EnerSys Q4 2023 Earnings Call
Speaker 1: is why many of our technologies, such as our advanced lithium systems and wireless charging, are among the first to pursue safety testing and certification from industry bodies, such as Intertek and UL. For example, rigorous safety testing is underway for our TouchSafe product with customer field trials planned for early calendar 2024. We also shipped our first AMEA customer units of our Nexus lithium ion 80 volt.
Speaker 1: to excellence, innovation, and sustainability in data center energy storage and power management. Our fast charge and storage initiatives are advancing with good progress on our production roadmap and supply chain initiatives and are designed for manufacturing now complete. Sourcing requirements related to EV tax credit qualifications.
Speaker 1: and look forward to featuring our Nexus Air wireless charger and fast charging storage system, among other technologies, during our product showcase at Investor Day on June 15. I'll now briefly walk through our business segment highlights. Please turn to slide seven.
Speaker 1: Please note, I will discuss our segment adjusted operating earnings excluding IRA benefit. We recorded in cost of goods sold in the fourth quarter. We believe reviewing the results without this credit provides a better view in comparability into the operating performance of each line of business.
Speaker 1: Energy Systems had strong full year sales of $1.7 billion, up 13%, and adjusted operating earnings were up over 80% versus fiscal year 22, driven primarily by growth in broadband, data center, and telecom, and our pricing actions catching up with the unprecedented...
Speaker 1: one quarter of bookings modestly higher than pre-COVID levels. Our CPUC lithium ion installations which account for a large portion of our 70 million dollars of CPUC backlog are on track to begin to...
Speaker 1: to begin deployments in the second quarter. While current demand trends are healthy, we are monitoring our key customer capex spending plans closely. We remain excited about the long-term opportunity for energy systems driven by the global mega trends for which our critical power solutions are a key enabler.
Speaker 1: Our mode of power business has a strong year with revenue up 7% and adjusted operating earnings up 5% year on year. Despite pressures in Amia and the potential of recession, this business remains healthy. Demand trends are stable and approximate. Normal light approximates.
Speaker 1: Normalized pre-COVID levels with backlog more than two times that of pre-COVID. A meal lead times were stable in European on-time deliveries hit a record high despite a softening order book. Maintenance free was 19% of revenue mix at the end of fiscal year 23 up from 15% in fiscal year 21.
Speaker 1: were up an impressive 13% over the previous year, though adjusted operating earnings was down 14% over prior year, impacted by productivity, headwinds, and our Missouri factories, and temporary cost pressures from our Silmar facility, which we're vacating at the end of the first quarter. We continue to rationalize our footprint and our transitioning ourselves.
Speaker 1: As such, transportation revenue continues to be paced only by capacity. We saw strong U.S. transportation orders in Q4 with a book-to-bill ratio greater than one, on top of achieving record deliveries in the quarter. Class A truck production is stable, up 12% year-on-year, and growth projections remain positive.
Speaker 1: to slide 8. We achieved impressive milestones toward the ESG goals we announced last year and continue to ensure that our metrics are accurate and auditable. Last week we published our 2022 sustainability update which includes solid progress towards our
Speaker 1: On the leadership front, we announce Shannon Thomas as our new chief human resources officer. I'm delighted to have Shannon join our executive leadership team where I believe her strategic vision and leadership will be instrumental as we continue to attract, develop, and retain top count from around the world while fostering
Speaker 1: In closing, I please that our excellent Q4 and four-year 2023 results demonstrate continued progress towards achieving our long-term financial and operational goals. We believe the steps we have taken over the past three years better position our business to benefit from global mega trends such as 5G, data center growth.
Speaker 1: material handling electrification and automation, grid stabilization and electric vehicle fast charging, all of which provide us both near and long-term growth opportunities that are materializing in our financial results and outlook. In addition to these trends, we're excited about our opportunities to benefit from US government mandates and funding that are driving markets to us because of the criticality.
Speaker 1: inflation interest rates and FX. I want to thank our employees for their dedication and hard work consistently capitalizing on opportunities in confronting challenges head on. I look forward to seeing you in the next few weeks at our investor day in June 15th, New York City. I'll now ask Andy to provide further information on our fourth quarter and fiscal 23 results.
