Q1 2022 EnerSys Earnings Call

August 12, 2021

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today, David Shaffer.

And CEO. Please go ahead.

Thanks, Victor Good morning, and thank you for joining us for our first quarter 2022 earnings call on the call with me. This morning is Mike <unk>, 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 in the.

<unk> section of our website at Www Dot Enersys dot com I'm going to ask Mike to cover information regarding forward looking statements.

Thank you, Dave and good morning.

Benjamin.

Expectation.

Okay.

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 and results of operation.

Set forth in our quarterly report on form 10-Q for the fiscal quarter ended July four 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 August 11.2021.

Which is located on our website at Www Dot Enersys Dot Com now, let me turn it back to you Dave.

Thanks, Mike Please turn to slide three.

We delivered solid first quarter results due to robust demand for our products and services in each of our business segments orders over the last week three weeks or 12 weeks excuse me, our 25% higher than the same period F 'twenty pre covid.

We reported first quarter fiscal 2021 adjusted earnings of $1.25 four per diluted share a 36% increase over the first quarter of last year, our motive power business generated strong revenue and earnings growth, while our specialty business continued its positive momentum fueled by.

Demand for our transportation products <unk>.

Despite challenges in the supply chain energy systems began its rebound from a challenging fourth quarter driven by growing demand in a variety of end markets, including mid spectrum, <unk> broadband and utility markets.

Similar to other industrial companies, we are facing some challenges in the wake of the world's steepest economic recovery as businesses reopen and competition for labor materials and transportation remains fierce.

While we are seeing unprecedented unprecedented demand growth, we have experienced constraints in our ability to bring on new employees necessary to keep up with demand freight and tariffs continues to be a source of cost pressure along with a variety of other components, including resins in semiconductors. Our team has responded well to the <unk>.

Short term challenges and we expect to see steady improvements in the supply chain as we work to mitigate its impact by identifying alternative sourcing methods and further leveraging our global footprint to align supply with demand.

As these temporary issues unwind, we will benefit from the strong market momentum.

I would now like to provide a little more color on some of our key markets. Please turn to slide four.

Let's start with our largest segment energy systems, which saw modest improvement from the prior quarter growing revenue by more than $22 million.

And generating nearly $4 million gain in operating income versus Q4 demand for our energy systems products remains strong with order intake from one of our larger telecom customers picking up after a slow Q4 that was driven by <unk> radio availability labor and permitting challenges.

Broadband orders continued to improve and are expected to accelerate dramatically is the California public Utilities Commission public safety grid shutdown extended network backward backup programs roll forward.

While the market is displaying positive momentum energy systems continues to experience drags in three primary areas.

First we have seen higher tariffs and freight costs as our efforts to move contract manufacturing out of China closer to home is slowed by Covid versus our plan also container shipping rates are in an unprecedented four fold from historical rates and expedited fees are common.

Delayed sales due to supply chain challenges, including semiconductors continue to constrain our topline and gross margins due to a lack of capacity for higher margin cable power supplies DC power plants and thin plate pure lead products.

Second we have incurred additional engineering costs to support our touch safe collaboration with Corning as well advancing as well as advancing our lithium offerings and the other NPI supporting <unk> and renewables from which revenue will begin to accelerate in the second half of this fiscal year our investment in R&D will also accelerate.

During the calendar year to advance the DC fast charge initiative that will benefit our next fiscal year. These investments will position us to be a significant participant in these new mega market trends third the Es group has been more heavily burdened with the ramp up of the integration of inefficiencies of the Northstar acquisition.

As noted prior this integration and expansion is roughly nine months behind schedule due to covid. Despite the short term cost pressures, we remain committed to <unk> expansion and cost improvements to handle the rapidly expanding <unk> demand in all lines of business.

Driven by sound underlying demand, we expect the energy systems business to continue its upward trajectory with the full opportunity set to be unleashed as these covid related supply chain headwinds subside.

Please turn to slide five.

Our motive power business was a bright spot bright spot during the quarter. Despite some lingering supply chain constraints, we returned to the historically higher end of our return on sales for this business. Our backlog is now at historic levels and our Nexus TPP L. Along with recently released lithium variance continues to gain mark.

Acceptance, we anticipate normal seasonality over the summer holiday months, while lift truck industry order statistics remain exceptionally high we are being mindful of OEM supply limitations. We are confident we are well positioned to benefit from a steady recovery throughout the balance of the fiscal year.

The restructuring of our Hagen, Germany facility remains ahead of schedule in regards to cost and timing with most of the cost savings yet to be realized we will further evaluate our global footprint to ensure we can meet strong current order patterns and continued to extract savings with further standardization of our legacy product offerings and.

Other business transformation initiatives. Please.

Please turn to slide six.

Our specialty business contributed another strong quarter to our overall results. Despite the northstar related cost drag mentioned earlier.

The high speed line and other productivity capacity enhancement enhancements are installed in our <unk> factories.

We'll enjoy lower costs and increased capacity in our second half results.

Demand in our transportation business remains exceptional buoyed by significant incremental revenue that we're positioned to win as additional Springfield capacity comes online.

U S transportation grew rapidly from the year ago quarter, and our backlog remains at record levels.

Continued strong demand for the remainder of the calendar year from the U S economic recovery.

We delivered exceptional results in aerospace and defense as all of our markets were strong, including tactical vehicles and munitions munitions recorded several key wins based on our industry, leading technology that provides 40% extended life in thermal batteries.

We will have doubled this business since the acquisition in just five years positive recent conversations with several large customers combined with the U S source lithium initiative. The bite administration is highlighting and their infrastructure legislation gives us great confidence in the future growth opportunities in many of our businesses.

Please turn to slide seven.

As you know, we announced our battery energy storage system, plus DC fast charge initiative in the fourth fiscal quarter, which remains on track regarding product development and performance all while this tremendous market opportunity continues to grow our goal is to deliver an EV charger that charges any electric passage.

Your car as fast as the car can handle reducing the process from hours to minutes by.

Using a large stationary battery too quickly charged to evs, we can dramatically reduce system installation costs at many sites, including the size of the AC transformer and high voltage cabling from the utility interconnect as well as the opportunity to provide optimized energy usage and emergency backup power.

Feedback from our potential launch customer has been very positive both on the speed of the development and level of software maturity and we will continue to provide updates on this exciting initiative as we move forward.

Please turn to slide eight.

Although we expect to continue to face some supply chain disruptions in the near term the fundamentals of our business are stronger than ever with global demand for our products and services growing by the day. The massive <unk> build out is getting underway and will provide a strong multiyear tailwind for enersys.

<unk> pure led demand is growing rapidly in all lines of business and the launch of best in class modular lithium systems in motive power and energy systems further enhances our market leading positions.

Lastly, a large bipartisan infrastructure bill is moving through Congress with additional bills being discussed which could provide another catalyst for enersys in areas such as the electric electric grid EV charging in the rural Buildout of high speed broadband.

Please turn to slide nine.

I'd like to close by recapping, our strategic initiatives, which remain unchanged.

One to accelerate higher margin maintenance free motive power sales with Nexus sign and Nexus pure.

Two to grow the portfolio of products and our energy systems business, particularly in telecom with fully integrated DC power systems, and small cell site powering solutions, which will accelerate our growth in <unk> <unk>.

As well as the addition of our battery energy storage system, plus DC fast charge initiative.

Three to increase thin plate pure lead capacity, particularly for transportation market share in our specialty business and finally four to reduce waste through the continued rollout of our Enersys operating system.

We will continue to execute on each of these initiatives and look forward to providing you updates on our progress in the quarters ahead.

Quarters ahead with that I'll now ask Mike to provide further information on our first quarter results and go forward guidance.

Thanks, Dave for those of you following along on our webcast. We have provided the information on slide 10 for your reference.

I am starting with slide 11.

Our first quarter net sales increased 16% over the prior year to $815 million due to a 12% increase from volume and.

And 4% from currency gains on our line of business basis, our first quarter net sales in energy systems were up 5% to $371 million specialty was up 21% to $108 million in.

In motive power revenues were up 28% to $336 million motive powers growth was mostly from 22% in organic volume and 5% in currency improvements.

The prior year motive power first quarter revenues were impacted significantly by the pandemic with a 24% decrease in revenue.

Our motive power revenues for Q1 are now comparable to the first quarter of two years ago.

Energy systems at a 3% increase from volume and a 3% improvement from currency net of a 1% decrease in pricing.

Specialty at 18% and volume improvements, along with 2% positive currency and 1% in pricing.

We had no impact from acquisitions in the quarter.

On a geographical basis net sales for the Americas were up 13% year over year to $557 million with a 12% more volume and 1% in currency.

EMEA was up 27% to $201 million from 18% volume, 10% improvement in currency less 1% in pricing.

