Q1 2024 EnerSys Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Q1 fiscal year 2020 for 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 this session. Please press star one.
One on your telephone and wait for your name to be announced to withdraw. Your question. Please press star. One again, 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.
Good morning, everyone. Thank you for joining us today to discuss <unk> first quarter fiscal 2024 results on the <unk>.
With me today are David Shaffer, President and Chief Executive Officer.
Andre I think Enersys executive Vice President and Chief Financial Officer last evening, we published our first quarter results and filed our 10-Q with the FCC, which are available on our website. We also posted slides that we will be referencing during this call.
On the presentation page within the Investor Relations section of our website.
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. These statements are made only as of today for a list of forward looking statements and factors, which could affect future results.
Please refer to our recent 10-Q filed with the FCC and.
In addition, we will be presenting certain non-GAAP financial measures, particularly concerning our adjusted consolidated operating earnings performance free cash flow adjusted diluted earnings per share and adjusted EBIDTA, which excludes certain items foreign explanation of the difference between the GAAP and non-GAAP financial metrics.
Please see our company's form 8-K, which includes our press release dated August nine 2023, now I'll turn it over the call to <unk>, President and CEO , Dave Shaffer.
Thank you Alicia.
Turn to slide four.
Our first quarter results reflect the exceptional work our team has performed over the last few years to transform our business.
Collectively we have taken and are sits from a product based business to an end to end solutions provider expanding our technology platform offerings and reach in existing end markets. While also entering new markets.
Andy will provide details on our Q1 fiscal 'twenty four performance not look, but I will first provide a few highlights our strong operational results in the first quarter were further aided by $19 million.
Of IRC 45 ex tax credits.
Unless noted my comments include the tax free $19 million or 45 X credits reported as a reduction to our cost of goods sold in the quarter.
Revenue of $909 million was up slightly against a strong prior year comparison, primarily driven by price mix improvement, particularly in energy systems.
We remain bullish on our mid term, 7% to 8% sales CAGR on our base business with global Mega trends, such as Baidu expansion rural broadband build outs electrification automation and de carbonization driving growth for us.
In addition at our Investor day, we called out in 8% to 10% sales CAGR through fiscal year 'twenty seven inclusive of revenue from our new fast charging storage initiative.
I am pleased to update you that we recently achieved a major milestone in our product innovation journey.
<unk>, our first customer for 10 fast charging storage systems and being part of a winning bid related to national electric vehicle infrastructure or Navy, which included the hardware for two additional systems.
In the near term, we are seeing a reduction in year on year orders with tough prior year comps in motive power and some softness in EMEA demand in U S telecom, partially offset by robust data center volume.
Customer order patterns are normalizing as they absorb high inventory levels and a few large telecom customers are delaying or reducing capex budgets.
Is pushed out our growth from small cell installations and network expansions, which we expect to continue through the end of the calendar year.
Our backlog is healthy and two times higher than pre COVID-19 levels.
The value of our solutions to our customers is evident in our exceptional gross margin improvement this quarter adjusted gross margin in the quarter improved over 600 basis points versus prior year to 26, 8%, excluding the IRS benefit adjusted gross margin was 24, 7% up 410.
10 basis points year over year, and the highest gross margin we have achieved in 10 quarters, even with significant zero margin cost pass through as we are retaining price across all of our lines of business. Our gross margin was also supported by an easing of supply chain pressures.
We achieved record adjusted operating earnings of 107 million adjusted operating earnings margin of 11, 8% and record adjusted EPS of $1 89, which all represent significant increases over prior year.
Our accelerated earnings strong operating cash flow and healthy balance sheet provide us with the flexibility to continue investing for long term growth and returning capital to shareholders as such our board of directors approved a 29% increase in our quarterly dividend to <unk> 22.
<unk> per share.
I am proud of our results and we remain cautiously optimistic as we continue to navigate this uncertain environment.
Broad secular mega trends give us confidence in our long term outlook, we have a lot of shots on goal and we have demonstrated our ability to execute and uncertain times.
Please turn to slide five.
In June we hosted our Investor day, where we presented our strategic plans growth drivers and long term outlook.
We introduced our strategic framework of innovate optimize and accelerate.
Let me take a moment to recap this framework presented our at our Investor day.
Innovation has been a key area of focus at Enersys, we continue to remain at the forefront of technology for our industry leveraging our modular technology platforms across all lines of business, we're constantly evolving our product lines to be more efficient intelligent and with better interfaces.