Speaker 2: partially offset by a 2% erosion from foreign exchange.
Speaker 2: Full year net sales increased 10% over the prior year to $3.7 billion due to an 8% increase in price mix and 7% increase in volume, partially offset by a 4% FX headwind.
Speaker 2: Adjusted operating earnings were $107 million in the fourth quarter, up $22 million sequentially, and $322 million for the full fiscal year, up $59 million versus prior year, inclusive of the $17 million IRA benefit booked in Q4.
Speaker 2: Even excluding the IRA impact, this marks three consecutive quarters of sequential adjusted operating earnings improvement, enabling the company to achieve another record quarter with our price recapture offsetting inflation and our mixed improvements and entercess operating system cost savings beginning to be visible on our bottom line.
Speaker 2: Adjusted EBITDA for the fourth quarter was $118 million and 11.9% of net sales compared to $88 million and 9.7% of net sales in the prior year fourth quarter.
Speaker 2: For the full fiscal 2023, adjusted EBITDA with $388 million and 10.5% of net sales compared to $340 million and 10.1% of net sales in the prior year.
Speaker 2: Our adjusted EPS was $1.82 per share in the fourth quarter of fiscal 23, up from $1.27 in the third quarter, due to the adjusted operating earnings improvements previously mentioned, as well as the favorable impact of the IRA, which contributed 42 cents per share.
Speaker 2: Full-year adjusted EPS of $5.34 represents an increase of approximately 20% over fiscal 22. Note that our full-year adjusted EPS before the IRA benefit was $4.93 per share. Matching the previous annual EPS record level achieved in fiscal year 19,
Speaker 2: intra-strict pressure.
Speaker 2: Please turn to slide 12.
Speaker 2: I will now provide additional details on the benefits we expect to receive through the Inflation Production Act.
Speaker 2: Section 45x of the IRA introduced advanced manufacturing production tax credits for batteries and battery cells produced in the United States with the specified energy density.
Speaker 2: Credits will be determined based on third-party sales of qualifying products produced in the US over the 10-year period from January 1, 2023 through December 31, 2032.
Speaker 2: Based on the current information available on the tax credit qualifications, we expect a material portion of our US produced batteries and battery cells, including much of our proprietary dinplate pure lead batteries, and a portion of our flooded lead acid batteries will qualify for these tax credits. While we are still awaiting for the clarification from the IRS on-
Speaker 2: of the law. We plan to use the credits received to accelerate our investment in U.S. capacity of qualifying batteries, including lithium and thin plate pure lead products.
Speaker 2: and IRS provide specific implementation guidance and will provide further updates to you as appropriate.
Speaker 2: Please turn to slide 13. On a segment basis, compared to the prior year, all lines of business posted strong revenue growth in the quarter driven by substantial price mix improvements and higher volumes in energy systems and specialty, which were partially offset by foreign exchange headwinds.
Speaker 2: The favorable impact of price mix improvements on adjusted operating earnings more than offset the higher costs for the quarter year on year.
Speaker 2: Please note, like Dave, the figures I will present on segment-adjusted operating earnings also exclude the benefit of the IRA for better comparability purposes and insight into operating performance.
Speaker 2: As David mentioned, energy systems delivered significant improvement to adjusted operating earnings as a result of price mix cost recapture taking hold for the second consecutive quarter with almost 90% adjusted OE improvement versus prior year and over 12% improvement sequentially.
Speaker 2: We are pleased to recapture lag and energy systems as reversed as we had anticipated when we advised that price mix cost recapture would be slower to manifest in energy systems versus our other segments due to the contractual nature and historically Asian based supply chains inherent in this business.
Speaker 2: On another positive note, Motive Power adjusted operating earnings improved 26% over the prior year fourth quarter and 7% sequentially.
Speaker 2: Driven by very strong TPPL mix improvements in the Americas, as well as ongoing positive price cost recapture.
Speaker 2: And finally, adjusted op earnings in our specialty segment was down $1 million versus prior year on 12% higher revenue as a result of performance issues in our Missouri plants incurred in the third quarter and higher costs in our summer plant.