Asia was up 3% at $57 million on 9% currency improvements lists 6% volume declines.

Please now turn to slide 12 on a sequential basis first quarter net sales were flat to the fourth quarter.

On a line of business basis specialty decreased 19% from a very strong Q4 due to resin shortages, which are largely behind us.

Motive power was up 1% as it rebounds from the pandemic and energy systems was up 6% from organic volume on a geographical basis Americas and EMEA were relatively flat, while Asia was up 5%.

Now a few comments about our adjusted consolidated earnings performance as you know we utilized certain non-GAAP measures in 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 high.

<unk> items, please refer to our company's form 8-K, which includes our press release dated August 11th for details concerning these highlighted items.

Please now turn to slide 13.

On a year over year basis, adjusted consolidated operating earnings in the first quarter increased approximately $14 million to $75 million with the operating margin up 50 basis points on a sequential basis, our first quarter operating earnings dollars declined $3 million from $78 million, while the OE margin.

40 basis points to nine 2%.

Primarily due to energy systems results, which Dave has addressed.

Operating expenses when excluding highlighted items were at 14, 5% of sales for the first quarter compared to 16, 1% in the prior year.

Our revenue growth exceeded our spending on.

On a city council, but excuse me sequential basis, our operating expenses declined $1 million and 10 basis points.

For the previously announced closure of our flooded motive power manufacturing site in Hagen, Germany.

Excluding those charges our motive power business generated operating earnings of 15, 1% or 470 basis points higher than the 10, 4% in the first quarter of last year due to easing of pandemic related restrictions and demand coupled with ongoing opex restraint.

The OE dollars for motive power decreased over 20, or excuse me increased over $23 million from the prior year.

On a sequential basis motive powers first quarter OE decreased 50 basis points from the 15, 6% margin posted in the fourth quarter due to higher lead and other input costs.

Energy systems operating performance percentage of three 5% was down from last year's 8.0%, although it improved from last quarter's two 6%.

OE dollars decreased $15 million from the prior year, however increased $4 million from the prior quarter on higher volume.

<unk> of higher tariffs freight materials and manufacturing costs continues to create headwinds.

Specialty operating earnings percentage of 10, 6% was up from last year's six 5% on higher volume.

But down from last quarters, 13, 2% OE dollars increased $6 million from the prior year, but declined $6 million from our strong fourth quarter on lower revenue.

Please move to slide 14, as previously reflected on slide 13, our first quarter adjusted consolidated operating earnings of $75 million was an increase of $14 million or 23% from the prior year. Our adjusted consolidated net earnings of $54.4 million was 15.

Higher than the prior year.

The improvement in adjusted net earnings reflects primarily the rise in operating earnings along with lower interest expense and a small currency gain.

Our adjusted effective income tax rate of 18% for the first quarter was slightly lower than the prior year's rate of 21% and lower than the prior quarter's rate of 19%.

Discrete tax items caused most of these variations.

We have made no adjustments for any proposed changes in taxation announced recently.

First quarter EPS increased 36% to $1.25, which was the top of our guidance range. We expect our weighted average shares for the first quarter or excuse me second quarter fiscal 'twenty two to remain relatively constant with approximately $43.5 million outstanding.

As a reminder, we now have over $55 million of share buybacks authorized and we purchased nearly $32 million recently. This recent buyback reflects the return to our normal pattern of removing the dilutive impact of our stock comp programs.

Last week, we also announced our quarterly dividend, which remained unchanged from prior levels.

Please now turn to slide 16.

Our balance sheet remains strong and positions us well to navigate the current economic environment, we have $406 million of cash on hand, and our credit agreement leverage ratio was 195 times levered.

Which allows over $600 million in additional borrowing capacity.

Last month, we extended and amended our credit facility on favorable terms, which is now in place through 2026, we expect our leverage to remain near two point times in fiscal 2022.

We spent $26 million on our Hagen restructuring along with $46 million in inventory growth to support higher backlogs.

And as a result, our cash flow from operations was a negative $48 million in the first quarter as we expected the benefits from the Hagen, Germany restructuring started in Q1, and we should exit the year with a $20 million annual run rate <unk>.

Capital expenditures of $16 million were in line with our prior guidance, our Capex expected expectation for fiscal 2022 is $100 million.

And reflects major investment programs in lithium battery development and continued expansion of our <unk> capacity, including the Northstar integration.

We anticipate our gross profit rate to remain near 24% in Q2 of fiscal 2022.

As David has described we believe all three of our lines of business find their products in high demand near.

Near term supply challenges or restricting our ability to execute fully on these opportunities our guidance range of $1 three to $1.13 for our second fiscal quarter of FY 'twenty to reflect the impact of these challenges along with the normal seasonality of Q2 and the added investments in product development.

And personnel now let me turn the call back to Dave.

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

As a reminder.

To ask a question you will need to press star one on your telephone.

All right.

Just press the pound key.

Please standby, while we compile the Q&A roster.

Our first question comes from the line of.

Okay.

Oppenheimer you may begin.

Good morning, and thanks for taking the question to put it mildly.

This is a very dynamic production environment across the industrial space and we've seen any number of companies talk about.

The impacts on our supply chain from chip shortages and alike.

So I was wondering if you can help us maybe dimension that a little bit some of these moving parts. What you saw in the quarter and what you expect in the upcoming quarter.

No.

From <unk> to higher freight costs.

Component cost increases you.

You mentioned the pull forward of the wage increases in the next quarter and the EV investment. So if you can give us any granularity on some of those moving parts it would be greatly appreciated.

Sure. Thanks Noah.

In terms of the supply chain pressures, there's really there's really four areas that are impacting I would say the first half of our year. So far so what we posted in Q1 and what we're forecasting in these Q2 numbers I would say the first one and we talked about this last quarter was freight.

The base freight situation I think is stabilizing so relative to where we were 90 days ago.

<unk> and.

Fortunately the base freight rate is higher and the lead times are longer than historic norms, but I think that situation is stabilizing so.

Our supply chain folks are just having to adapt but it seems like that situation is okay. Its more on the expedited freight where things are still crazy and so you can imagine in this era of.

All of the supply chain supplies is that more often than not and too often especially in Q1, we've had to expedite things and that those costs right now exorbitant. So we were.

We're trying very hard to minimize the amount of expedited freight we use because that continues to be a major pressure on the organization.

Obviously, another one is just.

We've talked about for years and Thats something that we have to deal with but what we've seen this year is obviously just like everyone else is inflation on other things non led.

And I think we've done three price increases already in our three lines of business. So far since April and we will continue to push these costs through it's just no one likes.

Suppliers don't like given us price increases and we certainly don't like giving them to our customers. It's just the world. We live in right now and I think we're all hoping for a little bit of stability, but in general I would say the price stickiness is good I think.

Our energy systems business has a longer tail because of the nature of the businesses. So.

Getting pricing from that piece of the business a little harder than the other two but that said all of our sales leaders are committed to protecting our our gross profit dollars.

Resin shortages was a real acute problem 90 days ago, when we spoke and it really has limited our ability to ship T. PPL, both in our specialty transportation business as well as our.

Yeah.

Reserve power legacy Reserve power energy systems battery business, and really put one of our factories.

Especially in Q1 and Q4.

On their tail, because they just couldnt get enough product and so we.

Absorbed a lot of areas.

Happy to report that we should exit this quarter.

With enough resin for the rest of the year. So that situation has dramatically improved versus 90 days ago.

When you combine that with the.

With the improvements we've made in terms of our ramp in Springfield, where we're much more optimistic about our production levels on thin plate pure lead in the second half and then finally the semi conductor issue. This is.

Like many companies now again.

The amount of semiconductors, we have in our revenue stream is different than other companies. So.

I would say in the first half Mike I would say semi conductors is equated to about 40 bps of gross profit pressure.

So far.

In H, one and it's really an issue.

No of mix because a lot of our higher margin products were on allocation right now on some of these chips. So we can be doing a lot more we certainly have the backlog and a lot of the shortages. We had resins included have been for products that are on the higher end of our mix. So the mix has been drag.

And the chips situation I think our allocations are going up a little bit.

As we go forward per quarter, but that's that that one is something we have to adapt to I know that Europe and the engineering group had been feverishly trying to.

Redesign things in.

In our supply chain folks are jumping through hoops, and and obviously, we're having to do some spot buys that we don't normally do to secure some of these I mean, one of the things. We've talked about is we have to protect the customers throughout all of this craziness.

I was laughing at myself. This morning, I think our ops team has probably had more sleepless nights sort of post covid than during Covid, It's just been that sort of crazy environment right now but.

That said, we're hanging in there and we're still extremely optimistic about our end markets.

And in terms of the.

Sequential Noah you mentioned I would say, yes, we're definitely seeing some pressure in the second quarter sequentially from the from the DC fast charge.

