Q3 2023 EnerSys Earnings Call
The conference will begin shortly.
Raising the lower Johan during Q&A, you can dial star one one.
[music].
Ladies and gentlemen, thank you for standing by and welcome to the third 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 will be a question and answer session to ask a question.
During this session you will need to press star one one on your telephone keypad.
Please be advised that today's conference call is being recorded at this time I would like to turn the conference over to Lisa Hartman, Vice President of Investor Relations.
Good morning, everyone welcome to the <unk> Q3 fiscal year 2023 earnings conference call on the call with me today are David Shaffer, President and Chief Executive Officer.
Andrea Funk, Enersys Executive Vice President and Chief Financial Officer last evening, we published our third quarter fiscal year 2023 results and filed our 10-Q with the SEC, which are available on our website. We also posted slides that will be referenced during this call. The slides are available on the presentations page.
Within the Investor Relations section of our website at Www Dot <unk> Dot com.
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 February nine 2023 for a list of forward looking statements in fact.
Which could affect our future results. Please refer to our recent 10-K filed with the FCC.
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 differences between the GAAP and non-GAAP financial metrics. Please see our company's.
Form 8-K, which includes our press release dated February eight 2023, now I will turn the call over to President and CEO , Dave Shaffer.
Thanks Lisa.
Good morning, everyone.
Please turn to slide four.
We delivered strong Q3 results reporting $920 million of revenue and $85 million of adjusted operating earnings our highest revenue and highest adjusted operating earnings in the company's history as all three lines of businesses performed well.
We realized the second consecutive quarter of significant adjusted gross margin expansion driven by impressive price mix improvement and continued robust demand for our products and all of our end markets.
Interest and FX rate headwinds as well as ongoing supply chain and inflationary pressures, we reported third quarter adjusted earnings of $1 27 per diluted share above the midpoint of our guidance and a 26% increase versus a $1 one per share in Q3 dollars 22.
As we've mentioned previously the inflationary impact of these past two years has been truly unprecedented.
For perspective, our Q3 23 costs were $115 million higher than in Q3, 'twenty one before inflation really began to rise this annualized as to roughly $460 million of higher cost were approximately $9 per share of EPS.
Pressure, which doesn't include the incremental impact on primary operating capital and interest expense.
While we've experienced timing delays in price recapture our focused efforts are now becoming visible in our results with opportunities for further mix improvement.
Pos or Enersys operating system savings to expand profits in upcoming quarters, while some commodity and freight cost pressures have lessened other supply chain shortages persist. Meanwhile, certain commodity prices remain elevated relative to and in some cases are even.
<unk> to rise versus historical averages were.
Our mitigating our exposure to both through ongoing price recovery increased stocking of critical raw materials and alternative sourcing we remain.
Vigilant in monitoring the global supply chain environment evolution, including energy allocation in Europe . Okay.
Commodity prices as China reopens from Covid shutdowns.
Please turn to slide five.
Backlog was up 11% versus prior year, but declined modestly for the second consecutive quarter, particularly in energy systems to $1 3 billion. Additionally, it is worth noting the calendar year and is often a seasonally lower quarter for new orders in energy systems.
Our backlog remains healthy at near all time highs and demand is robust across all our lines of business.
Please turn to slide six.
We are delivering on our innovation roadmap with proprietary technology solutions that are defining the future of energy transition.
For example, we're excited to have received our first orders for motive power wireless Chargers and look forward to showcasing our maintenance free battery and wireless charger solutions at both pro Matt.
Largely Matt Tradeshows this spring.
Demand for our <unk> and lithium maintenance free batteries is growing as customers across all of our end markets recognize the competitive advantage of our offerings, which help them achieve their operating efficiency and sustainability goals through higher energy density throughput software management capabilities and.
Value added services.
We are advancing our fast charging storage initiative with our near production Great system now fully operational at our Tech center, including new capabilities, such as bidirectional grid connection combined with our recent certification for open ADR, a software standard, allowing automated demand response to.
The grid our system offers further value for our customers. The team has also increased focus on our supply chain as we progress on our production roadmap.
I'll now briefly walk through our business segment highlights the.
The slides contain additional details about each line of business that I won't cover in my comments.
Please turn to slide seven.
Continuing its positive momentum energy systems saw a solid demand in the quarter, particularly in broadband and data centers reporting revenue of $434 million or 13% increase compared to the prior third quarter.
<unk> ability was also much improved with adjusted operating earnings increasing nearly 170% year on year.
We anticipate our topline growth to continue flowing down to the bottom line as we execute our price cost recapture strategy and see a richer sales mix with supply chain improving.
There is much to be excited about in energy systems with many of the major cable companies announcing capex increases for calendar year 'twenty three.
The rollout of our new product pipeline and incremental opportunities for enersys, such as the rural digital opportunity fund, our art off or.
<unk> momentum is building with one of our largest cable customers being the biggest winner of dollars to date.
To help dimension this opportunity approximately two 5% of their 5 billion spend applies to network powering, which we would expect to dominate participation in over the next several years.
