Q4 2021 EnerSys Earnings Call
Good day and thank you for standing by welcome to the Q4 'twenty 'twenty 1 earnings Enersys earnings Conference call. At this time, all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session you'll need to price.
Star 1 on your telephone please be advised that today's conference is being recorded if you require any further assistance. Please press star zero.
I'd like to hand, the conference over to your Speaker today, Mr. David Shaffer, President and CEO. Please go ahead.
Thanks, Shannon good morning, and thank you for joining us for our fourth quarter and full year 2021 earnings call.
On the call with me. This morning is Mike Schmidt line, our Chief Financial Officer 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 in the investors section of our website at Www dot.
Dot com I'm going to ask Mike to cover information regarding forward looking statements. Thank you David and good morning to everyone. As a reminder, we will be presenting certain forward looking statements on this call that are based on management's current expectations and views regarding future events and operating performance and our.
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 7 management's discussion and analysis of financial condition results of operations set forth in our annual report on form 10-K for the fiscal year March 31, 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's form 8-K, which includes our press release dated May 26, 2021, which is located on our website at www Dot Enersys Dot Com now, let me turn it back to you David.
Thanks, Mike Please turn to slide 3.
Consistent with our last call we generated strong results during the period due to a rapidly growing demand for our products and services, we reported fourth quarter fiscal 2021 adjusted earnings of $1.30 per diluted share a 17% increase over the fourth quarter of last year.
Our motive power business saw another quarter of solid revenue and earnings improvement in our specialty segment continued its positive momentum bolstered by strong demand for our transportation products.
Energy systems benefited from telecom, driven <unk> growth in the Americas, delivering solid revenue, but falling short on earnings, which I will address soon address.
Cash flow was again strong this quarter, producing a record year and leaving us on very solid financial footing.
Although the world has begun returning to some sense of normalcy, we continue to confront ongoing headwinds created by the COVID-19 pandemic. We have seen continued availability constraints in recruiting new employees and select raw material shortages, particularly in resins and electronic components.
Prices have been sticky, but always lag rapid cost cost increases our team is responding to the near term shortages on hiring challenges and expect steady improvement as the supply chain settles down and the rest of the world accelerates I'd now like to provide a little bit more color on some of our key markets.
Please turn to slide 4.
Let's start with our largest segment energy systems, which faced several input cost pressures during the period, including higher tariffs increased commodity prices and expedited freight costs. In addition, our customers continue to struggle with chip and labor shortages that have slowed their build rates, but we expect improvements from these brought.
Upstream and downstream supply chain issues in the back half of the calendar year.
Enersys is participating in the mid spectrum wireless U S build out with batteries and outdoor DC power systems, while we remain while we maintain our strong market position. We believe our results will further accelerate when customers rotate to higher spectrum small cell <unk> build outs and can benefit from our next.
Generation line powering products.
We're also very excited about U S broadband msos building out portions of their own wireless networks with their own HFC networks. Today. These msos, primarily wholesale lease and voice data minutes from other network wireless providers.
We have a full suite of DOCSIS 3.1 gateway products that helped the msos deploy their wireless networks much faster at a lower total cost.
Recently enacted extended MSL backup power requirements in California for public safety grid shutdown resilience provides an excellent near term opportunity for Enersys as well if all sites currently identified are deployed the opportunity as well in excess of $50 million.
In addition to telecom, we are seeing favorable industrial utility trends as infrastructure improvements reliability and resiliency are expected to provide another growth driver for energy systems.
Renewable markets continue to expand with the legislative and regulatory push for energy storage applications for residential solar plus storage monetization of distributed energy resources and numerous global climate initiatives aimed at vehicle electrification and renewable generation, we will capitalize more.
In this area as our next generation renewable Inverters and batteries are released we have also made substantial progress on our own battery energy storage system, plus DC fast charging initiatives for electric vehicles, which I will speak more about shortly.
Data center markets are also improving as areas lift more COVID-19 related site access restrictions all in all global Mega trends continue to be favorable to energy systems growth. Please turn to slide 5.
Our motive power business performed very well on the quarter. We're now the only battery producer to offer both lithium and TPP and maintenance free along with our traditional flooded products. This segment generated strong operating earnings from continued market demand recovery growing maintenance free revenues and continued opex discipline.
In addition, our Richmond, Kentucky facility has returned to full capacity and efficiency, while our Hagen, Germany restructuring.
Restructuring savings are starting to be realized we launched our lithium platform with our 4 variance this quarter.
And all of our motive power products passed their internal UO tests. This month, we will be launching 2 additional variance and we continue to collaborate with multiple material handling manufacturers. While we're only in the early stages of our launch our customers continue to find this chemistry is best suited for the toughest duty and are actively.
Trialing, our offering with excellent results, please turn to slide 6.
The third segment of our business specialty reported another strong quarter. Despite the ongoing impact of Covid on our capacity ramp our transportation business is performing well as the OEM class 8 market vehicle market recovers. However, we along with many of our competitors have been dealing with hiring challenges and some.