Again, because of Covid, we re timed our our normal annual wage increase I would say, it's been 3% forever.

It's just been rate times and I wanted to make sure that we adjusted I think we're going to stick with this timing going forward noticed so we just wanted to call that out to make sure we have that.

We've got our normal seasonality in the second quarter has a lot to do with.

A lot of the OEM customers in Europe, they've told us they're going to take their normal holidays, no one's working through the holidays, we thought maybe they would but everybody has taken their normal holidays and so seasonality is certainly part of there and then I think theres, probably about two pennies by below the line.

FX and so forth so that's sort of.

I think the supply chain pressure, we're feeling and then some of the sequential.

I would say really right now H, one and H two operationally feel pretty similar.

Just these other pieces to Q2 versus excuse me Q1, and Q2 feel operationally very very similar it's just that there's these other pieces, we just called out for the second quarter versus the first.

Okay.

That's very helpful. Dave.

You mentioned the stickiness of pricing.

Just given all the cost that you're talking about incurring I guess, it's a little bit hard to see in the quarter. The result prices basically.

Flat and even in motive and specialty it looks like Youre getting maybe a couple of million dollars of pricing benefit year over year. It doesn't seem enough to offset some of these.

You have increased cost pressure as you are talking about so.

Help us understand.

The company you talked about 5% to 10% type price increases when do we start to see more of that price flow and when could potentially you'd be getting into a more favorable price cost dynamic.

It's there's always a lag always between when when these things are executed we've.

It's Ben.

Ben.

A worsening situation in some of the commodity categories, it's been a stabilizing situation than others.

None of them have really receded so.

We're just executing prices, but the most recent one most recent price increase just went out.

Last week. So it's just there's just delays and how long it takes to get these through the system and I think it's it's a longer tail as noted on the energy systems business.

Relative to the other two businesses, Mike you want to add anything.

We expect price improvements in the upcoming quarter as much as $10 million some of that is <unk>.

<unk> done some of the costs that continue to increase but by and large we have been running at about 20 cents of headwinds for the last two quarters as we looked at and some of those will be abating in the upcoming quarter and we've done a great job on things like resin shortages.

Chip shortages of doing workarounds and substitution so we havent it hasnt had as.

As big of an impact but moving into.

Q2 from Q1.

The investment and the fast charge engineering cost the raise at least tempur.

Temporarily I would say it would have a little bit of drag the seasonality will disappear.

<unk>.

A higher tax rate and a little bit higher interest and FX headwinds will go away. So we don't necessarily see those as permanent and we do expect sequentially improving top lines, particularly once we move into <unk> two.

Okay. Thanks, I'll take the rest of my questions I appreciate it.

Thanks.

Our next question comes from the line of John France Europe.

Sidoti you may begin.

Hi, John.

John Your line is open.

Our next question comes from the line of Brian Drab William Blair you may begin.

Hey, good morning, Thanks for taking my questions.

Right.

Hi.

Can you.

Hey, Mike.

Quantify it a little more specifically.

Sequential impact.

Temporary issues from.

From first quarter into second quarter like the easy investment wave.

Wage increase.

In terms of EPS impact.

First quarter relative to second quarter.

Yes, no as Dave said.

The investment in additional engineering resources in the second quarter is about <unk> <unk> of headwind.

The annual increase in raises.

For that quarter is about six.

Okay.

Our normal seasonality and I will say that.

Our second quarter.

More often than not.

Less because of the Europe, primarily because of the European holiday situation. It doesn't always work that way because there's other dynamics that could impact the Q2, but one thing that is always constant is that seasonality is a drag it just may be offset by other items.

We report Q2 results, but that we expect to be about 5% to six.

Worth of drag.

And then as Dave mentioned, there is two to <unk> on the FX interest and tax rate below the op earnings line.

Yes.

Is it fair to say that when we can.

Do you think.

In may.

In EMEA probably.

That you felt like maybe other factors would overshadow the kind of offset some of these headwinds.

The second quarter is shaping up.

Below where you would have expected previously.

Or is this kind of.

Kind of guidance been contemplated you think like that.

<unk> gotten worse.

In terms of your outlook for the second quarter since may.

Yeah, Brian This is Dave I'll start.

I tried to make the point that I think operationally really H. One has been one set of circumstances. So there is no major changes there.

In terms of the seasonality in these things we've pointed out yes, I guess that they've been there.

As often is the case as Mike said in the case of seasonality. The engineering certainly that's an investment we've signaled that we're really excited about this opportunity so.

Yes, it's really the first half has been.

Sailing into some fairly strong headwinds.

I personally have a lot of optimism about the second half versus the first half I would say, we're going to have more <unk>, which is going to help margins, it's going to help revenue.

We should have less manufacturing variances.

Some of this covid stuff gets out of the way I think even though we're adding in this engineering.

Opex as a percentage of sales should.

Should stay in check in the second half.

I think we're going to come into the second half this year with the strongest backlog we've ever had go on going into the second half so.

That's certainly can't be a bad thing.

I think.

No and I were discussing earlier some of the pricing should start to catch up.

And I think that Hagen.

We haven't really realize much of those savings and we're going to start to feel that more acutely in the second half. So those are sort of my key reasons for optimism of course.

The supply situation as we noted in the press release is fluid and you just don't know what.

What's going to further happen, but most of the Sigma we've gotten some signals from our OEM I think.

For example, the semi conductor issue has been probably more of a downstream issue for Enersys then in upstream issue because a lot of our OEM customers arent building vehicles at the rate they would like to simply because they can't get enough chips and we've had a few of them signal to us sort of give us advance warning that theyre going to.

Ramped back their production rates higher in our fiscal second half then than where they've been running in our first half. So these are sort of the reasons for optimism.

By no means are we discounting the pressures that we're seeing on the supply chain side, but you worry about what you can control and we're just we're trying to get pricing as often as we can so.

That's my best sense of of the situation Mike.

Let's say anything there and then I think I think you've covered all the relevant items.

Okay, Yes.

This is.

It's such a challenging situation.

The middle of a global pandemic I mean, Mike area. David You mentioned you used the term posts.

Covid.

The ones feeling that way at the moment.

Like cases cases in Illinois doubled again last night so.

I know, it's a tough situation.

I guess the stock analysts looking at this and trying to model the second half of the year and right now the consensus estimate the average.

EPS for the third quarter fourth quarter of $1.48.

And when.

When we see the guidance for the second quarter I'm, just wondering can you make any comment as to whether.

And then the $1.48 is feeling like its right to.

To me at the moment and I just wonder if you could comment on that.

Much better visibility than than IV.

Well.

Ryan I think we've done a pretty good job of navigating covid for the last 18 months I'm, not saying that it's behind us clearly it isn't but.

I think I think that is.

Okay.

The inflationary pressures.

Somewhat of a guess, we really just do not know how much more headwind. We have there is always a drag between some of them what we incur versus what we can do in pricing, particularly in our order book, where some of that pricing not all of it but some of it set others are indexed to things like led adjustments et cetera.

Yes.

So there are plenty of things that you could say it could make the second half not as good as the analysts' expectations for age two.

But the demand for our product across every line of business has been unprecedented and.

Just for example, the drag we've had on resins that we've really just kind of gotten behind.

To be able to unleash the TPP L capacity up to a $300 million per quarter run rate and get our Springfield plant two and its high speed lineup to full operational speed.

We'll have great benefits, which we haven't really enjoyed to date. So there are plenty of reasons for optimism.

<unk> and <unk>.

Factory, which as I said only just started to deliver benefits is going to start showing up on our bottom line and ever increasing amounts per quarter for the rest of this year. So.

There's a lot of things that we're excited about it and there are some things.

Okay.

Are going to be a detriment there is some unknowns, we just can't comment on.

But I don't know that I don't think anyone here is ready to throw out age two and say, it's not going to be.

The step up that you expect that we would expect by Brian and you are right. Its porches port poor choice of words on my part Theres certainly we're living with the pressures every day I've met.

That was really.

About the shutdowns that we saw last year and where.

So yes, we are very concerned about the delta variant in the Transmissibility.

I think.

I'm more optimistic than it was a year ago I think we've got protocols in place. We've got a fair number of vaccinated folks we've got a lot of folks that have had the virus already.

And I haven't seen any signaling from really any one about.

The draconian type of shutdowns, we saw a precipitous type of shutdowns we saw so.

But I agree with you, 100% we are by no means out of the woods.

And our EHS folks, we still meet on a very regular basis and review all the data. So that was a poor choice of words on my part sorry. It wasn't meeting emphasized that I was just.

Obviously still a tough.

Situations and good luck to you guys.

Thank you.

Yeah.

And our next question comes from the line.

John.

Sidoti you may begin.

Can you hear me now guys.

