Q4 2022 EnerSys Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Q4 2022 and nurses earnings Conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your tell us.
Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker, Lisa Hartman, Vice President Investor Relations. Please go ahead.
Thank you good morning, everyone. Thank you for joining us today to discuss <unk> fourth quarter and full year fiscal 2022 results on.
On the call with me. This morning are David Shaffer, Enersys is president and Chief Executive Officer.
Andre I think Andrew <unk> Executive Vice President and Chief Financial Officer last evening, we published our fourth quarter and fiscal year 2022 results and filed our 10-K with the SEC, which are available on our website.
We also posted slides that we will be referencing during this call. The slides are available on the presentation page within the Investor Relations section of our website at Www Dot Enersys Dot com as a reminder, we will be presenting certain forward looking statements on this call that are subject to uncertainties and changes in circumstances.
Chances are actual results may differ materially from these forward looking statements for a number of reasons are forward looking statements are made as of today. Even if this presentation is replayed at a different time for a list of forward looking statements and factors, which could affect our future results. Please refer to our recent 10-K filed with the SEC.
In addition, we will also be presenting certain non-GAAP financial measures, particularly concerning our adjusted consolidated operating earnings performance adjusted diluted earnings per share and adjusted EBIDTA, which excludes certain items for an explanation of the difference between the GAAP and non-GAAP financial metrics.
Please see our company's form 8-K, which includes our press release dated May 27 2022.
Now I will turn the call over to <unk>, President and CEO , Dave Shaffer.
Thanks Lisa.
Please turn to slide four.
The March quarter marked a strong finish to a challenging year demand across all segments continued to surge with fourth quarter net sales of $907 million, an increase of more than 11% over Q4, 'twenty, one surpassing 900 million for the first time in the company's history.
Orders are kept sales by 17% in Q4, 'twenty two our backlog increased sequentially by $150 million to $1 3 billion breaking new records for the third consecutive quarter, our backlog is healthy with over half of our total backlog attributable to.
Two longer term projects related to <unk> deployments, California public utility Commission mandates and defense.
Our customers understand the supply environment, we are facing and we remain confident in our ability to deliver the industry leading products they need.
We continue to monitor the risk of an economic slowdown and the quality of our backlog Insulates us to a certain extent as telecom broadband and defense markets tend to follow their own cycles independent of GDP for example in fiscal year 'twenty, one when COVID-19 caused a significant economic.
Downturn motive power revenues decreased 14%, but A&D only decreased 5% largely due to government shutdowns and energy systems actually increased 2%.
These dynamics, although not identical were similar to what occurred in 2008 financial crisis further while motive power revenues track closer to GDP.
History has told us that a decline in lead prices and other commodity costs is also likely during a recession, which provides both the release of working capital from the balance sheet as well as tailwind from input costs. The inverse is what we're experiencing in FY 'twenty, two with significant inflation and recapture lags.
<unk>.
The price recapture lag has been our focus in fiscal year 'twenty, two and will continue to be in 'twenty three our pricing actions in the fourth quarter gained additional traction against the significant cost increases contributing to a 19% sequential increase in adjusted diluted EPS to one.
Dollars 20 per share despite continuing supply chain headwinds labor shortage shortages and historic inflation levels, while pricing has not yet fully caught up with the persisting inflation. We experienced this fiscal year. We are pleased with the trajectory. Our teams are making to realize are under.
<unk> financial potential in quarters to come.
We continue to focus on the elements of the business within our control looking forward. We are confident in our strategy and excited about our opportunities ahead as our proprietary technologies provide unique value propositions for our customers that position us well to benefit from the growing mega trends fueling the markets we serve.
Sure.
I'll now walk through our business segment highlights please turn to slide five.
Energy systems strong revenue momentum in fiscal year 'twenty two continued in the fourth quarter with an increase of 18% versus Q4, 'twenty, one, bringing the full year revenue growth to 11% over prior year.
While adjusted operating margins were lower in fiscal year 'twenty two versus 21 as Andy will review with you later energy Systems' fourth quarter margins improved for the second quarter in a row as our significant pricing actions are beginning to catch up on the substantial cost increases we experienced throughout the year Q.
Q4, 'twenty two order rates increased 20% compared to Q4, 'twenty, one and our backlog in this segment grew by more than $100 million in the fourth quarter alone.
Robust market conditions are attributable to significant infrastructure spending network upgrades and resiliency capex, while lithium is gaining momentum all participants are finding sourcing challenges, which has provided some increased <unk> opportunities in data center markets as we leverage our strategic advantage.
Offering multiple technology options to our customers.
The <unk> communications Buildout continues to have an incremental extended and mounting tailwind as customer Capex spending has been re prioritized from small cell tower build outs to expanding mid bands capabilities. While we play in all aspects of the <unk> spectrum, we have a unique.
<unk> position in the small cell powering due to our technological advantages small cell build outs are now expected to ramp in the 'twenty three 'twenty four accelerating into 2025 and 2026.
