Q2 2022 EnerSys Earnings Call

Good day, ladies and gentlemen, thank you for standing by and welcome to the energy second quarter 2022 earnings Conference call. At this time, all participants on a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During this session you will need to press. The Star then the one key on you touched on telephone.

Please be advised that today's conference is being recorded if you would go offer assistance. Please press Star then zero.

I'd now like to turn the conference over to your Speaker host today, Mr. David Shaffer, President and CEO. Please go ahead Sir.

Thanks, Olivia good morning, and thank you for joining us for our second quarter fiscal 2022 earnings call on the call with me. This morning is Mike <unk>, Our Chief Financial Officer, and Andrea Funk, our Vice President of finance of the Americas before we get started I would like to wish everybody a hat.

The veterans day.

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 <unk> Dot com.

I'm going to ask Mike to cover information regarding forward looking statements. Thank.

Thank you, Dave and good morning to everyone.

As a reminder, we will be presenting certain forward looking statements on this call that are based on management's current expectations 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.

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 October three 2021, which was filed with the U S Securities and Exchange Commission.

In addition, we will also be presenting certain non-GAAP financial measures, particularly concerning our adjusted consolidated operating earnings performance and our adjusted diluted earnings per share, which excludes certain highlighted items for an explanation of the differences between comparable GAAP financial information and the non-GAAP information.

Please see our company's form 8-K, which includes our press release dated November 10th 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.

Our second quarter results reflected a combination of record market demand across all of our segments with Q2, 'twenty two orders, 36% higher than the same period pre COVID-19 fiscal year 'twenty.

But accompanied by continued inflation and supply chain challenges, we reported second quarter adjusted earnings of $1, one per diluted share, which was a slight increase over the second quarter of last year, our motive power and specialty businesses delivered better than expected results, while energy systems continued.

To be disproportionately impacted by its Asia source supply chain.

Strong demand led to our quarter end backlog, reaching an all time record exceeding $1 billion, which is more than double normalized levels.

Backlog growth primarily occurred in our energy systems and specialty lines of business and is indicative of extremely robust robust end market demand over and above the COVID-19 recovery.

Let me take a minute to provide you some added color of the current economic environment.

As has been a common theme among most industrial companies. This earnings cycle, we are facing a number of challenges in the wake of the global economic recovery as the businesses aggressively compete for labor materials and transportation, all while still navigating isolated COVID-19 disruptions.

The trend we saw in Q1 has continued with nearly $20 million of sequential cost increases in freight wages led non led commodities and semiconductors.

Our team continues to take aggressive actions to mitigate these pressures, including the implementation of additional price increases resourcing of materials and engineering Redesigns as these issues stabilize our financial results will more fully reflect our record backlog enhanced profitability and across the.

Board demand for our products.

Now I'd 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 continues to see robust demand with Q2, 'twenty two order rates, increasing over 50% compared to pre Covid Q2, 'twenty, we saw exceptionally strong demand in <unk> mid spectrum and broadband.

Also received our first orders for the California public utilities public safety grid shutdown extended network backup program shipments for these orders are expected to ramp in Q3 Q4 and into fiscal year 2023.

In addition, we believe these programs may be extended to other states presenting another opportunity for future growth.

Countering this strong demand is the fact that energy systems has our longest and most complicated supply chain, which was therefore, the hardest hit by the macroeconomic environment in the quarter.

Energy systems price recapture cycle is longer due to the project nature of this business, while working through the contractual obligations of its lengthy backlog.

As a result in Q2 ongoing pricing actions lagged inflation and were largely offset by mix with more service revenue offsetting higher margin electronics orders that could not be shipped or could not be delivered due to chip shortages Terra.

Tariff mitigation strategies, including our efforts to move contract manufacturing out of China and closer to home continued to be slowed by semiconductor availability.

<unk> cost for energy systems alone rose sequentially, an additional $6 million in the quarter doubling the prior year level.

While energy Systems' operating earnings as Corning quarter were disappointing market demand and macro trends combined with additional price increases and the resources Resourcing of electronics still point to an extremely positive long term path for the business. However, due to the current state of the global supply chain, especially.

Availability of semiconductors.

Our third quarter will remain challenged.

That said as many of our commodities inflation trends appear to have peaked we're confident our price recapture initiatives will catch up in the near future.

Please turn to slide five.

Despite the challenges we noted in our energy systems business one of <unk> core strengths is our diversification our motive power business continued its positive momentum during the quarter.

Performing both topline and profitability expectations as demand returned to pre COVID-19 levels.

Revenue decreased $15 million from Q1 due to the traditional European summer holidays. Nevertheless, we believe this business has not yet reached its full potential as our OEM customers demand has been hampered by their ability to secure chips.

Margins improved as a result of price and mix improvements as well as ongoing opex efficiencies with motive power enjoying nearly 20% higher operating earnings in the same pre COVID-19 period in F. 'twenty.

Our next <unk> T PPO and recently released lithium variance continued to generate enthusiasm in the market.

In addition, the restructuring of our Hagen, Germany facility nears completion ahead of schedule on cost and timing with savings beginning to be realized we will also continue to extract additional savings with further standardization of our less legacy product offering and other business transferred.

<unk> initiatives, we remain well positioned to benefit from a steady recovery in this business throughout the balance of the fiscal year.

Please turn to slide six similar to motive our specialty business delivered a solid quarter A&D is performing well and demand in the transportation business remains extremely strong so it only by T PPL supply constraints in Americas and Europe.

We expect very robust transportation growth in Q3, as a result of our focus on aligning capacity with demand and our belief that the truck market will continue its growth into calendar year calendar year 'twenty two as a result of the improving economic.

The improving economy and their anticipation that chip shortages will improve.

Our thin plate pure lead production capacity continues to grow and we will exit the fiscal year at our planned run rate of $1 $2 billion per year.

The financial performance for TPP manufacturing has been under significant pressure all year long with Covid related staffing and supply chain shortages hampering productivity, we expect significant reductions in manufacturing variances next fiscal year as the supply chain issues slowly subside.

Reduced manufacturing variances combined with a record backlog and continued strong demand signals from our transportation customers gives us immense confidence in the future of our specialty business.

Please turn to slide seven.

Our product roadmap is one of the most exciting areas of our business as the technology advancement of our product pipeline has been long in the making but well worth the wait.

Fully launched 11 lithium variance for motive power group and continue to expand our product portfolio.

We have received OEM approvals and the family has successfully completed all with testing.

The demand for lithium products throughout our energy systems Group also continues to grow and.

In addition to the lithium portion of the California, PUC success mentioned earlier telecom and residential home energy products are all performing well on UL tests progress on the development of the touch safe product with Corning continues to go well customer plans for their high frequency networks using this solution.

Our accelerating.

Last but certainly not least our EV fast charging storage initiative is quickly moving forward feedback from our potential launch partner customer has been very positive, including speed and development as well as the level of software maturity.

We should see our first revenue for this product next fiscal year.

<unk> charging is a key focus of the recently passed infrastructure Bill.

Please turn to slide eight.

Looking ahead, our near term challenges revolve around addressing global supply chain issues as well as rising commodity and labor costs and shortages. We are actively working to mitigate these pressures through incremental price increases alternative sourcing engineering, redesigns and aggressive hiring actions.

We will remain nimble as we adjust to the changing environment.

Despite these hurdles there was a lot about enersys to generate real excitement current demand for our products is greater than I can ever remember fueled by a massive <unk> buildout and high growth categories, such as transportation, our future growth opportunities include significant investments in rural broadband high frequency small cell.

Deployment, EV charging home energy storage transportation market share growth increased defense allocations and material handling Oems returning to normalized levels.

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

I'll now ask Mike to provide further information on our second quarter results go forward guidance.

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

Our second quarter net sales increased 12% over the prior year to $791 million due.

Due to an 11% increase from volume and 1% from price net of mix.

On a line of business basis, our second quarter net sales in energy systems were up 9% to $370 million.

Specialty was down 3% to $101 million in motive power revenues were up 22% to $321 million.

Motive powers improvement was mostly from 20% growth in organic volume and 2% improvement from pricing.

The prior year motive power second quarter revenues were significantly impacted by the pandemic, resulting in a 21% decrease in organic volume.

Our motive power revenues for each one of this year, however are comparable to the pre pandemic levels two years ago.

Energy systems had a 9% increase from volume as well as a 1% improvement from FX.

But had a 1% decrease in price after including negative mix specialty had a 5% pricing improvement that was offset by an 8% erosion in volume due largely to delayed shipments.

We had no impact on revenue from acquisitions in the quarter.

On a geographical basis net sales for the Americas were up 14% year over year to $550 million with 14% more volume EMEA.

EMEA was up 5% to $180 million from a 3% increase in volume and 2% in pricing.

Asia was up 10% at $661 million on 7% more volume and 3% currency improvements.

On a sequential basis moving to slide 11, our second quarter net sales were down 3% from the first quarter largely due to the normal vacation holidays in Europe and supply chain shortages.

On a line of business basis specialty decreased 6% with supply constraints pushing out order fulfillment into Q3 motive power was down 5% due to the European holiday season previously mentioned.

And EMEA was flat excuse me energy systems with sweat.

On a geographical basis Americas was also relatively flat and Asia revenues were up 8%, while EMEA was down 11% mostly from lower volumes.

Please now turn to slide 12.

On a year over year basis, adjusted consolidated operating earnings in the second quarter decreased approximately $5 million to $61 million.

With the operating margin down 160 basis points.

On a sequential basis, our second quarter operating earnings dollars eroded $14 million from $75 million, while the OE margin.

Decrease 150 basis points to seven 8%.