Fly constraints, causing our backlog to remain stubbornly high as demand continues to grow faster than we can supply.
As a result, our focus remains on expanding <unk> production, particularly in our 3 Missouri factories, our Springfield ramp is behind schedule due to COVID-19, but we added a second shift to the high speed line and increased oxide and pasting capacity.
High speed line production doubled in the last 3 months and continues to improve our warrants per facility meeting significant improvement from the last 2 years' performance as well.
Lastly, our aerospace and defense team had another great quarter executing on submarine tactical vehicles and munitions projects we.
<unk> several space contracts with a variety of customers and programs.
Please turn to slide 6 I am pleased that we officially kicked off our battery energy storage system, plus DC fast charge initiatives during the quarter and we are moving fast early momentum has been driven by 2 commercial real estate partners and our engineering team has exceeded my expectations by delivering a 285 kilowatt hour.
Up and running on our Tech center here at corporate and just a few months our launch real estate partner has identified over $1 billion of multiyear revenue opportunity starting early calendar year 'twenty 2 if we hit the reasonable cost and performance targets.
Our goal is to deliver an EV charger that charges any electric passenger car as fast as the car can handle often changing hours into minutes by using a large storage battery to quickly charged to evs, we can dramatically reduce system installation costs at many sites, including the size of the AC transformer and high volt.
<unk> <unk> from the utility interconnect.
The energy system can also reduce operating costs by lowering peak demand from vehicle charging in addition to fast charging evs. The bidirectional energy system can also help the host site use electricity more cost effectively for its commercial operations and can provide emergency backup power during power outages.
The system is solar compatible and largely made from existing Enersys lithium battery modules and charged on technology. Our goal from the beginning of our lithium program is to use standardized modular products and use these products.
These building blocks across all of our lines of business. This drives economies of scale and accelerates our time to market.
We're lining up software partners for artificial intelligence and cloud services and reviewed preliminary business plans with our board last week, we will provide more color on this exciting opportunity over the summer.
With fiscal year 2021 behind Us I wanted to lay out what we're seeing in the market and the opportunities ahead of us. Despite the challenges of the past year. Many caused by the global pandemic, we are well positioned for long term success.
We are on the precipice of a massive <unk> build out that will provide a strong long term tailwind for our business recent commentary by the largest telecoms and equipment manufacturers has been unanimous <unk> is gearing up and we should begin seeing the accelerated ramp in the second half of calendar year 2021 was the buildup continuing for 5.
5 years or many more thereafter.
The factors leading to this <unk> growth include T Mobile's acceleration post sprint.
Universal and competitive fiber deployments for all carriers, including AT&T, which is expected to spend $24 billion a year on its network vicious entry into the marketplace with an FCC requirement to deploy 70% of the U S population by June 2023.
And finally government spending our government sponsored rural fiber broadband initiatives being rolled out.
At the federal and state levels throughout the U S.
There are some potential hurdles that could slow the ramp up including the success of the C band auction completed in February for more than $81 billion, which could limit some carriers financial resources to deploy at.
The second hurdle relates to supply chain shortages discussed by the <unk> manufacturers, particularly a lack of semiconductors, we will keep a close eye on these developments with the U S, leading Europe, but remain confident where at the door of a major <unk> expansion in the quarters and years ahead.
In addition, the bike administration has proposed to nearly 2 trillion dollars Bill which includes upgrades to traditional infrastructure like U S highways and bridges and would also make significant investments in non traditional areas that should benefit enersys directly such as the electric grid EV charging and high speed broadband while it is free.
From a done deal there is bipartisan support for several areas of the Bill that we are prepared to act on.
Our strategic initiatives outlined in our Investor day, nearly 2 years ago are worth repeating 1 to accelerate higher margin maintenance free motive power sales was an exercise and nexus pure.
2 to grow the portfolio of products and our energy systems business, particularly in telecom with fully integrated DC power systems, and small cell powering solutions, which will accelerate our growth from <unk>.
Third to increase TPP on capacity, particularly for transportation market share on our specialty business and finally to reduce waste through the continued rollout of the Enersys operating system and.
In addition, we're now adding our energy system, plus fast charging to the above initiatives. We feel it is a core competency from decades of experience charging electric forklifts and we believe it represents an immense opportunity.
We will work hard executing each of these areas and to deliver long term value of our customers and shareholders deserve.
With that I'll now ask Mike to provide further information on our fourth quarter results and go forward guidance.
Thanks, Dave for those of you following along on our webcast. We have provided the information on slide 9 for your reference I am starting with slide 10.
Our fourth quarter net sales increased 4% over the prior year to $814 million.
Due to a 4% increase from volume and 2% from currency gains net of a 2% decrease in pricing.