As a leading innovator of critical power solutions to telecom and cable companies. We continue to see <unk> build outs is favorable to our business over the next several years. In addition to new growth opportunities and activities that Msos cable customers are expected to grow their wireless businesses and invest.
And the next generation of DOCSIS network upgrades as they build out their own unique wireless networks with the estimated deployment of tens of thousands of these bespoke small cells, we expect robust demand for our power and backhaul gateway products and new OSP, our outside plant power systems over the next several.
Years, we look forward to sharing more detail in this area with you at our Investor Day on June 15th.
Motive power delivered another strong quarter with third quarter 'twenty, three revenue of $362 million, increasing 7% compared to the third quarter of fiscal 'twenty two.
Backlog and demand trends are strong with order rates in the Americas near record levels and while EMEA order rates were somewhat soft in the quarter, we believe our order and backlog strength position us well for growth overall.
We are monitoring this business very closely as it is our segment that is most vulnerable to economic slowdowns.
A positive motive power results reflect the strong customer demand for our proprietary Nexus TPP and lithium ion maintenance free product offerings, which were up 140 basis points year over year as a percentage of motive power revenue mix. We expect these solutions to keep increasing.
As a percentage of revenue as the trend towards automation and electrification of material handling equipment requires technology enabled power solutions.
Our specialty segment reported revenue of $124 million in the quarter up 4% year over year, primarily driven by the continued pricing actions and improved mix.
So demand is still strong. This line of business is still challenged by our GPL capacity constraints at our Missouri plants.
With the team fully assembled and retention improving we're laser focused on driving operational efficiency improvement and these facilities and further realizing the financial benefits of strong product demand.
Q3 started slowly for our Springfield factories with attendance and equipment issues and as a result, we were unable to close the gap even with a strong push in December however, positive momentum has carried over to our record Springfield January production.
And transportation backlog was on par with the prior third quarter in class eight truck OEM demand signals are strong.
We also remain very well positioned in our aerospace business and the recently announced a 9% increase in the fiscal year 'twenty three defense budget should provide an additional tailwind for our U S defense market, which is anchored by our premium tea PPL and lithium technology.
Moving on to some updates in our production capacity and operational efficiencies.
<unk> team continues to be confronted by a mix of headwinds, including ongoing inflation and productivity challenges utility inflation in EMEA and increased Covid cases in China have also presented some challenges while we work with ongoing instability in our supply chain and elevated costs in the business.
The EMEA utility inflation into perspective, we anticipate our fiscal year 'twenty three energy costs in EMEA will be 150% higher versus fiscal year 'twenty, one and for the first time in our history is expected to exceed the annual cost of our direct labor force.
On the positive front, we are seeing utility costs coming down from the peak in August signs of cost stabilization in freight rates coming down chip allocations, improving with certain suppliers and better availably and better availability of raw materials, all of which should begin to generate benefits in future quarters.
Collaboration across operations sales finance and it remains strong with efficiency and capacity improvements in Missouri, the top priority heading into the end of the fiscal year.
Our two new lithium ion module assembly lines are running as planned and the <unk> transition to Richmond is already paying dividends through greater operational efficiencies.
We exited Q3, 'twenty three stronger than last quarter, although there remains significant opportunities to reach our full potential.
Please turn to slide eight.
As one of the world's largest energy storage companies corporate responsibility is a key area of focus for Enersys.
We had several ESG announcements in the quarter, including the appointment of MS. Tammy We're at Coke to our board of Directors Tammy is the president of the pumps Division that flow served corporation.
She has established a reputation in the industry as an enterprise operating leader and a supply chain subject matter expert Tam.
Tammy has decades of experience with global industrial manufacturing operations will provide excellent support for the <unk> leadership team and our strategic objectives.
Please turn to slide nine.
In closing we are increasingly optimistic that our strong Q3 'twenty three results reflect the continued progression toward achieving our long term financial and operational goals.
While we are not out of the woods, yet with inflation and supply chain on predictability and there remains considerable uncertainty in global markets demand remains strong with secular trends in our end markets that along with a strong balance sheet and superior products and services provides us a buffer from the impact of a potential.
Economic pullback.
We believe the steps we have taken over the past three years better position our business to benefit from global Megatrends, such as <unk> data center growth material handling electrification and automation grid stabilization and electric vehicle fast charging which provides us near and long term growth opportunities that are <unk>.
Starting to materialize in our financial results and outlook.
In addition to these trends we are excited about our opportunities to benefit from U S government mandates and funding that are driving markets to us such as broadband expansion through the rural digital opportunity fund.
Still waiting for clarification on the inflation reduction act, but we are cautiously optimistic that a substantial amount of our batteries could qualify for the section 45 ex tax benefit which would provide meaningful upside to our profitability.
Look forward to ongoing progress during the remainder of this year and in fiscal 2024 as the true potential of our business that continues to present itself.