Primarily due to the persistent supply chain headwinds and inflation in energy systems, which Dave has addressed.

Operating expenses when excluding highlighted items were at 14% of sales for the second quarter compared to 15, 7% in the prior year and 16, 1% from two years ago as our revenue growth exceeded our spending growth and we have maintained a more efficient operating leverage.

On a sequential basis, our operating expenses were relatively flat.

Excluded from operating expenses recorded on a GAAP basis in Q2, our pretax charges of approximately $12 million related to $6 million in alpha and Northstar amortization and $4 million in restructuring charges from the previously announced closure of our flooded motive power manufacturing site in Hagen.

<unk>.

Excluding those charges, our motive power business generated operating earnings of $41 million or 12, 8%.

Which was 370 basis points higher than the nine 2% in the second quarter of last year due to stronger demand in.

Easing of pandemic related restrictions favorable mix from maintenance free growth and ongoing opex constraint or restrained.

Operating earnings dollars for motive power increased over $17 million from the prior year and $6 million from two years ago.

On a sequential basis motive powers second quarter OE decreased 220 basis points from the 15, 1% margin posted in the first quarter due to the vacation season volume decline noted earlier, along with higher led and other input costs.

Energy systems operating earnings percentage of two 3% was down from last years eight 8% in the prior quarter's three 5%.

OE dollars, a $9 million were $5 million below last quarters last quarter and $22 million below prior year costs from higher freight tariffs and materials caused erosion.

With unfavorable mix from supply shortages offsetting the lagging pricing improvement realization.

Specialty operating earnings percentage of 11, 8% was up from last quarter's 10, 6% in last year's 11, 4%.

<unk> dollars were largely flat sequentially and year on year driving the margin improvement from improving pricing was the lower sales volume.

Please move to slide 13.

As previously reflected on slide 12, our second quarter adjusted consolidated operating earnings of $61 million was a decrease of $5 million or 7% from the prior year. Our adjusted consolidated net earnings of $44 million was in line with prior year, but $11 million lower than the prior quarter.

Adjusted net earnings reflect the changes in operating earnings along with a lower adjusted tax rate.

Our adjusted effective income tax rate of 16% for the second quarter was slightly below the prior year's rate of 17% and lower than the prior quarter's rate of 18%.

Discrete tax items caused most of these variations.

Second quarter, EPS rose slightly year over year to $1 <unk>, although it was slightly below the bottom of our guidance range. We expect our weighted average shares in the third fiscal quarter of 2020 to be approximately 42 $5 million versus the $43 three.

<unk> million dollars in the second quarter.

As announced in our subsequent events footnote and last nights press release, we acquired nearly 743000.

Shares for just under $57 million after the second fiscal quarter ended.

Our board of Directors also recently renewed the $100 million share buyback authorization, we had in place over the last two years that was completed with these recent October purchases last week, we also announced our quarterly dividend, which remains unchanged from prior levels.

Slides 14, and 15 reflect year to date results and are provided for your reference, but I don't intend to cover. These at this time. Please now turn to slide 16.

Our balance sheet remains strong and positions us well to navigate the current economic environment, we have $408 million of cash on hand, and our credit agreement leverage ratio is now at two <unk> times, which allows nearly $550 million in additional borrowing capacity in July we extended and amended.

Our credit facility on favorable terms, which now is in place through 2026, we expect our leverage ratio to remain between two point.

<unk> and two five times in fiscal 2022.

Our year to date cash flow from operations was a negative $66 million.

Included in that amount was $28 million in spending on the previously announced restructuring of our Hagen, Germany motive power plant, which is in the second quarters, which in the second quarter started delivering on cost savings that should exceed $20 million annually. The.

The negative operating cash flow was also due to our inventory expanding $123 million to meet rising revenues as well as from higher input costs and transit times, along with the other inefficiency inefficiencies induced by supply chain disruptions.

Capital expenditures of $35 million were in line with our prior guidance, our capex expectation for fiscal 2022 remains approximately $100 million and reflects major investment programs in lithium battery development and our continued expansion of our <unk> capacity.

We anticipate our gross profit rate to remain near 22% in Q3 of fiscal 2022.

As David has described all three of our lines of business find their products in high demand near term supply challenges are restricting our ability to execute fully on these opportunities as a result, our guidance range of <unk> 96 to $1 six in our third fiscal quarter of 2022 reflects the.

Pact of these supply chain challenges, which we continue to see as temporary.

Please move to slide 17.

On a longer term basis, we recently renewed our reviewed our updated five year plan with our board of directors, we remain confident that our topline growth and overall profitability goals are still achievable with respect to the final years deliverables. However, those targets as previously communicated.

We'll take an additional year to be achieve compared to our investor day model in reflection of the delays the pandemic and supply chain challenges have had not only on our own progress with that of our customers and their broader markets now let me turn the call back to Dave.

Thanks, Mike.

Before we open the line for questions I would like to discuss an announcement, we made last night, along with our usually usual filings after more than 25 years with the company and 12 years as Chief Financial Officer, Mike has announced his intention to retire at the end of this fiscal year.

While we will Miss his wisdom and experience we are very confident that Andy Frank is the right person to fill this role and help enersys complete its transition from a battery maker to a world class energy systems leader.

Operator, we will now open the line for questions.

Thank you, ladies and gentlemen, I'd like to ask a question at this time you will need to press. The Star then the one key on your Touchtone telephone.

So are we talking a question press the pound key.

While we compile the Q&A roster.

No first question coming from the line of Noah Kaye with Oppenheimer. Your line is now open.

Good morning, Thank you for taking the questions and I'd start by congratulating Mike on his upcoming retirement.

Andy on her.

Succession in the role.

Good luck to both of you.

Thanks, Mike.

Thank you. Thank you.

So.

Maybe just focusing on energy assistance to start and this is I know a little bit of a high level question, but how do you think about.

Surely improve energy system to make it.

Quality business is more predictable and margins.

Better ability to pass on cost inflation.

<unk> cost headwind that were in this segment this quarter, maybe outsized ramp.

Rapid inflation, but.

Not having the ability to get price and obviously dealing with <unk>.

<unk> supply chain constraints.

How do you think about improving this business over the long term.

Yes.

Thanks Noah.

This is Dave.

The challenges in a lot of way starting with the tariff pressures.

And then sort of.

Continued to grow headwind wise with the shortages were experienced in the supply chain challenges, so and they are all sort of mixed together in that.

We've had difficulty with our onshoring of some of the products a significant number of the products.

Due to semiconductor availability so.

This business is different than the other businesses largely based on its supply chain.

And then the content of semiconductors.

In this business is much richer.

No.

Two to improve the quality of the business kind of what we're trying to do first and foremost is what we can control which is pricing.

And the price increases we've been enacting.

Our lagging the rate in which inflation has been increasing so we've been chasing it for a while.

That's.

<unk>.

In terms of the competitive landscape Theres no reason to feel of our competitors have any less susceptibility to these pressures. So it's just a question of staying at it and I think what's in this business compared to the other businesses.

<unk>.

The it's more of a concentrated customer base.

So I think thats part of the challenge has been.

Pushing through and I think.

These customers were able to.

Stiff arm us a little bit longer than some of our other customer bases are but that said.

We're past that phase now so we've got to get the prices.

Where we need them to be to offset the inflationary pressures. So the next piece and this is really can't be.

Overstated.

A lot of our margin comes from the higher mix content of our electronics products and that mix has been.

It's been hurt our mixing this business has been hurt due to the constrained availability of these higher margin products. So the businesses.

Is unbelievable in terms of the demand side and we're filling the portions of the orders that we can so a lot of service work batteries. Some enclosures, but these are these are the lower margin pieces of the business. So I think that as semi conductor availability improves and we are addressing that.

<unk> significantly I think we've.

We're up to over 10% of our engineering resources now have been refocused off of new products onto redesigning to build our products around more readily available semiconductors. So that's been a big initiative for us and Thats going to help in not only the energy system.

Business, but also on the on.

The motive power business. The charger the electronics is a smaller piece of motive, but still very important to the margin. So.

I think price recovery.

And then the <unk>.

Next phase, obviously is an improvement in mix and when these two pieces improve I think when you couple that with the.

Strong backlog.

<unk>.

I think well controlled operating expenses.

I think youre going to see a dramatic improvement in these results.

No. It was there any more color you needed on that question.

That's very helpful. Thanks.

I guess staying with the topic.

Yes.

Moving revenue capacity and improving mix TPP.

You hear that.

You're exiting the year on track to exit the year at target.

As you think about the revenue uplift on that maybe you want to look at that as something for 20 for next year.

I guess, what what are the implications in terms of revenue uplift and what are the implications for the OE dollars. Because obviously there is some mixed benefits with that and Theres also.

I think further reduction in manufacturing variances. So if you can quantify any kind of components of that for us I think it would be very helpful.

Well certainly the manufacturing variances, it's been a very significant headwind this year so.

We're fighting our way to the $1 2 billion it's Ben.

Without the productivity, we've got substantial improvement I don't have that number at my fingertips as to dimension that but it's in the tens of millions of dollars.

The headwind we have been.

Constrained with this year I'm sure Mike can jump in here in the second in and help out with dimensions on the manufacturing variance piece side.

And then one of the things that we and this is something thats.

It's one of the advantages we have in the business as we've had dramatic resin availability issues in our energy systems business, which has hurt.

Then on the mix side, it's beyond semiconductors, theres been a mix issue, we've been able to offset that by rotating some of that capacity into our specialty business to help on the transportation side. So.

I think as the resin availability.

Proofs.