On a line of business basis, our fourth quarter net sales in energy systems were up 11% to $349 million in specialty was up 16% to $132 million, while motive power revenues were down 6% to 333 million motive power suffered an 8% decline.
Client and volume along with a 1% decrease in pricing net of 3% increase in FX.
Prior year motive power fourth quarter revenue revenues benefited from a recovery of the September 2019 to fire in our Richmond, Kentucky facility.
Energy systems had a 12% increase from volume and a 2% improvement from currency net of a 3% decrease in pricing.
Specialty had 16% and volume improvements along with 2% offsetting impacts from positive currency and lower pricing.
No impact from acquisitions in this quarter.
On a geographical basis, our net sales for the Americas were up 4% year over year to $557 million with a 6% more volume and 2% less pricing.
<unk> was up 2% to 203 million, despite 3% volume and pricing declines due to an 8% improvement in currency, while Asia was up 19% at $55 million on 9% volume and 10% currency improvements.
Please now refer to slide 11.
On a sequential basis fourth quarter net sales were up 8% compared to the third quarter, driven by 9% volume improvements net of a 1% price decline on.
On a line of business basis specialty increased 21% with our TPP L. Continuing to provide more capacity for transportation sales, while motive power was up 9% as it rebounds from the pandemic and energy systems was up 3%.
On a geographical basis Americas was up 12% sequentially, while EMEA was up 5%, but Asia was down 7%.
Now a few comments about our adjusted consolidated earnings performance as you know we re route.
Utilized certain non-GAAP measures in analyzing our company's operating performance specifically, excluding highlighted items. Accordingly, my following comments concerning operating earnings. My later comments concerning diluted earnings per share exclude all highlighted items.
Please refer to our company's form 8-K, which includes our press release dated May 26 for details concerning these highlighted items.
Please now turn to slide 12.
On a year over year basis, adjusted consolidated operating earnings in the fourth quarter increased approximately $7 million to $78 million with the operating margin up 50 basis points on a sequential basis, our fourth quarter operating earnings dollars were flat at $78 million why our OE margin dropped 80 basis.
Points to 9.6%, primarily due to energy systems results, which I will address shortly.
Operating expenses when excluding highlighted items were at 14, 6% of sales for the quarter compared to 16, 4% in the prior year as we reduced our spending by $9 million year over year and by 10 basis points sequentially excluded from operating expenses recorded on a GAAP base.
In Q4, our pre tax charges of $27 million.
Primarily related to $6 million in alpha and Northstar amortization and $21 million in restructuring charges for the previously announced closure of our flooded motive power.
<unk> in Hagen, Germany.
Excluding those highlighted charges our motive power business generated operating earnings of 15, 6% or 300 basis points higher than the 12, 6% in the fourth quarter of last year due primarily to improvements in manufacturing costs and lower operating expenses.
<unk> dollars for motive power increased over $7 million from the prior year on a sequential basis motive powers fourth quarter OE decreased 230 basis points from the 13, 3 excuse me increased 230 basis points from the 13, 3% margin posted in the third quarter again due primarily.
Lead to improved manufacturing and operating costs, along with better price mix.
Energy systems operating earnings percentage of 2.6% was down from last year's 4.1% and from last quarter's 7.4%.
OE dollars decreased $4 million from the prior year and decreased $16 million from the prior quarter, despite slightly higher volume on lower margins and higher input costs.
These costs range from higher tariffs freight materials and manufacturing costs.
Specialty operating earnings percentage of 13, 2% was up from last year's 11, 7% and up from last quarter's 11, 9%.
<unk> dollars increased over $4 million from.
From both the prior year and prior quarter on higher volume and lower operating expenses.
Please move to slide 13.
As previously reflected on slide 12, our fourth quarter adjusted consolidated.
Operating earnings of $78 million was an increase of $7 million or 10% from the prior year, our adjusted consolidated net earnings of $56.5 million.
With $9 million higher than the prior year.
The improvement in adjusted net earnings.
Flex primarily the rise in operating earnings along with lower interest expense.
Our adjusted effective income tax rate of 19% for the fourth quarter was slightly higher than the prior year's rate of 18% and higher than the prior quarter's rate of 17% discrete tax items caused most of these variations fiscal 2021 tax rate of 18.
Percentage was consistent with that of the prior year.
Fourth quarter, EPS increased 17% to $1.30, which was near the top of our guidance range. We expect our weighted average shares for the first fiscal quarter of 2022 to remain relatively constant to the approximate $43.5 million of the fourth quarter.
As a reminder, we now have over $75 million of share by by buybacks authorized and we have made modest purchases recently last week, we announced our quarterly dividend, which remains unchanged from prior levels.
We have included our year to date results on slides 14, and 15 for your information, but I do not intend to cover. These details. Please now turn to slide 16.
Our balance sheet remains strong and positions us well to navigate the current economic environment, we have $452 million of cash on hand, and our credit agreements leverage ratio was 1.7 times, which allows over $600 million in additional borrowing capacity.