We are seeing ongoing progress with the California public utility commissions grid shutdowns and extended network backup mandate looking nearly $140 million in related orders in fiscal year 'twenty, two and already beginning some deliveries we expect our net sales to ramp up in fiscal Q3 'twenty.
Three and accelerate in Q4 and beyond we have also seen an acceleration in our rural digital opportunity fund or our doff projects with orders being received on a regular basis, which we expect to continue our significant funding becomes available over the upcoming years.
In addition, our fast charging storage initiative has seen further momentum in both software development and customer specification design.
Despite the strong product demand trends Enersys continues to face significant supply chain and cost headwinds, which have been exacerbated by the much publicized shortage of micro trips microchips.
<unk> chips as well as recent geopolitical tensions.
Our team continues to mitigate cost escalations with additional price increases our engineering and operations have been working closely to overcome shortages through product redesign and onshoring of contract manufacturing.
As we navigate through the current cost of supply chain environment and these pressures begin to subside. We expect continued robust demand for energy systems products to drive durable long term growth as a reminder, pricing catch up in this business segment was delayed compared to our other segments due to contractual limitations and custom.
Concentrate city. However, we have made incremental progress with price outpacing cost for the second quarter in a row.
Motive power delivered solid revenue growth up 17% for fiscal year 'twenty two versus fiscal year 'twenty, one and has been able to offset significant cost increases with ongoing pricing actions and the favorable mix impact of our higher margin maintenance free sales our results reflect the.
Continued customer enthusiasm of our prior or.
Proprietary Nexus <unk> and lithium iron maintenance free product offerings, we achieved a key milestone in the fourth quarter with the launch and you all safety listings of our high performance net Nexus lithium ion batteries.
Which feature an integrated battery management system that performs auto diagnosis voltage limitation and communication of performance data.
We're proud to be the first energy storage solution provider to bring this level of compliance standards to the material handling industry.
Overall market dynamics point to a strong and steady growth for motive power with benefits from the trend automation and electrification material handling equipment, along with the value of our maintenance free technologies and advanced charging solutions expected to have a lasting and positive impact on our growth in years to come.
Our specialty segment's full year revenue increased 6% versus fiscal year 'twenty, one mostly on price. However, this segment's true potential continue to be held back by supply challenges, while we have been able to increase our overall PPL capacity significantly in line with our strategic plan our <unk>.
Demand continues to outpace our capacity, forcing us to allocate production between all three lines of business due to supply chain issues. We made the strategic decision to allocate more of our capacity to our <unk> customers at the expense of our transportation market share growth.
Specialties adjusted operating margins were nearly 10% for fiscal year 'twenty two despite facing these pressures as productivity and capacity enhancements take hold and our <unk> factories more capacity can be allocated to this segment with lowered manufacturing costs.
In our transportation business, we continue to increase our share of the class eight market with the Oems.
While the Oems are constrained by supply chain and labor headwinds of their own inflation has persisted, which has been able to offset through additional pricing actions. Despite the current environment. The large transportation market as a significant long term growth opportunity for us as we focus on taking share with our proprietary.
Terry <unk> technology.
Aerospace and defense also provide significant growth opportunities given the current geopolitical environment.
Please turn to slide six.
Despite macro headwinds are global TPP production outpace output.
Output pace increased 24% in our fiscal Q4 dollars 22 compared to our FY 'twenty, one average with each <unk> factory, increasing production in the double digits in the fourth quarter, we achieved our goal of $1 $2 billion annual run rate of <unk> capacity in the second half of the fiscal year.
<unk> and have hit this watermark repeatedly in the third and fourth quarters.
Although cost and supply have been volatile we are much better positioned from a production standpoint than we were when the year began with plans in place for continued capacity expansion of $200 million per year for the next five years as previously mentioned TPP all capacity is distributed across.
All three of <unk>.
The lines of business in which demand of our proprietary technology cannot be satisfied.
We continue to make strategic investments in our technology and innovation roadmap partnering with customers to ensure we are delivering the solutions.
Needed for years to come the new products, we are delivering today combined with our future technologies are squarely focused on retaining our leadership position and growing share in the markets we serve.
Please turn to slide seven.
We also made significant progress on our ESG goals in the fiscal year, including several sustainability and environmental updates that culminated in the publication of our first comprehensive sustainability report last month to report highlights the critical role our power and energy solutions play in building a rich.
<unk> low carbon future and how they are a key component to decarbonization globally, while our products and services are critical to the energy transition our role in reducing the impact of our manufacturing and distribution processes is equally important our sustainability initiatives push us to be more efficient.
Develop innovative solutions for our customers and build a stronger more diverse and engaging workplace for all of our employees we.
We set meaningful goals to reduce our water and energy intensity and increase the diversity of our leadership team and workforce, we will work towards each of these goals and others to further position us as an environmentally and socially responsible global organizations. Please turn to slide eight.
As we enter fiscal year 'twenty three we expect to face ongoing challenges with continued supply chain constraints inflation exacerbated by the senseless conflict between Russia, and Ukraine, and the resurgence of Covid shutdowns in China.