<unk> current and anticipated market needs.
Within energy systems, we are creating customer centered end to end solutions.
One Great example is the work we did to help our customers meet the 72 hour backup power mandates of the California Public Utilities Commission.
We developed a tailored solution of <unk> batteries lithium ion modules and power supplies also known as our X R T system.
We were the only company to meet industry standards for the highest energy density to extend run times and scale deployment within the required timeframe.
When we think about optimize we think about our enersys operating system for operational excellence program, which ultimately drives margin expansion. The team has done a tremendous job in this area delivering high quality products, but the work is never done.
We are focused on our cost structure that just to reduce costs, but to be more efficient and flexible as we meet growing customer demand. While also looking to expand our higher margin solutions.
Within our facilities, we are deploying standardized processes and automated workflows to improve productivity and reduce waste.
And our Missouri plants alone. These efforts present, an opportunity to create additional <unk> capacity and save us approximately $40 million per year by fiscal year 'twenty seven.
And then accelerate.
Accelerate in its simplest terms means bringing our new innovative solutions to market quickly and scaling them for long term sustainable growth and value creation.
Our end to end energy storage and management solution with fast charging storage capabilities is the epitome of our accelerate strategy and is a game changer for enersys.
This technology Leverages, our core modular platform to create a high density <unk>.
<unk> energy ecosystem that addresses a critical and growing need in the market I am proud of how quickly the team designed and developed this truly revolutionary lithium based AI enabled technology, bringing this to market in under two years of phenomenal accomplishment.
The IR a further enables our acceleration by supporting investments in high density qualifying us produce batteries such as our plan to build a domestic lithium plant, which I will discuss later.
Troll over lithium cell supply will be critical for our fast charging storage launch as well as for our proprietary maintenance free conversions in our other lines of business.
Our strategy is clear and consistent and it is not new to Enersys. This is how we have been operating for the last several years and the time has come in which we will truly be able to innovate optimize and accelerate our business to maximize shareholder value or.
Our record earnings this quarter demonstrate the momentum we're building against the long term targets, we laid out at Investor day.
If you turn to slide six you will see these targets, where we introduced at our Investor day.
Well walk through each of them, but I will tell you I am confident that we have the right team and strategy in place to achieve these goals and our progress in fiscal year 'twenty three in Q1 'twenty four demonstrates this momentum.
Our resilient business model and flexible balance sheet are key enablers to driving our long term success.
Slide seven represents a drill down on the targets and milestones we communicated.
As a leading provider of energy storage solutions, we see tremendous growth opportunities in the coming years across the business.
And our system is ideally positioned to benefit from demand growth driven by megatrends, including energy transition energy security and connectivity.
Supply chain onshoring electrification and automation are driving demand, particularly in our motive power business. We are using software enabled intelligence to help our logistics and warehouse customers optimize their operations with proprietary maintenance free batteries and wireless charging solutions the.
<unk> market is growing rapidly in those vehicles will need access to fast charging our electrical grids need to be more reliant and resilient.
Radios and AI technology are both extremely power hungry.
<unk> band networks need to expand particularly in rural areas and are supported by government programs such as the rural digital opportunity fund.
Data communications plays an essential role in the world's infrastructure and evolving technologies are increasingly a need for power to support the density of energy needed for new equipment.
<unk> is a critical enabler of the technology, we rely on every day and that reliance is increasing dramatically as time goes on we are helping our customers optimize their power usage and making their networks and operations more efficient.
We have sustainable competitive advantages, including industry, leading core technologies, coupled with deep customer relationships. We are focused on achieving our long term targets and we will provide an annual update on our progress. Please.
Please turn to slide eight.
As we think about executing against our strategic pillars, and long term targets I'd like to spotlight a few developments in the quarter, which I am pleased to share with you starting with innovate during the quarter. We continued to make significant strides on our innovation roadmap I'm proud to say that we began installing our first lithium based <unk>.
Stendal run time XR T systems at key communication customer sites in June announced our <unk> distributed power transport system, which uses new fault manage power technology to safely deliver 10 X more power to meet the ever growing energy requirements of small cell nodes and we're off.
Also on track for production readiness to meet the deployment timelines for our first fast charging storage customers.
We optimize the business with the successful closure of our so more plant this quarter.
