EnerSys

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2021 Enersys earnings call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you need to press star 1 on your telephone. If you require further assistance, please press star then 0. I would now like to introduce your host for this conference call, Mr. David Schaefer, President and CEO. You may begin, sir.

Thanks, Kevin. Good morning, and thank you for joining us for our first quarter 2021 earnings call. On the call with me this morning is Mike Schmidlein, our chief financial officer. Last evening, we posted slides on our website that we will be referencing during the call this morning. If you didn't get a chance to see this information, you can go to the webcast tab in the investor section of our website at www.intersys.com. I'm going to ask Mike to cover information regarding forward-looking statements.

Thank you, Dave, and good morning to everyone. As a reminder, we will be presenting certain forward-looking statements on this call that are based on management's current expectations and views regarding future events and operating performance and are subject to uncertainties and changes in circumstances. Our actual results may differ materially from the forward-looking statements for a number of reasons. Our forward-looking statements are applicable only as of the date of this presentation. For a list of factors which could affect our future results, including our earnings estimates, C, forward-looking statements included in item two, management's discussion and analysis of financial condition and results of operations, set forth in our quarterly report on Form 10-Q for the fiscal quarter ended July 5, 2020, which was filed with the U.S. Securities and Exchange Commission. In addition, we will also be presenting certain non-GAAP financial measures for an explanation of the differences between the comparable GAAP financial information and the non-GAAP information please see our company's form 8K, which includes our press release date at August 12, 2020, which is included on our website at www.entersys.com. Now let me turn it back to you, Dave.