Certainly that's going to help and be part of the mix story on the energy systems part of the business. Mike do you have some dimensions for us.

On the TPP L question, No I would say.

We will exit the year at about a $1 $2 billion capacity rate, but obviously that means that sequentially going into next year, we should have $2 million to $300 million of additional <unk> revenue now.

Except in the case of motive power we do.

Don't have any flooded variance that go into the specialty transportation market.

Or in energy systems, because we for the most part sell exclusively <unk>.

Not a swap like you might find in motive power, where we're taking flooded motive power in perhaps selling a maintenance free solution of <unk>, where you would get.

<unk> and incremental margin improvement over flooded going to <unk>. In this instance, it's really just sales that we would.

So you can capture with.

This increase in market share, which is really what we are doing is taking more market share. So if we get that kind of number.

And you put down that you were talking about.

The amount of.

The improvement itself is pretty substantial.

We can get the variances down the integration you get the incremental sales of additional TPP volume. Then then you are talking about probably 50 plus million dollars of operating earnings on a full year basis.

It could be higher depending on how well we execute.

That's very helpful.

These two levers.

<unk> and energy system.

I mean, there is there.

A clear path to increase the operating earnings.

The coming years I think.

The last question really is around the EV charging opportunity.

So it's good to hear that you're expecting some sort of revenue next year can you just.

Give us a little bit more color on where you are at in the development of the program.

Some of the things you're doing to make sure that.

The storage system, plus the charging infrastructure.

Deliver spec for the customer.

And any kind of additional color on specific timing within 2023 would this be sort of.

But that back half of the year.

Sure, let me kind of re summarize that project. So we put together a system that is an energy storage of battery energy storage system, it's behind the meter. So it's on the customer side of the meter and it's between let's say 350, and 500 kilowatt hours of battery energy storage, So picture looks like.

Have a seat container sized.

Battery system, and so that energy storage system is also connected to some 160 kilowatt charging pedestals and so we can use those charging pedestals to provide very rapid charging for electric vehicles and our targets so far for the system.

Is.

Marshall Real estate partners that have the.

Enjoy the benefits.

The mixed use of this system. So they can not only enjoy the energy storage system in terms of peak shaving and solar renewable integration.

Emergency backup power, but they can also use the battery to provide very rapid charging the fastest available charging for their EV clientele that that want to charge their battery at the highest possible rate. So in most cases 99.

<unk> of the time, our system will be able to provide more charging power then the vehicle is capable of accepting so.

It's a nuanced focus that we're going after this isn't a big.

B to C change, we have limited number of partners.

The project is moving exceptionally well we had a good review of the project status with the board.

Recently.

Our CTO.

<unk>.

Again as I noted earlier by focus as the initial $100 million plus.

Order for the trial phase and that $100 million looks like it's going to start next year, which we're very very excited about so.

It's excellent progress and as you may have noted.

There are significant levels of.

Our committed dollars in the recently.

The house passed infrastructure Bill.

A dedicated towards energy towards electric vehicle charging and on top of that there's also a tremendous amount of monies available.

In that infrastructure bill to grid modernization and a big part of grid modernization is going to be the introduction of energy storage system. So that you can.

Separate when you make electricity versus when you use electricity. That's the beauty of these energy. These battery energy storage system. So I think theres a lot of.

Potential that bill took a little longer to get through than we had expected, but the pieces that are important to us.

Are very solid.

While we're on the topic of that Bill one of the most important parts of that Bill that just comes straight into our business is the $65 billion, that's dedicated for rural broadband initiatives and.

In my experience for many many years you have to figure at least to at least 2% of that 65 billion is going to be related to power.

And so we have that we're extremely well positioned.

And providing.

Vast array of power solutions.

For our broadband customers to.

To help as they pushed their networks deeper and closer to Rural America. It's a project, that's near and Dear to my Heart frankly, I think it's a tremendous.

On level, playing field between Rural America in urban and I Couldnt support this project.

More fully so theres a lot of good things even beyond that arent off the.

The energy grid improvements and then finally, the electric vehicle charging I think the infrastructure Bill is well matched to our investors.

Great. Thanks for all the color.

Thank you.

And our next question coming from the line of Greg with the coffee with Webber Research. Your line is open.

Hey, good morning, everyone. Thanks for taking the questions.

Good morning, I was wondering if you.

Good morning, I was wondering if you could speak to the energy systems backlog.

Is that strength, mostly attributed to pent up demand from the supply chain headwinds that we've been seeing or could this maybe be the start of the inflection point the hockey stick or is it some combination of both.

It's mostly theres two major pieces to it.

One is orders for power systems for mid spectrum <unk> build out so our customers are building out the mid spectrum right now.

They're installing you can envision a maybe like a refrigerator size cabinet that is filled with electronics and batteries and they are using these cabinets to provide power and backup power to their <unk> antenna. So that's that's a big part of the backlog and then the other another big.

Chunk of the backlog.

Is related specifically to the California public utility public Utilities Commission program as you know the wildfires in California have created the need for PGM and others too.

Cut power.

To prevent additional fires, so and it's very frustrating for folks who live out in California to lose power, so often and sometimes these power outages are long depending on the wins and the weather conditions. So Cal.

California Public Utilities Commission has mandated that the anybody providing lifeline 911 services.

Provide a much longer extended backups. So in the past one of the options. Obviously was using generators for these extended backups, but I know, there's some concerns about generators and.

Potentially.

Putting into these fire hazards situations. So a lot of our customers are opting to use batteries. Instead, so that's a big chunk of the backlog as well.

And then not in the backlog, yet but should be starting.

We're getting much stronger signals that some of the small cell <unk> projects are starting to heat up a little bit so that's.

That's a more of that piece of the <unk> isn't in there it's mostly right now in the backlog, it's the <unk> spectrum.

And then to your question.

We use for a lot of the systems businesses, we use contract manufacturers. So theres a lot of capacity for us to do more on a revenue basis, what's constraining things right now is the availability of the semiconductors. So what a lot of the semiconductor disc.

Distributors and suppliers are doing is allocating their supplies based on your historic usage patterns.

And our allocations are preventing us from achieving the revenue. So that's part of the reason. This is building up as we just can't get enough chip. So as I noted our engineering Department is working very hard to redesign our systems around chips that are more readily available some chips.

Or you can get in some chips you have to wait a long time on depending on whether theyre, a b or C items at the foundry.

So that's a big part of the initiatives. So once we can get our designs around available chips, we're going to be able to ramp up and then part of our ramp up on contract manufacturing is onshoring that to avoid some of the tariffs we've historically.

Paid to contract manufacturing from China. So a lot of a lot of our historic contract manufacturing has been Chinese based in and that's part of the.

Pressure I had mentioned to know earlier part of the pressures, we haven't been able to unwind ourselves from that simply because our onshore contract manufacturers can't get an allocation of the chips they need.

For our products, so it's a bit frustrating, but it is going to improve and we're very excited about our ability to flex up on that contract manufacturing piece.

Got it okay. Thanks.

Could you could you comment on the recent delays we've seen in the <unk> rollout for the airline safety issues.

Something that could evolve and end up impacting demand in 2022 and beyond or do you think it's more short term in nature.

This I don't think this is the first time. This concern has been flagged I think this is.

And the feedback we've received from our customers is that.

They don't expect to be.

Long term disruption to the business and its related specifically to one of the frequencies that they're building out so they have different.

The C band, obviously and Theres other frequency as well and it's possible that that may.

People to rotate more focus on some of the small cell construction.

As well, which operates at a much higher frequency, so but no I haven't heard anything from our salespeople are from drew or anybody yet about that being viewed as a long term concern.

Okay, great. Thanks for the color and Mike and Andy Congrats to both of you.

Thanks, Thanks, Greg.

And our next question coming from the line of John <unk> with Sidoti Your line is open.

Good morning, everybody and congrats Mike and Andy.

I'd like to start with the motive power business, a good quarter I'm curious whether or not this is a recovery of some pent up demand from last year or has there been a meaningful change in the order trends I know there was once a time used to talk about global order rates as that move meaningfully in recent months.

I would say that what we're seeing in motive is sort of getting back to normal I don't know that from a backlog perspective, an order rate perspective.

That you are seeing much when you.

Just told my people I don't even look at the Covid year anymore, I don't want to I don't use it as a reference or a measuring stick for anything so I make everybody go back a year prior and what we see mostly the biggest storyline in motive from my perspective is that our Oems our OEM customers.

Our very constrained on their ability to ship and they are having massive semi conductor and other supply chain issues.

I am very sympathetic and so their build rates are still below.

Normal levels and that so as their backlogs they have a big backlog of which we haven't seen any orders yet for the batteries to go along with that so they need to dig out there working with their suppliers. Their engineers are doing the same thing RSR redesigning things.

There is some runway left in the backlogs that our OEM customers have.

And.

And then to your point.

Don't see motive.

Just to me motive is just getting back to where it should be and.

It's much more of an acute issue in an energy systems in terms of the semi conductor content, but as I noted earlier motive has not been immune to that there is.

Been a lot of emotion and teeth gnashing, even in the last week about may.

Making sure because the margins on these products are accretive.

We Miss the mix impact so so part of the upside we havent motive yet to come is as the Oems getting back on a stronger footing improve.

Improving our mix with some more charges and then Sean who's leading that business has got a very keen focus on operating expense efficiency and modernizing some of the things that I noted in my prepared remarks.

Some standardization initiatives, we have so we still have a tremendous amount of runway left on that business with Barrick.

We're excited about.

Okay, and maybe just for my clarification.

Something earlier.

<unk> transportation.

Product line, how much of that product is sold directly to Oems and how much is sold through retail channels.