Yes, yes, we can.

Alright.

Thanks, operator.

I want to go back to your commentary about the EV market.

Calling it an immense opportunity.

Yes, my understanding I think the original expectations with something around $100 million does that.

And can you talk about the investment that's involved in the EV opportunity.

Yes. It is.

Really exciting we've slated.

And again it was about three pennies of pressure in Q2 for additional engineering support we need on the on the systems integration side, we've got a launch customer that we're focused on.

And the forecasts are so big I don't even want to talk about it because it's just.

It's just unbelievable.

<unk> exciting.

But that said our initial focus in the next 12 months or less is to secure an order for the first 100 systems.

And that 100 systems.

Could be between 50 and $100 million.

Pending on what.

Variation of the systems.

The launch customer wants to look at and we're particularly excited about this system because theres a lot of intrinsic benefits of combining this battery energy storage system with this DC fast charge. So these <unk> systems are just now starting to pencil because the cost of the lithium batteries has come down so much.

So the systems are just starting to pencil, but then when you layer on the ability to really rapidly or a hyper fast charge an electric car.

It really pushes the math over the top and we've just seen tremendous and our focus I know that the EV market is the wild West right now and we're really trying to hunt with a rifle amount a shotgun and we've really zeroed in on these commercial real estate partners that.

<unk>.

Have big portfolios, where they can benefit from the battery energy storage system. The energy systems, the demand charge mitigation the emergency backup power, but then they also for their tenants are their clients want to offer fast EV charging as part of their services that they provide so it's where a lot.

Dan We've got a great software partner we've.

And I'm, just really proud of my engineering team and how fast and how far we've come already and then I think a lot of what we're going to see.

This gets passed this stimuli.

Stimulus Bill, but as you say there is an astronomical amount of funds that are going to be allocated towards EV charging.

The space, where we're trying to compete which is.

Above 50 kilowatt. So fast charging is 50 kilowatt, we're trying to or charges or more like in the 160 kilowatt range. So these are hyper fast chargers.

Much less crowded space so it's.

And we think the macros are lined up and in the end and we just had this discussion at the board meeting.

Last week, it's really in the end the system, we're putting together, it's batteries and Chargers and this is what we do is enersys, we do batteries and we do Chargers and and the systems integration piece, we've come a long way over the last four years five years. So we're a different company and a lot of ways and it sets a subpar.

Perfect for market opportunities like this I think the other part of the stimulus Bill to that we mentioned we're excited about is this rural broadband initiatives, that's really big for US, we're so well positioned with the lax.

Windstream century frontier, we're well positioned with the Msos Comcast charter Cox folks like that and these are going to be the big winners in this rural broadband initiative and then.

I don't know if you've read the bill yet, but a lot of the.

Fairly prescriptive on what equipment is going to attract subsidy has to be part of the core and all the products that we.

That we make even really the new Corning project, we've been working so hard on that fits right in the sweet spot of what this rural broadband build out is going to be like so.

On the demand side of things the strategic plan, we've laid out the product portfolio, we're really in tremendous shape. It just comes down to getting through this.

This period and I can spend the whole call complaining about it but there is no use complaining about it we're just going to continue to fight through it Mike do you want to add anything yes, and the other program that we mentioned that we're really excited about and it's probably the most immediate all of them.

Is the California public utility commissions.

Backup for.

For that which is for us.

Just starting out as $50 million opportunity and it's providing turnkey operations in both with both lithium sales and our TPP L cells.

And this is for the.

The cable msos and to keep their networks up and running in case of fires high winds et cetera, so that.

That is something we're working on and finalizing some of the details right now in it. So there are a number of things and the last one.

I think most people know the <unk> build out right now is kind of that mid spectrum, which we are participating in but the one that we're really excited about is the small cell at the ultra wideband, that's where we think things like the touch the program is really going to shine. So there are probably five different projects, including the <unk> for <unk>.

Rural Digitization.

Program that Dave mentioned, there is a lot of great things in energy systems coming down the road in the next three years.

Okay, and I guess more immediately when we think about.

The resin shortage.

<unk> line.

Have you put in price increases.

Semiconductors.

<unk> impacted your higher margin products by 40 bps.

Think about the second half of the year and that stuff.

<unk> behind you what kind of.

Gross margin benefit we do anticipate from a normalization of those sales of those products.

I don't have that number in front of me, Mike Jeff Good estimate for that.

We talked about the fact that just.

The drag we've been experiencing thus far from some of the lost sales of those products was about a 40 to 50 basis points improvement.

We probably incurred nearly 100 points basis 100 basis points drag from expediting fees and higher freight now I can't promise that thats going to.

Normalized or I don't know when it's going to normalize, but I don't see it staying at this sustained right. So.

There are and as we said the other things that we expect to see improving the manufacturing variances, which were kind of dragging back as these plants come out lower capacities and they step up their operating efficiencies Springfield gets better you're going to see sequentially better manufacturing variances coming through on the P&L.

Opex should stay the same and even drive a little bit lower allowing us to make some of these investments in energy.

An engineer.

Engineering cost.

And the pricing will stick and it does take a quarter or two but we will start recovering on pricing and the Hagen savings are going to be.

There so.

I can't promise when it's going to happen, but there certainly is.

Enough opportunities to get over 200 basis points of improvement in margin.

Alright perfect.

You very much for that color I'll get back into queue.

Okay.

Hi, Thanks.

Once again Thats star one for questions. Our next question will come from the line of Greg Lewis from <unk> you may begin.

Yes, Thank you and good morning, everybody.

Following up Mike on the energy systems, I realize its kind of been picked over throughout the call.

But it is really that lagged Pam on pricing.

It sounds like that's a quarter or two before is that the right way to think about energy systems or is it kind of longer lead times, just as we've been thinking about inflation in the market for the last couple of quarters.

Just trying to just trying to understand just trying to understand that.

A little more color there.

Greg I think that.

The energy systems business is a much different supply chain than our other two businesses in weather.

Whether it's our old Purcell asset that we owned before the alpha.

Acquisition, and certainly the alpha pace.

It's really more of an integrator business, where we have a lot of the components and sub components and sub assemblies made in Asia with a very long supply chain and relative to our other businesses.

It has more semiconductor content, just a far more complex supply chain.

And.

And then as we've talked about those long supply change right now and getting brutalized set a longer supply chain. The tougher it's been so whether it's freight expedited freight we couldnt, even get sea containers for a while we had products sitting in warehouses in China that we just couldn't get so it's the length.

That supply chain and tariffs, obviously has been a major headache for us and we've been pushing really hard to bring that stuff closer to home and shorten up these freight lines and supply chains, but you can imagine during covid. It's just been it's been.

The wild West trying to get anything done in with these contract manufacturers with all the supply shortages and so forth. So it's just a much different business, but that said.

The outlook is fantastic and we just have to get through this period. Mike is there anything you want to well I would say that.

The pricing in energy systems in some cases in our aerospace and defense tend to be fixed for a period of time contractual period, maybe a year and there is little or limited ability to move pricing. Some of those agreements may have some esque.

Escalators, but.

There are some where youre limited by time in time for a certain amount of time to do any pricing motive power tends to be more adapt to changing quicker in the market.

We will come to a point, where those prices will be renegotiated those costs can then be recovered.

And Thats just things that we're working through on a case by case basis, I guess, the other piece to that and along that line is.

The energy systems business is dominated sites and very big customers Comcast charter AT&T, Verizon T Mo sprint.

So it's just it's a very different business in that sense, but the we just need to manage through this and.

The upside potential in the long run is tremendous but Mike's point is right.

The price tail is much different than it is in the other businesses.

Yeah, Okay, Yeah, I appreciate that and then and then Mike.

Inventories went up sequentially was that largely on the back of those.

I guess pre purchases or inventory build in Nebraska.

Maybe the right way to think about that.

Well I would say that.

A couple of things number one given the size of our backlog and when our production planners look at the order book they start ordering product.

And.

Assume that the production plan can be executed so so whenever youre backlog goes up your inventory order process goes in some cases, where <unk> seen some spot shortages you can find that they will try to cover with a little bit more safety stock. So some of that.

Defensive trying to just be have enough on hand, because sometimes just getting containers becomes a hit or miss things. So some of that is just.

Being prudent and some of it.

So.

And I will say that typically our fourth quarter tends to be the low point on inventory and then it kind of starts growing throughout the fiscal year, but.

So it wasn't unexpected I would say that.

The two things we've probably done this quarter, we've made sure we pay to our suppliers on time, because we don't want to cause ourselves do drop in anybody's priority list, because we werent paying on terms.

And in some cases order a little more than we need for a safety factor.

Yes, and then just and then just think about this obviously the supply chain issues globally or a mass I mean, I guess today or this morning, China announced another closing shut in temporarily one other board space is there any kind of way like as we think about your different segments, maybe which ones are more.