Speaker 2: which we are closing and transferring production out to other factories this quarter.
Speaker 2: These elevated costs were approximately $5 million in the fourth quarter. We expect the consolidation of the solar factory to provide annual cost savings of approximately $4 million.
Speaker 2: Accomplishments across all of our lines of business coupled with healthy market dynamics resulted in solid improvement in our quarterly adjusted OE results and increasing momentum going forward.
Speaker 2: More detailed sequential and geographic results can be found in our press release and in the supplemental slides.
Speaker 2: detailed sequential and geographic results can be found in our press release and in the supplemental slides. Please turn to slide 14.
Speaker 2: On a sequential basis, in the fourth quarter of fiscal 23, we realized $15 million or 29 cents per share of improvements in price mix.
Speaker 2: Adding on to an exceptional Q3 in which we had realized over $30 million of sequential price mix improvement over Q2.
Speaker 2: Q423 sequential price mix improvements more than offset the $12 million, or 24 cents per share of volume adjusted incremental costs incurred during the quarter.
Speaker 2: While we are still incurring significant cost increases, Q4 is $5 per share of positive price mix cost recapture is our third consecutive quarter of favorable net price mix cost recapture. Closing the gap on the unprecedented cost increases we have endured over the past two years.
Speaker 2: Cost increases in the fourth quarter were driven by continued, but leveling, inflation, including commodity and energy rates, particularly in Europe , as well as productivity challenges in our Missouri plants. While we are beginning to see costs stabilize, it is important to remember that there is a delay in realizing product costs in our P&L until...
Speaker 2: that inflation is near an inflection point as we have seen three consecutive quarters of solid growth margin improvement. Our adjusted growth margin expanded 320 Bips in Q423 over prior year, inclusive of the IRA benefits and 150 Bips before the IRA impact.
Speaker 2: Excluding the IRA benefit, we maintained margins sequentially. 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.
Speaker 2: and the margin benefit of maintenance-free conversions.
Speaker 2: as well as savings realization from our EOS accomplishments such as footprint rationalization cost reductions and other lean initiatives.
Speaker 2: savings realization from our EOS accomplishments, such as footprint rationalization cost productions and other lean initiatives, all of which to drop to our bottom line.
Speaker 2: Please turn to slide 15. Looking at our quarterly sequential adjusted EPS bridge, Q423 adjusted EPS came in at $0.02 per share higher than the midpoint of our guidance at $1.40 per diluted share before the additional $0.42 per share benefit from the IRA.
Speaker 2: Our sequential results were driven by higher volumes and the five cent per share of net price mix cost impact previously discussed.
Speaker 2: Year over year, Q423 adjusted EPS endured over $1.20 per share of pressure from higher costs in the quarter, which were more than recovered by an impressive nearly $2 per share of quarterly price mix improvements.
Speaker 2: Please turn to slide 16. Our balance sheet remains strong and positions us well to invest in growth and navigate the current economic environment.
Speaker 2: As of March 31, 2023, we had over $340 million of cash on hand. And our credit agreement leverage ratio was at 1.8 times EBITDA, below the low end of our target range.
Speaker 2: For the full year, we generated cash flow of $191 million, aided by a reduction in inventory this quarter.
Speaker 2: It is important to note that primary operating capital has historically been a significant cash generator during recessionary periods, providing a very effective natural hedge against the risk of a downturn on our balance sheet.
Speaker 2: Capital expenditures of $89 million in fiscal 2023 were below our original full year guidance due to the impact of supply chain headwinds on our capital projects.
Speaker 2: We remain on track for continued expansion of our TPPL capacity for fiscal 24 and incremental 150 to 200 million per annum increases through fiscal year 25.
Speaker 2: Our capital allocation strategy remains focused on three key priorities.
Speaker 2: Investing in organic growth.
Speaker 2: Complimented by Strategic M&A.
Speaker 2: And then returning excess cash to shareholders through competitive dividends and opportunists to share by backs. We have adjusted our target to the lower end of our two to three times EBITDA leverage ratio range in an effort to mitigate the impact of higher interest rates and provide dry powder for investment opportunities.