So.

Historically, our focus as we've noted in prior calls is a lot of it was with the truck Oems factories right.

Alright.

We've rotated two because the truck build rates. This year has been a little similar to the forklift market.

Truck build rates are not yet back.

Where they've been focused so what our sales teams have done is they've put more emphasis on the what we call. The OE S. It's the operating <unk>.

Original equipment service groups, so that's been a tremendous opportunity so.

They are both for OEM customers, but one for the factory and one has been on the service side and then in addition, as we've noted but we just haven't had the capacity to fully.

Realize yet is there is a tremendous amount of opportunity in the premium automotive space and Thats. So if you remember from the Investor Day, We said our target is to achieve 20% market share in the.

Class eight market in 2% market share in the automotive and I still feel extremely confident that we're on track to achieve that as we bring on additional <unk> capacity, Mike do you want to add anything.

Can say John the one thing you have to keep in mind on the truck OEM market is that oftentimes.

We focus on some of the big fleet operators and leasing companies and they're really the ones that are driving the TPP yield demand at the OEM level, because they are requiring the manufacturer of that vehicle to put our batteries into it. So it's that pulled through that is really.

To us the Oems themselves generally oftentimes don't have a great deal of incentive to put in a superior battery because of the poor or the battery the more likely they're going to be back at their oes level, replacing them out sooner. So we focus on the pull through from the customers themselves.

It's a good point Mike.

Thanks that helps and just one question kind of bug you.

Maintained your Capex number at a $100 million, but it looks like you only did about 35 million in the first half.

The sizable step up in the spend what are you spending it on is that money going to.

Well it remains the biggest line item is still the TPP L. Buildout.

Some of those those chunks or a little choppy in terms of when those.

Suppliers and equipment makers are delivering on their milestones so.

Our expectation is that we will fully use up the $100 million. Although it would look like the run rate would appear that thats not the case, but we're still fairly confident that that's based on the projects that we have and where we see them progressing that we will spend all of the $100 million.

So where do we stand in the TPP build out what's the kind of run rate we are at today.

Alright.

<unk> right.

Right now we've.

We're going to exit this year at a $1 $2 billion revenue run rate and the Max as we're building out an additional capex is going in.

Working to a $1 6 billion dollar number and Thats been previously communicated so alright.

That's where we've been at.

That's those are the those are the right figures yet another color I think Mike had.

$200 million increase a little more than that but it's actually a little higher because of some of the price increases.

And getting with declining that's true okay question.

Hey.

Okay. Thank you guys for taking my questions.

Thanks, Jeff.

And our next question coming from the line of Greg Lewis with <unk>. Your line is now open.

Great. Thank you and good morning, everybody and congratulations to Andy and Mike Thanks for helping.

Helping me over the last couple of years.

I guess my first question is around.

Very well very well publicized everywhere.

Transportation supply logistics remain a concern are done are remain a concern.

Is there anything that Enersys is thinking about in terms of trying to.

Minimized.

Those risks I E, maybe looking at potentially doing.

Medium or longer term.

Just the transportation agreements really what I'm trying to understand is.

Clearly the quarter was hurt it looks like next quarter is going to be hard.

Is there any kind of way, we can think about maybe.

Returning to a more normalized supply chain, where your margins arent getting sticking by that.

Well.

We had noted in the prepared remarks, a lot of the things we are doing so on a semi conductor availability we're trying to.

Redesigned products around more readily available chips. So that's going to help mix, that's going to help the top line as well.

As the onshoring has been a big big issue with the tariffs.

And we think that once we can free up and get our products designed around more rental readily available chips, that's going to accelerate some of the onshoring in terms of the freight that one has been particularly frustrating I had a call with the CEO of one of our contract manufacturers in Thailand.

And.

I was talking about chips and he was talking about freight so I mean, the freight piece has been.

Unbelievably.

<unk> added a lot of inventory to our balance sheet.

Pressured the P&L, we told you that it's been staggering now again, we're not unique in terms of an Asia based supply chain for a lot of these systems products, so but to your point, we're always going to be chasing the price increases until we get a slowdown or an inflection point.

So as.

The biggest things we're focused on right now in terms of innovative.

Thinking on freight and freight agreements.

I don't have any good specifics for you I'm certain our transport.

Team is is doing what they can.

And I'll try to come back with what.

What some of the initiatives they have but in general the.

The freight lines.

Both air and sea are just congested the ports are congested and thats been a big frustration for all of US Mike do you have any insight yet.

Greg with the price of diesel going up it's.

And labor for those drivers.

No.

The truckers are under rate pressure and they're passing it through in most of our focus has been how can we be more efficient in our transportation. So we're looking at all the ways, we move our product between our factories make sure that we source as close to the point of the end customer as possible. So that's really where we're trying to focus on.

As planned smarter. So we don't have to be so susceptible to the freight.

Okay, Great and then just one more for me I mean in.

In the presentation, you talked about the lithium bearing gaining acceptance.

Yes.

Any more color you can kind of.

No.

Provide there like maybe how we should be thinking about.

Maybe calendar, you're pointing to in terms of maybe a shift.

Business shift mix there in terms of the lithium acceptance.

I think from a margin perspective.

In the in the inside years.

There is not a mat and not a huge difference between lithium and flooded so.

<unk>, obviously is as our best.

Most favorable on the on the GP line, so the the rate at which our lithium build that again part of our challenges with the lithium program is to be fully transparent.

Is that the BMS, which is the battery management system.

Have semiconductor availability issues, as well and electrical component issues as well, which is a constraint so.

So some of that.

The rate of market acceptance of the lithium.

I think it's.

It's.

We don't.

The industry statistics don't indicate us losing.

Tremendous amounts of flooded share and the rate at which we cannibalized and move to lithium.

It's going to be somewhat.

Governed by the availability of semiconductors and I am certain.

All of our competitors have the same sorts of challenges so that may slow down things a bit and I think one of the other challenges obviously for our motive power customers.

They're just under such tremendous pressure right now with their own supply chain issues.

Things are just a little bit backed up so.

The point for you is whether we're selling flooded TPP L.

Our lithium we still have very very good prospects in the motive business and the rate at which that conversion takes place.

We're just really maybe dictate some of the longer term cash needs we.

We might need for footprint rationalization in the long run, but in the foreseeable future.

All of our factories are going to be busy.

Great to hear thanks. Thank you all very much for the time.

Mhm. Thank you.

And as a reminder, ladies and gentlemen to ask a question you will need to press. The Star then the one key on your Touchtone telephone.

Our next question coming from the line of Brian Drab with William Blair. Your line is open.

Hi, Good morning. This is Blake Keating on for Brian.

Hello, Blake Blake.

I was just kind of curious what is the outlook for four year port with battery business over the next several quarters.

Have you noticed that.

Simply losing share to other lithium battery providers.

In the pork with another market.

No I would say our business is right now as we noted is in pretty good shape.

The mix has been hurt because of the electronics availability for the Chargers more so than with the lithium batteries.

We are very solid.

Backlog prospects, our quote log our quote log for lithium is very big and our sales force.

CRM.

There's plenty of opportunities out there right now it's just a.

We're in a bit of a supply.

Constrained situation.

But Blake I am not.

I'm not aware of any.

<unk> changes recently or share changes the industry statistics I receive on a fairly regular basis don't indicate any major shifts so for us. It's just motive is sort of getting back to a normal footing.

I think.

Love, what we've done over the last five years on the product.

Positioning in and.

And then I really like what Sean is doing on the Opex side. So.

I think again I think the outlook is going to improve as semiconductors improve and I don't certainly.

You never want to stick your head in the sand, but I'm not aware of any significant share losses to competitive lithium products that have changed in the last six months or eight months or however long.

Alright, thank you for the detail.

And then have you noticed any.

Systemic limitations to your visibility compared to like a normal supply chain environment.

Just kind of pop up that you did it that you don't normally see.

The environment.

I think.

I think surprises is a word I hate it.

Unfortunately, as a as a new part of reality when we're setting these forecasts and so forth things Ken.

Come up a lot of it's freight related a lot of its port congestion related things that you think youre going to ship this quarter arent.

And one of the biggest pressures and Mike was talking about how significant the manufacturing variance pressure has been this.

Fiscal year to date is one of the reasons is because of the significant number of changeovers, we're forced to do.

Because parts just don't show up so you changeover you set up the line you're getting ready to run something and then it doesn't show. It also creates inventory mismatches, where you order.

Lids and boxes and parts for one thing because youre going to build something and then a certain terminal doesn't show up.

And now you are sitting on a bunch of lids and boxes that you can't use because you don't have all the parts. So it's been the worst.

In my 32 year career, I've never seen anything like it our ops people.

Are they are working as hard as they can but surprise after surprise after surprise after surprise.

But that said.

We just continue to adjust and look forward to a.

More predictable.

Level of service from our in most in almost every case, it's not our suppliers. It's their suppliers, so and a lot of the root cause issues come down to the same things which is semiconductors.

Our resins.

It's we're all frustrated with it but it has led to an inordinate amount of manufacturing variances this year and Thats just not <unk>, that's all of the factors.

And I.

I Miss anything there, okay, thanks, alright anything else.

No I'm good. Thank you I appreciate it.

Alright, Thanks, Blake Thanks Blake.

I'm showing no further questions at this time I would now like to turn the call back over to Mr. David Shaffer for any closing remarks.

Well.

I want to thank everybody for taking the time to attend our call today.

And we look forward to providing further updates on our progress on our third quarter 2022 call in February have a good day everyone.

<unk>.

Ladies and gentlemen that does conclude the conference for today. Thank you for your participation you may now disconnect.

