our major investment programs those being the lithium battery development continued expansion of our <unk> capacity, including the Northstar integration integration of our high speed line and the transition and Northstar products for European markets to our French factory are all progressing.
And as planned.
High speed line has completed its commissioning and is expanding to a second shift this month.
Even with these investments we have also retained the agility to flex our manufacturing footprint as needed or closure announced last November where Hagen, Germany facility has progressed better than our expectations in terms of speed and cost. We believe we will begin enjoying about half of the expected 20 million.
Per year of savings next fiscal year with the full benefit thereafter.
We anticipate our gross profit rate to remain near 25% and Q4 and fiscal 2021.
<unk> utilization and some of our factories over the holidays and from enhanced Covid restrictions will impact our P&L and Q4.
We have initiated price increases and our fourth quarter to mitigate the rising cost of many of our non led inputs, which should maintain our margins.
As David has described we believe motive power markets are recovering while our energy systems and specialty markets continue to have bright prospects with some of the uncertainty from our election and the pandemic behind US. We currently feel we have enough visibility to provide guidance and the range of $1 25 to $1 31, and our fourth fiscal.
Quarter now, let me turn the call back to Dave Thanks, Mike Don We can now open the line for questions.
Thank you and as a reminder to ask a question you will need to press star one on net on the phone.
And then as far and the number one to ask a question and please standby and while we compile the Q&A roster. Thank you.
Our first question is from the line of Mr and Milwaukee from Oppenheimer. Your line is now open.
Hi, good morning, Thanks for taking the questions.
So.
Getting back to being capacity constrained here following this rapid recovery and demand.
Can you dimension the impact of those constraints on revenue currently.
What was the revenue shortfall in the quarter.
What is the shortfall that you envision and <unk>.
And clearly you know you've mentioned transportation.
As one area.
And I understand why these constraints are really coming in.
Alright.
I know this is Dave.
Net.
We've got a record backlog right now and we.
It should have been and record or.
<unk> should definitely a better record quarter, but we havent gotten the trained fully back.
Go and a lot of its upstream on the supply chain side.
Some of it.
Hiring and training and productivity related you know we've mentioned prior and we feel like we're about a quarter behind on our HSR ramp.
So that has impacted.
And so.
I think that.
I don't.
I guess, Mike you can dimension for Noah.
And what you think the shortfalls were but it's no it's absolutely.
The other part of your question is it's mostly a T PPL issue.
And as noted all.
All three businesses sell T PPL and I think the largest portion of the backlog is probably the transportation sector right Mike Yeah. So.
We expect to have a sequential improvement and our top line compared to the third quarter of about $60 million to $70 million. So that would that would be the step up now.
Higher number for Q4 is still about that same amount as the amount by which we're missing are originally pre COVID-19 budgeted amount. So you can kind of see where kind of making up half the progress of where we want it to be in terms of the overall capacity on <unk>, we feel like we're somewhere in that <unk>.
$700 million to $750 million with the high speed line and its full operating 24, seven and that should add about $150 million to $200 million to our top line. So that would reset somewhere just $8 $50 million to $900 million and then to the $1 two that we've spoken to and our <unk>.
Analysts call that's in Capex expansions that will go on throughout our.
Our fleet of five factories that produce TPP and so they will be all incremental bottleneck.
Directed to try to expand each of those networks over at our factories over the next three years and now it just as a reminder, those capex requirements have been communicated and that roughly $100 million a year of capex need we need going forward that includes that TPI expansion.
Further expansion.
Very helpful and then on a related point.
And you mentioned in your prepared remarks, but just understanding the north star.
Integration progress.
Can you update us on where you're at in terms of having product qualified with all of the relevant and customers and how soon we can start to see really some of the logistics savings.
Savings.
Coming into the P&L.
As you kind of optimize your production to distribution footprint.
Well, we just had a great.
Global Ops review with Patrice and his whole team.
And a half ago. So we got.
Pretty good update on all the factories.
And we got a big certification and the French factory.
So that allows us to move.
Some of the OEM volume that was being exported from the Northstar Springfield factories, we're now and are positioned to start manufacturer that in and.