Also during the quarter, we accelerated by making great progress against our lithium strategy in June we announced we're exploring the development of our lithium battery Giga factory in the U S and that we entered into a non binding Mou with <unk> a European leader in battery technology as part of this initiative.
This new factory will allow <unk> to secure our supply chain, while providing independence from non domestic cell suppliers, which is critical for our defense customers.
The site selection process is underway and we are particularly excited about the scale and flexibility. This factory will provide us with both large production capacity and the ability to create cell designs optimized for enersys applications.
Based on our current outlook, we are targeting capacity of four gigawatt hours, which typically requires a capital investment in the range of $500 million.
The benefits we receive from IRC 45 X will help US fund this important manufacturing facility and we are exploring additional government funding that supports the critical need for domestically produced high density batteries as.
As we evaluate our funding options, we fully intend to stay within our two to three X leverage target range.
Please turn to slide nine.
Along with our innovation roadmap and disciplined cost structure, we remain highly focused on our sustainability goals.
This week, we published our 2022 value changed scope III greenhouse gas emissions data, which follows our scope one and scope two neutrality goal set earlier this year.
New chain emissions disclosures is another milestone of our commitment to enhancing our operations to foster long term sustainability.
Before I turn it over to Andy Let me close with this.
We have been on a multiyear transformation journey Enersys today is very different from just a few years ago, our earnings growth and strong balance sheet allow us to make the investments needed to achieve our long term profitable growth targets, our incredible team brings to commitment discipline and drive to move.
Our strategy forward, we are focused on executing in order to accelerate our impact on diverse and expanding end markets with products that are critical enabler enablers of multiple global Mega trends over the past three quarters, the benefits of our investment and hard work from the last several years have been.
<unk> in our financial results, but the real opportunity is still in front of us and it's ours to capture.
Thank you to our more than 11000 employees globally for your consistent hard work and dedication I will now turn it over to Andy to take you through our results and outlook in greater detail Andy.
Thanks, Steve Please turn to slide 11.
Before I review the details of our Q1 'twenty four result, I first wanted to discuss a change in our reporting which is effective as of April one 2023 for fiscal year 2024.
You may recall in the fourth quarter of fiscal 'twenty, three prerecorded benefits from IRI production tax credits on a separate line item, which we did not allocate to our reportable segments.
We are now expanding the items not allocated to our reportable segments.
<unk> startup operating expenses and results from our new operating segment, we have entitled New Ventures, which consists of our fast charging storage initiatives previously reported in our energy systems line of business.
We will also include any non capitalized costs related to our exploration of a domestic lithium plant.
Three items managed on a companywide basis will be lifted together on a line item called corporate and other when we report our results.
Now moving to our first quarter results.
Our Q1 'twenty four net sales were $909 million.
The slight year over year improvement was primarily driven by a 9% increase in price mix, which was partially offset by an 8% decrease in organic volume due primarily to the customer destocking and inventory normalization that Dave discussed.
During the quarter, we booked an IRA benefit of $19 million as a reduction to cost of goods sold.
This benefited our results from gross margin through net income.
However, it is important to note that our results excluding the IRS benefit saw significant year over year improvement as well I will speak to our results with and without the $19 million benefit for better year over year comparability purposes, and insight into our operating performance.
We achieved a record adjusted gross profit of $243 million and 26, 8% of net sales in the first quarter of fiscal 'twenty four.
Excluding the IRS benefit adjusted gross profit was $224 million and 24, 7% of revenue, reflecting an impressive improvement of 410 basis points over prior year.
As Dave mentioned this was the highest gross margin in 10 quarters, driven by the very strong price mix performance, which more than offset $123 million of higher quarterly costs versus Q3 dollars 21 and is underscored by the impact of margin.
Adjusting for the zero margin pass through of these costs over this time horizon, our growth margin pre IRA benefit would have been 28, 5% in Q1, 'twenty four made possible by our significant accomplishments in product mix, including maintenance III conversions and higher electronic content product.
Sales price stickiness, driven by our differentiated solutions and a smaller footprint with four less factories. So for the past five years.
Our adjusted operating earnings were a record $107 million in the quarter excluding.
Excluding the IRA benefits, we achieved adjusted operating earnings of $88 million up $23 million versus prior year with adjusted operating margin of nine 7%, improving nearly 250 basis points year on year.
Our adjusted EBITDA was a record $122 million.