Speaker 2: I should note that in the first quarter, we completed a small bolt-on acquisition of a UK Motive Power Distributor, IBCF for under $10 million.
Speaker 2: invest in organic growth and return cash to shareholders during a period of little to no M&A activity.
Speaker 2: We repurchased approximately $23 million of shares and paid $28 million in dividends in fiscal 2023.
Speaker 2: We are entering fiscal 2024 with ample room on our balance sheet to remain flexible to meet our business needs, and we will continue to allocate capital with the goal of delivering the best long-term returns to our share of our dollars.
Speaker 2: Please turn to slide 17.
Speaker 2: While we enter our new fiscal year 2024 with stable demand trends and a healthy backlog, we expect to continue to operate in a dynamic macro environment and anticipate headwinds including FX, geopolitical tensions, supply chain challenges, and inflation to persist for some time.
Speaker 2: Our fiscal first quarter 2024 guidance range is $1.77 to $1.87 adjusted diluted earnings per share, inclusive of 40 to 50 cents per share from IRA benefits.
Speaker 2: Excluding the IRA credits, this represents an increase of approximately 20% over the prior year. We anticipate realizing gross margins of 24 and a half to 26 and a half percent, including 150 to 250 Bips from the IRA.
Speaker 2: reflecting our expectations that are continuing mix improvements and EO savings will drive margin expansion.
Speaker 2: This is especially impressive when you consider that we have absorbed approximately $500 million of zero margin pass-through price cost-recaptured drag over the past two years on an analyzed basis.
Speaker 2: Our CAPEX expectation for the full year fiscal 2024 is approximately $120 million, reflecting investments in new products, including lithium production lines, and continued expansion of our TPPL capacity, and will increase over time as we deploy additional investments from the IRA credits.
Speaker 2: Our CAPEX expectation for the full year fiscal 2024 is approximately $120 million, reflecting investments in new products, including lithium production lines, and continued expansion of our TPPL capacity, and will increase over time as we deploy additional investments from the IRA credits. Please turn to slide 18.
Speaker 2: A reminder here that we look forward to presenting our strategic plans, growth drivers, and long-term outlook during our Investor Day in three weeks on June 15th at the New York Stock Exchange, and we hope you will join us in person or virtually.
Speaker 2: This concludes our prepared remarks. Operator, you may now open the call for questions.
Speaker 3: Thank you. Ladies and gentlemen, as a reminder to ask the question, please press star 11 on your telephone and then wait for your name to be announced.
Speaker 3: To withdraw your questions, please first start one one again. Please stand by while we compile the Q&A roster.
Speaker 3: Please first start one one again. Please stand by while we compile the Q&A roster.
Speaker 3: Our first question comes from the line of Lydia Young with Oppenheimer. Your line is open. Yes, good morning. This is Noah. Hi, I'm Noah.
Speaker 3: Our first question comes from the line of media y'all with Oppenheimer. Y'all on is open. Yes, good morning. This is Noah. Can you hear me? I know. The table. Hi, Noah.
Speaker 1: All right, yeah just to make sure there's no okay from Oppenheimer, thank you. So a quick question on the tax credit to start that the range of 40 to 50 cents benefit for the next quarter I guess just what factors would drive that to the higher or lower end of the range.
Speaker 1: Is it really just production of batteries or selling of those batteries or are there other tax related variables just to help us understand the factors in the calculation.
Speaker 1: It's mostly going to be mixed, you know, just, and if there's any production issues or, you know, unforeseen, you know, so the go forward, obviously, for the rest of the year is going to be more like our forward look, you know, in Q4, to qualify you had to...
Speaker 1: build in the quarter and ship in the quarter, but we shipped in Q4. Some of that was from inventory. So that's why we didn't get a full benefit in Q4. But I think the go-forward should be fairly predictable and consistent with product mix and certainly we have to work NOAA towards.
Speaker 1: This new reality in terms of energy density, the market is clearly going to move and we have to move with it. Thankfully, energy, value metric energy density has always been one of the key things our engineers have strived for since the beginning. Our customers want the most available energy and the smallest available space.