We expect our leverage to remain below 2.0 times in fiscal 2022.
We generated a record $288 million in free cash flow in fiscal 2021.
Capital expenditures of $70 million were in line with our prior guidance, our Capex expectation for fiscal 2022 is $100 million and reflects major investment programs in lithium battery development and continued expansion of our TPP on capacity, including the Northstar integration.
Even with these investments we have also retained the agility to flex our manufacturing footprint as needed on our decision announced last November to close our Hagen, Germany facility has progressed better than our expectation in terms of speed and cost the expected $20 million in annual savings are starting.
To be felt already.
With the full benefit arriving by our fourth fiscal quarter of this year.
We anticipate our gross profit rate to remain near 24% in Q1 of fiscal 2022, and we expect expanding margins thereafter.
As David has described we believe all 3 of our lines of business are well positioned and their diversity provides us with a stable earnings platform.
Despite some concerns over the potential for later arising shortages.
We feel we have enough visibility to provide guidance in the range of $1.15 to $1.25 in our first fiscal quarter of 2022 now let me turn the call back to Dave.
Thanks, Mike.
Shannon, we will now open the line for any questions.
At this time, ladies and gentlemen, if you would like to ask a question you will need to press star 1 on your telephone to wait.
Draw your question price, Japan can you.
Please standby, while we compile the Q&A roster.
Your first question comes from the line of Noah Kaye.
Well good morning, and thanks for taking the questions.
So so lots of details here.
Fair amount of commentary on that side.
Tied to improving.
My chain constraints in the back half of the year.
The calendar year, and so I wonder how that.
Set up.
So right on on a cadence basis.
Some of your topline recovery trends historically, I think <unk> has been a bit soft just to due to the European holiday.
But if indeed, there is going to be some debottlenecking here and you think that's going to take place in the September and December quarters. How do you think about the setup for a sequential revenue improvement over the course of the year.
Yeah.
Thanks, Mike do you want to you want to help Noah I would say.
We.
We are in the low $800 million range and that will probably stay will probably stay.
$820.830 million in the first half of the year and that will probably expand.
H 2 by at least $50 million per quarter. So we would expect that kind of not quite a 10%, maybe 7% to 8% improvement sequentially from H 1 to H 2.
Mhm.
And the supply chain issues as I noted were upstream and downstream. So we're getting some pressure, but our pressures our customers are getting some pressure too. So 1 of our big telcos couldn't get chips for their radios. So they put a lot of their order for the power systems on hold so.
Yes.
I think we're feeling at the same way as everybody else the businesses came back too fast but.
The feedback we're getting is mostly as we noted it.
Should slowly improve.
Yep Yep.
Maybe just on on the internal side do you think you could give us a little bit the impact of.
Some of the cost headwinds you mentioned around expedited freight.
And increased commodity I know the manufacturing inefficiencies are part of this as well, but just just in terms of materials and say can you give us those numbers.
Yes, I'm sure Mike can give you some direction on that but you're right. The manufacturing piece was a big part.
Depending on on which piece you are comparing it to or what base period, but but typically the drag we are seeing is.
The tariffs and a couple million dollars per quarter, the freight which is primarily a freight rate increase is probably in that same footprint some of the manufacturing variances, which at least in Q4.
Still have the incurred variances from as early as October of last year. When we were still little deeper in the grips with the pandemic. So as we move forward beyond there that those manufacturing variances going into let's say, particularly as we move into Q2.
Where we have the.
Current levels of operations and volume benefiting youre going to see a nice expansion there some of the other things that will drive margin expansion as we go through the course of this year is going to be.
A number of price increases, which we have done.
<unk>, which as they move through the order book will start to impact late in lets say June of this year. So starting this upcoming month youll start to see some pricing moving through Youre.
Youre going to see the fact that for all of our factories moving up from from.
Let's call them deepen COVID-19 type utilization rates, where you were running at 50% to 70% capacity will move back into their normal 80 plus percent capacity so across the.
Our factories, you would expect to see that in and the 1 that's been the biggest drag and this has been well known and well publicized when we bought the Northstar business, which included 2 factories in Springfield, Missouri, we knew that those factories based on the Northstar book of business, we're driving.
Quickly, but we bought them for their TPP on capacity and not their book of business. So as we've.
That integration move some enersys product in there done some transitions of their product to be closer to their end customers.
And then we've added the high speed line in.
The second of the 2 factories right.
Right now that drag has been $5 million to $6 million per quarter, which we expect to.
As we go through the end of this fiscal year. So thats a big piece of energy systems took a big chunk of that.
In terms of their allocation of net variance.
As I mentioned in my remarks, the Hagen restructuring will be generating $20 million on benefit 1 fourth of $20 million of benefit in our fourth quarter. So that's a big up side.
We've made some transfers in our contract manufacturers to move them out of China to move them into other non Chinese locations, including Mexico, where we would therefore not have to pay the tariffs, which are now 25% to 30%, we would shorten that supply chain cut down our freight cost.