Excluding the IRA benefit our Q1 'twenty four adjusted EBITDA was $103 million and 11, 3% of revenue compared to $86 million and 95% of revenue in Q1 fiscal 'twenty three.
From an operational perspective margins continue to benefit from mix improvements as well as pricing, which is more than offsetting net cost increases.
<unk> operating system or cost.
Cost savings in the quarter.
Offset by inflation and manufacturing variances, primarily from under absorption in our factories related to demand softness in telecom and to a lesser extent some continued productivity issues in our Missouri plant.
While there's still work to do we have seen year over year improvements in productivity.
We expect to continue.
In addition, as Dave mentioned in June we successfully completed the closure of our sylmar manufacturing facility and production transfer.
This will save an estimated $4 million per year going forward.
Please turn to slide 12.
Our record adjusted EPS was $1 89 per share, including IRA benefits of <unk> 47 per share in the quarter.
Adjusted EPS, excluding the IRS benefit with $1 41, and impressive 23% increase over prior year to $1 15 adjusted EPS.
Similar to Martin adjusted EPS benefited from favorable price mix actions, which outpaced year on year cost increases in the quarter.
In the first quarter, our tax rate on an adjusted basis was 17, 6% before the impact of IRA benefit.
On the right half of the page you can see the detail of net sales in AOE by segment, including our consolidated total.
Let me now provide details on demand and the performance for each of our segments, starting with our customer order pattern and then providing year on year performance by each line of business.
Turning to slide 13.
Looking at backlog as Dave mentioned overall, we are seeing order patterns normalizing as customers destock third large inventory balances and supply chains listen reducing customer requirement for longer lead time quarter and strategic inventory buffer.
Backlog declined from prior year peak level. However, our backlog remains very healthy with minimal cancellations in the quarter and is still two times pre COVID-19 level.
Fiscal Q4, 2002, we began presenting backlog detailed on a temporary basis to provide visibility into the drivers behind the significant increase in backlog related to supply chain headwind.
Supply chains are settling in backlog of normalizing, we do not intend to present. This slide going forward. As previously stated we expect backlog to gradually normalized sort of run rate of approximately one quarter of bookings moderately higher than pre COVID-19 level.
The change in customer order patterns, which is reducing our backlog should not have a material impact on our customer sales.
Please turn to slide 14.
In the first quarter energy Systems' revenue grew 4% over prior year to $425 million.
This increase was primarily driven by improvements in price mix and higher battery volumes in Americas, particularly with a record data center sales, which are up 50% versus prior year first quarter.
In the aggregate energy systems volumes were pressured by softness in EMEA and several large U S telecom customers pushing out capital expenditures.
Energy systems first quarter results were highlighted by strong margin improvement as a result of positive price mix cost recapture taking hold for the fourth consecutive quarter.
Adjusted operating earnings of $30 million more than doubled from prior year and adjusted operating margins of 7% improved an impressive 360 basis points over prior year.
We are pleased that the recapture lag in energy systems has reversed as we had anticipated. We expect this trend to continue as a cost recapture on this business has lagged our other business segment and we should continue to make gradual progress in closing the gap towards what should be more normalized margins.
Low double digit range.
We will benefit from additional volume mix improvement and cost savings over the next several quarters, particularly when U S Telecom Capex residents.
Please turn to slide 15.
Turning to motive power.
Revenue in the first quarter declined 5% from prior year to $351 million.
As we saw volumes normalize across all geographies against the tough prior year comp.
The decline was partly offset by extremely strong price mix.
I am very pleased to report that motive power maintenance III conversion trajectory is on track with the goals, we set at Investor day, and we are quoting more than one third of new projects with our proprietary maintenance free offerings.
Motive power reported strong adjusted operating earnings of $15 million, which improved 19% over prior year and adjusted operating margins of 14, 3%, which improved 280 basis points over prior year.
This strong margin performance was driven by the significant GPP L mix improvements in the Americas as well as ongoing positive price cost recapture.
Please turn to slide 16.
Turning to our specialty segment in the first quarter specialty revenue grew 9% over prior year to $133 million driven by strong volume in U S transportation market and continued benefits from price mix limited only by our GPL capacity constraint.
Missouri plant.
Adjusted operating earnings of $10 million improved 10% over prior year and adjusted operating margin of seven 4% improved 10 basis points over prior year.
Spike absorbing elevated manufacturing costs from our Missouri plant and operating inefficiencies of our sylmar plant prior to closure.