Speaker 1: So we've always driven for high volumetric energy density. But the market's going to continue to move that way. And my team, we've allocated dedicated resources to make sure that we keep pace with the market. But I think it's largely...
Speaker 1: a fairly predictable number. Yeah, that's very helpful and if we can sort of carry that forward, I guess what we would drive it up from here is really just your capacity and manufacturing expansion, right? If it really is the function of how much you produce and your already kind of capacity limited as you add, you know, TPPL and lithium ion capacity, theoretically that number can grow from here, is that fair? Absolutely. This is mostly a TPPL story right now, but to your point.
Speaker 1: there will be some level of optimization required in terms of...
Speaker 1: balancing our factories, deciding what we make where. So there's some certainly some opportunities around the edges, but I think you summed it up well.
Speaker 1: Can I double click on the commentary around how you see
Speaker 1: the timing of backlog normalization playing out.
Speaker 1: I think you had said maybe it would be a couple of quarters. You know, obviously it's still pretty elevated versus historical. Talk to us about how you see that playing out in any directional view you have on actual order rates versus just improving conversion of orders.
Speaker 1: Yeah, I would say largely orders are getting back to what I consider. They feel more normal, even though to your point, they're still elevated. I think a lot of that is going to depend on our customers and their ability to clear through their supply chain challenges and how much they're going to be able to get their staffing necessary to work down their backlogs as well. So we're not entirely in control of the rate at which that backlog gets absorbed. Any other thoughts or questions for that report?
Speaker 1: I've always, I've always, Noah, since the beginning of all this craziness tried to keep the team focused on what an extrapolated projection of order activity would be from a pre-COVID standpoint because everything got so disrupted. And I would say we're largely on track. Europe , we certainly have.
Speaker 1: It's always lumpy. There's always big project wins. I know we have our eye on one of our big customers in the telco space in the US has announced a CapEx slowdown. So certainly we've got our eyes on that impact. I think so far, Andy, I don't know if you've seen, that seems to be isolated to that one customer. I don't think Drew or John or Paul or anybody has said anything different. Yes, I think right now it's...
Speaker 2: Right now it's the one customer, but actually, no, I'm real happy with what happened to our backlog in the quarter. What we'd like to see is a very soft landing to more normalized levels. We're still seeing strong orders in line with pre-COVID levels where we'd expect them to be.
Speaker 3: And we don't expect there to be some big drop off of backlog. We think it's gonna be kind of normalized as customer order patterns returned to pre covered. Let's gonna take a little while to burn that through. Okay, I guess it's the last question related to that is, you know, within motive, the volume is kind of going slightly negative with that.
Speaker 3: Is that more related to production issues or end markets? Can you just give us some color on the volume dynamic there?
Speaker 2: I would say mostly Europe is mostly a Europe story. So that's where most of the, if any, of the pressure is. Yeah, but Motiv Power had an incredible maintenance-free mix pickup in the Americas. You know, it's a little bit of softening in EMEA. America's remained strong. We're not yet seeing, you know, really anything that we're concerned with, but we're keeping a close eye on it. Yeah. Because we read the same things in the newspaper, as you guys do. No.
Speaker 4: Thank you. Please stand by for our next question.
Speaker 4: Our next question comes from the line of Brett Wyskowski with Weber Research and Advisory. The line is open. The line is open.
Speaker 4: Our next question comes from the line of Greg Wyskowski with Weber Research and Advisory. Your line is open. Hey, good morning, Dave and Andy. How are you doing?
Speaker 5: Thanks for taking the questions. First one is on the tax credits and material portion being qualified. Can you just – it's two-parter with it. Can you remind us what portion of your product is produced within the U.S. and then within that, what is currently – –
Speaker 5: on plan regarding that portion of U.S. product that you expect to qualify for the credits. And I'm thinking in other words, I just kind of want to establish a benchmark, I guess, maybe when we get to the other side of Treasury guidance in the second half of this year. And we know that
Speaker 5: X percent will ultimately qualify. How does that ultimately compare to, you know, what you guys are putting in plan right now? Yeah, well, you know, this is just batteries for 45x. So I would say US batteries as a percentage of revenue is probably a little north of 50%.