In France, which is a big piece part.
We've qualified the alpha cell, which is a high volume block.
And that we were currently making and France. We have now qualified that on the high speed line. So all of those pieces, we had talked about as part of the deal logic and the synergies.
As you probably are insinuating or behind the acquisition schedule, largely because of Covid and the delays from the high speed line. Most of that is on track Mike mentioned, we are hiring a second shift.
Third quarter I think the team was very frustrated.
There was still a trouble getting folks hired were still kind of wrestling with some of the COVID-19.
Benefits and motivating people to come back to work and it seems.
It seems to have broken a little bit and we've been adding some folks now so that situation is is getting there, but obviously our inventories are way too low on the finished goods and.
We're in a little bit of a hole and we're working very hard to do.
Get caught up and.
And yes.
And so I'd say I'm very pleased.
With the Sox getting that Sox qualified on the accounting side I think we've hit most every mark.
On the Northstar deal other than just being delayed because of Covid and I.
I guess I would just throw in the transition of the Daimler product.
Was made in Springfield, Missouri to Ros, France, depending on the volume, we do with that customer should benefit us $5 million to $10 million a year.
And as David mentioned, the transfer of Enersys product.
And is now being made and the Springfield factories of Northstar.
Should help eliminate we've had a $4 million to $5 million per quarter drag from those two factories.
And their manufacturing variances and as we put volume in their TPP and demand in there we would expect that those variances to to eliminate it as utilization improves so.
So, it's a big deal and it shouldn't.
It's a big driver of what's going to enhance our margins over the next two fiscal years.
Perfect, maybe I could just sneak one last one and.
David you get and you mentioned in the prepared remarks.
Youre going to be working on some product development for or EV fast charging.
We look at this as a significant market opportunity and the coming years, and we're looking at something close to $3 billion of.
EV hardware opportunity per DC fast charging and the U S and Western U.
And so I think it would be helpful. I know you don't want to say too much about it now, but just can you give us the broad strokes of when we should think about the company, having a product and the market place and maybe how you might go to market.
I think whats and the.
The most exciting piece of it.
Is how similar the.
The first prototypes are being done this quarter over the Tech center and the building next door.
And I've been very pleased with the.
And a bill of materials similarity that is with a motive power system. For example, there is.
And the connectors theres, some things and the and the pedestals for the connecting to the electric vehicle that are a little bit different, but but by and large 100 kilowatt hour batteries and 100 kilowatt hour battery.
Lithium pack like we're doing from mode of so it's a.
It's a natural.
It's a natural step for us and.
The channels to market are interesting.
And there's been a lot of discussions with very large real estate companies actually so.
And the interest for this and how it's going to how these new charging infrastructure and going to rollout will be intriguing and and I think part of it.
No. It is it's what we call application stacking, where one let's call. It a clients can do multiple things and I think that's what's exciting about these projects is that same.
Asset can be used for past TV charge and it can be used per load leveling and demand shifting.
It can be used for powering and <unk> base station.
And just really it's really unbelievable frankly and and.
And and it's interesting how a few of our real estate.
Big real estate companies have really locked onto this idea. So like you said more to come but the key message for our shareholder base is that from a technology supply chain I would say for the last four or five years, we've been building a lot of competency and building a lot of muscle memory.
And it's about time, we start to flex this and we want it and we want to take and I've said this since Investor day, and before we want to take these core competencies and supply chain and engineering and start to push into new adjacent markets and we're very excited about it.
Okay, Great. We will look for more details and that and now I'll drop back into the queue. Thanks. Thank you.
And our next question is from the line of Greg Lewis from <unk>. Your line is now open.
Yes, Thank you and good morning.
And Greg Hi, Greg.
Hey, Hi, guys Joe.
And just realizing that it's early days and people like me on the finance side always want things to happen a lot quicker.
And then they actually can happen and the real World book, What you touched a little on the initial rollout of the lithium ion battery and mode of and just as we think about that.
As you think about it gaining.
Increasing and customer usage.
Is there any way to cash.
And is there any way to kind of think about how that plays out over the next 234 years and and as we think about that.