Thanks, Mike. I would like to spend the first few minutes of this morning's call providing an update on the state of the business and how COVID continues to present a challenge in the current environment. Later on, I'll provide more insight into each of our business segments. As you know, the coronavirus continues to significantly impact economic activity around the world. As we discussed on our year-end call in June, following the initial outbreak and subsequent shelter-in-place actions in March and April, local state and governments forced the closure of electric forklift and Class 8 over-the-road truck OEM customers, which had an immediate and significant effect on order rates. Our Q1 results reflect these temporary shutdowns, particularly in the motive business. While all of these customers' facilities have since reopened, they have done so at a reduced capacity due to market demand and supply chain disruptions. Our factories have remained open throughout, given we are essential critical infrastructure suppliers in communications, information technology, defense, energy, transportation systems, and we have secured our global supply chain. One of our primary areas of focus throughout the pandemic has been on the health and safeties of our employees worldwide, and that focus won't change. Wherever possible, our employees continue to work from home, and every factory is operating in compliance with all applicable health and safety guidelines, rules, and regulations. I am extremely proud of the continued adaptability of our employees in the face of this crisis as they remain committed to delivering for our customers. In addition to prioritizing our employees' health, as we began experiencing lower demand during the quarter, we leveraged our business model by aggressively flexing costs and operating capacities at our facilities. Operations pushed extensive cost reduction actions in all areas with a combination of furloughs, wage and salary freezes, short-time work, vacation, spend reductions, and other measures, In addition to the cost savings on travel and entertainment coming from the lockdown, SG&A costs were down $10 million, or 8%, and remained constant with the prior year's percentage of sales. As you can see in the numbers, our relatively variable cost structure and global footprint allows us to react quickly and appropriately to changing market conditions, flexing costs up and down throughout various economic cycles. Just as importantly, we flex our CapEx and OpEx without impacting our revenue growth objectives or quality of service. We will continue to adjust our costs further in response to demand shift in the months ahead. We are working to enhance our balance sheet in order to, one, maintain the flexibility and resources necessary to adapt to a changing economy and, and two, ensure we have the resources necessary to capitalize on opportunities as they arise. As the market leader, we appreciate the strong position we are in. We will continue to invest in the business to expand our competitive edge, work to increase market share from our competitors, and ensure we continue to deliver the high-quality products and services our customers have come to expect from Enersys. Our liquidity is strong and positions us well in today's market. We put our robust cash flow to work in the first quarter by reducing net debt by $67 million while generating $90 million in free cash flow, and we will work hard to reduce our leverage further. Mike will talk more about strong cash generation and balance sheet in his portion of the call. In the face of customer disruptions and ongoing headwinds caused by the COVID-19 outbreak during the quarter, We're pleased to report Q1 fiscal 2021 adjusted earnings of 92 cents per diluted share. China was the first economy to bounce back in Q1 after being hardest hit in Q4. European countries are having controlled reopenings, albeit with a reduced demand that was presenting itself pre-COVID. Specifically, EMEA has been softening from our traditional motive power OEM customers. Despite these challenges, EMEA demand for higher margin Motive Power TPPL products continues to improve. In the U.S., after several weeks of staggered openings throughout the country, we have seen business and energy systems and specialty rebound, while Motive continues to lag. Despite all of these challenges, our team performed and we continue to deliver for our customers. Please turn to slide three. I'd now like to update you on some of our key markets. Before I do, as a reminder, we have changed our reportable business segments from being based on geographic regions to lines of business. These segments are energy systems, motive power, and specialty. We believe this change will better address the global nature of our customer base and allow us to better tailor global products and services for their needs. Our energy systems business performed relatively well in light of the pandemic during the quarter as telecom carriers continue investing in their networks and to increase capacity and reliability. In the Americas, the completion of the T-Mobile merger has resulted in improved orders and revenue growth with batteries, power systems, enclosures, and services all positively impacted. However, we experienced a slower than expected quarter in cable television broadband as customers allocated their immediate attention on adding network capacity and subscriber circuits by consuming available excess power. The additional demand on these networks will inevitably require investment in more power in the quarters ahead as safety margins are consumed to ensure network resiliency. Please turn to slide four. 5G is emerging as a bright spot, and all signs point to things moving full steam ahead with the network build-outs, particularly in the U.S. AT&T is improving for us as they deploy 5G infrastructure for macro and RAN sites, and we are excited to announce a strategic collaboration with Corning to speed 5G deployment by simplifying the delivery of fiber and electrical power to small cell wireless sites. This collaboration will leverage Corning's industry-leading fiber, cable, and connectivity expertise, and Enersys' technology leadership in remote powering solution, and has been endorsed by one of our largest telecom customers. We are excited by this opportunity and all of the actions we are seeing on the 5G front. Data and UPS markets are holding up generally well with some COVID drag, but that has been stabilizing during the reopening process. TPPL demand remains exceptionally strong and supply issues have been resolved. In EMEA and rest of world energy systems, sales were down in the telecom segment as operators delayed their DC power investments, similar to what we saw in the U.S. last year. The uncertainty with Huawei to supply UK and European operators is a contributor to this slowdown. However, it opens positive opportunities for Enersys and EMEA as we are well positioned with the other large equipment manufacturers. Telecom customers as a whole seem committed to their increased calendar year 2020 capital expenditure plans. Telecom batteries, power systems, enclosures, and services should see greater positive impacts of this trend in fiscal 2021 particularly with 5G nationwide deployment ramping up and fiscal 2022 acceleration. We remain confident that our strategy