Q1 2023 EnerSys Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the first quarter fiscal year 2023, Enersys earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press Star 111.
Your telephone please be advised that today's conference is being recorded I would now like to turn the call over to Lisa Hartman, Vice President of Investor Relations. Please go ahead.
Thank you operator, and good morning, everyone on the call with me. This morning are David Shaffer President.
President and Chief Executive Officer, and Andrea Funk, Enersys, Executive Vice President and Chief Financial Officer.
Last evening, we published our first quarter of fiscal year 2023 results and filed our 10-Q with the SEC, which are available on our website.
Also posted slides that we'll be referencing during this call. The slides are available on the presentation page within the Investor Relations section of our website at Www Dot <unk> dot.
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. Our actual results may differ materially from these forward looking statements for a number of reasons are forward looking statements are applicable only as of today August 11th 2022 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 EBITDA, which excludes certain items.
Explanation of the differences between the GAAP and non-GAAP financial metrics. Please see our company's form 8-K, which includes our press release dated August 10, 2022, now I'll turn the call over to our President and CEO , Dave Schaeffer.
Thanks, Lisa please turn to slide four.
The first quarter of fiscal year 2023 was a continuation of many of the trends we saw in the back half of fiscal year 'twenty two.
Demand for our products was robust across all segments, our backlog grew to yet another record high.
Ongoing supply chain and inflationary pressures masked the inherent profitability of our business.
First quarter net sales were $899 million, an increase of more than 10% over Q1, 'twenty two driven primarily by our strong volumes and ongoing aggressive pricing actions, partially offset by FX headwinds. We also reported first quarter adjusted earnings of $1 15 per diluted share.
Which was in line with our guidance.
Excluding the FX headwinds and shutdowns at our Missouri plants due to serious supply chain issues. Our first quarter revenue would have been approximately $40 million higher.
A record $1 billion first quarter of orders continue to outpace sales in the quarter growing our backlog by more than $150 million to $1 5 billion, 70% higher than Q1 fiscal 'twenty, two and a salary of 165% higher than Q1 fiscal 'twenty one.
We had our third consecutive quarter of over $1 billion of new orders in the quarter, which were 113% of our sales.
Our backlog is healthy with nearly half attributable to program wins for discrete energy systems projects and organic volume.
More details about the composition of our backlog are shown on slide five.
As noted there is a lot of value trapped in our backlog, we incur opex to get orders not when we ship them. Therefore minimum incremental opex will be incurred once backlog was released resulting in higher margins largely attributable to energy systems.
We have a reputation in the industry for exceptional customer service and we back that up in this challenging macro environment by staying in constant communication with our customers regarding material shortages inflationary pressures and product availability.
We're committed to meeting their needs to the greatest degree possible and then return they have remained loyal to enersys with their business.
Similar to recent quarters Q1, 'twenty, three and dirt a staggering amount of volume adjusted sequential cost increases that were mostly offset by incremental price mix, which Andy will discuss further in.
In addition, the historic inflation and labor shortages and supply chain challenges continue to rear their ugly head in the quarter, though where was that more apparent than in our Missouri facilities, where supply shortages caused outages in Q1, reducing revenue by roughly $10 million of.
Of higher margin <unk> sales and.
In addition to ambiguity regarding when supply chains and inflation will normalize there is considerable uncertainty in Europe as to how energy will be allocated and what the ensuing impact will be.
To counter the ongoing pressures our pricing actions continue to take hold and we are pleased with the significant progress our teams are making to realize our underlying financial potential. We're laser focused on the areas of our business that we can control, including delivering innovation and enhanced technology in our product portfolio that will set us.
Apart from our competitors, both in the near and long term.
Global Megatrends, such as five G World Digital opportunity fund growing data centers material handling electrification and automation grid stabilization and electric vehicle charging continue to have long tailwind that we believe will fuel our future growth with all of that as a backdrop.
I remain more confident than ever we will continue to manage through today's unique and challenging market and we will emerge well positioned to deliver exceptional value for our customers and our shareholders.
I will now walk through our business segment highlights please turn to slide six.
Energy systems saw continued strong demand and volumes in the quarter reporting revenue of $409 million or more than a 10% increase compared to the same period.
Same prior year period.