Those two the Asia supply chain than others.

Well as Dave just mentioned energy systems has.

The exposure with the contract manufacturing other than that we try to build in the regions that we.

We sell in so we're.

Typically insulated on for the most part on a batteries side, but when it comes to the electronics.

Thats pressuring mode with some charges and stuff, but it's manageable.

The sales teams are doing a tremendous job of substitution. So it's four assets in es problems.

Okay, Great and then just one final one for me Dave.

Because.

It is.

It's good hopefully largely good.

I'd like to think about that backlog and it's kind of hit us hitting that record level is there any kind of way to parcel out.

How much of that backlog.

Is there because.

Supply chain issues I E would have been 85% to 10% lower if you weren't having these issues and that revenue maybe last quarter.

Right.

Have been higher is there any kind of way to think about that.

Yes.

It is.

A good question I would say that when I pressed during our monthly business reviews with my leaders.

They pretty much tie most of this too.

Particular jobs and so whether it's a T mo cabinet, thats going out or or whether it's a.

Motive power batteries thats tied to a truck.

It's mostly accounted for so I haven't been able to I try to pressure test that.

But.

And Mike can certainly add some color here, but that so far we just haven't been able to to look for any.

Any real kind of softness in the backlog number and the one of the things and we tried to point out if the worldwide industrial truck data we see these unbelievable.

80 kind of percent growth rates on orders, but then the forklift market continues to.

The revenue so their orders are just like a mount Everest, but the actual sales. So our sales are really linked to their sales not to their orders were not going to the truck lead time is so much longer than the battery lead times. So that again gives me some comfort that.

We're just in it.

Great demand environment right now Enersys is well positioned in some great macro markets.

We just need to execute through the supply chain issues and keep our chins up and not.

Not get too.

Dejected about it and stay optimistic and that's what we're trying to do Mike do you want to add anything yes, our backlog is probably $200 million higher than it might be on a typical quarter historically in.

And we've already said that theres, probably $10 million to $20 million that we leave on the table at any quarter from.

Missed revenue because of these shortages, we have been describing so you could probably take that off of backlog if you've executed.

There is probably some people ordering from us and other suppliers just to get into queue, but I think thats fairly limited.

That might be $20 million $30 million. So collectively I think what's left is at least $150 million, which which to Dave's point reflects core demand that is real and that is a reflection of what the markets for our products are doing.

Okay Super helpful. Everybody. Thank you very much have a great. Thanks.

Thanks, Craig Thanks, Greg.

Thank you.

And I'm not showing any further questions in the queue I would like to turn the call back over to David Shaffer for closing remarks.

Thanks, Victor and I want to thank everyone else for taking the time to join our call today, we look forward to providing further updates on our progress and on our second quarter 2022 call in November have a great day.

This concludes today's conference call. Thank you for participating you may now disconnect.

[music].

Good day and thank you for standing by welcome to the inner since first quarter 2022 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question.

No recession.

Star one on your telephone please be advised that today's conference is being recorded if you require any further assistance. Please press star Zero I went out I think in the conference over to your speaker today, David Shaffer.

And CEO. Please go ahead.

Thanks, Victor Good morning, and thank you for joining us for our first quarter 2022 earnings call on the call with me. This morning is Mike <unk> 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 in 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.

You, Dave and good morning.

Management's current expectation.

Okay.

Including our earnings estimates see forward looking statements included in item two management's discussion and analysis of financial condition and results of operation.

Set forth in our quarterly report on form 10-Q for the fiscal quarter ended July four 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 August 11.2021.

Which is located on our website at Www Dot Enersys Dot Com now, let me turn it back to you Dave.

Thanks, Mike Please turn to slide three.

Demand for our transportation products <unk>.

Similar to other industrial companies, we're facing some challenges in the wake of the worlds deepest economic recovery as businesses reopen and competition for labor materials and transportation remains fierce.

As these temporary issues unwind, we will benefit from the strong market momentum.

I'd now like to provide a little more color on some of our key markets. Please turn to slide four.

Let's start with our largest segment energy systems, which saw modest improvement from the prior quarter growing revenue by more than $22 million and generating nearly $4 million gain in operating income versus Q4 demand for our energy systems products remains strong with order intake from one of our larger telecom customers pick.

King up after a slow Q4 that was driven by five <unk> radio availability labor and permitting challenges.

Broadband orders continued to improve and are expected to accelerate dramatically as the California public Utilities Commission public safety grid shutdown extended network backward backup programs roll forward.

While the market is displaying positive momentum energy systems continues to experience drags in three primary areas.

Second we have incurred additional engineering costs to support our touch save collaboration with Corning as well advancing as well as advancing our lithium offerings and the other NPI supporting <unk> and renewables from which revenue will begin to accelerate in the second half of this fiscal year our investment in R&D will also accelerate.

During the calendar year to advance the DC fast charge initiatives that will benefit our next fiscal year. These investments will position us to be a significant participant in these new mega market trends third the Es group has been more heavily burdened with the ramp up of the integration of inefficiencies of the Northstar acquisition.

Please turn to slide five.

Market acceptance, we anticipate normal seasonality over the summer holiday months, while lift truck industry order statistics remain exceptionally high we're being mindful of OEM supply limitations. We are confident we are well positioned to benefit from a steady recovery throughout the balance of the fiscal year.

The restructuring of our Hagen, Germany facility remains ahead of schedule in regards to cost and timing with most of the cost savings yet to be realized we will further evaluate our global footprint to ensure we can meet strong current order patterns and continue to extract savings with further standardization of our legacy product offerings.

In other business transformation initiatives.

Please turn to slide six.

Our specialty business contributed another strong quarter to our overall results. Despite the Northstar related cost drag mentioned earlier as the high speed line and other productivity capacity enhancement enhancements are installed in our <unk> factories, we will enjoy lower costs and increased capacity in our second half results.

Demand in our transportation business remains exceptional buoyed by significant incremental revenue that we're positioned to win as additional Springfield capacity comes online.

U S transportation grew rapidly from the year ago quarter, and our backlog remains at record levels.

Continued strong demand for the remainder of the calendar year from the U S economic recovery.

We will have doubled this business since the acquisition is just five years positive recent conversations with several large customers combined with the U S source lithium initiatives by the administration is highlighting and their infrastructure legislation gives us great confidence in the future growth opportunities in many of our businesses.

Please turn to slide seven.

As you know, we announced our battery energy storage system, plus DC fast charge initiatives in the fourth fiscal quarter, which remains on track regarding product development and performance all while this tremendous market opportunity continues to grow our goal is to deliver an EV charger that charges any electric passenger.

Your car as fast as the car can handle reducing the process from hours to minutes by.

Please turn to slide eight.

<unk> in all lines of business and the launch of best in class modular lithium systems in motive power and energy systems further enhances our market leading positions.

Please turn to slide nine.

I'd like to close by recapping, our strategic initiatives, which remain unchanged one to accelerate higher margin maintenance free motive power sales with <unk> pure.

As well as the addition of our battery energy storage system, plus DC fast charge initiative.

We will continue to execute on each of these initiatives and look forward to providing you updates on our progress in the quarters ahead quarters ahead with that I'll now ask Mike to provide further information on our first quarter results and go forward guidance.

Thanks, Dave for those of you following along on our webcast. We have provided the information on slide 10 for your reference.

I am starting with slide 11.

Our first quarter net sales increased 16% over the prior year to $815 million due to a 12% increase from volume and.

And 4% from currency gains on our line of business basis, our first quarter net sales in energy systems were up 5% to $371 million.

Specialty was up 21% to $108 million.

In motive power revenues were up 28% to $336 million motive powers growth was mostly from 22% and organic volume at 5% and currency improvements.

The prior year motive power first quarter revenues were impacted significantly by the pandemic with a 24% decrease in revenue.

Our motive power revenues for Q1 are now comparable to the first quarter of two years ago.

Energy systems at a 3% increase from volume and a 3% improvement from currency net of a 1% decrease in pricing.

Specialty at 18% and volume improvements, along with 2% positive currency and 1% in pricing.

We had no impact from acquisitions in the quarter.

On a geographical basis net sales for the Americas were up 13% year over year to $557 million with a 12% more volume and 1% in currency.

EMEA was up 27% to $201 million from 18% volume, 10% improvement in currency less 1% in pricing.

Asia was up 3% at $57 million, a 9% currency improvements less 6% volume declines.

Please now turn to slide 12 on a sequential basis first quarter net sales were flat to the fourth quarter on.

On a line of business basis specialty decreased 19% from a very strong Q4 due to resin shortages, which are largely behind us.

Motive power was up 1% as it rebounds from the pandemic and energy systems was up 6% from organic volume on a geographical basis Americas and EMEA were relatively flat, while Asia was up 5%.