Okay.

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Yes.

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Okay.

Sure.

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Good day, ladies and gentlemen, thank you for standing by and welcome to the energy second quarter 2022 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During this session you will need to press. The Star then the one key on you touched on telephone.

Please be advised that today's conference is being recorded if you would go to offer assistance. Please press Star then zero.

I would now like during the conference over to you because today, Mr. David Shaffer, President and CEO. Please go ahead Sir.

Thanks, Olivia good morning, and thank you for joining us for our second quarter fiscal 2022 earnings call on the call with me. This morning is Mike <unk>, Our Chief Financial Officer, and Andrea Funk, our Vice President of finance of the Americas before we get started I would like to wish everybody at <unk>.

The veterans day.

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 <unk> Dot com.

I'm going to ask Mike to cover information regarding forward looking statements. Thank.

Thank you, Dave and good morning to everyone.

As a reminder, we will be presenting certain forward looking statements on this call that are based on management's current expectations 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.

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 October three 2021, which was filed with the U S Securities and Exchange Commission.

In addition, we will also be presenting certain non-GAAP financial measures, particularly concerning our adjusted consolidated operating earnings performance and our adjusted diluted earnings per share, which excludes certain highlighted items for an explanation of the differences between comparable GAAP financial information and the non-GAAP information.

Please see our company's form 8-K, which includes our press release dated November 10th 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.

Our second quarter results reflected a combination of record market demand across all of our segments with Q2, 'twenty two orders, 36% higher than the same period pre COVID-19 fiscal year 'twenty.

But accompanied by continued inflation and supply chain challenges, we reported second quarter adjusted earnings of $1, one per diluted share, which was a slight increase over the second quarter of last year, our motive power and specialty businesses delivered better than expected results, while energy systems continued.

To be disproportionately impacted by its Asia source supply chain.

Strong demand led to our quarter end backlog, reaching an all time record exceeding $1 billion.

Which is more than double normalized levels the backlog growth primarily occurred in our energy systems and specialty lines of business and is indicative of extremely robust robust end market demand over and above the COVID-19 recovery.

Let me take a minute to provide you some added color of the current economic environment.

As as has been a common theme among most industrial companies. This earnings cycle, we are.

We're facing a number of challenges in the wake of the global economic recovery as the businesses aggressively compete for labor materials and transportation.

While still navigating isolated COVID-19 disruptions.

A trend we saw in Q1 has continued with nearly $20 million of sequential cost increases in freight wages led non led commodities and semiconductors.

Our team continues to take aggressive actions to mitigate these pressures, including the implementation of additional price increases resourcing of materials and engineering Redesigns as these issues stabilize our financial results will more fully reflect our record backlog enhanced profitability and across the.

Demand for our products.

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 continues to see robust demand with Q2, 'twenty two order rates, increasing over 50% compared to pre Covid Q2, 'twenty, we saw exceptionally strong demand in <unk> mid spectrum and broadband.

We also received our first orders for the California public utilities public safety grid shutdown extended network backup program.

Shipments for these orders are expected to ramp in Q3 Q4 and into fiscal year 2023.

In addition, we believe these programs may be extended to other states presenting another opportunity for future growth.

Countering this strong demand is the fact that energy systems has our longest and most complicated supply chain, which was therefore, the hardest hit by the macroeconomic environment in the quarter. The energy systems price recapture cycle is longer due to the project nature of this business, while working through the contractual obligations of its lengthy back.

Club.

As a result in Q2 ongoing pricing actions lagged inflation and were largely offset by mix with more service revenue offsetting higher margin electronics orders that could not be shipped or could not be delivered due to chip shortages Terra.

Tariff mitigation strategies, including our efforts to move contract manufacturing out of China and closer to home continued to be slowed by semiconductor availability.

<unk> cost for energy systems alone rose sequentially, an additional $6 million in the quarter doubling the prior year level.

While energy Systems' operating earnings as Corning quarter were disappointing market demand and macro trends combined with additional price increases and the resources Resourcing of electronics still point to an extremely positive long term path for the business. However, due to the current state of the global supply chain, especially <unk>.

Availability of semiconductors.

Our third quarter will remain challenged that said as many of our commodities inflation trends appear to have peaked we're confident our price recapture initiatives will catch up in the near future.

Please turn to slide five.

Despite the challenges we noted in our energy systems business one of <unk> core strengths is our diversification our motive power business continued its positive momentum during the quarter outperforming both topline and profitability expectations as demand returned to pre COVID-19 levels.

Revenue decreased $15 million from Q1 due to the traditional European summer holidays. Nevertheless, we believe this business has not yet reached its full potential as our OEM customers demand has been hampered by their ability to secure chips.

Margins improved as a result of price and mix improvements as well as ongoing opex efficiencies with motive power enjoyed nearly 20% higher operating earnings in the same pre COVID-19 period in F. 'twenty.

<unk> <unk> <unk> and recently released lithium variance continued to generate enthusiasm in the market.

In addition to restructuring of our Hagen, Germany facility nears completion ahead of schedule on cost and timing with savings beginning to be realized we will also continue to extract additional savings with further standardization of our less legacy product offering and other business transformation.

Initiatives, we remain well positioned to benefit from a steady recovery in this business throughout the balance of the fiscal year.

Please turn to slide six similar to motive our specialty business delivered a solid quarter.

India is performing well and demand in the transportation business remains extremely strong slowed only by PPL supply constraints in Americas, and Europe, we expect very robust transportation growth in Q3, as a result of our focus on aligning capacity with demand and our belief that the truck market will continue its.

Growth into calendar year calendar year 'twenty, two as a result of the improving economic.

Improving economy and their anticipation that chip shortages will improve.

Our thin plate pure lead production capacity continues to grow and we will exit the fiscal year at our planned run rate of $1 $2 billion per year.

The financial performance for <unk> manufacturing has been under significant pressure all year long with Covid related staffing and supply chain shortages hampering productivity, we expect significant reductions in manufacturing variances next fiscal year as the supply chain issues slowly subside.

Reduced manufacturing variances combined with a record backlog and continued strong demand signals from our transportation customers gives us immense confidence in the future of our specialty business.

Please turn to slide seven.

Our product roadmap is one of the most exciting areas of our business as the technology advancement of our product pipeline has been long in the making but well worth the way.

We are fully launched 11 lithium variance for motive power group and continue to expand our product portfolio.

We have received OEM approvals and the family has successfully completed all witness testing.

The demand for lithium products throughout our energy systems Group also continues to grow.

In addition to the lithium portion of the California, PUC success mentioned earlier telecom and residential home energy products are all performing well on UL tests progress on the development of the touch safe product with Corning continues to go well customer plans for their high frequency networks using this solution.

We're accelerating.

Last but certainly not least our EV fast charging storage initiative is quickly moving forward feedback from our potential launch partner customer has been very positive, including speed and development as well as the level of software maturity.

We should see our first revenue for this product next fiscal year EV charging is a key focus of the recently passed infrastructure Bill.

Please turn to slide eight.

Looking ahead, our near term challenges revolve around addressing global supply chain issues as well as rising commodity and labor costs and shortages. We are actively working to mitigate these pressures through incremental price increases alternative sourcing engineering, redesigns and aggressive hiring actions.

We will remain nimble as we adjust to the changing environment. Despite these hurdles. There is a lot about enersys to generate real excitement current demand for our products is greater than I can ever remember fueled by a massive <unk> build out and high growth categories, such as transportation, our future growth opportunities include.

Significant investments in rural broadband high frequency small cell deployment EV charging home energy storage transportation market share growth increased defense allocations and material handling Oems returning to normalized levels.

We'll continue to execute on our strategic initiatives and look forward to providing you updates on our progress in the quarters ahead.

With that I'll now ask Mike to provide further information on our second quarter results and go forward guidance.

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

Our second quarter net sales increased 12% over the prior year to $791 million.

Due to an 11% increase from volume and 1% from price net of mix.

On a line of business basis, our second quarter net sales in energy systems were up 9% to $370 million.

Specialty was down 3% to $101 million in motive power revenues were up 22% to $321 million.

Motive powers improvement was mostly from 20% growth in organic volume and 2% improvement from pricing.

Prior year motive power second quarter revenues were significantly impacted by the pandemic, resulting in a 21% decrease in organic volume.

Our motive power revenues for each one of this year, however are comparable to the pre pandemic levels two years ago.

Energy systems had a 9% increase from volume as well as a 1% improvement.

<unk>.

But had a 1% decrease in price after including negative mix specialty had a 5% pricing improvement that was offset by an 8% erosion in volume due largely to delayed shipments.

We had no impact on revenue from acquisitions in the quarter.

On a geographical basis net sales for the Americas were up 14% year over year to $550 million with 14% more volume EMEA.

EMEA was up 5% to $180 million from a 3% increase in volume and 2% in pricing.

Asia was up 10% at $661 million on 7% more volume and 3% currency improvements.

On a sequential basis moving to slide 11, our second quarter net sales were down 3% from the first quarter largely due to the normal vacation holidays in Europe and supply chain shortages.

On a line of business basis specialty decreased 6% with supply constraints pushing out order fulfillment into Q3 motive power was down 5% due to the European holiday season previously mentioned.

And EMEA was flat excuse me energy systems was flat.

On a geographical basis Americas was also relatively flat and Asia revenues were up 8%, while EMEA was down 11% mostly from lower volumes.

Please now turn to slide 12.

On a year over year basis, adjusted consolidated operating earnings in the second quarter decreased approximately $5 million to $61 million.

With the operating margin down 160 basis points.