Adjusted operating margins took a slight step back in Q1 'twenty three due primarily to the previously mentioned headwinds, including the Missouri labor and supply shortages, some isolated delays and price recovery and elevated freight and tariff expenses from higher Interplant volumes as China open back up.
These headwinds were partially offset by tight opex controls the.
The team is extremely focused on resuming the margin recovery momentum we saw throughout the second half of fiscal 'twenty two.
With continued price increases in an environment that is challenged by ongoing cost increases and supply headwinds.
Once again demand was extremely strong in energy systems with backlog, increasing from $740 million at fiscal year end to $847 million at the end of Q1 'twenty three.
This compares to $397 million at the end of Q1, 'twenty, two and $260 million at the end of Q1 'twenty one.
Infrastructure spending and network upgrades resiliency Capex funding continue to fuel an even more robust marketplace. The California public utility commissions program, which includes the grid shutdowns and extended network backup mandate is continuing to do well, we're ramping our field deployments of <unk>.
Systems with the network operators per the California mandates are fast charging storage initiatives. So additional momentum in the quarter as well both on software development and customer specification design and we remain confident we will book our first orders towards the end of this fiscal year.
Finally, recent legislation, including the rural development fund is helping to drive drive demand for our products.
<unk> Communications Buildout also continues to move forward as evidenced by positive public commentary by many of the large telecoms.
We're benefiting from customer Capex spending focused on expanding mid band capabilities and expect to take additional wallet share when those dollars are allocated more towards small cell build outs.
We're well positioned and small cell power due to our technological strengths and go to market strategy. Our forecast for small cell build outs is unchanged from last quarter with an expected ramp up in $2023 2024 accelerating into 'twenty five 'twenty six.
Despite the strong product demand trends energy systems continues to face significant supply chain and cost headwinds, particularly with higher margin electronics, which were chasing with additional price increases our engineering and operations team members have been working closely to overcome shortages through product redesign and onshoring of.
Contract manufacturing.
As we navigate through the current cost and supply environment and as we release and monetize the backlog, we expect robust demand for energy systems products and catch up with price cost recapture to drive long term profitable growth.
Motive power once again delivered a solid quarter with revenue growth over 9% compared to Q1, 'twenty two and has been able to offset significant cost increases with ongoing pricing actions tight expense controls and the favorable mix impact of our higher margin maintenance free sales or re.
<unk> reflect the continued customer enthusiasm over our proprietary nexus <unk> and lithium ion maintenance free product offerings. We also overcame a dramatic decline in the euro during the quarter, which translated into a $3 million.
Quarterly operating earnings impact on Q1 from currency alone.
Overall market dynamics point to a strong and steady growth for motive power with benefits from the trend to automation and electrification of material handling equipment.
Along with the value of our maintenance free technologies and advanced wireless charging solutions expected to have a lasting impact on our growth in years to come.
Relative power should also benefit from improved maintenance free and charge your mix additional price recapture and structural cost improvements such as the announcements of our Tennessee plant closure in our Richmond, Kentucky Mega motive power DC openings. Additionally, while price recapture has been steadily improving.
Were continuing to catch up with the cost absorbed in recent quarters and remain committed to recovering ongoing cost headwinds in this segment.
Our specialty segment reported revenue of $123 million in the quarter, a 14% increase year over year, which was driven by strong volume and improved price mix. Despite the continued challenges of labor and supply shortages, including the Missouri shutdown mentioned earlier, along with the normal seasonal.
In both transportation and aerospace and defense.
These headwinds we have remained aggressive with our pricing actions and are maintaining tight opex controls.
Similar to our other segments demand continues to be strong throughout the specialty business.
In transportation, we further increased our share of the class eight markets as the Oems remain constrained by supply chains and labor headwinds. However, we sensor supply chain disruptions are somewhat receded with their ordering patterns beginning to normalize as they begin to clear their backlogs and we're not hearing about a slowdown.
From our class eight customers.
We're also progressing exciting battery programs with class eight Oems for their next generation Drivetrains that will increase enersys is TPP and lithium content.
There are many opportunities for growth among the large auto parts companies with which our team is diligently pursuing.
And in aerospace and defense given the combination of leading edge products in the current geopolitical environment.
Our best in class technology sets us apart in the large transportation and A&D markets, giving us incredible confidence in our long term growth opportunity for Enersys as we focus on taking share with our proprietary <unk> and lithium technologies.
Moving onto some developments in our production capacity and operational efficiencies.