All highlighted items. Please refer to our company's form 8-K, which includes our press release dated August 11th for details concerning these highlighted items.

Please now turn to slide 13.

Up 40 basis points to nine 2%, primarily due to energy systems results, which Dave has addressed.

Operating expenses when excluding highlighted items were at 14, 5% of sales for the first quarter compared to 16, 1% in the prior year.

As our revenue growth exceeded our spending.

On a sequential but excuse me sequential basis, our operating expenses declined $1 million and 10 basis points.

Excluded from operating expenses recorded on a GAAP basis in Q1, our pre tax charges of $14 million, primarily related to $6 million in alpha and Northstar amortization of intangibles and $8 million in restructuring charges for the previously announced closure of our flooded motive power manufacturing site in Hagen, Germany.

The OE dollars for motive power decreased over 20, or excuse me increased over $23 million from the prior year on a sequential basis motive powers first quarter OE decreased 50 basis points from the 15, 6% margin posted in the fourth quarter due to higher lead and other input costs.

Energy systems operating performance percentage of three 5% was down from last year's 8.0%, although it improved from last quarter's two 6%.

OE dollars decreased $15 million from the prior year, However increased $4 million from the prior quarter on higher volumes the cost of higher tariffs trade materials and manufacturing costs continues to create headwinds.

Specialty operating earnings percentage of 10, 6% was up from last year's six 5% on higher volume, but.

But down from last quarters, 13, 2% OE dollars increased $6 million from the prior year, but declined $6 million from a strong fourth quarter on lower revenue.

<unk> net earnings of $54.4 million was $15 million higher than the prior year.

<unk> and adjusted net earnings reflects primarily the rise in operating earnings along with lower interest expense and a small currency gain.

Our adjusted effective income tax rate of 18% for the first quarter was slightly lower than the prior year's rate of 21% and lower than the prior quarter's rate of 19%.

Discrete tax items caused most of these variations.

We have made no adjustments for any proposed changes in taxation announced recently.

Last week, we also announced our quarterly dividend, which remained unchanged from prior levels.

Please now turn to slide 16.

Which allows over $600 million in additional borrowing capacity.

Last month, we extended and amended our credit facility on favorable terms, which is now in place through 2026, we expect our leverage to remain near 2.0 times in fiscal 2022.

We spent $26 million on our Hagen restructuring along with $46 million in inventory growth to support higher backlogs.

Capital expenditures of $16 million were in line with our prior guidance, our Capex expected expectation for fiscal 2022 is $100 million.

And reflects major investment programs in lithium battery development and continued expansion of our <unk> capacity, including the Northstar integration.

We anticipate our gross profit rate to remain near 24% in Q2 of fiscal 2022.

As Dave has described we believe all three of our lines of business find their products in high demand.

Near term supply challenges or restricting our ability to execute fully on these opportunities our guidance range of $1 three to $1.13 for our second fiscal quarter of FY 'twenty. Two reflects the impact of these challenges along with the normal seasonality of Q2 and the added investments in product development.

And personnel now let me turn the call back to Dave.

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

Okay.

To ask a question you will need to press star one on your telephone.

So it's really a question just press the pound key.

Please stand by while we compile the Q&A roster.

Our first question comes from the line of Noah.

Okay.

You may begin.

Good morning, and thanks for taking the questions.

Put it mildly this is a very dynamic production environment across the industrial space and we've seen any number of companies talk about.

The impact on supply chain from chip shortages and the like so I was wondering if you can help us.

Maybe dimension that a little bit some of these moving parts what you saw in the quarter and what you expect in the upcoming quarter.

You know.

From <unk> to <unk>.

Freight costs.

Component cost increases.

You mentioned the pull forward of the wage increases in the next quarter and the EV investment. So if you can give us any granularity on some of those moving parts it would be greatly appreciated.

Sure. Thanks Noah.

In terms of the supply chain pressures, there's really.

There's really four areas that are impacting I would say the first half of our year. So far so what we posted in Q1 and what we're forecasting in these Q2 numbers I would say the first one and we talked about this last quarter was freight.

The base freight situation I think is stabilizing so relative to where we were 90 days ago.

Unfortunately, the base freight rate is higher and the lead times are longer than historic norms, but I think that situation is stabilizing so.

Our supply chain folks are just having to adapt but it seems like that situation is okay. Its more on the expedited freight where things are still crazy and so you can imagine in this era of.

All of these supply chain supplies is that more often than not and too often especially in Q1, we've had to expedite things and that those costs right now exorbitant. So we were.

We're trying very hard to minimize the amount of expedited freight we used because that continues to be a major pressure on the organization.

Obviously, another one is just.

<unk>, we've talked about for years and Thats something that we have to deal with but what we've seen this year is obviously just like everyone else is inflation on other things non led.

And I think we've done three price increases already in our three lines of business. So far since April and we will continue to push these costs through it's just no one likes.

Suppliers don't like given us price increases and we certainly don't want to give them to our customers. It's just is the world. We live in right now and I think we're all hoping for a little bit of stability, but in general I would say the price stickiness is good I think.

Our energy systems business has a longer tail because of the nature of the businesses, so getting pricing from that piece of the business a little harder than the other two but that said all of our sales leaders are committed to protecting our our gross profit dollars.

The resin shortages was real acute problem.

90 days ago, when we spoke and it really has limited our ability to ship T. PPL, both in our specialty transportation business as well as our.

Okay.

Reserve power legacy Reserve power energy systems battery business.

And I really put one of our factories.

Especially in Q1 and Q4.

On their tail, because they just couldnt get enough product and so we.

Absorbed a lot of areas.

Happy to report that we should exit this quarter.

With enough resin for the rest of the year. So that situation has dramatically improved versus 90 days ago.

When you combine that with the.

The amount of semiconductors, we have in our revenue stream is different than other companies. So.

I would say in the first half Mike I would say semi conductors is equated to about 40 bps of gross profit pressure.

So far.

In H, one and it's really an issue.

Noah of mix, because a lot of our higher margin products were on allocation right now on some of these chips. So we can be doing a lot more we certainly have the backlog and.

And a lot of the shortages we've had that resins included have been for products that are on the higher end of our mix. So the mix has been dragged in.

And the chips situation I think our allocations are going up a little bit.

As we go forward per quarter, but that's that that one is something we have to adapt to I know that Europe and the engineering group had been feverishly trying to.

Redesign things in.

And our supply chain folks are jumping through hoops, and and obviously, we're having to do some spot buys that we don't normally do to secure some of these I mean, one of the things. We've talked about is we have to protect the customers throughout all of this craziness.

I was laughing at myself. This morning, I think our ops team has probably had more sleepless nights sort of post covid than during Covid, It's just been that sort of crazy environment right now but.

That said, we are hanging in there and we're still extremely optimistic about our end markets.

And in terms of the.

The sequential Noah you mentioned I would say, yes, we're definitely seeing some pressure in the second quarter sequentially from the from the DC fast charge.

Again, because of Covid, we re timed our our normal annual wage increase I would say, it's been 3% forever.

It's just been rate times and I wanted to make sure that we adjusted I think we're going to stick with this timing going forward Nellix. So we just wanted to call that out to make sure we have that.

We've got our normal seasonality in the second quarter as a lot to do with.

FX and so forth so that's sort of.

I think the supply chain pressure, we're feeling and then some of the sequential.

I would say really right now H, one and H two operationally feel pretty similar.

Just these other pieces to Q2 versus excuse me Q1, and Q2 feel operationally very very similar it's just that there's these other pieces, we just called out for the second quarter versus the first.

Okay.

That's very helpful. Dave.

You mentioned the stickiness of pricing.

Just given all of the costs that you're talking about incurring I guess, it's a little bit hard to see in the quarter as a result prices basically.

Flat and even in motive and specialty you know it looks like you're getting maybe a couple of million dollars of pricing benefit year over year.

Doesn't seem enough to offset some of these.

You have increased cost pressure that you're talking about so.

Help us understand the company.

You talked about 5% to 10% type price increases when do we start to see more of that price low and when could.

You'd be getting into a more favorable price cost dynamic.

Theres always a lag always between when when these things are executed.

It's Ben.

It's better.

A worsening situation in some of the commodity categories, it's been a stabilizing situation than others.

None of them have really receded so.

Executing prices, but the most recent one most recent price increase just went out.

Last week so.

Theres, just delays and how long it takes to get these through the system and I think it's it's a longer tail as noted on the energy systems business.

Relative to the other two businesses, Mike you want to add anything.

We expect price improvements in the upcoming quarter as much as $10 million.

Some of that is absorbed on some of the costs that are that continue to increase but by and large we have been running at about 20 cents of headwinds for the last two quarters as we looked at and some of those will be abating in the upcoming quarter and we've done a great job on things like resin shortages.