How should we be thinking and how that maybe impacts margins on kind of like and.
Basis is it just.
And any kind of color around that and I think would be helpful.
Well Greg.
What we laid out at our Investor Day model included a lot of the product migration and product rotation a lot of the margin improvement. So a lot of that was baked into our investor day model and the assumptions at the time.
Don't know that the assumptions have dramatically changed in terms of the rate of conversions or are they.
The impact on the margins.
Post Covid I think if anything just the kind of that whole of demand is sort of delayed.
And things from a COVID-19 perspective, but in general what we have to do like.
And the Big one was the hog and factory.
That certainly was an expensive endeavor and it's part of that product rotation.
That a strong balance sheet allows us to to make those right kind of moves.
Adding in additional engineering talent with new skills.
We've been doing this.
And for years now and.
And.
I think we're going to continue to see those lifts.
Also should start to see additional lifts as we can.
Continue to drive waste out of the organization one thing I've really pressed.
My three key line of business leaders on is operating expense I think COVID-19 really showed.
These work from home initiatives that we can do things a lot cheaper than we've done historically in terms of travel and entertainment.
And things in those areas. So theres certainly places to tighten up there, but in general I would say most of the assumptions.
And that we see about margin improvement product rotations restructuring costs is all reflected in the model and I think as we've communicated the last cycle, Mike and we.
We feel like we're behind schedule as a result of Covid.
And.
Greg I would say to your question on what it's going to do to overall margin. So we would expect we ought to and this upcoming fiscal year's sales $50 million to $100 million and our motive power products lithium boost.
And most of the product and current costs as youre using soft tooling you have some fairly small purchase quantities.
And assembly teams are going through a learning curve. So as as we expand we would expect the first year and those margins to be fairly modest actually be a little dilutive to our overall margin profile, but as you cost out in that first year. The product. We would expect obviously that these are.
B.
Among our higher margin models, but don't expect that and the upcoming I think.
I think Greg sort of asked and the long run, but certainly I agree with Mike's point and the in the near term, there's going to be some growth pains in terms of margin impact and Thats and thats reflected in our model.
Okay, Perfect and then you touched on it briefly in the prepared remarks. It seems like it's something that's really gaining momentum or as we think about energy storage you kind of laid out.
Opportunities and residential telecom energy.
Is there any kind of I guess.
Two questions and there is there any way to think about.
Stacking those opportunities, where where do we think.
Tap is telecom going to be the initial opportunity and maybe energy is the opportunity longer term is there any way to think about how and how each of those is going to perform over the over the next few years and just on the back of that as you think about that opportunity clearly.
With the.
The acquisition and 19 that the deleveraging of the balance sheet.
Clearly you guys are an opportunity and it once again to bolt on.
Things that might be needed to kind of really plant the flag and this in these various sectors just kind of curious how are you.
You're thinking about.
And the opportunity and energy storage.
The.
Is it <unk>.
Now, it's really a question of going after the right targets, because it's such a target rich environment as Mike mentioned.
We think that change and administration is only going to improve the prospects for these opportunities. We think that the key as I mentioned earlier to know is the ability to application stack. These devices. So there is multiple value streams that are created and.
And I feel very confident that the technology piece is well within our core competency now as you expand.
And to like Razee and your push into some of these kind of utility Interconnects. There are some software elements were.
A tuck in or something might make some sense and.
And we're working on those issues.
Every day so it's the software component of the business is increasing.
As part of the the needs here on the hardware side I think we're really well positioned we do need to add some expertise on software but.
And I really like this I really like this space I think.
During the Obama administration.
And this same team and a lot of ways.
Wanted to do some of these things it just was too early the technology wasn't ready.
All these years later I think now we're in a much better position.
To do things as the costs have come way down on on battery energy storage in general.
Okay, and so when you mentioned earlier about the net.
Engineers, I guess, it's safe to assume that a lot of those positions or potentially or probably for software.
Yeah.
And the software piece the firmware piece for sure.
That's a big part of it and as our needs as we push deeper into these areas that will be more and more the mix of people. We're hiring is on the software side.
Perfect day, Thank you very much true at the time Super helpful.