Despite macro headwinds are global TPP production output pace increased 13% in Q1, 'twenty three versus Q1, 'twenty, two and would have grown 17% on year, if not from the Missouri outages.
Costs and supplies have been volatile we are much better positioned from a production standpoint than we were with the calendar year began.
With plans in place for continued annual <unk> capacity expansion as we have previous previously discussed <unk> capacity is distributed across all three lines of business in which demand for our proprietary technology cannot be satisfied.
From an operational efficiency standpoint in June we announced the closure of our <unk> facility. The transition process is going well, so far with a favorable inventory position and key employees taking positions elsewhere within the company, we will continue to seek out opportunities to improve our overall cost structure.
Enhanced manufacturing efficiencies and fully leverage our global footprint to create exceptional earnings leverage this leverage will be much more pronounced when the current inflationary and supply chain environment normalizes.
Please turn to slide seven.
We also continued 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.
We believe we must always be investing and innovating regardless of market conditions to maintain our leadership position and know our customers will continue to come back to us for their energy storage needs because of this approach. Please.
Please turn to slide eight on.
On the ESG front, we made several recent announcements related to governance and our climate initiatives first I am pleased to welcome Mr. Rudy Winter to our board of Directors Rudy is the president of National Grid's, New York business.
Leading national Grid's regulatory energy delivery portfolio that provides electricity and natural gas services to customers across the state of New York.
The breadth and depth of rudi's experience in the utility industry, particularly with clean energy and electric grid resilience will provide immeasurable value to Enersys is leadership team.
We also announced our climate neutrality goals to achieve scope, one greenhouse gas neutrality by 2040 and scope to neutrality by 2050 as part of our commitment to building a sustainable future.
Our operations team has already identified initial capex requirements to achieve these goals, which will be including included in our upcoming strategic plan.
Last but not least we submitted our first carbon disclosure project questionnaire response in late July we look forward to feedback from the CDP and our shareholders. Once the report is publicly available.
Please turn to slide nine.
I am very excited about where the company is going well, we expect to face ongoing challenges with supply chain constraints and inflationary pressures. We remain focused on what is in our control.
I'm extremely proud of our employees continued dedication hard work creativity and flexibility in addressing each of the macro challenges. They face they have a proven track record of meeting the unique needs of our customers and have the utmost confidence that they will continue to do so regardless of what the market throws our way.
Not only are we managing through the current environment, but we are setting ourselves up for long term success as well in the past several quarters, we have maintained or many cases gained market share in all of the business segments aggressively pushed through pricing actions that will ultimately catch up with inflation maintained a disciplined focus on operating.
Expenses and placed a major emphasis on technology and innovation to ensure we stay ahead of the curve and our customers' needs.
Each of these levers combined with long term industry tailwind and historical demand for our products positions Enersys were incredibly strong results as supply chain as a supply chain and inflationary challenges subside.
We are in the process of completing our annual strategic plan update.
Forward to providing you with a brief refresh later in the fiscal year.
With that I'll now ask Andy to provide further information on our first quarter results and go forward guidance.
Steve I will focus my discussion this morning on the key financial metrics and takeaway for the quarter for more detailed information about our results. Please refer to our first quarter 2023 press release and the supplemental slides that were posted to our website last night.
For those of you following along on our Powerpoint Slide I will begin on slide 11.
Our first quarter fiscal 'twenty, three net sales increased more than 10% of the prior quarter to $899 million and.
8% increase from price mix improvement and 7% from organic volume growth, partially offset by a 5% decrease in foreign currency translation impact.
The Missouri sitcom Steve mentioned reduced revenue by approximately $10 million with a 3 million dollar drag on operating earnings due to a richer mix of revenue being impacted and with $2 million of incremental costs from the shutdown being deferred until Q2 2003, when inventory will be sold.
Adjusted operating income was $65 million in the first quarter down slight.
Slightly from the $67 million reported in the fourth quarter of fiscal 'twenty, two net of an increased FX drag and down $10 million over Q1, 'twenty net of over $4 million of FX pressure with the remainder due largely to the price cost recapture lag.
Adjusted EBITDA for the first quarter with $86 million and 95% of net sales compared to $94 million and 11, 5% of net sales in the prior year first quarter with over $5 million at the erosion due to increased FX drag on EBIT.
It is worth noting that our margins are artificially deflated from the margin math impact cost pass through.