And ship shortages of doing workarounds and substitution. So we havent it hasnt had as big of an impact, but moving into Q2 from Q1.

Investment in the fast charge engineering cost the raise at least.

Temporarily I would say it would have a little bit of drag.

Seasonality will disappear.

Sure.

Okay. Thanks, I'll take the rest of my questions offline I appreciate it.

Thanks Dara.

Our next question comes from the line of John France, Europe from Sidoti you may begin.

Hi, John.

John Your line is open.

Our next question comes from the line of Brian Drab William Blair you may begin.

Hey, good morning, Thanks for taking my questions.

Hi.

Can you.

Hey, Mike.

Quantify it a little more specifically the <unk>.

Sequential impact.

Temporary issues from.

From first quarter to second quarter like the easy investment wave.

Wage increase.

In terms of EPS impact.

First quarter relative to second quarter.

Yes, no as Dave said.

The investment in additional engineering resources in the second quarter is about <unk> <unk> of headwind.

The annual increase in raises.

For that quarter is about six.

Okay.

Our normal seasonality and I will say that.

Our second quarter.

More often than not.

We report Q2 results, but that we expect to be about 5% to six.

Worth of drag.

And then as Dave mentioned.

There is two to three on the FX interest and tax rate below the op earnings line.

Yes.

Is it fair to say that when.

When we talk to I think Lance.

In may.

In EMEA probably.

That you felt like maybe other factors would overshadow that.

They kind of offset some of these headwinds.

The second quarter is shaping up.

Below where you would have expected previously.

Or is this kind of.

Kind of guidance.

Contemplated you think like that.

Worse.

In terms of your outlook for the second quarter since may.

Yeah, Brian This is Dave I'll start.

And I tried to make the point that I think operationally really H. One has been one set of circumstances. So there is no major changes there.

In terms of the seasonality in these things with pointed out yes, I guess that they've been there.

As often is the case as Mike said in the case of seasonality. The engineering certainly that's an investment we've signaled that we're really excited about this opportunity so.

Yes, it's really the first half has been.

Selling into some fairly strong headwinds.

I personally have a lot of optimism about the second half versus the first half I would say, we're going to have more <unk>, which is going to help margins, it's going to help revenue.

We should have less manufacturing variances.

Some of this covid stuff gets out of the way I think even though we're adding in this engineering.

Opex as a percentage of sales should.

Should stay in check in the second half I think we're going to come into the second half this.

This year with the strongest backlog, we've ever had going going into the second half so.

That's certainly can't be a bad thing.

I think as Noah and I were discussing earlier some of the pricing should start to catch up.

And I think that Hagen.

We haven't really realized much of those savings and we're going to start to feel that more acutely in the second half. So those are sort of my key reasons for optimism of course.

The supply situation as we noted in the press release is fluid.

You just don't know what.

That's going to further happened, but most of the Sigma and we've gotten some signals from our Oems I think the like for example, the semiconductor issue has been probably more of a downstream issue for enersys on an upstream issue because a lot of our OEM customers arent building vehicles at the rate they would like to simply because they can't get enough chips.

And we've had a few of them signal to us sort of give us advance warning that theyre going to ramp back their production rates higher in our fiscal second half than where they've been running in our first half. So these are sort of the reasons for optimism.

By no means are we discounting the pressures that we're seeing on the supply chain side, but you worry about what you can control and we're just we're trying to get pricing as often as we can so.

That's my best sense of of the situation Mike did.

Just anything there and then I think I think you've covered all the relevant items.

Okay, Yes.

This is.

It's such a challenging situation.

Middle of a global pandemic I mean, Mike area. David You mentioned you used the term post <unk>.

I don't know.

Everyone's feeling that way at the moment.

Yeah like cases cases in Illinois doubled again last night so.

I know, it's a tough situation but.

It's just like a stock analysts.

This is trying to model the second half of the year and right now the consensus estimate you know like the average.

EPS for the third quarter fourth quarter of $1.48.

And.

When we see the guidance for the second quarter I'm, just wondering can you make any comment as to whether.

And then the dollar 48, feeling like a stretch to me at the moment and I just wonder if you could comment on that.

Obviously, a much better visibility than that.

Well, Brian I think we've done a pretty good job of navigating covid for the last 18 months I'm, not saying that it's behind us clearly it isn't.

I think I think that is.

Okay.

Inflationary pressures is somewhat of a guess, we really just do not know how much more headwind. We have there is always a drag between some of what we incur versus what we can do in pricing, particularly in our order book.

Some of that pricing not all of it but some of it said others are indexed to things like led adjustments et cetera.

So there are plenty of things that you could say could make the second half.

Not as good as the analysts' expectations for age two.

But the demand for our product.

<unk> every line of business has been unprecedented.

<unk>.

Just for example, the drag we've had on resins that we really just kind of gotten behind.

To be able to unleash the TPP L capacity up to a 300 million per quarter run rate and get our Springfield plant two and its high speed lineup to full operational speed will have great benefits, which we haven't really enjoyed to date. So there are plenty of reasons for optimism.

<unk>.

The Hagen.

Factory, which as I said only just started to deliver benefits is going to start showing up on our bottom line and ever increasing amounts per quarter for the rest of this year. So.

There's a lot of things that we're excited about and there are some things.

They.

Are going to be a detriment there is some unknowns, we just can't comment on.

But I don't know that I don't think anyone here is ready to throw out age two and say, it's not going to be.

Step up that you expect that we would expect by Brian and Youre right. Its <unk> port poor choice of words on my part.

And we're living with the pressures every day I met.

That was really.

About the shutdowns that we saw last year and where.

So yes, we are very concerned about the delta variant in the Transmissibility.

I think I.

I am more optimistic than it was a year ago I think we've got protocols in place. We've got a fair number of vaccinated folks we've got a lot of folks that have had the virus already.

And I haven't seen any signaling from really any one about.

The draconian type of shutdowns, we saw a precipitous type of shutdowns we saw.

But I agree with you, 100% we are by no means out of the woods and.

And our EHS folks, we still meet on a very regular basis and review all the data. So that was a poor choice of words on my part.

Sorry, it wasn't meeting emphasized that I was just.

Obviously, it's still tough.

Situation and good luck to you guys.

Thank you.

And our next question comes from the line.

Jon Fredrik.

Sidoti you may begin.

Can you hear me now guys.

Yes, yes, we can.

Alright.

Thanks to the operator.

I want to go back to your commentary about the EV market.

When we get to an immense opportunity.

From my understanding I.

I think the original expectations were something around $100 million.

That changed and can you talk about the investment that's involved in the EMEA opportunity.

Yes, it's really exciting we've slated.

And again it was about three pennies of pressure in Q2 for additional engineering support we need on the on the systems integration side, we've got a launch customer that we're focused on.

And the forecasts are so big I don't even want to talk about it because it's just.

It's it's just unbelievably exciting, but that said our initial focus in the next 12 months or less is to secure an order for the first 100 systems and that 100 systems.

Could be.

Between 50 and $100 million depending on what.

Variation of the systems.

So the systems are just starting to <unk>, but then when you layer on the ability to really rapidly or a hyper fast charge, an electric car it really pushes the math over the top and we've just seen tremendous and our focus I know that the EV market is the wild west right now and we.

We're really trying to hunt with a rifle not a shotgun and we've really zeroed in on these commercial real estate partners that.

Have big portfolios, where they can benefit from the battery energy storage system. The energy systems, the demand charge mitigation in the emergency backup power, but then they also for their tenants are their clients want to offer fast EV charging as part of their services that they provide so.

We're locked in we've got a great software partner with.

And I'm, just really proud of my engineering team and how fast and how far we've come already and then I think a lot of what we're going to see hopefully this gets passed this is.

Stimulus Bill, but as you say there is an astronomical amount of funds that are going to be allocated towards EV charging.

The space, where we're trying to compete which is.

Above 50 kilowatt. So fast charging is 50 kilowatt, we're trying to or charges or more like in the 160 kilowatt range. So these are hyper fast chargers.

Much less crowded space so it's.

And we think the macros are lined up and in the end and we just had this discussion at the board meeting.

Last week, it's really in the end the system, we're putting together, it's batteries and Chargers and this is what we do is enersys, we do batteries and we do Chargers and and.

And the systems integration piece, we've come a long way over the last four years five years. So we're a different company and a lot of ways and it sets us up perfectly for market opportunities like this I think the other part of the stimulus Bill to that we mentioned were excited about is this rural broadband initiatives, that's really big for US, we're so well positioned.

And with the lax like Windstream century frontier, we're well positioned with the Msos Comcast charter Cox folks like that and these are going to be the big winners in this rural broadband initiative and then I.