We remain focused on what we can control.
Catching inflation with ongoing price increases redesigning our products for supply chain components, such as chips and resins.
Reducing cost through our Enersys operating systems lean and footprint optimization ongoing efforts expanding our portfolio with more technologically advanced products growing profitably through TPP L capacity increases and new product introductions, and finally mitigating risk to supply chain disruptions by contract.
Any fracturing onshoring efforts dual sourcing and strategically building inventory.
I am proud of our employees resilience and proven ability to address these challenges head on and despite these near term headwinds we are optimistic about our ability to persevere and capitalize on the opportunities ahead of us our world class technologies and capabilities position us to win in the growing markets we serve.
Leveraging our proprietary technologies across all of our energy solutions, we are able to offer our diverse set of customers. The best options to meet the needs of their specific use cases.
We are confident in our ability to continue to deliver sequential profit improvements once the macro headwinds subside and remain on track to realize our strategic plan.
We're committed to being a good corporate citizens and delivering long term value to our shareholders through profitable growth and a disciplined capital allocation strategy with that I'll now ask Andy to provide further information on our fourth quarter and F. 'twenty two results and go forward guidance.
Thanks, Steve.
In effort to leave more time for Q&A My scripted remarks, there will be more streamlined than in past periods I will focus my discussion. This morning on the key financial metrics and take growth.
For more detailed information about our results. Please refer to our press release on our fourth quarter and full year fiscal 2022 financial results and the supplemental slides, which were posted to our website last night.
For those of you following along on our Powerpoint slides I will begin on slide 10.
Our fourth quarter net sales increased in excess of 11% over the prior year to $907 million due to an 8% increase from volume and 6% from improved price net of mix, partially offset by a 2% erosion from foreign exchange.
Full year net sales increased 13% over the prior year to $3 4 billion due to a 10% increase from volume and 3% improvement from price net of mix.
Adjusted operating income was $67 million in the fourth quarter and $264 million for the full year of fiscal 'twenty two.
This represented a sequential improvement of over $6 million in the quarter as our price recapture has begun to catch up to the unprecedented cost increases we incurred this fiscal year.
Also as a reminder, when considering our full year results in fiscal 'twenty, one we had $12 million of business interruption insurance recovery for the fire in our Richmond manufacturing facility that occurred in fiscal 'twenty.
Excluding that impact our adjusted operating income erode at $8 million in fiscal 'twenty two versus fiscal year 'twenty, one due to approximately $50 million of lagging price capture on nearly $150 million of cost increases this year.
The impact of which overshadows or improvement from volume and productivity gains.
Please note this quarter, we began reporting EBITDA and adjusted EBITDA.
We believe these metrics will be useful for investors when analyzing our core operating performance and cash flows.
Adjusted EBITDA for the fourth quarter with $88 million and nine 7% of net sales.
Third to $97 million and 11, 9% of net sales in the prior year fourth quarter.
For the full year fiscal 2022, adjusted EBITDA was $340 million and 10, 1% of net sales compared to $334 million and 11, 2% of net sales in the prior year. When you exclude the impact of last year's business interruption insurance recovery.
It is worth noting that our margins are artificially deflated from the margin math impact of cost pass through.
A reconciliation of net earnings to adjusted EBITDA is presented in the appendix of our supplemental presentation for your reference.
Our adjusted EPS was $1 20 in the fourth quarter of fiscal 'twenty two up from a dollar one in the third quarter due to improvements in adjusted operating income previously mentioned as well as FX gains and other income and expense from a weaker euro.
Please turn to slide 11.
On a segment basis compared to prior year, our fourth quarter net sales in energy systems were up 18% to $410 million motive power revenues were up 10% to $365 million and specialty revenue was essentially flat year over year at $132 million.
All lines of business posted substantial year on year price mix improvement as our pricing actions are sticking and beginning to catch up to the unprecedented cost increases we have incurred this year.
More detailed sequential geographic results can be found in our press release and in the supplemental slides.
Before I continue I would like to note that in slides 12 through 16, I will present, some information relevant to this quarter's result that I don't intend to necessarily include every quarter.
Please turn to slide 12.
While robust demand remain the most important headline of the quarter supply chain disruptions and inflationary pressures continue to impact our financial results.
On a sequential basis, we incurred approximately 35 per share or volume adjusted incremental costs, which were more than offset by almost <unk> 40 per share of improvement in price and mix.
Cost increases in the quarter were driven by both led and non led commodity inflation as well as higher manufacturing costs from labor challenges supply disruptions freight and tariff cost increases and higher utility costs.
Energy costs were particularly impacted in our European plants. This quarter as a result of the senseless, Russia Ukraine War.
This brings our fiscal 2022 volume adjusted cost increases.
Nearly $3 per share year over year.
With almost two thirds, having been offset by price mix improvement, leaving.
Leaving approximately $1 per share not yet recaptured.
Led nonlinear commodities and freight tariff inflation each comprise approximately one third of the volume adjusted cost increases with plant labor and utility inflation mounting and offsetting most of the productivity improvements we made during the year.