Thank you.
And our next question is from the line of Brian Drab from William Blair. Your line is now open.
Hey, Good morning, Hi, David Hi, Mike.
Brian Brian.
Okay.
The first question.
And Theres a lot of moving parts here in terms of the capacity constraints and they need to push through some price you've taken out costs closing facilities.
If I remember correctly, we were.
At the analyst day.
About a year and a half and I'm talking about marching toward 2018, and 30% gross margin.
And you know we're at around 2025 now.
And as you look to fiscal <unk>.
'twenty two.
And and you move past the capacity constraints put through some of the price you get the costs out.
Is it reasonable.
Our expectation.
Can you get 200 basis points of gross margin and the next fiscal year and.
And on volume coming back I guess as well or is it.
100 <unk>.
Where do you think gross margin could be in fiscal 'twenty two.
Well.
We still feel like that and margin expansion will happen.
The pandemic and the restrictions from that is something of a wildcard that I can't speak for them, but to all the points you just mentioned.
Getting capacity up that's the drag that the Northstar factories have been on us.
The overall capacity that will improve across all of those and items the benefits of $20 million not all recognized next year, but the rest of it and we kind of estimated about $10 million benefit from hog and next year and $20 million thereafter.
So all of those are the things that should drive and including.
As we need to.
Adjusting our pricing for any changes and freight or commodity inputs et cetera. So.
I would say and there are you know you got a caveat it with some of the uncertainty in this world, but that margin expense expansion should be it should be 100 to 200 basis points by the end of next fiscal year. So we ought to exit 2022.
100 to 200 basis points higher than where we are today.
Yes, I'd say the biggest and.
And Mike ticked off most of the.
The volume absorption.
Getting some of this COVID-19 related volume reductions FIFO.
And through the P&L.
Hagen and I think the biggest headwind that the finance team has been flagging going into F. 'twenty two.
Is the tariff and freight side, so freight rates are.
Still a pressure point.
Some of the tariffs gone from 10% to 25%.
We're very that's a very time consuming part of our procurement team right now is it's moving things around and changing suppliers and that's.
That's been a nightmare frankly, but.
We just do we have to do but.
Anyway.
That's the biggest but most everything and and like we are trying to get ahead like we said on the.
And the commodity pressure with some price increase so.
I think Mike's numbers.
Very reasonable.
Okay really appreciate that detail and then one of the.
Topics that.
I've been getting calls on for it feels like 10 years now with respect to enter assistance and lithium.
The threat of new competitors.
Producing lithium batteries per forklifts and and.
I just wanted to again kind of check in with you and a public way. It today on how that competitive landscape is looking to you know my understanding is that.
Today less than 5% of forklifts are shipping with lithium batteries me, it's a little more.
And Europe than it is in North America, but globally.
Somewhere around that 5% or less range and you've got a lithium product now who are the competitors that you are seeing the most and the marketplace and are you seeing some of that.
Are you are you feeling increased pressure to have a lithium product because some of these forklift Oems are.
Partnering.
Theres always been these partnerships that have been developing across the industry between the Oems and.
And some.
Generally kind of startup lithium battery.
Suppliers.
Well, it's a great question I think that Asia, especially the China market is the furthest ahead on lithium I think part of that is because BYD is both a battery company and a forklift company.
And they use lithium iron phosphate technology, so I would say the percentages have moved higher than than where you are at it.
And we are.
Our next assignment product is well positioned to participate I think one of the things you have to think about is this hold make versus buy.
In terms of how easy it is for.
These forklift companies to get into the battery business that that's a real.
A real serious question and the objective from me and my team.
And as to make that.
Decision really easy that our products are going to be better safer and cheaper and readily available.
To try and.
Protect our protect our share grow our share grow our margins.
And we're having we're having success and.
And the rate the other piece to it is.
The maintenance free is what a lot of these customers want.
And our Nexus pure which is R. T PPL variant.
Also fills a lot of those or checks a lot of those boxes as well so we feel like between our.
New nexis.
And our Nexus I on products, we have a very compelling.
And option as people want to push into more of these maintenance free solutions.