to provide full turnkey DC power solutions, including lithium batteries, is on the mark for the subtech and network infrastructure investment. Please turn to slide five. Our motor power business faced strong headwinds in Q1, with many forklift truck manufacturers closed for several weeks and the reopenings occurring at less than full capacity to match demand. Although industrial manufacturing is still constrained in the Americas, and we are seeing dampened demand for Class I sit-down rider trucks, Class II lift trucks, used primarily in distribution and fulfillment centers, have held up better with the shift in consumption to e-commerce. Our overarching focus in motor power remains promoting the maintenance-free experience or their Nexus Pure and soon to be released Nexus Ion products. In Europe, the Motive Power sales team continues to push TPPL, which finished slightly up from the prior year and now represents almost 11% of total sales. The key OEMs in EMEA have all reopened, but activity is down as the factories adjust to lower market demand. Factory loading in our legacy European Motive Power factories is a significant headwind. As we discussed on our last call, one of our large competitors, Exide, had declared bankruptcy for the third time. They have since been acquired by a private equity firm in a complicated process. Regardless, as a result of our return to full capacity at our Richmond, Kentucky plant, we have continued to respond to any customers concerned about Exide's future ability to perform. Our technology teams made significant progress on our Motive Power product roadmap in the quarter in spite of COVID. Our next generation of TPPL Nexus Pure products soon to be launched include enhanced carbon and battery management systems that deliver a motive power customer experience that surpasses most competitors, including their lithium. Our Nexus Ion is on track to launch this quarter and will deliver an industry-leading experience for the most demanding of motive applications and customers. These programs have been delayed. and have yet to deliver any contribution to our financial results. We have qualified the system to ISO 26262 functional safety, the first system in industrial markets to be qualified to this standard. As mentioned earlier, in all of our segments, we have been keenly focused on reducing our operating expenses to compensate for the loss of throughput and also to reduce cash spent by tight control of inventory, receivables, collections, and payables management. These actions help mitigate the impact of the mode of power slowdown and can be seen in our strong cash flow results. Please turn to slide six. The third segment of our business, specialty, performed exceptionally well during the first quarter, particularly in light of the ongoing impact of COVID on OEM demand. We have continued to increase EnerSys' market share in the transportation sector and by leveraging our technology platform with TPPL. U.S. transportation beat our internal pre-COVID expectations in the quarter due to an increase in retail market demand and carried that momentum forward by coming out of the block strong in July. We will continue to monitor the success of new retail programs over the coming months, but are excited by the way this business is taking off as we continue to bring on additional thin plate pure lead capacity. Despite our success in the U.S., EMEA transportation volumes were down in Q1 and may remain lower than F20 as a result of the COVID pandemic scaling back production at OEMs. Defense provided positive news in the specialty segments in Q1, showing strong demand in munitions after being awarded several new contracts during the quarter. Since the investor day in late 2019, Enersys has won over $50 million in funded munitions awards on multiple programs. The majority of these programs have capitalized on our industry-leading thermal battery technology that provides lighter weight and extended operating times for applications in air and missile defense, air-to-ground weapons, and hypersonics. These programs all fall under the U.S. Army's Big Six funding priorities and align Enersys' enabling technology with the challenging future requirements of the U.S. Department of Defense. We expect that demand in orders to increase in coming months and mirror the volume and order timing of FY20. I will now provide additional updates on the continued progress we are making on our thin-plate pure lead expansion. As you know, last September we acquired Northstar Battery, which aligned perfectly with our strategy to increase sales of premium products by putting Enersys in a position to accelerate our sales of higher-margin thin-plate pure lead. At this point, the integration of NorthStar is largely complete as we pursue seamless operations, marketing, and product delivery. The transition and integration of NorthStar created significant manufacturing variances, most acutely in our specialty business in Q1. This will improve as we bring on new customers and plant loading is smoothed with harmonized tooling and processes. The installation of the new high-speed line was proceeding extremely well until technicians and engineers from our UK supplier were recalled home in March due to COVID concerns. But we are now back on track with U.S.-based contractors and continue to expect commissioning this month and much higher production capacity in our second half. Despite beginning the quarter in the midst of one of the worst economic disruptions in history, we are pleased and proud of how our team adapted to the new environment that set us up for success in the future. Our distributed footprint served us well. We worked quickly and strategically to ensure the health and safety of our employees, reduce our cost footprint to align with lower production demand, and invest in new and innovative technology that will further enhance our competitive advantage throughout the cycle. We have responded to the challenge. Looking forward, while we expect the Motive Power business to perform in line with macro trends, we're extremely excited about the accelerating 5G build-outs and the significant opportunity in both transportation and defense. Demand for our TPPL product remains strong as customers continue to seek a maintenance-free solution to meet their critical power needs, and we solved our capacity challenges in order to meet this demand in the months and years ahead. As we have shown throughout our history, Enersys is the longtime leader in the power storage market because we not only understand how to operate when the market is strong, but also during times of economic uncertainty. We are built for this moment, which we see as an opportunity, not a risk. While some of our smaller competitors may face financial or strategic challenges, our highly diversified business, both in geography and customer and markets, will help insulate us from an economic downturn, while our leaner cost structure and strong product demands will ensure robust cash flow generation for the business and for our shareholders. We will continue to enhance our strong and flexible balance sheet, allowing us to successfully navigate this market while also capitalizing on opportunities that will drive long-term growth. With that, I'll now ask Mike to provide further information on our first quarter results.