Please turn to slide 17.
Our balance sheet remains strong and positions us well to invest in growth and navigate the current economic environment.
As of July 2023, we had $258 million of cash and cash equivalents on the balance sheet.
Our net debt position of $690 million is a reduction of approximately $46 million.
From the fourth quarter of fiscal 'twenty three.
Our credit agreement leverage ratio was one five times EBITDA.
Adding back our off balance sheet asset securitization program, our leverage ratio was one eight times EBITDA below our target range of two to three times and an improvement of <unk> three times from the end of the fourth quarter of fiscal 'twenty, three enabling us to mitigate higher interest rates and provide dry powder going forward.
Third.
In the quarter, we generated strong cash flow of $75 million and free cash flow of $59 million.
Capital expenditures were $16 million.
Please turn to slide 18.
Our capital allocation strategy remains focused and disciplined around investing in organic growth.
Complimented by strategic M&A.
Maintaining a net leverage ratio at the lower end of our two to three times adjusted EBITDA target range, and returning capital to shareholders through dividends and share buybacks.
During the first quarter, we paid $7 million in dividends and did not repurchase any shares.
Please turn to slide 19.
As Dave noted our board of Directors recently approved an increase in our quarterly dividend to <unk> 22, and a half cents per share from $17.05 per share.
As part of our disciplined capital allocation strategy, we are committed to a competitive dividend that grows with the earnings excluding IRA benefits overtime.
We have 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 shareholder returns.
Please turn to slide 20.
We expect to continue to operate in a dynamic macro environment and anticipate headwinds to persist for some time.
We are working with our customers and keeping a close eye on any changes in order patterns, particularly with the U S telecom market as capex budgets have tightened.
Well volume was down versus prior year, we are encouraged by the impressive margin improvement and excellent demand prospects driven by Megatrends for which our products are key enablers.
Our fiscal second quarter 2024 guidance range is $1 77 to $1 87, adjusted diluted earnings per share inclusive of 42 to <unk> 52 per share from IRA benefit.
Excluding the IRA credit this represents an increase of approximately 22% over the prior year.
I would like to remind everyone that the IRS has not yet issued additional clarification guidance related to section 45 Act, which could materially increase or decrease the quantity of our U S produced batteries.
Five for this credit.
We anticipate realizing gross margins of 25% to 27%, including 150 to 250 basis points from the IRA benefit.
Our capex expectation for the full year fiscal 2024 is unchanged at approximately $120 million, reflecting investments in new products, including lithium production lines and continued expansion of our TPP out capacity and May increase over time, as we deploy additional and Jeff.
To increase our capacity of U S produced qualifying batteries from the IRA credits.
I would like to highlight again that we are key participants in large and growing end markets supported by global Megatrends.
We continue to generate healthy cash flow and have clear capital allocation priorities are.
Our team is energized and focused on executing our strategic initiatives to achieve our long term goal.
And with that I will turn it back over to Dave.
Please turn to slide 22.
As we close today I want to summarize what makes <unk>, a differentiated investment of choice for long term profitable growth.
We are a global leader in energy storage technology.
Provide highly differentiated energy solutions with a full suite of technologies for diverse end markets. We are strategically aligned with megatrends in large and growing markets. We have a resilient business model, which is well positioned for strong cash flow generation profitable growth and margin.
Expansion.
We have a strong flexible balance sheet with clear capital allocation priorities for accelerated earnings growth.
And were led by an energized team focused on execution and continuous value creation for all stakeholders with that let's open it up for questions operator.
Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
One moment for questions.
Our first question comes from Brian Drab with William Blair You May proceed.
Hi, good morning, Thanks for taking my questions.
I just wanted to first yes, good morning.
Just regarding the guidance I guess is it fair.
Fair to infer that.
In the second quarter.
Fiscal quarter for you that it's going to be more of the same in terms of volumes in general across the segments and.
It also looks like you are.
Because the EPS guidance is down slightly from what you produced in the first quarter.
Also it looks like the gross margins a little bit lighter in the second quarter. So if you could just elaborate on the guidance a little bit in terms of volume and margin that'd be great.
Sure. Brian This is Andy good morning, as you know our second quarter is typically our lightest quarter.
I think volumes will probably be just about neutral over Q1, maybe even slightly up despite the European holidays.
So it gets us a little bit of drag just because Q1, we had it was a little lighter than we had expected.