Things are.
The percentage of lithium and the marketplace I don't have a clean number like I do with led because of industry associations and so forth, but it's pushed past that 5% number globally for sure.
And we're going to participate well, we're going to be there.
And we're going to be the only supplier out there that carries you know traditional flooded led.
Next the cyan and next is pure maintenance free price, Mike do you want and anything that I just think Brian when you think about market penetration you have to think of the size of the vehicles and they have a much higher penetration and the class III vehicles, where they don't those vehicles that the operator walks alongside so the counterbalance weight.
As a little bit differently, they don't need to be heavy.
So even though those are class III trucks are the most numerous that's not in terms of battery sales, it's not necessarily where the money is.
So I would say your higher penetration class III less so and wanted to yes.
The market is moving to maintenance free we're moving with the market.
And we and in terms of the competitive landscape you mentioned.
There's really two sets of <unk>.
<unk>, there's been a lot of small startup companies that have tried to compete and that's not always easy terms of costs and balance sheets and and.
And.
And then and then there are some of the big Oems like and Heidrick that have tried to do their own organic programs.
And again, it's incumbent on us to offer a better mouse trap and to do it more effectively so it's easier for the Oems to use our products integrated into their trucks and that's what we're trying to do every day.
Okay.
Okay.
I'm just.
And processing that and thinking you start and David I'm talking about Asia.
I mean your share in Asia.
If my memory is correct and it's more around the mid teens range and in the Americas and motive its over 50% I think and.
Europe as you know and the.
<unk> 40 per cent range and.
And I believe four or maybe mid thirties and.
And then the large trucks and where the money is and if you just said so.
Overall.
And if you just look at the Americas and Europe.
And you even ballpark you know what percentage of your of the market that's important to enersys.
And is now shipping with lithium versus what assets.
The.
Can speak to the led piece of the lead markets and the demand are still robust and healthy and.
And the U S market and and and the European market.
I would also say lithium is coming off of a very small base so their growth potential or their growth rates are obviously.
Super double triple trip.
Triple.
But coming off a small base.
And so in terms of.
The loading the margins and all of them, we feel like a lot of that as best as we could do we baked into our Investor day model.
And Thats the best answer I can give you and I don't have I really don't have good statistics.
Like we do with led for how many lithium batteries are out there, but in terms of our lead battery business and the demand for our lead batteries. It is still very.
It's normal and I would.
I would think based on our lab and the information we're seeing from our customers.
And that there is some pent up demand from earlier and.
Let's say the spring of 2020, when all the factories got shut down.
Okay, and then just last question probably for Mike.
I just want to be clear on this I think I heard you say that sequentially revenue should improve.
In the fourth quarter, I think you said by $60 million to $70 million and then Im wondering as you go into the first quarter of fiscal 'twenty two.
Given that you have this dynamic of may.
And the capacity constraints lessening.
Would you expect typical seasonality and the fiscal first quarter were revenue steps down.
And materially or could it be a situation where actually revenue holds flat or even up as you move sequentially from the fourth quarter to first.
Yes, I think it's going to be a flatter look than most years. So.
But on the top line I would expect Q1 won't look tremendously different from Q4.
And was I correct in the third and fourth Youre expecting a sequential improvement you said that right.
Yes.
Okay. Okay.
Thank you.
Okay.
And our next question is from the line and Greg What's it called escape from Webber Research. Your line is now open.
Hey, guys. Good morning, Thanks for taking my questions.
Okay.
Just wanted to revisit the comment on renewable storage is it explicitly talking about and getting into the resi storage business or is it something else, maybe utility scale or something more unique.
<unk> is part of it and then the other one is commercial and industrial so C&I behind the meter.
We've said previously we're looking at systems, probably and the ZIP code of 500 kilowatt hours plus or minus.
And.
Not utility scale. That's that's the piece that we have not identified and our and our product roadmap.
Got it okay. Thanks, and then.
And just kind of thinking about the EV charging and then the red the storage market.
And you kind of touched on this earlier, but can you compare and contrast and.
The competitive dynamics and those two markets and.
Maybe just give like the biggest hurdle for entering each one.