Costs.
So we think that is going to add to our benefit.
And we do think from a mix standpoint, some of our highest.
The best business, we have typically is in our outside plant in.
Energy systems, particularly alpha in that outside plant revenue has been mostly weather related but for other COVID-19 reasons has been slower than normal we would expect that to expand now that it's.
On the time, where that kind of work does go on and we've seen evidence of that so we would expect a normal.
Margin improvement just from the normal cycle seasonal cycle that we'd see.
No just a couple of points just to add to what Mike said.
Is the.
The energy systems business the quote.
Michael is much longer than the other 2 businesses. So we will put proposal because it's very project oriented so the price.
Changes have always been slower in that business too.
<unk> through so there is some lag on that debt.
There are some note and then <unk>.
Clearly our energy systems business is with a higher.
Inclusion of electronics.
<unk> has been exposed much more to the tariff pressures.
That business has caught a lot of this.
But as Mike as Mike Ticked off we've got good line of sight and a lot of pressure on the teams COVID-19.
Covid made competition for CMS moving out of China. It just slowed everything down, but we do have good line of sight and Thats why we remain confident things are going to slowly get better.
Yes.
A lot of questions, but I'll, probably take offline I guess the interests of sharing the ball, but let me ask just 1.1 more that I've been getting from some investors.
I think November 2019, a lot of us.
A really long time ago, but you did mention the Investor Day day.
And so maybe can you just help us calibrate.
We are now.
Versus sort of that that outlook from Investor day.
Is it fair to say that some of those targets for 2024 have been pushed a few years to the right.
How would you kind of.
David States the trajectory of the company's on here in terms of earnings power.
Yes.
It's Mike I would say because we refresh this last September October which was.
Not completely through the pandemic, but had most of it in our rear view mirror. So so our assessment was that it probably.
Pushed us a year out overall.
And none of the the premises that we or the takeaways that day the numerator.
In his remarks about <unk>.
Increasing maintenance free motive power sales with Nexus I on a pure growing the portfolio of products and energy systems, increasing PPL for transportation, reducing waste through us.
All of those were still there.
We are in Dave's remarks commented about how important you thought that the.
The new I'll call at battery storage in DC fast charge initiative is how much potential is out there. So so I would say.
Beyond the fact that the pandemic youre kind of just.
Dead space in some respects for advancing some of these initiatives.
I would say.
You'll take that model and add a year or 2 it and you'd be there yes.
That's super helpful guys. Thank you.
Okay. Thanks, Paul.
Your next question comes from the line of Greg Watson Koski.
Hey, good morning, guys how are you.
Good day David.
Thanks for thanks for taking the question.
Could you elaborate a little bit more on the labor shortages youre seeing across the different segments, we've seen similar issues.
With the availability of skilled labor force.
Knowing the stimulus checks I'm just curious is that driving the majority of the labor shortage that youre seeing or are there other contributing factors there.
I think the biggest pressure for us is the ramp in our Springfield, Missouri, we just needed to hire a lot of folks and this is direct labor mostly <unk>.
Direct skilled labor and.
Yes, it's just I think it's the same issues that many companies are facing in the U S right now.
Obviously the COVID-19.
On fears of returning to work some of the benefits extended unemployment benefits.
Yeah.
We're not immune from all of those.
Pressure. So it's the same thing for us most acutely felt in Springfield, though we see it in Poland, we see it in France, we see it.
We see it around the world, but for us the most acute pressures in Missouri, but and don't forget the acute pressure that our suppliers are feeling because piece part availability becomes.
It can become.
<unk> drilled distractions as you try to you know.
2 workarounds for that so it's not just us it includes our supply chain, including getting drivers and trucks align for getting shipments out in a timely fashion.
Got it yeah that's helpful color.
And then for free.
For the lithium I on it last quarter, we talked about ramping in and material handling through fiscal 'twenty 2.
With introductions coming in Red the storage and telecom.
Presumably over the course of the next year with meaningful revenue contributions towards the end of fiscal 'twenty 2 into fiscal 'twenty 3.
Is that still the general timeline or could we see these supply chain constraints on labor issues meaningfully affect that rollout.
Or alternatively could you.
See if you're continuing to see positive reception there could you maybe accelerate that timeline.
And rollout into other business lines.
We're not I'm not hearing the labor narrative on any of those initiatives. We currently have our lithium.
Our facility in the U S.
Is handling every everything but we are ramping up.
In Asia and also a site in Europe. So.
We're going full steam ahead, the the feedback on the motive side has been very positive.
And as you noted.
It's the same core technology, we are using in telecom and data center and really that system I spoke of the energy system with the fast charging capability is also based on the same technology. So.
It's.
It's broad based and.
I would say if anything we're more excited than we've ever been about the potential.
Great. Okay. Thanks for the time, guys I'll turn it over.