A reconciliation of net earnings to adjusted EBITDA is available in the appendix of our supplemental presentation for your reference.
Our adjusted EPS was $1 15 in the first quarter of fiscal 'twenty, three which is the midpoint of our guidance compared to $1 20 in the fourth quarter.
I will present, a reconciliation of Q1, 'twenty three sequential and year on year EPS shortly.
Please turn to slide 12.
On a segment basis compared to prior year, all lines of business posted significant revenue growth driven by dramatic price mix improvement as our pricing actions continue to aggressively chase the unprecedented cost increases we've incurred over the past year and will provide tailwind from cost stabilized and we recapture mark.
<unk> from the pricing lag.
More detailed sequential and geographic results can be found in our press release and in the supplemental slides.
Please turn to slide 13 for more detail on our price cost recapture trend.
On a sequential basis, we incurred approximately <unk> 50 per share volume adjusted incremental cost in Q1, 'twenty, three which are mostly negated by 40 per share of improvement in price mix.
While the price mix improvements were significant pricing like cost by approximately <unk> 10 per share in the quarter.
We offset this impact with tight spending discipline, reducing opex by <unk> 15 per share sequentially.
Cost increases in the first quarter were driven by higher manufacturing costs due to spikes in energy rate, particularly in our European plants. As a result of the ongoing war in Ukraine, as well as higher costs from labor challenges and supply disruption.
Increased freight and tariffs as we replenished inventory from China to the Covid shutdown with lifted and persisting led and non led commodity inflation.
Okay.
Taking a step back puts the massive inflationary pressures into even greater perspective.
Paired to the first quarter of fiscal 'twenty, one we've incurred aggregate cost increases of over a $1 70 per share with $1 35 per share having been offset by price mix improvement.
Approximately 35 per share quarterly price cost recapture opportunity when cost stabilized on top of the impact of future mix improvement when supply chains become balanced.
Despite the difficulty of predicting when supply chain inflation with normalized history tells us they will and when they do these current margin headwind will become tail wind as or Onshoring initiative take hold mix improvement opportunities in March and our pricing actions finally catch up from the Multicore.
<unk>.
Please turn to slide 14.
Looking at our quarterly sequential EPS adjusted EPS Bridge.
Q1, 'twenty three adjusted EPS was in line with expectations coming in at $1.15 per diluted share.
As previously mentioned the sequential price cost recovery like pressured earnings by approximately <unk> 10 per share and we incurred a <unk> <unk> per share reduction from volume due to normal seasonality decline on top of the Missouri closures.
Our strict focus on Opex restraint contributed a sequential boost <unk> 15 per diluted share to achieve our guidance for the quarter. Despite five cents per share pressure from FX and interest expense net of our lower share count.
As with all multinational we've been increasingly impacted by the recent dramatic foreign exchange movement.
Regarding the impact of FX on our Q1 results.
In Q1, 'twenty three operating earnings were reduced by approximately <unk> <unk> per share after tax from the weak euro which was fully offset by the favorable impact of FX revaluation and other income and expense from the declining euro.
Note that operating earnings is impacted by the relative value of foreign currency. The dollar where other income and expense is impacted by the movement of currencies within the period.
Therefore, we anticipate that we will continue to experience operating earnings pressure from foreign exchange, but the favorable FX revaluation will not repeat in future quarters, if the euro remains at current levels.
Compared to the fourth quarter, the net impact of FX created approximately <unk> <unk> of incremental drag on both OE and our earnings per share and compared to the prior year with pressured by approximately <unk> <unk> per share of incremental impact with a <unk> <unk> per share incremental net drag on EPS.
From foreign exchange after the favorable FX benefit in other income and expense.
Approximating the impact of foreign exchange using the euro as a proxy for foreign currencies and a constant currency basket.
We estimate that the current relative exchange rate create approximately seven to eight cents per share of OE pressure and every additional one movement in the euro versus the dollar impacted operating earnings by a little less than a penny per share on an after tax basis.
This is obviously not an exact science due to other currencies and their respective weightings as well as tax rate and share count, but it is the best directional information we can provide at this time.
Please turn to slide 15.
Our balance sheet remains strong and positions us well to navigate the current economic environment at July three 2022, we had over $380 million of cash on hand.
Our credit agreement leverage ratio was at three times EBITDA does that the high end of our target range as expected.