On a sequential basis, our second quarter operating earnings dollars eroded $14 million from $75 million, while the OE margin.

Decrease 150 basis points to seven 8%.

Primarily due to the persistent supply chain headwinds and inflation in energy systems, which Dave has addressed.

Operating expenses when excluding highlighted items were at 14% of sales for the second quarter compared to 15, 7% in the prior year and 16, 1% from two years ago as our revenue growth exceeded our spending growth and we are maintaining a more efficient operating leverage.

On a sequential basis, our operating expenses were relatively flat.

Excluded from operating expenses recorded on a GAAP basis in Q2, our pre tax charges of approximately $12 million related to $6 million in alpha and Northstar amortization and $4 million in restructuring charges from the previously announced closure of our flooded motive power manufacturing site and Hagen, Germany.

Excluding those charges our motive power business generated operating earnings of $41 million or 12, 8%, which was 370 basis points higher than the nine 2% in the second quarter of last year due to stronger demand and easing of pandemic related restrictions favorable.

Mix from maintenance free growth and ongoing opex constraint or a restrained.

Operating earnings dollars for motive power increased over $17 million from the prior year and $6 million from two years ago.

On a sequential basis motive powers second quarter OE decreased 220 basis points from the 15, 1% margin posted in the first quarter due to the vacation season volume decline noted earlier, along with higher led and other input costs.

Energy systems operating earnings percentage of two 3% was down from last years eight 8% in the prior quarter's three 5%.

$8 $9 million were $5 million below last quarters last quarter and $22 million below prior year costs from higher freight tariffs and materials caused the OE erosion with unfavorable mix from supply shortages offsetting the lagging pricing improvement realization.

Specialty operating earnings percentage of 11, 8% was up from last quarter's 10, 6% in last year's 11, 4% OE dollars were largely flat sequentially and year on year driving the margin improvement from improving pricing was the lower sales volume.

Please move to slide 13.

As previously reflected on slide 12, our second quarter adjusted consolidated operating earnings of $61 million was a decrease of $5 million or 7% from the prior year. Our adjusted consolidated net earnings of $44 million was in line with prior year, but $11 million lower than the prior quarter.

Our adjusted net earnings reflect the changes in operating earnings along with a lower adjusted tax rate.

Our adjusted effective income tax rate of 16% for the second quarter was slightly below the prior year's rate of 17% and lower than the prior quarter's rate of 18%.

Discrete tax items caused most of these variations.

Second quarter, EPS rose slightly year over year to $1 <unk>, although it was slightly below the bottom of our guidance range. We expect our weighted average shares in the third fiscal quarter of 2022 to be approximately 42 $5 million versus the $43 three.

<unk> million dollars in the second quarter.

As announced in our subsequent events footnote and last nights press release, we acquired nearly 743000 <unk> shares for just under $57 million. After this second fiscal quarter ended our.

Our board of Directors also recently renewed the $100 million share buyback authorization, we had in place over the last two years that was completed with these recent October purchases last week, we also announced our quarterly dividend, which remains unchanged from prior levels.

Slides 14, and 15 reflect year to date results and are provided for your reference, but I don't intend to cover. These at this time. Please now turn to slide 16.

Our balance sheet remains strong and positions us well to navigate the current economic environment, we have $408 million of cash on hand, and our credit agreement leverage ratio is now at two <unk> times, which allows nearly $550 million in additional borrowing capacity in July we extended and amended.

Our credit facility on favorable terms, which now is in place through 2026, we expect our leverage ratio to remain between two point.

<unk> and two five times in fiscal 2022.

Our year to date cash flow from operations was a negative $66 million.

Included in that amount was $28 million in spending on the previously announced restructuring of our Hagen, Germany motive power plant, which is in the second quarters, which in the second quarter started delivering on cost savings that should exceed $20 million annually.

Negative operating cash flow was also due to our inventory expanding $123 million to meet rising revenues as well as from higher input costs and transit times.

Along with the other inefficiencies inefficiencies induced by supply chain disruptions.

Capital expenditures of $35 million were in line with our prior guidance, our capex expectation for fiscal 2022 remains approximately $100 million and reflects major investment programs in lithium battery development and our continued expansion of our <unk> capacity.

We anticipate our gross profit rate to remain near 22% in Q3 of fiscal 2022.

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

Near term supply challenges are restricting our ability to execute fully on these opportunities as a result, our guidance range of <unk> 96 to $1 six in our third fiscal quarter of 2022 reflects the impact of these supply chain challenges, which we continue to see as temporary.

Please move to slide 17.

On a longer term basis, we recently renewed our reviewed our updated five year plan with our board of directors, we remain confident that our topline growth and overall profitability goals are still achievable with respect to the final years deliverable. However, those targets as previously communicated.

We will take an additional year to be achieve compared to our investor day model.

In reflection of the delays the pandemic and supply chain challenges have had not only on our own progress with that of our customers in their broader markets now let me turn the call back to Dave.

Thanks, Mike.

Before we open the line for questions I would like to discuss an announcement, we made last night, along with our usually usual filings after more than 25 years with the company and 12 years as Chief Financial Officer, Mike has announced his intention to retire at the end of this fiscal year.

While we will Miss his wisdom and experience we are very confident that Andy Frank is the right person to fill this role and help enersys complete its transition from a battery maker to a world class energy systems leader.

Operator, we will now open the line for questions.

Thank you, ladies and gentlemen, I'd like to ask a question at this time you will need to press. The Star then the one key on your Touchtone telephone.

He'll be joining a question press the pound key please standby, while we compile the Q&A roster.

No first question coming from the line of Noah Kaye with Oppenheimer. Your line is now open.

Good morning, and thank you for taking the questions and I'd start by congratulating Mike on his upcoming retirement.

And Andy on her.

Our succession in the role.

Good luck to both of you.

Thanks, Mike.

Thank you. Thank you.

So.

Maybe just focusing on energy system Society, and this is I know a little bit of a high level question, but how do you think about.

Surely improving energy system to make it.

A higher quality business.

More predictable margin.

Better ability to pass on cost inflation.

Price cost headwind that were in that segment this quarter maybe outsized.

And inflation is but.

Not having the ability to get price and obviously dealing with.

Significant supply constraints.

How do you think about improving this business over the long term.

Yes.

Thanks, Noah this.

This is Dave.

The challenges in a lot of way starting with the tariff pressures.

And.

And then sort of.

Continued to grow headwind wise with the shortages were experienced in the supply chain challenges, so and they are all sort of mixed together in that.

We've had difficulty with our onshoring of some of the products a significant number of the products.

Due to semiconductor availability so.

This business is different than the other businesses largely based on its supply chain.

And then the content of semiconductors.

In this business is much richer so.

To improve the quality of the business.

We're trying to do first and foremost is what we can control which is pricing.

And the price increases we've been enacting.

Lagging.

The rate at which inflation has been increasing so we've been chasing it for a while.

That's.

In terms of the competitive landscape Theres no reason to feel our competitors have any less susceptibility to these pressures. So it's just a question of staying at it and I think what's in this business compared to the other businesses.

The it's more of a concentrated customer base.

So I think thats part of the challenge has been pushing.

Pushing through and I think they are at.

These customers were able to.

Stiff arm us a little bit longer than some of our other customer bases are but that said.

We're past that phase now so we've got to get the prices.

Where we need them to beta offset the inflationary pressures for the next piece and this is really can't be.

Overstated.

A lot of our margin comes from the higher mix content of our electronics products and that mix has been.

It's been hurt our mix in this business has been hurt due to the constrained availability of these higher margin products. So the businesses.

Is unbelievable in terms of the demand side and we're filling the portions of the orders that we can so lot of service work batteries. Some enclosures, but these are these are the lower margin pieces of the business. So I think that as semi conductor availability improves and we are addressing that.

<unk> significantly I think we've.

We're up to over 10% of our engineering resources now have been refocused off of new products onto redesigning to build our products around more readily available semiconductors. So that's been a big initiative for us and Thats going to help in not only the energy systems.

Business, but also on the on.

On the motive power business. The charger the electronics is a smaller piece of motive, but still very important to the margin. So.

I think price recovery.

And then the <unk>.

Next phase, obviously is an improvement in mix and when these two pieces improve I think when you couple that with the.

Strong backlog.

<unk>.

I think well controlled operating expenses.

I think youre going to see a dramatic improvement in these results.

No. It was there any more color you needed on that question.

That's very helpful. Thanks.

I guess staying with the topic.

Yes.

Moving revenue capacity and improving mix TPP.

To hear that you're exiting the year on track to exit the year at target.

As you think about the revenue uplift on that maybe you want to look at that as something for 20 for next year.

I guess what are the implications in terms of revenue uplift and what are the implications for the OE dollars. Because obviously there are some mixed benefits with that and there is also.

I think further reduction in manufacturing variances. So if you can quantify any kind of components of that for us I think it'd be very helpful.

Well certainly the manufacturing variances have been a very significant headwind this year. So.

We're fighting our way to the $1 2 billion it's Ben.

The productivity, we've got substantial improvement I don't have that number at my fingertips as to dimension that but it's in the tens of millions of dollars of headwind we've been.

Constrained with this year I'm sure Mike can jump in here in a second and help out with dimensions on the manufacturing variance piece side.

And then one of the things that we and this is something thats.

It's one of the advantages we have in the business as we've had dramatic resin availability issues in our energy systems business, which has hurt again on the mix side Thats beyond semiconductors, and it's been a mix issue, we've been able to offset that by rotating some.

That capacity into our specialty business to help on the transportation side. So.

I think as the resin availability improves.

Improves.