I want to thank our employees for their dedication and hard work consistently capitalizing on opportunities and confronting a myriad of challenges head on we as a unified team with a common goal have positioned <unk> for long term success and look forward to updating our shareholders on that success.
In the quarters and years ahead.
With that I'll now ask Andy to provide further information on our third quarter results and go forward guidance.
Thanks, Steve.
I'll focus my discussion this morning on the key financial metrics and takeaways for the quarter.
For more detailed information about our results. Please refer to our third quarter 2023, 10-Q press release and supplemental slides that were posted to our website last night.
For those of you following along on our Powerpoint slides I will begin on slide 11.
Our third quarter fiscal 23, net sales increased 9% over the prior year to a record $920 million, even after absorbing roughly $35 million of foreign exchange assets.
This record was achieved two 5% organic volume growth and 8% price mix improvement, partially offset by the 4% decrease from foreign currency translation, Jeff mentioned.
Adjusted operating earnings were also a record for the company at $85 million in the third quarter up 41% from Q3, 2002, and 30% higher than Q2.
Foreign exchange negatively impacted our year on year and sequential comparisons by approximately $6 million and $2 million respectively.
In constant currency Q3, 23, adjusted <unk> improved nearly 50% versus the third quarter of the prior year.
Adjusted EBITDA for the third quarter with $98 million and 10, 7% of net sales compared to $79 million and nine 4% of net sales in the prior year third quarter.
FX pressured the year on year comparison by approximately $7 million.
Please recall that our margins are artificially deflated from the margin impact of the unprecedented significant cost pass through that Dave mentioned.
A reconciliation of net earnings to adjusted EBITDA is presented in the <unk> of our slides for your reference.
Our adjusted EPS was $1 27 in the third quarter of fiscal 'twenty, three up 26% from $1. One in Q3, 2002 and up 14% from the $1 11 in the second quarter.
It is worth highlighting the significant headwinds we are facing from foreign exchange and interest rate.
Excluding the impact of FX and interest our Q3 23, adjusted EPS increased nearly 60% versus prior year.
I will present, a reconciliation of the third quarter sequential and year on year EPS shortly.
Please turn to slide 12.
On a segment basis compared to the prior year all lines of business posted strong revenue growth driven by substantial price mix improvements, which were partially offset by foreign exchange headwinds.
The favorable impact of price mix improvement on adjusted operating earnings more than offset the higher costs and $6 million of unfavorable FX year on year.
As Steve mentioned energy systems delivered significant improvement to adjusted operating earnings as a result of impressive price next cost recapture taking hold for the second consecutive quarter with nearly 170% adjusted OE improvement versus prior year and over 60% improvement sequentially.
We are pleased with the recapture momentum in energy systems is becoming increasingly evident on our bottom line as it had been slower to manifest versus our other segments due to the contractual nature and historically Asian based supply chains inherent in this business.
On another positive note motive power adjusted operating earnings improved approximately 20% over both prior year and prior quarter, driven by mix improvements and maintenance free sales as well as positive price cost recapture.
And finally in our specialty segment, while muted due to constraints in our Missouri plant was still up over 20% sequentially and nearly in line with the prior year.
Accomplishments across all of our lines of business, coupled with healthy market dynamics resulted in solid improvement in our quarterly adjusted results and increasing momentum going forward.
More detailed sequential geographic results can be found in our press release and in the supplemental slides.
Please turn to slide 13.
On a sequential basis in the third quarter of fiscal 'twenty, three we realized $32 million or <unk> 65 per share of improvements in price mix, adding onto an exceptional Q2 with nearly $30 million of sequential price mix improvement as well.
Q3 dollars 23, a sequential price mix improvement more than offset the $12 million or 25 per share or volume adjusted incremental costs incurred during the quarter.
While we are still incurring significant cost increases Q3 dollars 40 per share of price mix cost recapture is our second consecutive quarter of significant improvement further closing the gap on the unprecedented cost increases we have endured over the past two years.
Cost increases in the third quarter were driven by continued inflation, including commodity and energy rates, particularly in Europe as well as productivity challenges in our Missouri plant.
While we are beginning to see cost stabilized. It is important to remember that there was a delay in realizing product cost in our P&L until the related inventory is sold.
Fortunately this accounting treatment, coupled with lagging price cost adjustment should provide very nice margin tailwind, if and when inflation turns to deflation and cost normalized.
We are cautiously optimistic that inflation is near an inflection point.
After six consecutive quarters of gross margin erosion from steeply escalating costs.
We have now seen two consecutive quarters of solid improvement.
Our adjusted gross margin expanded 130 bps in Q3 23 after a similar increase the quarter before posting a total of 250 basis point improvement over the first quarter of fiscal 'twenty three despite the March and masked the impact from higher cost pass through.
Right.
Going forward price mix gains should continue to surpass cost increases due to ongoing price cost pass through.
Mix improvements from supply chain loosening, especially for our higher margin electronics products and the margin benefit of maintenance reconversion.
As well as savings realization from our iOS accomplishments, such as cost reductions from footprint rationalization.
Which should drop to the bottom line.