As a reminder, current margin headwind will become tailwind when supply chains inflation stabilized or onshoring initiatives take hold and our pricing actions catch up from the multi quarter lag.
Please turn to slide 13.
Looking at our quarterly sequential adjusted EPS Bridge Q4, 'twenty two benefited from the net favorable price recapture previously discussed.
Proximately <unk> <unk> per share of organic volume growth and FX gains and other income and expense from a weaker euro.
Which one.
What partially offset by higher Opex raised our adjusted EPS from 19.
19 from $1 one in Q3 dollars 20 to $2 20 per diluted share in our fourth fiscal quarter.
For the full year adjusted EPS as just reviewed our net price mix flag has not yet recaptured approximately one dollar of the unprecedented cost increases.
Volume growth from robust markets increased our full year adjusted EPS by approximately $1 40 per share.
It should be noted that a large portion of our massive backlog growth was due to our suppliers and our customers suppliers inability to ship as.
As such the volume impact could and indeed should have been even greater but instead will be pushed into upcoming quarters as supply chain has normalized.
Fiscal year 'twenty. Two also did not benefit from the 22 cents per share of last year's business interruption insurance recovery.
Opex was higher year on year due to investments in engineering increases in wages and some resumption of travel.
Finally, we enjoyed favorable FX gains and other income and expense during fiscal year 'twenty, two compared to FX losses in fiscal year, 'twenty, one, which added almost 30 per share as well as less shares outstanding.
These massive changes largely offset to <unk> declined from $4 49 in fiscal year 'twenty, one to $4.47 of earnings per diluted share in fiscal year 'twenty two.
Please turn to slide 14.
As Dave mentioned, the combination of strong demand and supply chain constraints led to a sequential rise in our backlog, which broke another record level to $1 $3 billion at quarter end.
An increase of approximately $150 million over Q3 dollars 22 and double prior year.
The fourth quarter backlog was driven by over $1 billion $60 million of new orders, which were 117% of our sales level.
Approximately 50% of the year over year backlog growth was driven by both organic volume and longer duration program wins, such as the CPUC backup mandate, while the remaining 50% with comprised of increases from price <unk>.
Advanced order by customers, often due to their supply chain challenges and our delayed shipments due to our internal supply chain challenges.
Please turn to slide 15.
Our balance sheet remains strong and positions us well to navigate the current economic environment.
At March 31, 2022, we had just over $400 million of cash on hand, and our credit agreement leverage ratio was at two five times EBITDA, which is at the midpoint of our target range. The.
The year over year increase in our leverage ratio is due to our opportunistic share repurchase.
As well as our strategic decision to build $200 million of inventory $50 million of which was in the fourth quarter of 2002.
The inventory growth was attributable to higher costs and lead times as well as an intentional focus on lithium cells led and other raw material component builds to mitigate against supply chain disruption.
We expect our leverage to be at the higher end of our target range of two to three X EBITDA for the first fiscal quarter of 2023, as we continue to re prioritize mitigating our risk to ongoing supply chain headwind.
It is important to note that our investment in primary working capital has historically been a significant cash generator during recessionary periods, providing a very effective natural hedge against the risk of a downturn on our balance sheet.
In addition, our capital expenditures of $74 million in fiscal 2022, we'd below our original full year guidance due to the impact of supply chain headwinds on our capital projects.
We remain on track for a strategic models planned continued expansion of our TPP L capacity for fiscal 'twenty, two and the incremental $200 million per annum increases thereafter.
Our capital allocation strategy remains focused on three key priorities.
Investing in organic growth.
Complimented by strategic M&A.
And finally, returning excess cash to shareholders through consistent dividends and opportunistic share buybacks.
Our fiscal year 'twenty, two capital allocation demonstrated our flexibility to thoughtfully invest in organic growth and returned more cash to shareholders. During a period of little to no M&A activity.
We repurchased approximately $160 million of shares in fiscal 2020 to nearly half of the total amount repurchased in the past five years.
In March our board authorized $150 million to our repurchase program, which was augmented by $25 million in April through our annual evergreen dilution authorization.
In the first quarter of fiscal 2023 to date, we've repurchased $20 million of shares, leaving 188 million of authorization remaining.
We are entering fiscal 2023 with ample room on our balance sheet to remain flexible to meet our business needs and we will continue to allocate capital with the goal of delivering the best long term returns to our shareholders.
Please turn to slide 16.
We believe we have set a solid foundation for our strong financial future.
Our fiscal first quarter 2023 guidance range of $1 10 to $1 20, adjusted EPS with a gross margin of 21% to 23%.
Reflects our expectations that Alex accelerating price actions and cost recapture catch up were more than offset the sequential impact of significant incremental inflation and also that the FX gains we enjoyed in the fourth quarter will not repeat in Q1 'twenty three.
Our capex expectation for the full year fiscal 2023 is approximately $100 million.
<unk> investments in new products, including lithium production lines and continued expansion of our <unk> capacity.