Thank you Greg.
Your next question comes from the line of John Frenchman.
Good morning, David Mike.
Guys I wanted to talk about pricing you touched a little bit on it.
On slide 10, all 3 segments were down year over year.
Best I can tell.
On the commodity costs are up in volume is up could you just explain to me why that happened.
Well, John remember on that slide.
It's a combination of both pricing and it is a combination of mix. So it's a little bit of a tale of 2 stories the on the pricing side.
Our pricing typically lags the lead cost structure by about 3 to 4 months in.
And let costs have more recently risen, but if you went back 4 or 5 months.
Declining so you've got that tail, which is while youre led costs are going up in the near term the revenue.
Adjusted <unk> is reflecting a period earlier, which is putting a little bit of compression, particularly in those lines of business that use those pass through mechanisms, which is about 30% of our revenue now so it's not huge.
But it is.
Notable and then the other piece is mix and what you are selling in the service work that youre doing and what margins that you have day.
Yes, I would say.
On the energy systems piece, what we've experienced is.
Some of the shortages we have been feeling.
Been on some of our higher margin products. So we've been pushing more because of that.
Availability and Thats. The work we have to do right now on service and some of the lower margin stuff. So.
So, yes, I'm glad might cleared that up because it's really price slash mix.
So thats been a big part of that on the energy system side.
Okay.
And on competitive landscape issue or anything of that.
I would say, it's more COVID-19 related supply chain related and.
And then the other big pieces I noted, especially on energy systems as is just timing.
On getting things so I'd tell you afraid its not insignificant its millions of dollars of freight rate changes we're seeing.
And that's why we're pushing price increases across the board to recover.
Because everything has gone up and we did have 1 of the things that the north star sellers.
Did slightly before they.
They started their process was.
Engaged are contracted with a couple of good sized players in a couple of different markets for pricing to get a healthy book of business, which was at low margin business.
<unk>.
For 1 of those big players that term or that agreement is pretty much up and so we anticipate a significant either increase in price or the ability to take the volume, which we had a dedicated 2 to $8.2 higher margin business. So.
We're going to see a nice just in that 1 alone because it's a fairly good size.
Entity that we.
We should see an improvement on that 1 just based on a lapse of time and being able to move out of our pre acquisition agreement.
On the North Star side.
And Thats net.
That contract would have been 1 in specialty and 1 on Es. It's an excellent point, we're starting to get out from underneath those.
That actually helps a lot on David Mike and then just shifting over I guess, specifically to the motive segment with your backlog up strongly and the wits data through.
Through the roof.
But shipments are down at the OE side, how long is it going to take you to catch up on equilibrium is this is going to be into the 2023 year or is it going to be back.
2020.
It's hard to judge.
The order data, which we usually provide on width is extraordinary.
But when you look at the shipments day that tells a much different story in fact I think.
Throughout the course of the year to date shipments are actually down because of supply chain shortages at the truck Oems I know that they are working through that they have very complicated supply chains.
So.
The feedback we're getting is.
Pressure on all of the Oems are putting more pressure on us and asking us to ramp and be ready.
To handle it as they can expand their production capabilities and and then there was some recent.
This announcement about some internal combustion engine business.
On forklifts and the news that.
Is going to maybe even put more pressure on on electric demand for electric forklift trucks some emissions.
Issues so yeah.
Yes.
Signals are all very positive the backlog is very strong and it's just a question of how quickly.
These Oems can get their supply chain stuff ironed out.
And that they've made that point that some of the truck data is up as high as 86% year over year on a 3 month trailing but their orders.
<unk> slightly decline so it's a shifts the shipments on I'm sorry, their shipments are actually slightly decline. So it's going to it's taking them on time to catch up and obviously are.
Battery sales are more linked to their shipments than their order intake. So.
Alright.
Great, Okay, and I guess, 1 last question just on the fast charging technologies can you just give me sense context.
How quick your fast charging moving existing technologies and how much how much quicker.
In order to be proved to be viable.
Electrical vehicles.
Yes.
I, probably need to get a good way of simplifying them because the engineering may it just depends on how state of charge the battery.
The type of car the all of the cars charge a much different rates like the Porsche tie can can really take charge extremely well, but other chart other cars can't handle it but in general you can think of roughly.
Most electric cars have like an 18 kilowatts charger on board. So typically what people are doing is just plugging that charger into AC power.
And it takes literally hours to recharge to fully recharge the battery.
What we're doing is we're actually charging the battery directly so it's DC fast charging so were going around that onboard AC charger, we're charging the battery directly and again as I said in my remarks, our goal is to be able to provide as much juice as any car can handle but.
At their fastest charge rates.
You can see you can see people starting to get enough.
Range added to their vehicle in 10 or 15 minutes.
Again, we're trying to create that experience more similar to refueling.