Please turn to slide 14.
Looking at our quarterly sequential adjusted EPS Bridge Q3, 23, adjusted EPS came in <unk> <unk> higher than the midpoint of our guidance at $1 27 per diluted share.
Our sequential results were driven by the impressive <unk> 40 per share of net price mix cost impact previously discussed which was partially diluted by the substantial 25 cents per share of net pressure from foreign exchange and higher interest expense from rate increases.
The FX headwinds were primarily a result of the weak euro throughout the quarter negatively impacting transactional FX and as well as the revaluation impact in other income and expense when the euro strengthened at the end of the quarter.
Year over year Q3 dollars 23, adjusted EPS has approximately 35 cents per share of drag in the quarter from FX and interest expense headwinds.
Please turn to slide 15.
Our balance sheet remains very healthy with improved liquidity positioning us even better to navigate both the current economic environment and a potential downturn.
In Q3, we had $188 million of positive free cash flow with our net bank leverage improving to two three times EBITDA at the end of Q3 23 from two nine times at Q2 'twenty three.
This was driven by strong earnings improvement and reductions in working capital investment due primarily to the initiation of a $150 million asset securitization program in December .
In addition to reducing bank leverage by <unk> four times EBITDA. This program will reduce interest expense by approximately $1 $4 million per year, beginning in Q4 23.
In constant currency, our inventory was flat despite investments to support Q4 volumes and maintain strategic inventory levels to mitigate ongoing unpredictability in supply chain.
At the end of Q3, 'twenty three we had approximately $300 million of cash on hand.
After a period of investing in working capital and increasing inventory to create targeted buffers and absorbed the impact of longer lead times and higher costs. We are now focused on reducing inventory where prudent.
Excluding the impact of our $150 million asset securitization program, we believe the leveling off of our primary operating capital levels. In Q3, 23 represents an inflection point in which further efficiencies should positively impact cash by the end of fiscal 'twenty three with significant cash.
Generation opportunities when supply chain volatility and costs begin returning to pre pandemic levels.
That said, we are fortunate that we are able and we will continue to prioritize minimizing risk to our business and customers with investments and strategic inventory when necessary.
Capital expenditures for roughly $18 million in Q3 dollars 23, and $58 million year to date.
We remain confident in our multiyear plan TPP all capacity targets building off our capacity expansion success in fiscal 'twenty two.
Our prudent capital allocation strategy remains unchanged.
Considering higher interest rates, the new 1% tax on buybacks already in effect and global economic uncertainty, we have tightened our target to remain below the midpoint of our two to three times EBITDA bank leverage for the remainder of fiscal year 'twenty three.
In Q3, 'twenty three we did not repurchase any shares and currently have $185 million authorized in our share buyback program.
Please turn to slide 16.
Our business remains well positioned as demand for our products continues to be robust supported by megatrend, providing ongoing tailwind for the business.
Given prevailing economic predictions and some slowdown in other industries outside of ours, we remain vigilant and are making conservative capital allocation decisions.
As a reminder, we have a strong balance sheet and a number of structural advantages that have mitigated the financial impact to us in past economic downturns, and which position us even better at this time.
The diversity of our revenue model includes large portions of our business that are cycle independent and we have enjoyed significant cash flow generation during past recessionary periods.
Well I don't intend to review it again on this call a recession playbook remains intact and is included in the appendix of our slides.
For the fourth quarter of fiscal 2003, our adjusted diluted EPS guidance range is $1 33 to $1 43, which at the midpoint is up 9% from the $1 27 per share we just reported.
Year on year, our midpoint adjusted EPS Guide reflects a 15% improvement over the $1 20 per share we reported in Q4 2002.
However.
While our year on year improvement is commendable.
<unk> understates the impressive operational improvement of our business as our guidance reflects our expectation of continued sequential volume and net price mix cost gains, but our strong financial performance, we will again be muted by FX and interest rate headwinds similar to what we saw in Q3 23.
We expect our gross margin to be in the range of 22% to 24% and we are refining our capex expectation for the full fiscal year 'twenty three to approximately $90 million, reflecting investments in new products, including lithium production lines continued expansion of our <unk>.
Capacity and cost improvement and automation initiatives.
We look forward to updating you on our continued progress and providing an overview of our refreshed strategic plan at our Investor Day on June 15th in New York City.
This concludes our prepared remarks, operator, you may now open the call for questions.
Yes.
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Please standby, while we compile the Q&A roster.
Okay.
Our first question or comment comes from the line of Noah Kaye from Oppenheimer Corporation. Okay. Your line is open.
Hey, good morning, Thanks, so much for taking the questions.
To start with order rates and lead times within the energy systems.
Can you comment on the characterization of the orders Youre seeing coming in are we kind of past.
Double ordering or.
Longer lead times, and just with the supply chain starting to loosen.
Lead times trending now.
Yes, I would say that there is an good morning Noah.
I would say there is definitely a normalization.
Buying behavior I think there is a little bit less preordering I don't know that people are double ordering per se, but they were ordering very early whenever they had any visibility for our project.