And we're seeing the order books that that is really in line with pre COVID-19 levels. So we think Q1 was a little softer than.
Normalized and then we had a really exceptional price mix as you can see by our margin improvement in Q1, and so we're a little cautious to forecast set at the same level. So.
We pulled back a little bit.
And that's what's driving the slight margin erosion and Brian part of that to us.
Because of the summer holidays, our service groups a lot of our costs and our service groups tend to be fixed costs that we don't have as many billable hours. So we always get a little bit of.
Sequential margin pressure from Q2.
Q2 from Q1.
So I would say that's.
That's probably the biggest issue as well.
When we rolled up the numbers from the groups.
The service piece is always a little bit little bit lighter in Q2.
Okay, great. Thanks.
I guess can you.
You elaborate also on the inventory drawdowns and the timing of that.
Now.
I guess I guess, you said that you expect that to continue to persist, but if you could just elaborate on that.
Timing, how long you think it persist and then is that still primarily in motive or are you really.
Because I know there's been a lot of volatility.
Of course in the Fork truck industry, but are you seeing those drawdowns also in other industries.
Yes, I would say motive its the most obvious is that.
People are getting back to trusting the supply chains.
<unk>.
The ports have opened up and things are are largely back to normal for us I suspect for our customers. They are seeing similar.
Improvement in their overall supply chain situations. So I would say indeed people are.
Getting back to their normal.
Levels of inventory, obviously, the higher interest rates puts more pressure on all of us holding that inventory. So there's just a natural tendency to want to get things back to normal as quickly as possible.
Our Es group I would say theres some of that but you also have to remember that in Es, we had a big <unk>.
Order book with.
The CPUC projects. So those orders tend to be very lumpy in that business. So I would say, yes, it was as much or more about <unk>.
Just some big project wins as opposed to but in addition to as you said people are starting to trust the supply chains a bit more so it's a combination in the specialty segment again, it's more similar to Es, we had some big project wins.
Along the way, we always get that's a lumpy business in the aerospace defense side.
On the supply chain side I would say.
Class eight OEM market is similar to the fork truck OEM market in terms of them getting back to more normalcy. So it's a mixed bag of issues, but certainly.
As Andy noted the the overall.
Demand signals from outside of a few key areas and Andy touched on.
The Europe is certainly an area, we've we've got our ion and <unk> and we need to.
Adapt our business accordingly.
And then certainly telecom I would say.
That this.
This spectrum space seems to be.
Slowing down in terms of building out this kind of early our first tranche of the <unk>.
Vectren and Theyre getting ready and they're signaling for us to get ready for the next.
Phases of investment as additional spectrum comes online and part of that obviously is.
The small cell focus so.
As.
I would say most of the customers are telling us this is just.
It's a slowdown but it's not.
In no way are we.
Done or with five G per se. It's just this early phase of it is.
Yeah.
It's all the telcos, it's not just.
We had signaled I think last quarter that we had one customer, but all of them seem to be in this mindset of getting ready for this next layer of the investment but outside of those areas.
<unk>.
We're seeing pretty much.
Normalcy in the order patterns, Andy Yeah, two other things I'd add I think some bright spots data centers are up 50% year on year, 65% versus <unk> two years ago.
And then motive power.
You look at our history last year.
10% of motive power business with thin plate pure lead our order book a third of it is thin plate pure lead which.
It's obviously very accretive to margin so.
We're seeing a lot of great activity with some normalization.
The product that Youre shifting there, primarily TPP L or lithium or mix.
Could you repeat that again.
Just wondering you mentioned strong growth in the data centers, which of your products is most in demand for data centers and the <unk> <unk> okay.
Okay I'll follow up more later, thank you very much.
Okay.
Thank you.
One moment for questions.
Our next question comes from Noah Kaye with Oppenheimer You May proceed.
Thank you.
Maybe a follow up question on yes.
I think you gave us good color on.
Telecom dynamics, but just wanted to make sure we understand the CPUC project dynamics. So that was was that a source of strength in the quarter is that.
And your expectations continuing to to ramp from here.
Because we're kind of looking at <unk>.
Energy systems backlog pretty much flat sequentially.
And just trying to understand the dynamics around what has kept that sort of backlog steady it sounds like some of that the telecom push out but.
If youre getting more orders.
Location CPUC.
Just help us understand that dynamic as well.
Yes, I would say largely know the CPUC has been.