Looking ahead, the pillars of our strategy remains unchanged our priorities are on track and trending to our initial investment thesis and we are confident in fiscal year 'twenty three will demonstrate continued progress on our journey.
We've learned a lot over the past year and anticipate ongoing sequential margin improvement in the upcoming quarters as the true underlying profitability of our business emerges.
And revisiting our strategic plan.
<unk> and its related supply chain challenges have occurred and have been disruptive.
While we did not plan for these volatile supply chain conditions and do not know when they will stabilize we will remain focused on the things we can control and we'll continue to make progress on the strategic initiatives, we have laid out.
Our estimate of the incremental value. These priorities will deliver at the exit of our strategic plan period remains unchanged.
<unk> is timing.
As Dave described earlier demand remains robust and in fact, our end market opportunities have been further spurred by exciting megatrends and the accelerating energy transition towards a low carbon alternatives from fossil fuels.
We are on track for our planned TPP L capacity increases and despite the distractions of product Redesigns and component shortages, we are making significant progress on our new product initiatives that will continue to elevate enersys from a traditional lead acid battery company to a fully integrated energy systems.
<unk>.
These proprietary technology platform can be leveraged across all three of our segments with higher margin products that meet our customers' needs and dynamic market, including the initiation of additional programs such as DC fast charging storage, which had not been contemplated when we last updated our strategic plan.
We continue to execute on our <unk> program with savings generated from lean initiatives and our Hagen plant closure, although the favorable impact of these efforts has been overshadowed by labor inflation and supply chain challenges.
We've restrained opex growth to provide leverage against our revenue growth and our share buybacks have returned value to shareholders, which were bolster earnings per share.
We will provide a more comprehensive refresh of our strategic plan, including projected timing when market conditions stabilized for.
For now we remain excited by our end market opportunities.
We are pleased with the progress we are making against our strategic priorities and finally, we are confident in our ability to create the shareholder value. We committed in our strategic plan at our 2019 Investor day and reiterated in our update last fall.
This concludes our prepared remarks.
Operator, you May now open the call for questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster. Our first question comes from Noah Kaye with Oppenheimer. Please go ahead.
Good morning, and thanks for taking questions. Andy you provided a lot of great color on some of the price cost considerations. So I appreciate the disclosures can you maybe tell us.
Dimensionally, what youre thinking about in terms of price cost per one Q are you you mentioned some incremental costs.
It's the energy, but if it does.
Give us a little bit more detail around that and maybe possibly even if I were you.
Price cost to be and then I guess the second part of this.
A lot of the backlog is really a longer lead time projects do you have visibility on where price cost might head to the back half of the year.
Okay. Thanks, Noah it's a it's obviously the area that we spend a good deal of our time.
Looking forward for the first quarter as Dave mentioned, we incur a lot of our costs. This fiscal year and then they roll off so we do get pretty good visibility into much of those costs.
We expect it to be another quarter of significant cost increases.
Probably in the range of $25 million to $30 million of incremental costs.
But we anticipate that we will more than offset that with pricing actions. It was higher than we had originally expected. If you recall on our last call. We had thought costs were stabilizing and indeed, they got worse, but we continued to put incremental price increases on top of that.
So that was the question on the price recapture I think you had another question on backlog.
Yeah, just really given that that a lot of your backlog seems to be for longer lead time projects, what kind of visibility do you have into that.
Assuming we don't get any further cost increases, which is a dangerous assumption I know at this point, but.
Look at the cost structure today, and then you look at where price and mix can get to based off of what's in backlog.
What would that imply in terms of potential uplift in the back half of the year.
Yeah, well there are two pieces, obviously, there's the price and theres the mix. So as electronics have continued to be constrained by supply chain headwinds our mix has been danford, especially in energy system.
On the pricing one of the things we've learned throughout the course of this year, we've become much more aggressive in pricing and reached into our backlog in and taken price actions even on our backlog as we are able to.
So.
You know our backlog is not scale on pricing.
So that we will continue to have the catch up there. The issue is the lag and I think that's one of the things that was meaningful for us and showing the quarterly price cost our view for the FERC for you.
Can see that the costs started to grow and then the price came later.
When costs stabilize and Thats the uncertainty youll start to see that catch up and as we mentioned the lag was about a dollar in this fiscal year. So that's what you could imagine would be the full potential and no.
As we noted in the remarks, we got a late jump on price recovery in the energy systems business. So that really put a lot of pressure on us that's improving that situations improving.
We feel much better about where we're headed.
But that was one of the headline issues, obviously for fiscal year 'twenty two.
We just got pounded on costs for the first half without a lot of price recovery, but I can tell you.
That's getting better.
Great great. Thanks, Dave.
Maybe one just touching on the.
The comments you made during the prepared remarks around the unique cycles for the telecom folks.
There are sort of off the macro cycle.
What do you think happens to the carriers <unk> expansion plans. If we do indeed go through recession and I guess what are you what are you hearing from them.
Terms of focus areas plan build out in and the kind of sensitivity planning they might be doing around an economic slowdown.