And of course, just like us it puts pressure on your balance sheet. These inventory balances and so there just seems to be a general.
Getting back to normal as you know we were coming off some tough comps we had some big big wins like the CPUC project.
But I would say even relative to historical norms I am very pleased with our order rates our book to Bill in January was one two in Es.
So still very strong.
And Jamie just this January which we just closed so.
In General I think drew feels really good about the business and.
And then in the other parts of the business, we referenced Europe I would say we've looked at kind of Europe's on the motive power side is the other area where orders maybe are a little bit soft, let's say revenue is actually dead flat, but we do have some price increases in there so from a volume standpoint, I would say.
It is a little bit soft but in general.
We feel pretty good about the overall demand for all the businesses.
One other comment now and good morning, it's good to talk to you one other comment I think that's worth noting in our in our slide deck, you can see our quarterly backlog coverage historically was a little under one Q2 'twenty one it was <unk> eight our backlog coverage is still at one four.
In motive power with <unk> now is one one.
Energy systems <unk> seven now with one six.
So we really do still have a lot of ground to cover.
I think Noah's questions right I think.
That things are getting a little more normal in terms of lead times and expectations.
That's very helpful. Thanks, and then you.
You mentioned commodities a couple of times in the prepared remarks.
We can see what's happening with with lead prices and I think.
We understand there is there is some lag on commodities because of FIFO accounting, but just high level what are your expectations in terms of how commodity impact mark.
Our margin profile going forward, maybe dimension that.
In terms of what's contemplated in the <unk> Guide and then as we look out maybe a quarter or two.
While commodity is.
The commodities that are important to us led being one of them, obviously, but steel copper.
The ones that are important to us most of them have come off some pretty significant highs I think.
So the go forward and it should and I think Andy touched on this in her prepared remarks. The go forward should continue to help us as we run more of these inventories at the higher costs through the through the P&L and off the balance sheet and in general as I said in my remarks, no. Other one thing we've got our.
Obviously, as China kind of reawakening, and what impact that could have on commodities coming.
What we continue to do is focus on recovering those through our pricing actions wherever it is.
And Unfortunately, I know, it's frustrating for all of us that it just doesn't happen overnight, but I think we are starting to demonstrate.
Our ability to recover those are commodity impacts afraid impacts inflationary impacts with our pricing mechanisms. So yes, I'd say the general outlook as things are better.
We're looking for some stability, we've got our eye on on commodities with China.
Coming back.
Coming back after the shutdowns.
But in general I think there is some tailwind there.
Yes, it seems like Youre right exactly where you inflected positively on net recapture and that's going to continue in the quarters ahead is that a fair assumption.
Yes, we are really focused and.
Good of my salespeople.
I think it took us a little while to get where we needed to be but I think there is a clear acceptance.
That the inflationary pressures belonged to the salespeople they own them and whether it's wage inflation or commodity inflations. We just discussed they need to offset these with pricing actions.
It's just we're just trying to stay level.
From a dollar standpoint, we've talked about that is dilutive obviously on margin math.
We've fought like Tigers.
To just protect our our margins and I'm very very proud of the teams in those we've got different pricing strategies for different markets, whether it's surcharges for energy in Europe , whether its list price changes whether it's.
Gains of high Stakes chicken with certain big OEM customers.
We've had to run the full gamut with full playbook over the last few quarters, but you can see some of that starting to catch up.
Yes, very helpful. I'll take the rest of my questions offline.
Thank you.
Yeah.
Thank you our next question or comment comes from the line of <unk>.
Greg Watson Koski from Webber research standby.
After western costs get your line is now open hey, good morning, David Thanks for thanks for taking the question.
I'll stay with the backlog.
I was just curious can.
Can you talk about how you view kind of moving through that backlog.
I mean, usually usually growing the backlog is.
Inanimate is really a good thing, but at a certain point you want to be able to kind of converted to sales.
And then production also becomes a good thing and its and its own special waste. So just curious how how are you guys thinking about that.
Moving through the year.
We're quantitatively where it could maybe be a happy place to settle for.
Talk us through your thoughts like are you are you happy when you see backlog go down because you're converting it are you happy to see it go up because youre getting new orders just how.
How are you thinking about that for this year.
It's a great question and I'm happy when the customers are happy usually.
And I don't think our customers have been really happy.
With us because of our supply chain delays and that's been such a.
A struggle for us so certainly we want to reach some stability what I always do is I always go back to sort of pre COVID-19 to see what the normal.
Order rates were what were the long term trajectories what did we have as CAGR is in our five year model.
And compare the order rates against that and try to isolate all of these buying behaviors that Noah talked about.
Some of these.
The hoarding some of the advanced ordering trying to isolate that so to your point.
For us I definitely.
Want to see our contract manufacturing partners, our chip suppliers pick up the pace we've had various go.
<unk>.
We are way behind the original schedule as we had laid out to bring contract manufacturing out of the Chinese tariffs zone.
We're very late on that.