Speaker 1: It's in that zip code. I don't have that exactly. I apologize. But I think in terms of the way to model it and think of it is, as I said to Noah, is it should be a reasonably stable from that Q1 projection to extrapolate that. And then as we are
Speaker 1: able to increase our TPPL production capacity, that should drag along additional IRA benefit as well. Okay, that makes sense.
Speaker 5: And then along those lines, just on the facility closures, just curious now at this point, is it – are those still purely related to cost savings, or is there any sort of correlation to draw here between the products that you expect to qualify for tax credits and the facilities that you've closed or could be thinking about closing in the future?
Speaker 1: we were able to, and the team has been really supportive. I just had a great call and we had some success on our first product we made for some medical batteries in a new facility. So the team out there has been great and we're really happy with that. But in that instance, we're really happy with that.
Speaker 1: Thankfully, we were able to pick up that equipment and physically move some of the team members into other locations. And I'm really happy with the folks that moved. And then that's one of the cases. And then, Andy, is there... Yeah, I'd add two things. First, just to comment on the Sylmar closure, even though we were evicted. It's going to cost us a little shy of $6 million, of which $1 million is non-cash.
Speaker 2: Ultawa was closing some of our flooded footprint as we migrated to more of our energy dense products like thin plate pure lead and lithium. So it's really consistent with the strategic initiatives we had in place already. Yep, yeah, and the maintenance tree element of that as well is critical for where we've intended. So,
Speaker 5: the price mix charts, which are always very helpful for us. Just wondering if you could break that down per segment at a high level. Remind us, you know, which segments are contributing most to that price mix catch-up and which are lagging at the moment. I'm going to start and let Andy, you know, go to her magic computer here, but I would say all
Speaker 1: And there certainly was some lags. RES got, you know, it took much longer due to the nature of that business to get started. But I think in all three groups had a pretty good performance in a quarter. Andy, you have those numbers in front of you? Yeah, I mean, there's a couple things that I think are worth commenting is.
Speaker 2: Number one, as we had talked about before, in energy systems there really was a lag. So they were a little slower getting out of the gate and a lot of that, as we had talked about previously, was really due to the fact that they source a lot of their products from China so there was a longer lead time between the quote to ship. And so it really just...
Speaker 2: in this quarter and last quarter just had an outstanding mix improvement with migration to our maintenance free. So that's very positive as well. I think when you look at the trend of the price cost, as we mentioned the last three quarters being positive price mix, we've caught up and I think our narrative now will probably.
Speaker 3: pivot from being a price cost recapture, we'll certainly continue to go after pricing of inflation and move more towards a mix improvement and cost reduction. Yep, but in terms of the balance between the three LOBs, it was fairly consistent, right? All three groups contributed meaningfully.
Speaker 3: to the results. Yeah, yeah, especially if you have a little bit of struggle from from the Missouri cost, but otherwise yes, you're right Dave. Okay, all right, great, all right, thanks Dave and Andy, I'll see you in June . Thank you, thank you, please stand by for our next question.
Speaker 1: some PPPL capacity constraints? Yes, and the SOMAR facility move we just talked about. So it was a combination of, we had a pretty tough Q3 in Missouri, and those costs disproportionately hurt the specialty.
Speaker 1: P&L because it's smaller. So as a percentage of revenue those costs are more problematic for the return on sales and then the Sylmar facility. So yes, in terms of the price mix the revenue growth
Speaker 1: The product roadmap, I would say that that business is moving along nicely. I think there's a lot of defense momentum building for us. So it's really exactly as you said, it's these plant issues that we think are temporary and should improve as we move forward.
Speaker 2: Yeah, but I could definitely see us returning back to double-digit and specialty over the course of the next fiscal year It'll be it'll be a gradual pick up as we get somewhere behind us that might take a quarter or two And then continuous improvement in a Missouri plans as we've mentioned both on a cost standpoint as well as an output standpoint. Yeah Got it, but you got it. You're on your own mark You you have the right you had it, right? Yes
Speaker 6: So that leads perfectly into my follow-up. The backlog increased sequentially for specialty. So I'm wondering, what are you hearing from your Class A customers more broadly? Obviously, you know, you just said growth is limited by capacity, but I'm just curious about the demand side. I'm just wondering, what are you hearing from your customers more broadly?