The quarterly increase in our leverage ratio was primarily due to a $109 million increase in primary working capital.
Working capital increases where necessary to support our strong revenue growth and we're also a result of our strategic decision to invest in inventory.
We have increased inventory of $225 million in the past fiscal year 61 million of which within the first quarter due to increased sales volume higher cost and lead time and are focused on lithium cells led and other raw material components to mitigate supply disruption.
We view this as a significant cash flow cushion when markets stabilize we expect our leverage to remain near the high end of our target range of two to three times EBITDA for the second fiscal quarter of 2023, as we continued to prioritize supporting revenue growth and mitigating our risk of ongoing supply chain headwinds and.
To return to the mid point of our target range when price capture cost and supply chain stabilizes.
Capital expenditures were $23 million in fiscal Q1, 'twenty three and we are largely on track with their capital projects.
<unk> sustained supply chain headwind.
<unk> offer capacity expansion success in fiscal 'twenty, two we remain confident in our multiyear planned ttgl capacity target.
Our capital allocation strategy remains focused on three key priorities.
Investing in organic growth strategic M&A, and returning excess cash to shareholders through consistent dividends and opportunistic share buybacks in.
In Q1, 'twenty, two we've repurchased $23 million of shares and we plan to continue buying back shares after our leverage returns to the midpoint of our target range.
As a reminder, early this year our board authorized an additional $150 million share repurchase program, which was augmented by approximately $30 million in April through our annual evergreen dilution authorization, leaving us with approximately $190 million available for future stock repurchases.
Our strong balance sheet strict focus on managing our operating costs and our ability to quickly adapt to changing market conditions and positions us well for the quarters ahead, and also enables us to retain tremendous upside as supply chain and inflation headwinds recede.
Please turn to slide 16.
While we have not yet seen signs of a slowdown in our business. We remain sensitive to the possibility that numerous economists have been predicting and we're poised to act accordingly.
In addition to the obvious benefits of a strong balance sheet and conservative capital structure Enersys has a number of structural advantages that have mitigated the financial impact to us in past economic downturn.
Further our current business condition to offer unique advantages that would shelter us more so now than in past recessions.
For example, a larger portion over 60% of our business follows GDP independent cycle, which tend to be minimally impacted by an economic slowdown and are fueled by large mega trend, including five that are expected to continue regardless of the macro environment.
Our record backlog and robust demand should delay the impact of a slowdown on our financial results.
The subsequent easing of supply chain disruption should help power profits and also offer mixed benefits.
Stable costs to drive price recovery catch up improvement opportunities with potentially lower cost, creating tailwind from lagging price cost dynamics.
The subsequent easing of supply chain disruptions would help power profit and also offer mix benefit.
And our investment in primary working capital has historically been a cash generator during recessionary periods, providing a very very effective natural hedge on our balance sheet that would only be exaggerated by the strategic investments we've made in inventory this past year.
We have spent considerable time as you would expect conducting a variety of modeling scenarios analyzing what they would mean for the business and looking at what we should be doing today to get in front of potential issues. If a recession were to come.
For example, we've been disciplined with holding Opex at conservative levels and have kicked off targeted inventory reduction initiatives to minimize the potential risk of obsolescence, if demand softens and more exposed to areas of our business.
We're in a very solid position because of the significant pent up demand for our products and the robust product lineup, we have on tap and our experienced leadership teams recessionary playbook, which has prepared us to respond to any economic cycle.
Please turn to slide 17.
Our fiscal second quarter 2023 guidance range is $1 five to $1 15 adjusted earnings per share up from $1 one per share in Q2 'twenty two.
Our guidance reflects the seasonally slower quarter due to holidays in Europe and is also absorbing four cents per share hit from the Q1, 'twenty three Missouri closer and approximately <unk> <unk> per share pressure from FX on op earnings as we assume the euro dollar relationship will remain at Q1 'twenty three level.
And we will benefit from the other income and expense gain we experienced this past quarter when the euro value declined.
We expect our gross margin to be in the range of 21% to 23%.
Our capex expectation for the full fiscal 2023 remains at approximately $100 million.
Reflecting investments in new products, including in lithium production lines continued expansion of our <unk> capacity and cost improvement and automation initiatives.
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 tight labor markets persisting inflation and supply chain.
Challenges.