Really frustrated.
But thats gotten better.
Had to redesign.
Everything we're really now to the point, where one of the chipsets that we're still struggling to this day to get.
We're really trying to move all of our customers off of that product range.
There are so many moving pieces to your question I don't really have a good number for you I do at the electronics and the chip allocations is improving so we should see as we go into F. 'twenty four.
Better.
Tariff performance, because we're going to be doing more onshore we should be seeing a little bit shorter lead times, which again can impact the backlog to your question is a lot of our customers.
Just say no with some of the struggles we've had on lead times have been ordering early I think when they get more.
Assistant that we can deliver.
810 week period consistently.
Probably won't order is often so I will kind of be happy as long as we stay.
Add those long term CAGR that we laid out in our in our five year model stay above the sort of order rates and really wanted to get this we still have a lot of electronics trapped in the backlog and that tends to be accretive to the mix. So I know that's a long winded answer to a very important question.
But.
Like I said January orders were good I think we will see how they go for the rest of the quarter. There is some seasonality to this as well that we can't ignore.
But the.
Between the art off projects, finishing up the CPUC project, the <unk> small cell.
There's plenty of opportunities for us in this business.
Got it thanks, Dave that's helpful color.
Next one.
Two parter here on capital deployment, so first part.
On the Capex guidance going down a bit I mean, nothing major but.
Can you maybe speak to that and what youre expecting for the year forward just in terms of.
Investing in growth versus being disciplined on the capex side, and how youre thinking about that and then second part.
Is that kind of leading into M&A.
Obviously focus is on reducing that net net leverage number but it's been a while since we've seen some M&A. So just gauging your appetite there what kinds of things you guys could be looking at or focusing on in terms of application or geography et cetera.
Yeah I'll start on the Capex and then Andy can talk about the rest of the cap structure, but on the Capex were a little disappointed.
That we're not getting it spend fast enough.
On some of these big projects some of these big.
Big productivity improvement projects expansion projects, just because equipment lead times have been insane.
Things that were supposed to take six months too.
Build and ship.
The equipment suppliers have taken two years. So some of that is just frustration on our part.
These these equipment guys. They can't get it's not their fault they can't get the plc and other issues that is starting to unwind a little bit which is helpful. So hopefully we're going to see some capex pick up but we've been we've been pretty pretty rigorous about that but typically with capex with us. It's a question how much we can.
Digest as opposed to how much we have available and then regarding the other uses of cash.
Certainly I'll start with M&A, we always have our eyes open we have the bankers in here.
Pitching ideas regularly.
And you are right when the leverage is closer to three your appetite is probably a little less but things.
As the look forward as things start to improve.
Obviously, the high cost of that higher cost of debt.
<unk> has paid down some debt has some intrinsic value as well so theres lots of lots of things Randy to juggle, but Andy how are you looking at.
Yes, I mean, I think one of the things we've.
First of all the Capex on your first question, Greg I think that's just timing as Steve mentioned that wasn't any kind of strategic pull back or anything.
As far as capital allocation, we're very fortunate that we've got a business that kicks off a lot of cash that said given the current.
Market conditions interest rates being higher uncertainty.
We are taking a little bit more conservative view on targeting.
Leverage more on the lower end of our two to three times EBITDA that will save a little more on interest expense you've got the stock buyback.
1% tax that is already in effect.
So we are and we want to have a little bit more dry powder.
With that said our business continues to kick off a lot of cash so no change first invest internally.
If there is a slowdown pwc should kick off a lot of cash we're still being intentional about making sure that we've got buffers for our customers, but if things move in as deflation that will certainly turn into a lot of cash and acquisitions. We're always just opportunistic I don't think we have any real change in strategy there.
Nothing to announce at this time.
Does that answer your question.
Yes, that's perfect.
One thing, Greg I think Mike might be worth mentioning as well.
<unk> talked about just the significant impact of FX and interest in <unk> year on year, it might be an impact as much as in a close to a $1 a share of the change so its been significant.
One thing I'm really proud of our team here is while there's a lot that's outside of our control we're not being victims. In this so there's a lot we're doing to try to mitigate.
As you recall, we entered into 300 million FX swap that was saving $4 million of annual interest expense. We terminated that received proceeds to pay down our revolver that was $2 million of interest expense savings than we re entered into another 150 swap that savings about $3 million.
We repatriated $175 from EMEA to pay down our revolver and I'll say this about $9 million of interest and we had to do a lot of.
Cash out of China, we had about $100 million of cash we took almost half of that out.
I'm trying to work closely with with tax on making sure we can minimize.
Any impact of doing some of that repatriation.
We mentioned the change in kind of our capital allocation strategy.
We're getting out of.
Pension plan that we had that taking advantage of where FX and interest rates are at right now to buyout one from $20 4 million. So we initiated that soon.
So there's a lot that we're doing we've got some.
FX hedges that we put in place.
It has a lot of headwinds, but I think we're not the asset.
Securitization that we mentioned will save us significant amount of interest bearing down on me.