Fuel station, so, but yes, as I said, it's kind of turn hours into minutes and a lot of in most cases, it's very very exciting, but whats John what's really great about the project is that same investment that same energy system also has a day job. It's also helping the customer save a lot.
Christy it's also being renewable integration it can be slaved with other systems to create a virtual power plant for the utility.
It's amazing all the.
Functionality. This 1 investment can handle on that's why these commercial real estate guys are so keenly interested.
And they're pushing us and they are pushing us hard.
Great. Thanks, a lot David appreciate the color.
Hey.
Your next question comes from the line of Brian Drab.
Hi, Brian Hi, Hey, good morning.
Can we just talk a little bit more about the second half of the fiscal year and 1 thing that.
He stood out to me on that long list of items that you use.
You gave us in terms of what could help margins in the second half of the year was.
And $5 million to $6 million.
Thank you.
Opex drag or.
Cost drag from Northstar.
And per quarter and that.
I mean on an after tax basis, it seems that translate to like 8 or 10 cents a quarter just that 1 item and then you listed a bunch of other items that would help margins and then you also said I think that.
Revenue would be potentially $50 million higher.
In the third and fourth quarter.
Relative to the first half run rate so.
And then you get obviously operating leverage on that so I'm just wondering it seems like you.
You could see material.
On material step up on earnings in the second half of the year in terms of the quarterly run rate and I just want to.
Clarify that or get you there.
Comment further on that.
Hi.
Mike can get you some better dimensions I think it wasn't opex its manufacturing variances. So it's on the cost of sales area and the factories were under loaded when we bought them.
We are ramping and as I said in my Mark.
I've said, we're well behind our ramp schedule that we had put into the Investor day model and Thats all related to Covid purely.
But what we said on the Investor Day model as we were going to by fiscal year 'twenty to increase our <unk> production.
On capacity to $1.2 billion in revenue and from at that time, we were sitting at about $6.50.
I feel pretty good right now that we will exit our fourth quarter at a $300 million plus run rate.
For <unk> expansion.
And so that we're well over we're more than halfway of where we wanted to bay and the other thing we're trying to do which is going to again helps us. This drag as we worked with the board last week at the meeting and we actually got permission to accelerate some of the Capex on <unk>.
To help alleviate some of this pressure frankly demand has exceeded our best case.
Expectations, we use for the model so all of this.
On the stabilization getting the folks hired.
The training.
Productivity scrap rates everything has been really kind of lousy frankly.
From that factory, but it's getting better it's getting better every day and again I'm really excited about being at a.
Being on that $1.2 billion pace and then with additional Capex. We can continue to grow that revenue so Mike John any more color to your question, Brian I would anticipate.
We gave guidance with a midpoint of $1.2 million for Q1, I would expect Q4 is going to be.
20% to 25% higher at the EPS level, which is the embodiment of all of those improvements that I enumerated earlier.
And.
So on a true.
In Q4, 20% to 25% higher than Q1 is that.
Can you just say.
What I just said.
Got it okay got it and kind of progressing.
Not so linear not necessarily in a linear fashion from <unk>, but kind of stepping up in that.
On the second half.
I imagined third third quarter and fourth quarter it might be.
Similar is that fair or no.
Well I guess.
Got too.
You don't have a line for each 1 and then align that's higher on the board for each to I would say that there is.
2 lines.
Q Q2 is better than Q1, but there is a step up to go to Q3, which then improves to Q4.
A lot comes down to resins some of our best margin products, we're just out of.
And thats because there is a shortage globally of polycarbonate, which is blended into our resins. So.
Mike's a little hesitant to tell you what the shape is because we don't really know when some of that resident availability is going to open up we are hearing we are hearing in the summer time so.
But yes, I would say largely you captured it.
That probably Q3 will be better than Q2.
In Q4, it should be better than Q3.
Okay. Okay. Thanks, and then.
I'm just curious if there's any way to.
Size how.
Large this issue of the hiring constraints was in the quarter.
If you have any sense for how much that limited your capacity, maybe like what what might revenue had been in the in the fourth quarter. If you had no hiring constrained.
We should've been by now we should have already been on the.
$1.2 billion. According to the original plan so as such you can say that.
Top line has been impacted probably.
Let's say.
For the past few quarters, the top line is probably $200 million light.
Annually and then.
And then.
Put that on a per quarter basis, and then as Mike said, the manufacturing variances had been huge in $5 million to $6 million quarter is a huge number and sometimes it's a story.
You can oftentimes hire the people but.
To retain them pass that's a 90 day training period, where they're really starting to provide.
On a return on net investment of training.
The work.
A lot a lot of times people find well.
I was getting paid more than I might be able to do sitting at home but.
Light of the level of work activity.
I think I'm going to go back to sitting at home. So that's part of it was weighted a little bit we don't want to get too deep into why the psychology, but we fully expect with the vaccine rates with.
With things starting to settle down that there is going to be a general more confidence in our HR people are confident that things are going to get better.
Okay, So youre, saying really David the $1.2 billion target.