The closer of our <unk> facility is expected to save us approximately $8 million per year with $2 million of savings beginning in the back half of fiscal 'twenty three.
We will continue to identify opportunities such as this to optimize our operations footprint.
As Dave mentioned, we're in the process of our annual strategic plan refresh.
Timing and market conditions have been volatile this past year, our market opportunities have only continued to grow.
We are confident the true profitability of our business and advancements we have made against our strategic plan will be evident when market conditions stabilize and we look forward to providing you our update later this fiscal year.
This concludes our prepared been overshadowed by tight labor markets persisting inflation and supply chain challenges.
The closer of our <unk> facility is expected to save us approximately $8 million per year with $2 million of savings beginning in the back half of fiscal 'twenty three.
We will continue to identify opportunities such as this to optimize our operations footprint.
As Dave mentioned, we're in the process of our annual strategic plan refresh while timing and market conditions have been volatile this past year, our market opportunities have only continued to grow.
We are confident the true profitability of our business and advancements we have made against our strategic plan will be evident when market conditions stabilize and we look forward to providing you our update later this fiscal year.
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 please standby, while we compile the Q&A roster.
Our first question comes from Noah Kaye with Oppenheimer. Your line is open.
Good morning, Thanks for all the detail.
First question really around price cost expectations.
And what is the price cost expectation embedded in the midpoint of the Q2 guide.
Guide.
And follow up is given the easing in the commodity complex.
Would you expect price cost to inflect.
Positive with.
For the second half of the fiscal year, just based off of your pricing initiatives debate and where the commodity complex is growing thanks.
While she is looking at the numbers.
I would say the commodity started to rollover. This spring for sure we've seen steel and copper and a lot of the things we buy have come down significantly.
And it takes some time, especially for our Es business to flush through the <unk>.
Contract manufacturers and their supply chain and the and the transit times and so forth but.
I totally agree with you that.
That should start to show itself later in our fiscal year. So Andy on the price cost question, yes, Thanks, Noah and obviously, it's an important question.
We're thinking that Clos and we've got a pretty good feel on costs and I think we were dead on this quarter.
We're looking at next quarter, our costs will probably be about a 10% to $15 million increase so that's.
In the range of 25 per share. So obviously there are a few items that we don't it depends on where inventory levels are from a FIFO roll off with some period costs, but in that range. So it's starting to get a little better.
One thing to keep in mind, especially and in a segment like energy systems. So many of our products.
Our items that we source our two contract manufacturers.
So when costs lower.
It has to go to a lot of pockets until it ends up on our P&L. In addition to the.
In addition to the inventory being worked through so we're starting to see signs of cost coming down we're seeing good signals in commodity baskets like Dave mentioned of looking like things have started to level off in April , but we're not yet seeing it on our bottom line.
One other thing just to point out with guidance.
If we start from Q1, 'twenty $3 15, right away, we're absorbing 14th between the OID not repeat higher interest not repeating the.
Discrete tax benefits, we had so you get a dollar one you start then you have maybe.
The cost increase and.
<unk> got slightly lower volumes, that's a purchasing through.
Okay.
Okay, that's very.
Very helpful. It seems like you don't actually need a lot of sequential price increase then to offset the cost increase so so.
Im not trying to pin you down but it seems like.
Getting pretty close to neutral on a sequential.
Please within your sights.
Feel free to disagree with me.
I think thats, a fair comment and I know that the teams are actively and aggressively.
Going at going through the backlog repricing I mean, there's literally thousands of orders that have to be re priced it's Ben.
It's an intense focus focus so certainly.
I think your comment is fair.
Okay.
Hey, I wanted to take Oh, sorry go ahead Andy.
I was going to say I think one thing with how significant were seeing these cost increases I don't know if it makes sense to walk through what we look at when we talk about margin math, it's pretty straightforward but.
Look at Q1, 'twenty three obviously, we come in at a 26% gross margin.
Disappointing, but when you take into consideration the impact of cost. So I'll just walk you through how we look at it if we have sales of $899 million and you pull out the price increases that we had that only one.
Part of the way to offset costs compared to Q1 of 'twenty two that would bring you down to $815 million. So if the price just offsets cost gross profit would be the same. So then you have $815 million.
85 million of gross profit on $815 million of revenue.
End up with a 22, 8% gross profit instead of the 26 and then when you pick up the additional.