Thank you. As Dave mentioned, we have changed the segment report. geographic areas. Those three lines are mode of power, energy systems, and specialty. This change reflects not only recent management changes, but more importantly, how we view our evolving business model with global customers, products, and markets. Now, for those of you following along on our webcast, I am starting with slide eight. Our first quarter net sales decreased 10% over the prior year to $705 million due to an 11% decrease from volume, a 1% decrease in pricing, along with a 2% decrease from currency, net of a 4% increase from acquisitions. On a line of business basis, our first quarter net sales in motive power were down 24% to $263 million, while energy systems net sales were flat, at $353 million, and specialty increased 8% in the first quarter to $89 million. Motive Power suffered a 21% decline in volume due to the pandemic, with smaller additional decreases in FX and pricing. Energy Systems had a 6% increase from acquisitions, offset by decreases of 1%, 2%, and 3% in pricing, currency, and volume, respectively. Specialty had 12% from the Northstar acquisition, less 4% in volume declines. On a geographical basis, net sales for the Americas were down 5% year-over-year to $491 million, with 7% volume declines, net of a 4% increase from acquisitions, along with minor pricing and FX pressures. EMEA was down 22% to $159 million on 24% volume declines, and Asia was down 8% to $55 million, primarily due to a 7% of pressure arising from volume and currency combined. Please now refer to slide 9. On a sequential basis, first quarter net sales were down 10% compared to the fourth quarter of fiscal 2020, driven by a 9% volume and 1% price declines. On a line-of-business basis, motive power declined 26% and specialty declined 22%, primarily from the COVID impacts, while energy systems was up 12% as the work-from-home demands helped our volume. On a geographical basis, America's was down 9%, EMEA was down 20%, while Asia was up 21%. Now a few comments about our adjusted consolidated earnings performance. As you know, we utilize certain non-GAAP measures in analyzing our company's operating performance, specifically excluding highlighted items. Accordingly, my following comments concerning operating earnings and my later comments concerning diluted earnings per share exclude all highlighted items. Please refer to our company's Form 8K, which includes our press release dated August 12, 2020, for details concerning these highlighted items. Please now turn to Slide 10. Slide 10. On a year-over-year basis, adjusted consolidated operating earnings in the first quarter decreased approximately $17 million to $61 million, with an operating margin down 130 basis points. An additional $3.7 million of business interruption recovery in Q1 from our September 2019 fire in Richmond, Kentucky, along with lower commodity costs, were not enough to offset the volume declines and higher manufacturing costs. On a sequential basis, our first quarter operating earnings declined 40 basis points to 8.7%. Operating earnings, when excluding highlighted items, were at 16.1% for the first quarter compared to 15.9% in the prior year, as we reduced our operating spending by $10 million. Excluded from these operating expenses recorded on a GAAP basis in Q1 are pre-tax charges of approximately $8 million, primarily related to $7 million in alpha and Northstar amortization charges. Excluding those charges, our motive power business segment achieved an operating earnings performance of 10.4%, which was 50 bps lower than the 10.9% in the first quarter of last year due to the 21% volume decline mentioned earlier, driving a $10 million drop in operating earnings. On a sequential basis, Motive Power's first quarter operating earnings decreased 230 basis points from the 12.7% margin posted in the fourth quarter due primarily to volume. Energy Systems' operating earnings percentage of 8.0% was down from last year's 8.5%, but up from last quarter's 4.1%. OE dollars decreased $2 million from the prior year, primarily from higher manufacturing costs, but they increased over $15 million from the prior quarter on 13% organic volume increases from the work-from-home demands and other seasonal fluctuations. Specialty operating earnings of 6.5% was down from last year's 12.5% and down from last quarter's 11.7%. OE dollars decreased $4 million from