You feel like Youre limited, primarily though by hiring constraints in terms of Covid.
Spanning the TPP all capacity like Youre ready to go you just need the people.
I think.
Absolutely the majority of the issues have been personnel related.
But it is mostly personnel related there are some capital spend.
Gating items, which in our most recent board of directors meeting or.
Our board authorized the acceleration of some of that spend so that we could meet that but.
So it's.
But to Dave's earlier point, we expect to exit.
Nearly at full capacity.
Okay got it and then just 1 last question from now I'm just curious on.
Where we are.
In terms of alpha opportunity per small cell site. It my sense is that still really hasn't started yet and has the alpha enabled any small cell antenna sites.
At this point and do you still see this as a $1 billion revenue opportunity for Alpha.
Yes, I do I think small cell has been deep prioritized by couple of the big carriers everyones put more emphasis on mid spectrum versus where we thought we would be with small sales when we did the alpha acquisition.
We've been plenty busy on the mid spectrum buildup. So we're we're fine.
We just need we need the supply chain issues.
To settle down on the small cell we got too.
Good place to good shots on goal.
<unk> is the gateway products and we just got our first significant order yesterday, frankly, or some gateway products for 1 of our MSL carriers to start to install.
Radios right on their HFC bank loans, so the gateway gives them not only a way to backhaul the call traffic, but also provides the power. So yesterday was a big day as drew was really excited and then on the flip side. The other major project. We have on small cell is our project with Corning.
And they've been unbelievable partner I, even have regular calls with their CEO. So that we stay calibrated and I think.
Wendell and I are both extremely excited about the program.
And again, though.
They the millimeter wave spectrum has been a little bit behind schedule, whereas where we thought it was going from the prior Mike is there anything you want to add.
And don't forget we also mentioned in Dave's remarks about the opportunity that just recently came up through the California public utility Commission for some of that.
Grid, resiliency, which network resiliency.
It's really going to fill a lot of the GAAP the whole that that higher spectrum range. If it gets pushed out.
Which nicely fill out yes, I think that will help but that's mostly related to the wildfires and the power shutdowns. So the CPUC is asking for longer standby.
Network critical sites.
It's well over $50 million opportunity, it's here and now and I think that's just kind of gets to the.
On.
No I made this comment many quarters ago.
This business is a little bit.
Peaky.
It's.
It's.
Okay.
Theres high watermarks, and we're going into 1 of those periods without for right now so thats why we have to get some of the supply chain stuff ironed out so we expect.
We expect to come back off this low cycle, we've been on and unfortunately.
Everybody's trying to come back too fast and it is just catch on all of the supply chains off guard, but we're very I think that opportunity alone.
Even without the 5 G narrative is big.
Okay. Thanks very much.
Okay.
Once again, ladies and gentlemen, if you have a question. Please press star followed by the number 1 on your telephone keypad.
Your next question comes from the line of Jacob Green.
Thank you.
So a lot of it's already been asked so I'll just keep it quick just trying to frame the bigger picture on the energy storage side.
Kind of the micro grid opportunity how should we think about your charging station progression over the next few years and on the margin side is there an opportunity to say utilize any of your recycled motive batteries that may be at call. It 80% of our new capacity so non ideal for motive.
But would work just fine for energy storage.
It's a great question, frankly, and it would it would mechanically it would work because they are the same models.
So it's not something we're focused on right now.
That's.
It's a great food for thought.
The way this is rolling out the system, we set a free included a picture of we need to get 100 of those systems done quickly and that's what we're working on and we've got a nice supply chain partner nice contract manufacturing partner lined up.
And they've been fantastic, we've got to get 100 systems out.
As fast as we can.
And then as I noted if things go well and they go according to plan.
This customers identified $1 billion.
Potential sites, where they want to install this kind of system.
So a lot's going to depend on how how these first 100 go.
And and then after the first 100, we the engineering team and we just we just put in Rex for hiring.
Our new.
Group, just dedicated to going to a cost down version. So the the initial prototype is probably.
Much more expensive than what we'll be selling in the end because we just wanted to get something out fast, but now and everything I'm talking about is just 1 customer and as I said in my remarks, I think the buys administration is wildly committed I think this new.
ATV incentive that Theyre talking about micros at $12000.12500, 12500, <unk>, we think that that incentive can have a very meaningful impact on how many people choose electric.
So we think that this administration is very committed so we like the timing here.
And again it's.
It's really the system is amazingly similar.
Frankly, 1 of our forklift batteries.
Great. Thanks for that I'll turn it back.
Alright.
There are no additional questions in queue at this time I will turn it back to Mr. David Shaffer for closing remarks.
Well, thank everyone for attending our call today, and we look forward to providing further updates on our progress on our first quarter 2022 call on August have a good day and a good holiday weekend.
Ladies and gentlemen, this does conclude today's conference call. You may now disconnect. Thank you for your participation.