Price cost Miss that we had from last year. So when we catch up you end up getting to a 23, 7% gross margin. So this margin math with the significant cost increases that we're talking about.
When it is just a pass through it really does have a dramatic impact on our margins.
Sure Yeah, Yeah, so almost 300 basis points there just on the margin that understood.
Dave.
I'll make up my last question.
Private spotlight, but your comments around Europe , and the energy situation. There I just wanted to pick up on that because I know that.
And the question is.
Are your plants generally in industrial clusters that would typically get priority in terms of energy allocation is there.
How real is the.
Disruption risk potential as we prepare for a difficult winter in the European energy World.
The teams are working on that obviously I think both both of the major factories that would be of chief concern.
Or in.
Industrial clusters as you stated so we.
We don't have a full readout, yes, I don't think anybody does and certainly many of our customers in Europe are also having the same question Mark So as we get more details on that risk score the sharpening of that risk, we'll let you know and let's just hope senior heads prevail over there.
And know that there's obviously the allocation, which the teams are working on and then there's the cost impact I mean, just to give you an idea.
Our our costs our utility costs in our plants were a little over $11 million in Q1 of 'twenty, two and we're over $17 million in Q1 of 'twenty. Three so just to give you an idea that youre absorbing an extra $20 million of utility costs.
Just from last year.
And even the last year being lower went from $11 million in Q1 up to over $16 million in Q4. So.
And we look to offset that with price, but obviously of course this all at the lag as we look to catch up.
Very helpful. Thank you.
Okay.
We have a good chance.
Brian Drab from William Blair. Your line is open.
Hi, good morning, Thanks for taking my questions.
Good morning, Brian .
Good morning, So there's a lot of talk there about price costs, one thing that Dave you said in the opening remarks.
Caught my attention was just a lot of the.
If not all of the selling.
Non marketing opex associated with <unk>.
A lot of the sales that resulted in the large backlog that's already.
Yes.
That's happened and Youre going to get a lot of leverage on those fixed costs.
Youre able to shift so can you can you quantify or talk a little bit more about that.
Take a deal that can be.
Down the road for you guys in a couple of quarters from now in terms of operating margin expansion.
Yes, the drop through should be good. So we are repricing backlog actively we've got two lines of defense one we're physically going in and then we are.
Also have folks at the shipping docks trying to make sure that everything gets shipped out at the at the updated prices. So we're trying to get to the point, where the backlog has.
The same margins gross margin standard margins that we have going forward and then to your point.
And my comment and Im glad you picked up on that a lot of the opex numbers are selling and engineering related we have caps on almost all of our selling incentive program. So even fully capped.
They're not going to have a material impact on the on the numbers. So there is great graph there is great drop through.
<unk> as we start to unload that and then the third piece of that as we've noted to.
Most.
A big chunk of that backlog or in the product portfolio that are constrained, which is typically electronics and <unk>, which both typically have accretive margins. So it's good rich mix in there we are repricing and.
There should be good operating leverage our operating expense leverage as that drops through so.
It is a great opportunity we have to demonstrate that we can get it shift that we need to get more chips allocated to us from our suppliers, we need to get the engineers continuing to redesign we need our onshore contract manufacturers to pick up the pace a little bit we're still dragging way too much tariff.
Than we planned because our onshore CMS just aren't moving fast enough, which is putting a lot of pressure on the ESP Enel. So we've got a lot of work to do.
But to your point there is a tremendous opportunity and I think if you were to assume that at least two thirds of our opex is selling and engineering and just work it back from there.
Okay. Okay. Thanks.
Bigger picture question.
You.
But a lot of time here is really getting the high speed line.
Up and running and where you wanted it I was wondering if you could just step back and look at.
Yes.
How that line is running.
What kind of grade would you give that project relative to what you are.
Your expectations were.
Is there the opportunity there.
Replace more of your capacity with the high speed line, if you're really happy with that.
Right.
The high speed line itself.
Is not the issue.
On the issue, we're having today is providing enough plates to feed it so it makes batteries in it.
Alarming rate I guess compared to where we were.
It's our ability to provide.
Enough plates and as U S.
We had a significant supplier disruption this quarter, which was not anticipated and not included in our guidance, but in addition to that we still have.
Ways to go in terms of stabilizing our employment forces there. So I would say most of the issues today outside of the shutdown we were given by our supplier.