the prior year, primarily from higher manufacturing costs, and decreased nearly $8 million from prior quarter on 21% organic volume declines, primarily related to COVID. Please move to slide 11. As previously reflected on slide 10, our first quarter adjusted consolidated operating earnings of $61 million was a decrease of 21% from the prior year. Our adjusted consolidated net earnings of $39 million was $17 million lower than the prior year. The decline in adjusted net earnings is consistent with the decline in operating earnings. The recovery on our business interruption claim from the Richmond fire continues to progress, although slowed by remote work mandates for those involved in the claim. We received $5 million in April, which was reflected in our fourth quarter results. We received another $4 million in May, which was recorded in this first quarter of fiscal 2021. And we have received another $1 million in July, which, along with any future receipts, will be recorded in Q2 or beyond. Those receipts reflect approximately 60% of our claim as we continue to pursue recovery on our interruption loss. Our adjusted effective income tax rate of 21% for the first quarter was higher than the prior year's rate of 18% and higher than the prior quarter's rate of 18%. Discrete tax items caused most of these variations. Fiscal 2019's full-year tax rate was 17%, while our fiscal 2020 tax rate was just below 18%, which is consistent with our expectations for fiscal 2021. EPS decreased 29% to $0.92 on lower net earnings. We expect our second fiscal quarter of 2021 to remain near the 42.9 million weighted average shares outstanding in the first quarter. As a reminder, we still have nearly $50 million of share buybacks authorized. but have no immediate plans to execute any repurchases, with perhaps the exception of the modest annual repurchases made to offset employee stock plan dilution. Our recently announced dividend remained unchanged. Please now turn to slide 12. Our balance sheet remains strong and well positioned for us to navigate the current economic environment. We now have nearly $384 million of cash on hand and our credit agreement leverage ratio is 2.2 times, which allows over $500 million of additional borrowing capacity. We expect our leverage ratio to remain at or below 2.5 times in fiscal 2021. We generated over $90 million in free cash flow in the first quarter. Our Q1 cash generation was very strong, as expected, and our receivables collection remained robust with days sales outstanding constant with that of March. Capital expenditures of $26 million were at our expectations for the quarter. We have expanded our capex expectation for fiscal 2021 to approximately $65 million from an earlier expected reduced spend of only $50 million. We remain committed to our major investment programs those being the lithium battery development, continued expansion of our TPPL expansion, including the Northstar integration, the completion of our high-speed line, and the transition of Northstar products for the European market to our French factory. Most of the spending on our high-speed line has already been made. Even with these investments, we have also retained the agility to flex our manufacturing footprint as needed As I mentioned earlier, we are maintaining our dividends to shareholders. We anticipate our gross profit rate to remain near 25% in Q2 of fiscal 21, as lower revenue and lower utilization in some of our factories will likely counter the benefits of lower commodity and energy prices. With regards to tariffs, we anticipate a cash and earnings clawback of up to $5 million sometime in Q2 from exemptions we have already received. With regard to resuming guidance, we are awaiting a better understanding of the mode of power recovery, along with a reduction to the uncertainty of future pandemic restrictions by public authorities. As Dave has described, we continue to expect a continuation of a lower demand in motive markets. while other markets remain constant or may rise. We continue to believe we have taken the necessary steps to position ourselves to not only withstand this challenge, but emerge stronger, as was the case a decade ago. We believe potential market share enhancements may mitigate lower total market demand. And we remind you of the fact that during the last recession, we delevered and increased our market share. Now, let me turn it back to Dave.