A source of steady loading over the last four or five quarters.
And that project is.
80% complete something in that ZIP code I don't have that exact where we're at through that project in terms of new orders. This last quarter. The book to Bill in the quarter was still above <unk> nine I don't know exactly do you have that Andy for you, yes, it was around 9%.
We're still getting additional orders in.
In other areas and we were able to shift quite a bit we've been unleashed.
Unleashing some of that backlog so.
Yes, I would say and then the <unk> project and there is other areas, where we expect the broadband investments to improve.
Yeah, we probably still have.
Of our CPUC around 180, we've shipped around 110 of it okay.
I mean, I guess, the logical follow up to that is yes.
Do you see book to Bill trending above one or one in.
In subsequent quarters.
I mean, what would what would drive that.
Yes, I think as we mentioned on the last quarter will probably be slightly below one, which which is good I think it's a good sign that supply chains are starting to normalize what we really look at what we project our shipments to be and there's been some change in customer order patterns. We used to do a lot more of book and ship for example.
Sample in motive power.
Yes had a lot of choppiness with some of these large program orders, but now we're able to start getting some of the electronics some of the forklift Oems. They still have long lead times. So we don't have quite as much of the book and ship as we used to but it's starting to get Unclothed a little bit. So that's why we commented when we look at what.
We expect our shipments to be that'll be pretty much normalized in line with pre COVID-19 levels, and we expect the backlog coverage to start leveling off closer to a little over one right now we're still at about one three times quarterly backlog.
And can we understand the margin implications.
Starting to see.
That backlog come down, which means you are converting right faster.
Obviously, you've had some volume impacts both in yet.
Motive this quarter, but.
Just looking at the backlog and I assume that price mix benefited versus what you've been able to ship.
What would that mean for where margins can go.
Yes, I think.
The team has done a fantastic job with it with capturing price I mean, we talked about some of the stats.
And we have re priced backlog, we do have a little bit of a richer mix in backlog.
But.
We're getting the pricing on our orders right now its holding firm we.
We do expect the costs will start to come down a little bit also.
No.
Think Noah as we see the backlog online the positive side to me is we don't have this big egg in the snake, that's going to come through and things are going to change. It's just a gradual return to normalization and we've got healthy pricing and mix in the backlog.
So I don't see that as having a material impact on margin.
Okay helpful.
You mentioned earlier, you're on track with DC fast charging can you just give us a little bit more detail on that.
Timing of.
Production expected shipments.
Whether you've gotten some orders in yet.
Little bit more of an update please.
We noted in the prepared comments we've gotten.
The 12 systems now so that's really exciting for us.
The timing is still a little bit up in the areas. We are finalizing the terms and conditions and so forth of the of the orders, but we will we will start shipping in the coming quarters. So we've done some as we had noted prior we had done some advance long term purchasing and a prep.
In preparation these two opportunities we're not our original target launch customer, which is still fairly imminent, we suspect as an opportunity. So the program is achieving all of the marks.
So it's.
It's really it's really a testament to our long term strategy.
And what we've laid out.
We couldnt be more excited about the progress so theres no.
There'll be more additional updates to come but.
<unk> systems, and we expect that to just continue to grow as time progresses.
Yes, no I think it's worth noting but that's that's really why we decided to pull this out of energy systems.
Really now becoming.
Starting to become a new segment in and of itself.
And while we don't expect there'll be a material financial impact this fiscal year.
It's a switch of realizing into a business in and of itself.
It's exciting.
Helpful. Thank you.
Great.
Thank you and as a reminder to ask a question. Please press star one on your telephone.
Our next question comes from Greg Lewis with <unk> you May proceed.
Yes, Thank you and good morning, and thank you for taking my questions.
Andy Thanks for all the color you've been given <unk> given us around the IRA benefit.
I want to say last quarter, you mentioned that around 60% of the portfolio is subject to the benefits from IRI.
Is that kind of still the number or just given the network gaming units.
Realizing that it's still a smaller number but the fast charging.
Doug.
That percent would you be surprised if that percentage of the portfolio continues to melt higher over the next one to two years.
Yes, Thank you and good morning, Greg.
We mentioned last time about 60% of our U S produced batteries qualify and what we currently have in the calculation.
We are still waiting for clarification, and we think theres a good chance there could be material upside or potential downside, depending on how it gets clearer clarified we've been intentionally conservative in our calculations. So there's two things Greg that could impact the IRA benefit going forward one is.