I think the.
I think it's just it's not a well defined market yet I think by the administration is certainly recognizes the criticality of charging and charging infrastructure as part of.
Reaching more carbon reduction targets and getting more vehicles electric you have to be able to charge them and we're looking at the portion of the market.
Where we and folks that are interested and charging very quickly.
That's really the portion of the market, we're most focused and and we have forklift customers, who want the same thing they want to they want to get the electricity back into the battery pack as fast as possible. So we want to leverage what we've done.
And the forklift area and.
Pursue it into the electric car market as well so in terms of what the capabilities are you have to have expertise and energy conversion you have to have packaging software.
Balance sheet.
And it's all the things that we feel like we already bring in terms of the channels to market.
<unk> seen some.
Mou Mou's, we've done before.
And with blank and and.
And we certainly we've spoken to other people in this area, but it's still a very I would say, it's still fairly early days and I don't know that theres, a clear roadmap yet as to how this market is going to develop I think what I said earlier.
And I think it was Noah.
Is it.
Its very interesting how the real estate companies or thinking about taking a leadership role and a lot of this.
EV charging area.
Okay, and then one more quick one if I could.
Jumping back to energy systems and <unk>.
And last quarter, you said, you kind of expect like and accelerated ordering activity and the spring.
Late spring and into the summer.
Just given how quickly things can change nowadays it seems like that's still the case, but thought I'd check.
Still the timeline that youre thinking.
Yes, we're doing orders are good.
And the Corning project is really exciting.
And they mentioned our collaboration and their coal.
A couple of weeks ago.
And it's we're part of their evolve program and it's a whole concept of how to deploy.
Deploy.
Fiber much easier for the customer so it's pre fabricated connectors and our role and that is.
As part of their <unk>.
Big cable is embedded some power conductors and we're using our.
Uh huh.
And new systems that.
Allow through that corn and cable to trance MIT, the energy to the base station and a power supply.
Like a mile away.
And so it's a fantastic project and this is and Corning mentioned Verizon and there.
And their press release certainly Verizon.
And this is <unk>.
Tied really to the small cell site ultra wide band Rollouts and so the timings and timing of that is behind the orders. We're getting today are from customers, mostly on the lower spectrum, where there and.
And really the activity is good and building out <unk> radios.
And more of a macro level, but the ultra wide band and small cell site is coming.
Coming probably a little bit later, but.
But certainly we've hit some key milestones on this on this development, we're very excited about it and the other thing I mentioned in my prepared remarks, which is not insignificant.
And as some communications by some of the big cable companies with their intention to to go to a clot quad play so theyre going to offer wireless.
Their own but they want to start to do it over their own networks instead of being a mobile virtual network operator, they want to put the data traffic the radios the powering.
Right on their existing HFC networks, and and Thats really and a sweet spot for us and it was one of the things that attracted us to the Alpha acquisition was the gateway product family that provided a DOCSIS compliant high speed modem for backhaul and <unk> traffic in addition to providing the 40.
Eight volt power and the piece to the whole five G rollout that I think it doesn't get well understood is how much the installation getting licenses for electrical connections. That's a big heavy part of this and a lot of these programs. We're working on is to try to make.
The rollout of <unk> small cell site easier faster and cheaper.
Okay got it helpful and thanks for the time guys.
Thanks, Thanks, Greg.
And as a reminder, the logical question you will need to press star one on your telephone again and they start on the number one to ask a question and please standby and while we compile the Q&A analyst day. Thank you.
And we have over the last question from the line of John from Zerbe from Sidoti and company. Your line is now open and thank you.
Thank you guys and questions have been interest.
Okay. Thanks, Jeff Thanks, John.
Yes.
Hey, Dan I don't think Theres any more questions.
Alright, there are no questions at this time, Sir and then starting with your boss Mr. Shaffer. Thank you.
Well again, we just want to thank everybody for attending the call today, we look forward to providing further updates on our progress on our four core fourth quarter and year end 2021 call and May have a good day, everyone Bye bye.
Yeah.
And it sounds like today's conference. Thank you for participating you may now disconnect.
And then.
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