Thanks, Mike. Kevin, we will now open the line for questions.

Ladies and gentlemen, if you have a question or a comment at this time, please press the star, then the one key on your touch-tone telephone. If your question has been answered or you wish to move yourself from the queue, please press the pound key.

Our first question comes from Noah K. with Oppenheimer. Good morning. Thanks for taking the questions. I appreciate the new segment reporting, and the redesigned website looks good, so well done there. Can we start with the TPPL capacity ramp and how that may start to impact the financials? You know, if you start the high-speed line commissioning this month, and it sounds like the, you know, North Star integration and homologation to Anderson's TPPL product is really well underway here, or should we say just, you know, ramping at this point. Maybe you can provide some color on that. That implies you could be sort of in October with about $400 million or so of incremental TPPL revenue. Do I have that right?

Thanks, Noah. And, you know, this transition and your reference to, you know, bringing everybody to the same standards has put a big drag in the last couple of quarters, and you see it acutely. You see that manufacturing variance drag in the specialty segment. that's definitely going to start to improve as we ramp up new customers. Yes, your point is well taken. I'm headed out there, I think, end of this month, and we're going to look at all the new equipment. It's not just the high-speed line, but it's all the plate making to feed it. We should be in a great position to bring on new and more customers starting, as you mentioned, in our second half. So that's going to ramp up. We're not going to turn on the spigot and pick up $400 million overnight. It's going to take time for the ops team to bring it on and the sales guys. But I'm very proud of our sales guys. You know, hopefully you heard the prepared remarks. They've done a great job of working with the ops team to get things keyed up and queued up. 30 years at this business, it's been hard to get capacity and demand and supply in sync. I think we're doing a better job of that right now. So we're very excited about that. And I've been getting videos every day of the new equipment as it comes online. It was frustrating that, you know, COVID slowed us down, but the team has responded. I'm very excited about our second half. We're going to start to ramp that piece of our business up starting in our third quarter. Mike?

I guess you threw out the $400 million of additional capacity. I think that's a decent number to use in terms of what that line is capable of doing when it's running at full production levels. What you might want to factor in is whether, you know, there might be cannibalization from other factories. So it may not be a total $400 million because some of the other TPPL factories might have been able to make some of that product as well. So you'd want to temper that a little bit.

Yeah, it's the ramp. No, one of the things that's been interesting in the course of this COVID crisis is how hard it's been to hire people. It's crazy. It's upside down. You look at the unemployment statistics, and every plant manager I have is screaming about how hard it is to get people into the factories right now. So it won't be perfect, but the hard part is over. The equipment looks great, and the customers are queued up. So we're excited.

I appreciate that, Collin. Thanks. And then, you know, you talked a bit as you went through the new segments, you know, about demand patterns. I wonder if you could just expand a little bit more, you know, certainly anything that you saw in July in terms of, you know, notable order pattern changes, you know, improvements, you know, deceleration. I would certainly be interested in your observations. You know, in the telecom broadband space, you know, we knew that the telecom side of the business was picking up, and we saw that here in the fiscal first quarter. But, you know, do you think broadband, you know, is already starting to come back as those safety margins are consumed? And what might that mean for this quarter?

Well, I'll let Mike give you the order numbers here and trends, four-week, eight-week averages in aggregate. You know, it's mostly a motive story. I think, you know, hopefully you heard that. It's relative to our business plan or budget for the year. And inside a motive, it's a mixed story. So, like the U.S. food markets, they're holding up pretty well, and that's an important part of the key drivers for the motive business. Warehouse construction, you know, that's still going strong with all the e-commerce companies. And then it was really it's us trying to sort out the difference between supply and demand issues. How much of this was forced closures from government actions and how much is longstanding impact to the business? And I wish I had that clarity. That's why we're holding off on the guidance a little bit. In general, I can tell you everything's getting better. The order rates are improving. Mike will give you those numbers here in a second. And then to your point on the cable television customers, I can't tell you when. I know they're scrambling right now to handle all of the work from home, new users, people asking to upgrade their bandwidth speeds. They're going really well. But right now, their initial focus is bringing on all those new subscribers. But as you point out, they're soaking up every ounce of safety margin they have, and that's just their initial focus, and we expect things are going to continue. That's a great business, and it's been a great business for a very long time, and we continue. We still have great expectations for that. So, Mike, you want to talk specifically about the orders?