Or just about training and productivity, it's just getting that workforce stabilized.
That part of Missouri as I've noted on prior calls is exceptionally low unemployment.
So.
As the.
As the GDP and the markets start to stabilize and we can get that workforce stabilized we should be able to feed enough place to continue to grow that said, we have grown as noted even with the shutdown were up double digits versus year on year on year in terms of volume so.
It's just an ongoing.
But I would say principally most of the issues today.
Are related to people in Missouri, it's not the equipment itself. So I guess, we can.
Give it a greater of an incomplete because theres still work.
Okay and then just quickly are you generating material revenue now in the EV market and what's the outlook for that revenue opportunity in it.
That mainly lead acid or lithium or both.
In the EV market, we have no material revenue our biggest project is our DC fast charge project, it's lithium based.
We've made again continued as I noted in the prepared remarks, we've made continued progress with our customer.
We had hoped as I said last call that habit.
The Mou signed it hit at it tripped the spending authority levels. So it's up to their board level. So it had to go in for a next level of signature so.
Yes.
As I said, we still hope this.
Later this fiscal year to start to book.
Book, our first revenue in this area.
And we're just we're just tremendously excited about the project and Theres just any number of green shoots that can develop.
From from this program and we just have to continue to focus on.
And even starting to take advantage of some of the legislation that's probably going to pass I think theres significant funding that's been outlined for bidirectional charging which is within our capability. So.
Again, a great opportunity for us and it's going to be lithium based.
Got it okay. Thank you.
Yeah.
Thank you as a reminder to ask a question you will need to press star one one on your telephone.
Our next question comes from Greg Koski with Webber Research Your line is open.
Hey, good morning, David Andy how are you doing.
Hey, great good morning.
So ill.
Volunteers tribute to ask about inflation reduction Act, David just you just kind of touched on it but.
Obviously, a lot to get our arms around and thinking about everybody in the space. It would just be nice to hear.
Your take on it.
What gets you most excited when you look at what's potentially included there.
I think in general it's just the.
The commitment by.
D C to continue to advance electric vehicles and as we've as we've said to you we've identified our niche of that space is being those folks that want to recharge their electric vehicles quickly I think Noah and I had a conversation year on year and a half ago.
Most TV folks charge at night, just like I do in my electric vehicle, but there is times when you.
You do have to charge quickly.
And we are focused on providing a charging system.
Net charges the car as fast as the car can accept the energy. So we're focused on the hyper fast markets. We're also focused on those areas of the country.
There there is not the available AC power to directly tie that.
Charge or to the grid. So you need to put us shock absorber in a sense between the grid and the vehicle to.
And to dampen that severe impact that that electric vehicle charging has so we're using a large lithium battery bank to absorb that shock and moderate the impact on the grid. So we've gotten tremendous impact.
As I noticed.
As I noted earlier.
We keep having the pushback because the opportunities.
I really challenge the team to get this first.
<unk> out the door before we start chasing too many others and get the technology right, but these just become building blocks and can be applied in so many ways.
And we're extremely excited continue to be about the impact this can have.
For all of us in the future.
Awesome, great and that kind of leads right into my next one.
The EV charging product outside of the.
One or two major customers I'm, just curious what the commercial backlog is looking like there.
Are you guys kind of waiting to get that first one over the line before.
Turning it up or would you do pilot programs or demonstration programs with other customers.
But maybe it wouldn't get publicly announced but is that is that something that you guys are focusing on in the background are kind of waiting until that first and I'll get to over the line.
With the sales funnel is filling up.
Without a doubt there's some fleet charging opportunities we've entertained that that go in addition to our initial focus which is on this.
Commercial real estate folks.
So.
But to your point I really.
Resisted and have even held the sales folks back from from making any sort of commitments until we deliver the thickness. Peyton you may now disconnect and so thats. The initial focus right now and even this first opportunity, which again, we should be in a position at some point soon to dimension the opportunity.
Even this first opportunity is very significant we will have.
A very measurable impact on Enersys.
Great Awesome. Thanks, Ed.
Thank you.
Thank you and I'm showing no further questions at this time I would like to turn the call back for management for any closing remarks.
Great well. Thank you everyone for joining us today, and we look forward to providing further updates on our progress on our second quarter 2023 call in November have a good day everyone.
Yeah.
This concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly to raise Johan during Q&A you can dial one one.
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