The amount of our sales of domestic produce batteries, which it's been completely in line with David strategy, all along of increasing our capacity of high density batteries. So we do intend to increase that capacity and what the IRA has done is changed our focus to make sure. We're looking at domestic production and then second as.
We get clarification, depending on how the clarification comes from the IRS that could actually also expand.
We see there's more upside than downside, but it's.
It obviously depends on what clarification comes out from the IRS.
And besides the clarification.
Greg to your point your question I think obviously, there's a natural benefit and tendency for us to want to reshape and rebalance our factories and our product portfolios in all of our NPI towards this 100 watt hours per liter thresholds. So.
The natural tendency is for that number to increase over time independent of whether or not we change.
Related to the to.
To the IRS. So yes, I think the answer to your question is yes.
Okay, and then just realizing theres always.
A disconnect between what can happen and telling them you don't want the real world versus what.
Wall Street, sometimes looking for.
You think about that.
The U S domestic lithium battery production any kind of realizing that it's early days.
We will continue to look for partners.
Realistically when do we think we could get some clarity around what that is going to look like on a go forward basis is that something we could potentially get an update on later this year or is that something that just given all the heavy lifting involved is something where we're probably going to have to wait until.
Fairly optimistic we're going to be able to give you at least progress updates material progress updates every quarter.
Made exceptional progress so far in terms of building out our team and in looking at different sites around the country.
And as we noted this this will depend on making sure that we have enough funding available too.
Keep us within our current.
Expectations.
Patients as they relate to our liquidity and.
And frankly, our return on invested capital so.
But.
We are very optimistic I think that the.
As we as we look at especially in the areas of.
Our government projects.
Recently was.
In our presentation.
The government showed.
The amount of their projected growth in this area.
And it's amazing, but whats staggering about it as much as the government wants to grow.
In terms of their battery usage.
It's still just a.
Drop in the bucket compared to the electric vehicle volumes and so there is this.
Challenge.
Two four gigawatt hours to us is a significant investment in size of a factory, but it's a rounding error for some of these these these bigger EV initiatives and so the ability for us to be able to control.
The design and the supply chain and have domestic sourcing which is critical for all of these government projects is.
As one of the key drivers for this.
<unk> so im.
I'm fairly optimistic that.
There's a need there is a clear need the government recognizes this need and we should be able to lineup the funding.
To push this forward and in the coming quarters.
Okay, Great and then just one more for me I did want to touch a little bit more on mode of.
It seemed like in the prepared remarks, and the Q&A you kind of obviously you called out Europe , as an area, where youre seeing some softness.
I guess I guess.
Sound Asia, realizing it's a very small piece mode of very small piece.
Of your business.
Color there and then as we look at the U S.
I imagine there has been some slowing.
And really realizing there is no such thing as kind of.
With normalized type level.
Any kind of thoughts around the.
The outlook for motive.
In the U S.
Everyone's looking at the same data and it seems like it's slowing.
But maybe where we could garner.
As you see it playing out like how should we be thinking about maybe a bottoming in mode of here over the next few quarters.
On Asia Asia was a bright spot so Asia is actually improve.
Improving somewhat.
And.
And as it relates to the U S.
Uh huh.
The repatriation of certain production from <unk>.
From abroad.
The push towards the higher margin maintenance free products and the the overall levels and opportunities we have.
With our new product portfolio, we remain very optimistic about what's happening in motive in the U S market specifically.
And you said slowing.
I view it as a normalization that's going on in motive that Ivy.
I've asked the teams to present to me and all the meetings is what the long term.
Trajectories look like sort of pre COVID-19 in and forecast that forward and as we assess order rates and.
Activity levels in shipping levels Theyre definitely strikes me as a normalization so.
It's been a very dynamic period, especially as it relates to orders and when you look at the shipments of trucks, they've actually been fairly stable for.
For some time nowhere nowhere near.
The surge in shipments of new trucks as compared to.
The order activity so.
It's just things things seem to be getting back to normal and we're very optimistic about this business.
Okay Super helpful. Thanks for the color and have a great day.
Thanks, Greg.
Thank you.
Now I'd like to turn it back to David Shaffer for any closing remarks.
I want to thank everyone for joining today's call and thank you for your interest in Enersys. We look forward to updating you again next quarter have a good day.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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Dan.
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Dan.