Well, just to give you kind of a broad look at it, When we look at our order pattern, looking at kind of the more current orders, those being the ones collected over the last four and then eight weeks averaged, and then the later ones, 12 and 16 weeks. So Motive Power's got an improving story, whereas the 12 and 16 week averages were more like down 20%, they're now down 10%. So that is a deceleration of the decline that we saw year over year. Energy systems, because of some of the strength of some of the work from home projects that the networks were doing to add capacity, has stayed relatively flat, albeit there are some puts and takes within that portfolio of winners and losers in terms of who's doing well and not doing well. Our specialty business, which was this was where some of those truck, over-the-road truck OEMs were shut down early in our fiscal quarter. and then reopened. So that's a good news story, whereas it was about a minus 5% order intake for those earlier periods is now a positive 5% year over year. So, you know, I would say, and broadly, whereas we were as a total company about minus 10% in 12 or 16-week averages, you know, we're now down to about minus 5%. So we're certainly narrowing the gap, and it's an improving situation based on order intake.

And then, Noah, just remember for our second quarter, it's just important to remember that we fight for a lot of our manufacturing variances. So, you know, as much as we try to, and I'm really happy with the job the teams have done, you can never flex instantly. And so you're going to, you know, we're going to carry forward some pretty good, no, not good, pretty bad manufacturing variances from the first quarter in Kurds into the second quarter. But I think what's really important to note is that the order rates are definitely recovering. And really, and I said in my remarks, we think it's our geographic and market diversification that sort of helped us. And Mike has said for many years that about the strength of our balance sheet and our business model. Commodities go down typically in these recessionary periods, and you see that in our cash flow numbers that really, as Mike predicted, that fared well. We're feeling cautiously optimistic, but that said, we do have pressures. Europe was going slow on motive before COVID, and we've got some challenges to to adapt to there, but in general, the environment is improving.

That's very helpful. If I could sneak in one more, you know, the timing is really interesting of your reporting the new segments and their margins in a quarter that is probably as unusual and lacking continuity as probably any you've experienced. And so the margins that we see this quarter are not really sort of normalized margins for the business segments. But is there anything you can share with us in terms of how we should think about a normalized margin profile for each of the segments or any margin targets for these segments that you can share?

Well, you know, I can also only say, you know, looking back historically that the The margins at the gross profit line and really even the operating earnings lines are typically fairly similar. As you know, as a company, we tend to be in a gross profit percentage at about 25% of sales. And as you look at these segments, that's about where they track to. and most of them have 15% to 16% or 17% operating expenses at the moment, although those are declining. Those numbers are probably more representative of last fiscal year than what they are this year. So with the objective that everybody has to deliver at least 10% of operating earnings, and the only caveat I would give you is that the specialty business, especially as you think about it a year ago, we only had the North Star acquisition in it for the second half of the year. So it's got a little bit of a drag, as Dave mentioned, in the near term compared to a prior year Q1 or Q2 comparison. But once you get to Q3 and Q4, when we do expect that high-speed line to start having a positive contribution, I think you'll see an improvement there. But But given its smaller size at about $90 million per quarter, it's always going to have a little bit more volatility from some of these inputs than the bigger segments. But by and large, at least when you're starting your modeling, I would probably keep everybody in that 25% gross profit rate because they're not that much different in the aggregate.

I agree, and I'm glad Mike pointed it out. I really wanted to stress that note. I don't want anyone to make – any bad assumptions about pricing or gross profits on the specialty side. That's entirely a manufacturing variant story, an integration story, and should improve in the coming quarters.

Thank you. I appreciate the caller.

Thanks, Bill.

Our next question comes from Brian Trapp with William Blair.