On our grid on our pricing structure and also gives us a little more dry powder. So.
There's definitely significant headwinds, but our team is doing a lot to mitigate it where possible.
Great very helpful. I'll turn it over thanks guys.
Thank you very much our next question or comment comes from the line of Brian Drab from William Blair. Mr. Drab. Your line is now open.
Hi, good morning, Thanks for taking my question.
Hi, Brian Hi, Paul.
Hi.
I'd like to focus on the fork truck market for a minute.
Can you update us on what percentage of your overall business or what percentage of motives.
Related to Fork truck and then.
This is <unk>.
The area of the business.
People are.
If there are concerns may be there.
They are around the outlook for fork trucks given the.
Macro and the latest data I guess, we don't have the fourth quarter reports from some of the fork truck guys, but.
The latest data was declining orders there.
And I'm just wondering if you could give us any any.
Like what kind of conversations youre, having with the board.
Manufacturers.
If you have the wits data at your fingertips that would be really interesting to see what the latest electric fork trucks.
Yes, I don't have the Wednesday I apologize.
That's my fault, but in terms of what we're hearing from the customers and the conversations we're having.
In Europe , what we talk a lot about still.
Our supply chain constraints at our customers so they.
Yes.
That's really the prevailing narrative and.
And so really it's a question of how much theyre forecasting that we haven't had a lot of.
Beyond the Russia, Ukraine markets.
Havent had a lot of narrative about the.
Thanks, Andy I appreciate that.
It is delayed six months. So the stuff we have is not very fresh so but I do have I do have some wits data here.
But in terms of the narrative, we get from them. It is still mostly about their frustrations of getting enough parts, whether it's steering mechanisms or what.
Whatever the issues they're having.
It's different for each of them. So that's that's the dominant there and then the U S markets I think the supply chain narratives.
Are there as well, but there seems to be a little bit more because they don't have the high energy overhang like we do in Europe .
So it just seems to be a little bit more buoyancy in the U S.
We just.
We just went through the budgeting process with the board last week and Sean gave a.
Ah.
Cautiously optimistic outlook with the go forward and then if you know Sean you would know that he is not going to get too far over our skis. So.
We.
Well again that business, we I feel a little bit better.
If things do turn down.
With the order will move the Hagen move will be and definitely a better.
From a fixed cost absorption standpoint will be in a much better place than we were.
In prior slowdowns, but that's just it's really mostly still about all of these chronic nagging supply chain issues that are.
Driving most of the narrative.
Okay.
In terms of the statistic.
So I don't read the wrong column or anything I'm going to have Lisa.
Just said you said you whatever information you want.
Thanks, Dave.
What.
Within motive.
How much this port strike account.
That's the.
Dominant the dominant I mean, Theres, Florida scrubbers.
And then a little bit of rail.
And stuff, but you can say, 80% plus is related to focus yeah. Yeah. So that is.
Yes that hasn't evolved dramatically.
Dramatically there in terms of the percentage okay.
And then.
I'll just ask one other question maybe for now.
The opportunity with the.
For <unk> and small cells are understood.
Talking about it for.
So for almost five years now.
And.
I know.
The way that that.
<unk> has evolved it hasn't been as favorable.
You initially expected, but today on the call I think you said.
Something about tens of thousands of <unk> cells.
I think we are.
Are you still hoping that your the opportunity of the 1 million plus.
How has that changed and how are you looking at the timing of when that impact centers.
Alright, with tens of thousands was specifically for some of the DOCSIS modem enabled.
Okay.
<unk>.
So that's kind of part of our product portfolio. So when the when the cable companies are building their own networks out they like to use the strand for the backhaul and the power.
So.
The.
That piece is going well and has accelerated.
And then what we did so that's just part of it and then the bigger obviously is the.
The big.
The big wireless companies like T, Mo and Verizon and AT&T and what their strategies are.
It's interesting timing we had the.
We have a guest speaker at the board meeting last week and he is kind of one of the leading industry experts and the small cell area and so we took the board through a deep dive in and the key topic was the timing and why are things off of where we had originally predicted especially.
As we did the Alpha acquisition. It was it was certainly a key part of our deal logic was small cell powering because.
As you probably remember <unk> spending.
As a good thing for Enersys, so whether it's the central offices, whether it's the big cell towers, we have content throughout the network.
Have we were excited about small cell just because we think we've got a very interesting product portfolio, there and we have a chance to command more market share in the small cell arena, so that and then.
As we've noted in the past it literally takes a million plus small cells to match the coverage and the speed I don't think any of us are satisfied yet with <unk> in terms of the incremental speed and benefit of <unk> versus LTE.
Many people are satisfied.
<unk>.
So.
That real change in performance will be when they can start to build out. These small cell. These densification initiatives and use the higher frequencies and it's been a technical challenge and we have a deep dive with the expert a lot of the issues were COVID-19 related.
Last week. So we went through this and we have Carolyn Shan on our board from Intel and she is really one of the thought leaders in this space.