Certainly that's going to help and be part of the mix story on the energy systems part of the business, Mike you'd have some dimensions for us.

On the TPP L question, No I would say.

We will exit the year at about a $1 2 billion capacity rate, but obviously that means that sequentially going into next year, we should have $2 million to $300 million of additional <unk> revenue now.

Except in the case of motive power, we don't have any flooded variance that go into the specialty transportation market.

Or in energy systems, because we for the most part sell exclusively TPP L and it's not a swap like you might find in motive power, where we're taking flooded motive power, perhaps selling a maintenance free solution of <unk>, where you get perhaps an incremental margin improvement over flooded going to <unk>.

In this instance, it's really just sales that we would.

In capture with.

This increase in market share, which is really what we are doing is taking more market share. So.

If we get that kind of number.

And you put down that Youre talking about.

The the amount of the.

The improvement itself is pretty substantial it if we can get the variances down the integration you get the incremental sales of additional TPP L. Volume. Then then you are talking about probably 50 plus million dollars of operating earnings on a full year basis.

It could be higher depending on how well we execute.

That's very helpful.

With these two levers.

<unk> and energy system.

Thank you <unk>.

A clear path to increase the operating earnings.

Over the coming years, Inc.

The last question really is around the EV charging opportunity.

Sure.

So it's good to hear that you are expecting some some revenue next year can you just.

Give us a little bit more color on where you're at in the development of the program.

Some of the things you're doing to make sure that.

The storage system, plus the charging infrastructure.

Deliver suspect with the customer.

And any kind of additional color on specific timing within 2023 with the SEC.

Back half of the year.

Let me kind of re summarize that project. So we put together a system that is an energy storage battery energy storage system, it's behind the meter. So it's on the customer side of the meter and it's between let's say 350, and 500 kilowatt hours of battery energy storage So picture.

Half of our sea container sized.

Battery system, and so that energy storage system is also connected to some 160 kilowatt charging pad hostels and so we can use those charging pedestals to provide very rapid charging for electric vehicles and our targets. So far for this system.

Is commercial real estate partners that have the.

Enjoy the benefits.

The mixed use of this system. So they can not only enjoy the energy storage system in terms of peak shaving and solar renewable integration.

<unk> see backup power, but they can also use the battery to provide very rapid charging the fastest available charging for their EV clientele that that want to charge their battery at the highest possible rate. So in most cases 99.

Sent a time our system will be able to provide more charging power then the vehicle is capable of accepting.

So it's.

Nuanced focus that we're going after this isn't a big.

B to C change, we have a limited number of partners and the project is moving exceptionally well we had a good review of the project status with the board.

Our recently.

Our CTO.

And.

Again as I noted earlier my focus is the initial $100 million plus order.

For the trial phase and that $100 million looks like it's going to start next year, which we're very very excited about so it's excellent progress and as you may have noted.

There are significant levels of.

Our committed dollars in the recently.

The house passed infrastructure Bill.

Dedicated towards energy towards electric vehicle charging and on top of that there's also a tremendous amount of monies.

Available in that infrastructure bill to grid modernization and a big part of grid modernization is going to be the introduction of energy storage system. So that you can.

Separate when you make electricity versus when you use electricity. That's the beauty of these energy. These battery energy storage system. So I think theres a lot of.

Potential.

That bill took a little longer to get through than we had expected, but the pieces that are important to us.

Our very solid and while we're on the topic of that Bill one of the most important parts of that Bill that just comes straight into our business is the $65 billion, that's dedicated for rural broadband initiatives and.

And my experience for many many years you have to figure at least to at least 2% of that 65 billion is going to be related to power.

And so we have that we're extremely well positioned.

And providing.

<unk> a variety of power solutions.

For our broadband customers.

To help as they push their networks deeper and closer to Rural America. It's a project, that's near and Dear to my Heart frankly, I think it's a tremendous.

On level, playing field between Rural America and urban.

And I Couldnt support this project.

More fully so theres a lot of good things even beyond that art off.

The energy grid improvements and then finally, the electric vehicle charging I think the infrastructure Bill is well matched to our investors.

Great. Thanks for all the color.

Thank you.

And our next question coming from the line of Greg with the coffee with Webber Research. Your line is open.

Hey, good morning, everyone. Thanks for taking the questions.

Good morning, I was wondering if you good.

Good morning, I was wondering if you could speak to the energy systems backlog.

Is that strength, mostly attributed to pent up demand from the supply chain headwinds that we've been seeing or could this maybe be the start of the inflection point the hockey stick or is it some combination of both.

It's mostly theres two major pieces to it.

One is orders for power systems for mid spectrum <unk> build out so our customers are building out the mid spectrum right now.

They're installing you can envision a maybe like a refrigerator size cabinet, that's filled with electronics and batteries and they are using these cabinets to provide power and backup power to their five antennas. So.

That's a big part of the backlog and then the other another big chunk of the backlog.

Is related specifically to the California public utility public Utilities Commission program as you know the wildfires in California have created the need for PGM and others too.

Cut power.

To prevent additional fires, so and it's very frustrating for folks who live out in California to lose power, so often and sometimes these power outages are long depending on the wins and the weather conditions. So.

California Public Utilities Commission has mandated that anybody providing lifeline 911 services.

Provide a much longer extended backup so in the past one of the options. Obviously was using generators for these extended backups, but I know, there's some concerns about generators and potentially.

Putting into these fire hazards situations. So a lot of our customers are opting to use batteries. Instead, so that's a big chunk of the backlog as well and then not in the backlog yet but should be starting.

We're getting much stronger signals that some of the small cell <unk> projects are starting to heat up a little bit so that's.

Thats a more of that piece of the <unk> and then they're it's mostly right now in the backlog, it's the <unk> spectrum.

And then to your question.

We use for a lot of the systems businesses, we use contract manufacturers. So theres a lot of capacity for us to do more on a revenue basis, what's constraining things right now is the availability of the semiconductors. So what a lot of the semiconductor disc.

Distributors and suppliers are doing is allocating their supplies based on your historic usage patterns.

And our allocations are preventing us from achieving the revenue. So that's part of the reason. This is building up as we just can't get enough chip. So as I noted our engineering Department is working very hard to redesign our systems around chips that are more readily available some chips.

Or you can get in some chips you have to wait a long time on depending on whether they're a b or C items at the foundry.

So that's a big part of the initiatives. So once we can get our designs around available chips, we're going to be able to ramp up and then part of our ramp up on contract manufacturing is onshoring that to avoid some of the tariffs we've historically.

Paid to contract manufacturing from China. So a lot of a lot of our historic contract manufacturing has been Chinese based in and that's part of the.

Pressure I had mentioned to know earlier part of the pressures, we haven't been able to unwind ourselves from that simply because our onshore contract manufacturers can't get an allocation of the chips they need.

For our products, so it's a bit frustrating, but it is going to improve and we're very excited of our our ability to flex up on that contract manufacturing piece.

Got it okay. Thanks.

Could you could you comment on the recent delays we've seen in the <unk> rollout for the airline safety issues.

It's something that could evolve and end up impacting demand in 2022 and beyond or do you think it's more short term in nature.

This I don't think this is the first time. This concern has been flagged I think this is.

And the feedback we've received from our customers is that it's something they don't expect to be.

Long term disruption to the business and its related specifically to one of the frequencies that they're building out so they have different.

The C band, obviously and Theres other frequency as well and it's possible that that may get people to rotate more focus on some of the small cell construction.

As well, which operates at a much higher frequency so.

But no I haven't heard anything from our salespeople are from drew or anybody yet about that being viewed as a long term concern.

Okay, great. Thanks for the color and Mike and Andy Congrats to both of you.

Thanks, Thanks, Greg.

And our next question coming from the line of John <unk> with Sidoti Your line is open.

Morning, everybody, Congrats Mike and Andy.

I'd like to start with the motive power business, a good quarter I'm curious whether or not this is a recovery of some pent up demand from last year or has there been a meaningful change in the order trends I know there was once a time used to talk about global order rates as that move meaningfully in recent months.

I would say that what we're seeing in motive is sort of getting back to normal I don't know that from a backlog perspective, an order rate perspective.

That you are seeing much when you just told my people I don't even look at the Covid year anymore, I don't want to I don't use it as a reference our measuring stick for anything so I make everybody go back a year prior and what we see mostly the biggest storyline in motive from my perspective is that our.

Oems are OEM customers.

Our very constrained on their ability to ship and theyre, having massive semi conductor and other supply chain issues.

I am very sympathetic and so their build rates are still below.

Normal levels and that so as their backlogs they have a big backlog of which we haven't seen the orders yet for the batteries to go along with that so they need to dig out there working with their suppliers. Their engineers are doing the same thing RSR redesigning things.

There is some runway left in the backlogs that our OEM customers have.

And.

And then to your point.

I don't see a motive.

Just to me motive is just getting back to where it should be and.

It's much more of an acute issue in an energy systems in terms of the semiconductor content that as I noted earlier motive has not been immune to that.

Been a lot of emotion and teeth gnashing, even in the last week about may.

Making sure because the margins on these products are accretive.

And we Miss the mix impacts so so part of the upside we have in motive yet to come is is the Oems getting back on a stronger footing improve.

Improving our mix with some more charges and then Sean who's leading that business has got a very keen focus on operating expense efficiency and modernizing some of the things that I noted in my prepared remarks about some standardization initiatives. We have so we still have a tremendous amount of runway left.

On that business with Barrick.

We're excited about.

Okay, and maybe just for my clarification.

Something earlier.

<unk> transportation.

Product line, how much of that product is sold directly to Oems and how much is sold through retail channels.

So.