Yes.
That early in my remarks, because it's fresh on our minds because we just came off our board meeting last week.
One of the things the board wanted us really to do with pressure test the backlog.
And so we kind of cut at six ways to Sunday to look for where.
Where the vulnerabilities would be and again, we feel we could because to your point a lot of it's related to projects that we think based on our historic because it was good for Andy I asked her to go back and because she wasn't around there and I said go back and look at prior downturns and look at what happened with.
The business and I think that as she noted.
The the most.
The ability for us is probably in the motive power portion of our business, but thats pretty thats less than a third of our backlog down.
That's not the biggest piece and.
And in years past the recovery has been.
Profit standpoint, because as Andy noted commodities tend to go down in these cycles cash generation give.
Positive so it's not as if I'm rooting for a recession, but we are definitely getting ready and that's why this was kind of freshen our minds from aboard meaningless.
Okay, great. Thanks, So I have more questions, but I'll jump back.
Thank you and all of those.
Thanks Scott.
Thank you. Our next question will come from Greg Wasikowska with Weber Research. Please go ahead.
Hey, good morning, David and Andy how are you doing.
Good morning, Greg.
So.
First question can you just remind us what.
Typical seasonality looks like for you guys throughout the year and how that might differ this year in fiscal 'twenty three with.
It supply chain and having a chunk of your backlog.
Our Q2, historically not always would've been our weakest quarter, mostly because of the summer shutdowns in Europe .
And some other issues, so, but that's not always the case and.
It's really hard today to.
Comment on seasonality because there's so much disruption across as you noted not just the supply chain upstream or downstream, but also upstream for our customers. So I'm a little hesitant to comment on seasonality in this in this current climate, but I would say historically our strongest quarter.
There was our fourth quarter and our weakest quarter was our second quarter, but but again that's.
Thats not a R squared of 1.0 correlation it does change year to year.
Got you fair enough.
And then next is kind of a two parter on <unk> on the EV charging.
Any updates.
Sorry to I'll call them, the anchor customers and <unk>.
Securing our first legitimate order.
And can you give us an expected timeline on.
When you expect that to happen and then second part of that any of it any updates on the broader strategy as well in terms of thinking about other applications like highway highway corridors and or for fleet use yes.
No great question, So I was hoping to have that.
The documents are in <unk>.
Legal right now between us and the customer so it's kind of an open to have that wrapped up for this call, but we didn't quite get there in time, but we really want first revenues if our suppliers cooperate with US we want first revenues at the end of this fiscal year.
And the the projects have actually had the units have gotten bigger so.
When we were talking about it like a 500 kilowatt hour unit before.
Double that these days so the customer really is I think I said it on the last call. We've had a heck of a time getting them nailed down on exactly what they want.
But that said things are progressing well and I like your question because.
We we've had our business review meetings this week and it was interesting how each of the product management leads.
Ed identified opportunities for this technology in their own lines of business.
You can think of in a distribution center environment.
There's plenty of applicability here by using a combination of solar energy storage and charging a fleet of electric forklift trucks.
It's a very viable.
Option and really the benefit and I think this is what we have to do a better job of explaining to folks.
Again the.
The power draw in consumption from these electric vehicles, if you want to charge them rapidly as very very excessive.
And Electrify America charging station this weekend and there was a line and it was they had 403 400 350 kilowatt Chargers and then for 150 kilowatt.
So they had to bring in a big transformer and a big power feed to feed all those stations.
<unk>.
As you can probably imagine where you want to put charging and where power is available or readily available don't won't always intersect. So by using our storage battery you can hasten the deployment you can get there faster without as much.
Bureaucracy and certainly you avoid the cost of some of these big Transformers and high voltage feeds. So we're super excited about expanding this space I've I've really maybe to a fault, but I've really tried to keep the team focused on the initial.
Commitments to customers before we start spreading our wings too much but.
Got.
Each of our lines of business now is seeking opportunities for this technology and the basic we've made.
Tremendous progress.
And one of the pictures, we have in the deck you can actually see.
A fully functioning system and its all Enersys technology I think that's really important if not we arent cobbling together components from other manufacturers.
Our battery modules and our Chargers.
Packaged differently.
We've added pretty good drag probably 30 software folks added to the P&L to help get this thing to market.
But it's gone extremely well.
And.
I couldnt be more excited and clearly the cost of fuel.
And some of the issues can only hasten the rate at which electric.
Vehicles are put into service.
Alright, Thanks, David I'll jump back.
Thank you. Our next question will come from Greg Lewis with <unk>. Please go ahead.
Hey, Thank you and good morning.
Dave I was hoping you could talk a little bit about.
Whats going on in the led market.
Ben.
An interesting couple of weeks with lead pricing kind of kind of rolling down here.
I guess two questions really any kind of sense for what's driving that recent weakness and then as we think about.
Your lead procurement.
Like when should that the recent drops startup maybe benefit numbers yes.
Yes.
So I just I guess it was a couple two or three weeks ago I was down at the Battery Council International Conference.