And she knew this consultant pretty well and there was just a.
I don't I don't think there was any anybody that's on our border and our management team that's happy with these delays, but in the meantime, we haven't stopped on the product portfolio.
And we're getting really close on some UL approvals that will be critical in this space. So in a sense, it's given us some time to do some things.
That we may not have had time to do.
So, but there is still a tremendous upside expected at least from this industry consultant on <unk> spending and what he essentially showed US was a chart.
Where things slid over three years to the right I mean, it was literally three years, where everything has just been in a stasis on the small cell builds but it's getting better.
Comment that I would just add because Steve mentioned, we have some really great proprietary products that solve customers' problems.
Hi, electronics content these are higher margin products.
The mix here is favorable.
And then the other thing is as we noted is we think we've got some unique value propositions and that should help as well, but again I share everybody's frustration with us, but it is not us.
It's nothing that the team has done wrong. It's just really the focus of the big Telcos has been on building those macro cell sites and Thats helped us don't get me wrong, we've gotten a lot of those orders as well.
Yes, okay. Thanks for going through that that's very helpful. Thanks.
Hmm.
Thank you.
Again, ladies and gentlemen, if you have a question or comment at this time. Please press star one one on your telephone keypad.
Our next question or comment comes from the line of Tyler <unk> from BTG. Mr. <unk>. Your line is open.
Hi, everyone. Thanks for taking my question here.
And can what can we go back to the <unk>.
PPL capacity constrained.
Specialty.
I just wanted to get a better sense of that Missouri plant and kind of how youre thinking about it and just any other color there would really appreciate that.
Sure Tyler.
Thanks for the question.
I would say it.
At the highest level.
We are hanging in with our demand and <unk> growth, but it has been painfully expensive to do it so far.
So we have generated a tremendous amount of manufacturing variances on the way there.
And some of that is not in our control per se like for example, the wage pressures and.
I think the sales guys like I mentioned earlier have owned that portion of the manufacturing variances, but the other part of the manufacturing variances equipped.
Equipment delays from suppliers has been a huge issue.
Absent theism training just the tenure.
We're trying to hire a lot of people in a job market that is really tight and an area of the country with especially low unemployment.
So we've just done every trick in the book that we could think of to get the folks to come to the factory, we had a little bit of Covid scare that hurt us a little bit on some of the tenants issues. So yeah as I noted the quarter.
The quarter started off really rough and then I would say Andy.
For Mark's group, the specialty group, we probably left $15 million of revenue.
On the Doc in a sense, that's about right, yes, right Thats correct Thats about the right number so we.
December was pretty good and January was really good.
And so we just have to keep these but we got ourselves into a pretty deep hole and a lot of this.
Tyler has just it's a new team that's there and.
We just need to get it stabilized and everyday we just need to make some some improvement. So I think we're going to work between the capex investments between the demand, bringing on new customers as demand.
We're still very confident.
That we can achieve what we've laid out historically as part of our long term growth initiatives, what I need the team to do.
Is get there without so much pain, and it's literally Andy that close side, the inflationary stuff, it's still tens of billions of dollars of productivity scrap.
Related things that.
As we've ramped up this factory that we've left on the table. So if we look I think the comment that we've made in the past Tyler that might be helpful. And this is just pure data if we compare our rough clamp, which is our most highly performing.
<unk> plant to our Missouri plant.
We called out we probably have $40 million of.
The delta between performance scrap productivity efficiency.
It takes a longer time, you've got some of it is capex investment you have to train people. So it's a multiyear project, but I would say.
We run the Eros plant and we know and we know how to do it. So it's not an engineered managers engineers. The same equipment now one of the big gaps is the Eros factory is farther along on automation.
And we have struggled in defense of my my team.
We have struggled with these equipment suppliers. So we've ordered equipment years ago, that's still just now getting commissions. So it's.
<unk> been we have not escaped COVID-19 pressures hiring pressures labor pressures.
And I would say for Enersys as a company.
Our Missouri factories are right at the epicenter of those challenges, but everyday is getting better one of the metrics. We use in HR reports on is just that the average tenure of our folks in 90 days seems to be a magic number and we definitely have a lot more folks now that have at least 90 days.
Tenure with the factory. So we just we've got a lot of work to do but I think the general question.
In terms of our Capex deployment.
And generating enough demand to continue the growth in <unk> I think we're everything is full steam ahead in that area.
Okay great.
Okay, great. Thank you I know we're at time here I'll take the rest of my questions offline. Thanks for the time great.
Great. Thank you. Thank you.
Thank you I'm showing no additional questions in the queue at this time I would like to turn the conference back over to Mr. Shaffer for any closing remarks.
Well I just wanted to thank everyone for joining us today, and we look forward to providing further updates on our progress on our fourth quarter fiscal year end call.
2023, that's in May so have a good day everyone.
Thanks, Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a wonderful day speakers standby.
The conference will begin shortly to raise and lower Johan during Q&A you can dial one one.
[music].
Okay.
Okay.
Okay.
Good.
Yes.