Historically, our focus as we've noted in prior calls is a lot of it was with the truck Oems factories right.

Alright.

We've rotated two because the truck build rates. This year has been a little similar to the forklift market.

Truck build rates are not yet back.

Where they've been focused so what our sales teams have done is they've put more emphasis on the what we call. The OE S. It's the operating <unk>.

Original equipment service groups. So that's been a tremendous opportunity so theyre both for OEM customers, but one for the factory and one is then on the service side and then in addition, as we've noted but we just haven't had the capacity to fully.

Realize yet is there is a tremendous amount of opportunity in the premium automotive space and thats. So.

So if you remember from the Investor Day, we said our target is to achieve 20% market share in the.

Class eight market in 2% market share in the automotive and I still feel extremely confident that we're on track to achieve that as we bring on additional <unk> capacity, Mike do you want to add anything.

Just going to say John the one thing you have to keep in mind on the truck OEM market is that oftentimes.

We focus on some of the big fleet operators and leasing companies and they are really the ones that are driving the TPP yield demand at the OEM level, because they are requiring the manufacturer of that vehicle to put our batteries into it. So it's that pulled through that is really.

Important to us the Oems themselves generally oftentimes don't have a great deal of incentive to put in a superior battery because of the poor or the battery the more likely they're going to be back at their oes level, replacing amounts sooner. So we focus on the pull through from the customers themselves.

Yes, yes that's.

Good point Mike.

Thanks that helps and just one question kind of bug me here you maintained your capex number at $100 million, but it looks like you only did about 35 million in the first half.

The sizable step up in the spend what are you spending it on where is that money going to.

Well it remains the biggest line item is still the TPP L. Buildout.

Some of those those chunks are a little choppy in terms of when those suppliers and equipment makers, who are delivering on their milestones. So.

Our expectation is that we will fully use up the $100 million. Although it would look like the run rate would appear that thats not the case, but we're still fairly confident that that's based on the projects. So we have and where we see them progressing that we will spend all of the $100 million.

So where do we stand in the TPP build out what's the kind of run rate we are at today.

Right.

As I noted we right now.

We're going to exit this year at a $1 $2 billion revenue runway and the Max as we're building out an additional capex is going in.

Working to a $1 $6 billion number and Thats been previously communicated so.

That's where we've been at.

Andy that's those are the those are the right figures yet another color I think Mike had.

That $200 million increase a year and a little more than that but it's actually a little higher because of some of the price increases.

Getting with declining that's true okay.

Okay.

Okay. Thank you guys for taking my questions.

Thanks, Jeff.

And our next question is coming from the line of Greg Lewis with <unk>. Your line is now open.

Thank you and good morning, everybody and congratulations Andy and Mike Thanks for helping.

Helping me over the last couple of years.

I guess my first question is around.

Very well very well publicized everywhere.

Transportation supply logistics remain a concern are done are remain a concern.

Is there anything that Enersys is thinking about in terms of trying to.

Minimise.

Those risks I E. You may be looking at potentially doing.

<unk> longer term.

Logistics transportation agreements really what I'm trying to understand is.

Clearly the quarter was hurt it looks like next quarter is going to be hard.

Is there any kind of way, we can think about maybe returning to a more normalized supply chain, where your margins arent getting sticking by that.

Well.

We had noted in the prepared remarks, a lot of the things we are doing so on the semi conductor availability, we're trying to.

Redesigned products around more readily available chips, so thats going to help mix, that's going to help the top line as well.

So the onshoring has been a big big issue with tariffs and we think that once we can free up and get our products designed around more rental readily available chips, that's going to accelerate some of the onshoring in terms of the freight that one has been particularly frustrating I had a call with the CEO of one of our cost.

Fact manufacturers in Thailand.

<unk>.

I was talking about chips and he was talking about freight so I mean, the freight piece has been.

Unbelievably.

<unk> added a lot of inventory to our balance sheet.

<unk> the P&L, we told you that it's been staggering now again, we're not unique in terms of an Asia based supply chain for a lot of these systems products, so but to your point, we're always going to be chasing the price increases until we get a slowdown or an inflection point.

So as.

The biggest things we're focused on right now in terms of innovative.

Thinking on freight and freight agreements.

I don't have any good specifics for you I'm certain our transport.

The team is is doing what they can.

And I'll try to come back with what some of the initiatives they have but in general.

The freight lines.

<unk> Air and sea are just congested the ports are congested and thats been a big frustration for all of US Mike do you have any insights.

Greg with the price of diesel going up it's in.

And labor for those drivers.

No.

The truckers are under rate pressure and they're passing that through in most of our focus has been how can we be more efficient in our transportation. So we're looking at all the ways, we move our product between our factories make sure that we source as close to the point of the end customer as possible. So that's really where we're trying to focus on it.

As planned smarter. So we don't have to be so susceptible to the freight.

Okay, Great and then just one more for me.

In the presentation, you talked about the lithium bearing gaining acceptance.

I mean any more color you can kind of.

No.

Provide there like maybe how we should be thinking about.

Maybe calendar year 'twenty two in terms of maybe a shift.

Business shift mix there in terms of the lithium acceptance.

I think from a margin perspective.

In the interim.

Inside years.

There's not a math and not a huge difference between lithium and flooded so.

The TPP, obviously as is our best.

Most favorable on the on the GP line, so the the rate at which our lithium build that again part of our challenges with the lithium program is to be fully transparent.

Is that the BMS, which is the battery management system.

Semiconductor availability issues, as well and electrical component issues as well, which is a constraint so.

So some of that.

The rate of market acceptance of the lithium.

I think it's.

It's.

We don't.

The industry statistics don't indicate us losing.

Tremendous amounts of flooded share and the rate at which we cannibalized and moved to lithium.

There's going to be somewhat.

Governed by the availability of semiconductors and I'm certain.

All of our competitors have the same sorts of challenges so that may slow down things a bit and I think one of the other challenges obviously for our motive power customers.

They're just under such tremendous pressure right now with their own supply chain issues.

Things are just a little bit backed up so.

But the point for you is whether we're selling flooded TPP L.

For lithium we still have very very good prospects in the motive business and the rate at which that conversion takes place.

We will just really maybe dictate some of the longer term cash needs. We we.

We might need for footprint rationalization in the long run, but in the foreseeable future.

All of our factories are going to be busy.

Okay, great to hear thanks. Thank you all very much for the time.

Thank you.

And as a reminder, ladies and gentlemen to ask a question you will need to press. The Star then the one key on your Touchtone telephone.

And our next question coming from the line of Brian Drab with William Blair. Your line is now open.

Hi, Good morning. This is Blake Keating on for Brian.

Hello, Blake Blake.

I was just kind of curious what is the outlook for four year port with battery business over the next several quarters.

Have you noticed that.

Literally losing share to other lithium battery providers.

And the forklift another market.

No I would say our business is right now as we noted is in pretty good shape.

The mix has been hurt because of the electronics availability for the Chargers more so than with the lithium batteries.

We have a very solid.

Backlog prospects, our quote log our quote log for lithium is very big and our sales force.

CRM.

There's plenty of opportunities out there right now it's just.

We're in a bit of a supply.

Constrained situation.

Blake I'm not.

I'm not aware of any.

Big changes recently or share changes the industry statistics I receive on a fairly regular basis don't indicate any major shifts so for us. It's just motive is sort of getting back to a normal footing.

I think I love, what we've done over the last five years on the product.

Positioning in <unk>.

And then I really like what Sean is doing on the Opex side. So.

I think again I think the outlook is going to improve as semiconductors improve and I don't certainly.

You never want to stick your head in the sand, but I'm not aware of any significant share losses to competitive lithium products that have changed in the last six months or eight months or however long.

Alright, thank you for the detail.

And then have you noticed.

Any systemic limitations to your visibility there do like a normal environment.

Anything just kind of pop up that you did it.

Don't normally see.

Normal environment.

I think I think surprises is a word I hate it.

Unfortunately, as a as a new part of reality when we're setting these forecasts and so forth things Ken.

Come up a lot of it's freight related a lot of its port congestion related things that you think youre going to ship this quarter arent.

And one of the biggest pressures and Mike was talking about how significant the manufacturing variance pressure has been this.

Fiscal year to date is one of the reasons is because of the significant number of changeovers, we're forced to do.

Because parts just don't show up so you changeover you set up the line you're getting ready to run something and then it doesn't show. It also creates inventory mismatches, where you order.

Lids and boxes and parts for one thing because youre going to build something and then a certain terminal doesn't show up.

And now you are sitting on a bunch of lids and boxes that you can't use because you don't have all the parts. So it's been the worst.

In my 32 year career, I've never seen anything like it our ops people.

Are they are working as hard as they can but surprise after surprise after surprise after surprise.

But that said.

We just continue to adjust and look forward to a.

More predictable.

Level of service from our in most in almost every case, it's not our suppliers. It's their suppliers, so and a lot of the root cause issues come down to the same things which is semiconductors.

Our resins.

It's we're all frustrated with it but it has led to an inordinate amount of manufacturing variances this year and Thats just not <unk>, that's all of the factors.

Andy Rooney I.

I Miss anything there, okay, thanks, alright anything else.

No I'm good. Thank you I appreciate it.

Alright, Thanks, Blake Thanks Blake.

Im showing no further questions at this time I would now like to turn the call back over to Mr. David Shaffer for any closing remarks.

Well.

I want to thank everybody for taking the time to attend our call today.

And we look forward to providing further updates on our progress on our third quarter 2022 call in February have a good day everyone.

<unk>.

Ladies and gentlemen that does conclude our conference for today. Thank you for your participation you may now disconnect.