As you can imagine lead batteries.
Far and away the largest.
Use of led these days.
It's the dominant use of led these days and more specifically the dominant use of led.
As starter batteries for internal combustion engines. So we get we could see the forecast that's usually a fairly predictable.
Number of battery units.
That are manufactured for Soi starting lighting ignition.
And I gave up years ago trying to correlate demand.
And in the price of lead.
So my personal view is it's financially driven in many in many cases.
Where the flows of money go to but I can tell you in general on the supply and demand standpoint.
The supply.
Certainly has been impacted somewhat with the old COVID-19 challenges in getting folks.
And to work in the smelters and so forth and then on the demand side. If you can imagine it's been fairly good.
<unk> and predictable.
Even throughout the course of this period so.
Again, I haven't been able to get there we have lead pass through clauses or pricing mechanisms for led with those customers. So.
It flows and it has laid down a little bit and certainly.
We should see the benefits of that in a in a couple of quarters.
And we just have to continue to be flexible.
Okay, Great and then and then.
As we think about the year going forward.
We haven't given guidance on it.
And we don't we don't.
How are we iron ore.
And you talked about cost recapture from.
Inflation in logistics.
As we think about our logistics needs.
Over the next couple of quarters.
How much of that is still a function.
So what I'm wondering is have we kind of fixed or contracted any of that out so whether or not.
I don't know logistics costs go up or downward we're kind of insulated at least for the next couple of quarters.
Yes, I think we do fight for costs. So our incurred show up a quarter. Later, so we do have a certain level of visibility at least in the next.
In the next 90 days.
I don't know that we fully know yet the impact of these Chinese shutdowns I don't know that thats fully well understood im nervous about freight congestion again in some other areas. So.
I don't know that Thats fully.
Understood for US one of the one of the big drivers.
And it's been disappointing frankly.
Because we've been talking about it too long.
As repatriating.
Uh huh.
Or at least onshoring of lot of our electronics goods on the on the energy systems side of the business because we're attracting a lot of tariffs I mean tens of millions of dollars of tariffs we've had to pick up in <unk>.
And our our onshoring efforts had been delayed because our contract manufacturers in North America have the same challenges as everybody. They can't get enough people they can't get enough semiconductors. So its been and as you can imagine enersys isn't the only company trying to get away from Chinese supply.
Because of the tariff situation. So that's been that's been frustrating that's absolutely part of.
Part of the pressures, we feel we have made progress there.
We are probably at least a third of the way through what we wanted to.
Onshore.
But we by now.
I would have hoped we had been would have been at 100%. So our CMS are are really struggling as well. So it's I think the key messages. We wanted to deliver on this call and I think Andy did it effectively is we do feel confident in our ability to.
To get price.
We just can't get it soon enough.
Always lagging so price lag is something that we have to bake into the models and but we have a lot of confidence in the <unk>.
The piece of that too is that that headwind will become a tailwind at some point, we have to constantly remind ourselves of that and then the other thing we wanted to make sure the message we wanted to deliver it.
As we have gone back and are thinking through what a recession would mean to us and we still feel very good about the backlog and the nature of a lot of the demand be it defense five G CPUC.
Theres a lot of things in there that we don't think are necessarily going to flex down.
So.
That's sort of a long winded answer to your question no that was great Super helpful. Everybody. Thank you very much.
Thanks, Craig.
Thank you as a reminder, if you would like to ask a question. Please press Star then one our next question will come from Brian Drab with William Blair. Please go ahead.
Hi, Good morning. This is Blake Keating on for Brian .
Hi, Blake.
You talked about you touched on it a little bit in the prepared remarks, but can you elaborate on the market dynamics for the <unk> small cell rollout, what's been causing the delays.
And if you're.
Okay.
Adding anything to your solutions I know you guys had mentioned.
Frequently had been.
Because the interruptions within some of the challenges.
So if you're adding any of those solutions to help mitigate that.
Yes, I would say that I think there's some technology issues that have impacted.
Decision to focus on the mid spectrum earlier on I think the.
Some of those issues, there's probably some supply chain and microprocessor issues involved in where the.
Where the customers started where they wanted to I think there was some pressure from the competitive environment I think one of the big carriers jumped out.
Rapidly with the mid spectrum campaign, and that forced to everyone's sort of to refocus off of some of the small cell.
Ultra wideband type of activities more to the mid spectrum.
So.
Then spectrum availability, obviously I think it's I don't think it's an easy answer I think what is important though.
As for our investors to understand is we are we sell power and batteries up and down these telecommunications networks.
So whether it's mid spectrum high frequency are small so we've got.
We've got a place in the market, we feel particularly good about the small cell arena simply because we think we have some very.
Legitimate technology advantages in that space. So we think we can command a higher share.
As the small cell and better margins hopefully as the because of those technology advantages.
As that portion of the market starts to accelerate and as I said in my remarks, we do expect that to.
Really pick up speed in the 2024 2025 and ramping until then so we do have.