I don't know if you've read the bill yet, but a lot of the it's fairly prescriptive on what equipment is going to attract subsidy has to be part of the core and all of the products that we do.

We make even really the new Corning.

<unk>, we've been working so hard on that fits right in the sweet spot of what this rural broadband build out is going to be like so.

The demand side of things the strategic plan, we've laid out the product portfolio.

We are really in tremendous shape. It just comes down to getting through this.

This period and I can spend the whole call complaining about it but there is no use and complaining about it we're just going to continue to fight through it Mike you want to add anything yes, and the other program that we mentioned that we're really excited about and it's probably the most immediate of all of them.

Is the California public utility commissions.

Backup for.

For that which is for US is just starting out as $50 million opportunity and it's providing turnkey operations in both with both lithium sales and our TPP L cells.

And this is for.

The cable msos and to keep their networks up and running in case of fires high winds et cetera. So.

That is something we're working on and finalizing some of the details right now and so there are a number of things and the last one.

I think most people know <unk>.

<unk> build out right now is kind of that mid spectrum at which we are participating in but the one that we're really excited about is the small cell at the ultra wideband, that's where we think things like the touch safe program is really going to shine. So there are probably five different projects, including the <unk> for rural Digitization.

<unk>.

Program that Dave mentioned, there is a lot of great things in energy systems coming down the road in the next three years.

Okay, and I guess more immediately when we think about.

The resin shortage.

<unk> line.

And you put in price increases.

Semiconductors.

<unk> impacted your higher margin products by 40 bps.

Think about the second half of the year and Thats <unk>.

Presumably behind you.

What kind of <unk>.

Most margin benefit we do anticipate from a normalization of those sales of those products.

I don't have that number in front of me, Mike Jeff that estimate for that.

We talked about the fact that just.

The drag we've been experiencing thus far from some of the lost sales of those products was about a 40 to 50 basis points improvement.

We probably incurred nearly 100 points basis 100 basis points drag.

Expediting fees and higher freight now I can't promise that thats going to.

Normalized or I don't know when it's going to normalize, but I don't see it staying at this sustained right. So.

There are and as we said the other things that we expect to see improving the manufacturing variances, which were kind of dragging back as these plants come out lower capacities and they step up their operating efficiencies Springfield's gets better you're going to see sequentially better manufacturing variances coming through on the P&L.

Opex should stay the same and even drive a little bit lower allowing us to make some of these investments in energy.

Engineering cost.

And the pricing will stick and it does take a quarter or two but we will start recovering on pricing and the Hagen savings are going to be.

There so.

I can't promise when it's going to happen, but there certainly is.

Enough opportunities to get over 200 basis points of improvement in margin.

Alright perfect.

Thank you very much for that color I'll get back into queue.

Okay.

Alright. Thanks.

Once again Thats star one for questions. Our next question will come from the line of Greg Lewis from <unk> you may begin.

Yes, Thank you and good morning, everybody.

Following up like on the energy systems I realize its kind of been picked over throughout the call.

But it's really that lag Tam on pricing.

It sounds like that's a quarter or two before is that the right way to think about energy systems or is it kind of longer lead times, just as we're thinking about inflation in the market for the last couple of quarters.

Just trying to just trying to understand just trying to understand that.

Probably a little more color there.

Greg I think that.

The energy systems business is a much different supply chain than our other two businesses.

Whether it's our old Purcell asset that we owned before the Alpha acquisition and certainly the alpha pace.

It has more semiconductor content, just a far more complex supply chain.

And.

And as we've talked about those long supply chain right now and getting brutalized shuttle longer the supply chain. The tougher it's been so whether it's freight expedited freight we couldnt, even get sea containers for a while we had product sitting in warehouses in China that we just could get so it's the length of that.

Supply chain and tariffs, obviously has been a major headache for us and we've been pushing really hard to bring that stuff closer to home and shorten up these freight lines and supply chains, but you can imagine during covid. It's just been it's been the wild west trying to get anything done with these contract.

These factors with all the supply shortages and so forth so.

It's just a much different business, but that said.

The outlook is fantastic and we just have to get through this period. Mike is there anything you want to add I would say that.

The.

Pricing in energy systems in some cases in our aerospace and defense tend to be fixed for a period of time.

Contractual period, maybe a year and there is little or limited ability to move pricing some of those agreements may have some.

Escalators, but.

There are some where youre limited by time in time for a certain amount of time to do any pricing motive power tends to be more adapt to changing quicker in the market but.

So we will come to a point, where those prices will be renegotiated those costs can then be recovered.

And Thats just things that we're working through on a case by case basis, I guess, the other piece of that and along that line is.

The energy systems business is dominated sizes very big customers, Comcast charter AT&T, Verizon T Mo sprint.

So it's just it's a very different business in that sense, but the we just need to manage through this and.

The upside potential in the long run is tremendous but Mike's point is right.

The price tail is much different than it is in the other businesses.

Yeah, Okay, Yeah, I appreciate that and then and then Mike.

Inventories went up sequentially was that largely on the back of those.

I guess pre purchases or inventory build in Nebraska.

Maybe the right way to think about that.

Well I would say that.

A couple of things number one given the size of our backlog and when our production planners look at the order book they start ordering product.

And.

Assume that the production plan can be executed so so whenever youre backlog goes up your inventory order process goes up in some cases, where <unk> seen some spot shortages you can find that they will try to cover with a little bit more safety stock. So some of that.

Offensive trying to just be have enough on hand, because sometimes just getting containers becomes a hit or miss things. So some of that is just.

Being prudent and some of it.

And I will say that typically our fourth quarter tends to be the low point on inventory and then it kind of starts growing throughout the fiscal year, but.

So it wasn't unexpected I would say that.

The two things we've probably done this quarter, we've made sure we pay to our suppliers on time, because we don't want to cause ourselves do dropped in anybody's priority list because.

Werent paying on terms.

And we in some cases order a little more than we need for a safety factor.

Yes, and then just and then just as I think about this obviously the supply chain issues globally or a mass I mean, I guess today or this morning, China announced another closing shutting temporarily one other board style is there any kind of way like as we think about your different segments, maybe which ones are more.

Suppose to the Asian supply chain and others.

Well as Dave just mentioned energy systems has the most exposure with the contract manufacturing other than that we try to build in the regions that we.

We sell in so we're.

We typically insulated and on for the most part on a batteries side, but when it comes to the electronics and chemicals manufacturing.

That's pressured mode with some charges and stuff, but it's manageable where the sales teams are doing a tremendous job of substitution. So it's four assets in es problems.

Okay, Great and then just one final one for me.

Just because it is.

It's good and hopefully largely good.

I'd like to think about that backlog.

Kind of hit us hitting that record level is there any kind of way to parcel out.

How much of that backlog is.

Is there because of supply chain issues I E would it be maybe five or 10% lower if you weren't having these issues now revenue maybe last quarter.

It would've been higher is there any kind of way to think about it like that.

Yes.

<unk>.

A good question I would say that when I pressed during our monthly business reviews with my leaders.

Pretty much tie most of this too.

Particular jobs and so whether it's a T mo cabinet, thats going out or or whether it's a.

Our motive power battery, that's tied to a truck.

It's mostly accounted for so I haven't been able to I try to pressure test that.

On.

But.

And Mike can certainly add some color here, but that so far we just haven't been able to to look for any.

Any real kind of softness in the backlog number and the one of the things and we tried to point out if in the worldwide industrial truck data, we see these unbelievable.

80 kind of percent growth rates on orders, but then the forklift market continues to.

The revenue so their orders are just like a mount Everest, but.

Their actual sales so our sales are really linked to their sales not to their orders were not going to the truck lead time is so much longer than the battery lead times. So that again gives me some comfort that we're just in a great demand environment right now Enersys is well positioned in some great Matt.

<unk> markets, and we just need to execute through the supply chain issues and keep our chins up and not get that.

That get to.

Dejected about it and stay optimistic and Thats what were trying to do Mike you want to add anything yes, our backlog is probably $200 million higher than it might be on a typical quarter historically.

And we've already said that theres, probably $10 million to $20 million that we leave on the table at any quarter from.

Missed revenue because of these shortages, we have been describing so you could probably take that off of backlog if you've executed.

There is probably some people ordering from us and other suppliers just to get in the queue, but I think thats fairly limited.

That might be 20 million 30 million. So collectively I think what's left is at least $150 million, which which to Dave's point reflects core demand that is real and that is a reflection of what the markets for our products are doing.

Okay Super helpful. Everybody. Thank you very much that's great. Thanks.

Thanks, Craig Thanks, Greg.

Thank you.

And I'm not showing any further questions in the queue I would like to turn the call back over to David Shaffer for closing remarks.

This concludes today's conference call. Thank you for participating you may now disconnect.

Q1 2022 EnerSys Earnings Call

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