Speaker 1: I think you know a lot of our class eight business today is with the OEMs. So we're selling into the OEM portion of the business and that sort of dominates the narrative with us and that's where a lot of our focus is. And the most of the discussion we have with the OEMs is still related to the tremendous amount of backlog there is.
Speaker 1: as that backlog works its way through. And in terms of the miles driven or the overall economic activity, I would say that we haven't been given any strong signals that are negative in any way. But one of the big opportunities we have to remind you of
Speaker 1: is as our production capacity improves, we want to expand our focus on beyond just the factory fit OEM business. But there's still three, maybe four times as much business in the service elements of these OEMs that do the service for these fleets. So there's still so much up.
Speaker 2: What's really exciting, as Dave mentioned, is the OES side that we've really been holding the reins on. We have a new transportation DC all ready to go as soon as we have the capacity available to start getting out of the gate. And MARC will provide a lot more color on that in investor day. It's higher margin. The other piece when you look at specialty backlog in the aggregate is to keep in mind that our airspace and defense is pretty much made to...
Speaker 4: star 11 on your telephone.
Speaker 4: Our next question comes from the line of Blake Keating with Will Blair. The line is open.
Speaker 6: Hi guys, good morning. This is Blake on for Brian . Good morning Blake. I just wanted to ask about the maintenance fee. You guys have touched on it a little bit. It was up almost 20% year over year for the full year. Can you dive a little bit more into the demand drivers you've seen this year and how we should think about growth moving forward?
Speaker 1: And then what kind of margin tailwind should we see from growth and maintenance free? I think the demand driver mainly for maintenance free is it's just related to the the lack of availability of human capital to To do this task. So these these there's just not
Speaker 1: and it will continue to be. So the other element of our products beyond being maintenance-free is we tend to operate at the high performance end and the duty cycle on batteries tends to just increasingly every year get more tough.
Speaker 1: In the old days, the battery sort of had one job, which was to crank an engine or just an emergency backup. One time the amount of service that the battery was called to do was not very frequent. But today, the electrical demands, the batteries just get really abused. So customers need higher quality.
Speaker 1: more advanced products to stand up to the abuses of these today's applications. So that's the other driver is just the more electronic content in anything from a classic big rig or a forklift truck. There's just more electronic content in this such the batteries are heavy.
Speaker 1: And as Andy noted, I don't think it's a coincidence that this lines up so well with what the IRA is all about. So we've been on the right path and we're going to stay on that path.
Speaker 6: Got it. Understood. Thank you. And then just lastly, we're hearing companies are beginning to see quoting activity pick up for projects related to the infrastructure bill. Can you talk about what you're seeing with project activity and the expansion broadband access? Are you seeing the level of activity you were expecting or how should we think about potential growth? I would probably go here and tell people. The current demand of the dollars that are spending, yeah, I think thatís why I started listening to what you said abouttonv.com saying
Speaker 1: I think specifically for us the one that gets most attention on my radar screen is the Rural Digital Opportunity Fund, the RDOF, the RDOF build, which I think some of the funding came through that law. And one of our, I guess, broadband cable television customers has really taken a strong lead.
Speaker 1: expect more of our customers in the ILEC world and other cable television type customers will also see opportunities to push fiber deeper into these rural areas. So that's the one that's the most prominent for me and we're off to a very good start.
Speaker 6: Thank you. I'll pass it along. Thank you. Thanks. Thanks.
Speaker 6: Thank you. I'll pass it along. Thank you. Thanks. Thank you.
Speaker 1: I'm showing no further questions in the queue. I would now like to turn the call back over to David Shafer, President and CEO for closing remarks. I just want to thank everybody for your time today. And most importantly, I'm really excited to go in a higher level of detail and really demonstrate the product roadmap and the strategic initiatives we have.