We have projects throughout our small cell portfolio, it's just not where we thought it would be a few years ago in terms of the volume, but that said it's still.
It's still a tremendous opportunity for us and we've got plenty of backlog and plenty of demand in our energy systems business right now really for US it's about executing on.
What we have already but that the small cell opportunity is certainly still in our headlights.
Got it. Thank you and then just one more for me.
Feedback early feedback have you gotten now that you've had the Mojave home energy system launched for a while.
Any early wins or unexpected challenges there.
Yes supply chain issues.
Okay.
Yeah.
Can't build them right now we were really having we are struggling with the CMS CMS are really having the same problems we are.
So it's getting the chipsets it's good.
Getting the painful.
It's really a question of priority and what we have everybody working on is scrambling. So.
The product's fantastic and whereas another version of it coming out later that we're continuing to work on with engineering.
At a better cost point, but in the meantime.
We are really struggling on the supply chain with all of the new products because it comes down to the same issue.
Chip.
Manufacturers that ship distributors, they're all out there putting everyone on allocation so when you're trying to bring something new to the market that you haven't delivered in the past, it's very hard to get an allocation because they're just they've got limited supply and they divvied up based on your historical usage patterns.
So and as we noted and as Andy pointed out again, that's trapping a lot of electronics in our backlog.
Good news about that is it tends to be our richest margin business and that's part of the.
The biggest issue with our <unk> businesses, we got a late jump on the price recovery, but the second biggest issue there is.
As the mix has been.
We've been selling more batteries in service in cabinets and not enough electronics, which hurts the mix.
Got it thank you I'll pass it along.
Alright.
And our next question will come from John <unk> with Sidoti <unk> Co. Please go ahead.
Hi, good morning, Thanks for taking the question.
Two questions one it seems like the biggest concern.
Recessionary front is in the motive power business.
Shortly.
Lance the order trends globally or anything in those order trends that give you reason for concern.
No actually.
No.
Orders are still very robust.
I think the Q4 orders were good where we're at Q1 to date there is nothing on the.
Theres no blinking lights on the dashboard.
But certainly we read all the same things you do and we want to be we wanted to be ready, but right now orders here.
Still.
Strong.
Okay.
Just on you talked about margin headwinds, becoming tailwind and the mix of electronics is holding you back on the gross margin front.
And price cost recaptured collectively.
Collectively how would you anticipate ending the gross margin profile at the end of this fiscal year relative to the 'twenty one to 'twenty two that you put out for the first quarter.
I'll, let Andy take a crack at that it's going to be difficult for her unless she can tell.
I can get the ops guys to tell me how much can you give me a first yes Paul.
P chips, we can get delivered this month.
Go ahead, Andy you can take a crack at it I mean, I think John one thing that might be helpful. Just to give you give you an idea.
When a quarter ago. When we were looking at what was going to happen going out this quarter.
Between in a three month timeframe, there was $20 million more costs than we had anticipated now.
Pricing, we were able to increase that a little bit, but then we increased our pricing that we'll see in the second quarter. So it's constantly.
We get the surprise of $20 million additional cost, we're able to maybe get $5 million of that additional price to capture this quarter, but then the other $15 million gets layered onto the quarter. After so it's kind of like a domino effect just because of the lag.
So I will tell you we have in there what we what we see in our Strat plan and we refresh our strat plan every year, we presented at Investor day, but every year as part of our ongoing cycle prior setting our budget our lines of businesses in a look at all the markets the pricing what's happening and the Delta is that it's really comes.
Unchanged I mean, we've got strong.
Markets from a CAGR standpoint, there's a lot happening with five <unk> maintenance free growth transportation market share A&D.
The higher value products that we're doing.
PPL growth right on plan the lithium.
<unk> that we'd have you all approvals are putting us on track.
Systems and technology to everything urine and his team are doing there in fact, we hadn't included fast charging storage those items are still real we're making progress.
The iOS opportunities, where we're creating that we're doing footprint rationalizations, we're having lean initiatives.
Just been a lot of headwinds from supply chain Opex leverage still real we're realizing it and as volume increases even more there'll be even more of that out there and then we have the price recapture lag that will happen. It's just a question of when.
So.
We've got good visibility going out a quarter after that it really is we focus on what we can control, we're trying to be more proactive getting onto a backlog quicker and putting pricing actions in place.
Hard for us to say, when it's going to normalize and.
One other comment I'll make is we spent a lot of time looking at liquidity and cash flow to get comfort level. We do sensitivity analysis on if theres, a significant recession or slowdown or if theres significant continued to place in.
Goldstar are possible.
We feel very comfortable with our strong balance sheet, we prefer the recession.
And frankly.
I hate to say it but I.
I hope that answers your question John Okay.
Okay fair enough. Thanks for taking my questions.
Alright.
I am showing no further questions in the queue at this time I would now like to turn the call back over to Mr. David Shaffer for any closing remarks.
We want to thank everyone for joining us today, and we look forward to providing further updates on our progress on our first quarter 2023 call in August have a good day.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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