Good morning. Congrats on the solid performance in the tough environment. Can you maybe just comment further on operating expenses that came in? I know you're doing a lot of good cost-cutting, and there's lean activities that were initiated pre-COVID. There's about $6 million below my first-quarter estimate in OPEX, and I'm just wondering if you could help me model that going forward. Does some of that start to flex back in if volumes pick up?

I guess I would say, Noah, that when I look at – It's Brian now, Mike. I know Noah was on for a while. It's Brian now. Sorry, Brian. Sorry, Brian. For our friends at William Blair.

When I look at our operating expenses, I would tell you that I think our selling expenses flexed very well. We spent a lot of energy making sure that that gets right-sized. And so it's flexing well. The G&A expense is not quite as flexible because it has most of the overhead, like David and myself. And we flex a little bit, but we're getting older, so we're not very flexible. And engineering's done a reasonable job. But I guess the two things I would tell you that have kind of been a big mover is the travel restrictions and not having collectively, out of our 13,000 employees, there's probably about 1,000 of them that tend to move and get on airplanes. And if none of them are traveling, it does have a collective impact and lowers your spend. And the other part that caught me a little bit by surprise was the reduction in some of our payments to our medical providers as some of the medical services were restricted over the pandemic, particularly in the early periods. And if people can't get access to their health care providers, the bills go down. And I didn't really anticipate that, but it's been fairly noticeable as well.

Yeah, Brian, you know, I talk to the guys pretty much every day on this topic of really what this – I mean, the – the silver lining in this is it shows how effective technology, some of these new Microsoft, my hat's off to the Microsoft team, we're using their 365 suite of products, and it's just done extremely well for us, been very stable, push of a button, I can be speaking to someone in China, and so we need to do more of that. I think we've actually broken some golden idols recently, so We hope to not bring it all back, but I can't give you a number yet. I don't know.

So that's all really helpful, but not even directionally. What would you think for the second quarter if OPEX dollars are up or down?

I think you're going to see, I mean, in general, and I realize we didn't give you guidance, but I would say in general you should expect Q2 to look pretty similar to Q1. Yeah, I agree.

Okay. Okay, thanks. And then can you talk a little bit more about the retail success that you mentioned in transportation? I think the one that you've announced, the partnership you've announced is with AutoZone. How many other partnerships now have you signed, and how kind of broad is your presence in that market at this point?

It's improving. So we've done at least three more partnerships. let's say, material deals. And that piece of the business is going as planned. A couple of the areas, you know, AutoZone is principally focused on premium retail. If you remember, we decided 2% of that addressable, you know, 2% of that market was our addressable market. And then the other piece, and we mentioned this, and we are starting to have some success, is focusing on away from the OEMs on the Class 8 and putting more of our emphasis on the service and the replacement side, and that's going well, too. The OEMs were, you know, that was not a good story, frankly, with those forced closures. If we were only selling to the truck OEMs, we were going to have a lot worse quarter than we did. So that diversification is helping us and definitely going in the right direction.

Okay, great. And just the last one, can you talk a little bit more about what you're seeing in 5G? You mentioned AT&T specifically. You made some other comments around good momentum there, but are you seeing T-Mobile, Verizon, DISH, these companies starting to spend more and release more orders for 5G? And where do you stand in terms of what you think about the timing of 5G having a material impact on your revenue?

We have discussions and programs going with all of those customers you just mentioned, but they're all a little bit different. I mean, as we've said, whether it's macro sites, if it's fiber buildouts, if it's central office adding power to a central office, small cell site powering, we've talked to you a lot about all of those areas of the network investment uh we we will participate in we've put special emphasis on the small cell powering given that we we feel like in the long run 5g will require to get the benefits that that that the carriers are really looking for they're going to need a small cell start the small cell site uh sort of network topology so we've put a lot of emphasis in that area The corning project we announced is very exciting. I don't want to get out ahead of corning in terms of dimensioning, but they've talked about it on their analyst call. I know that we have visibility in the C-suite of a major carrier on this program. So it's a very exciting opportunity for us specifically, but we're seeing it across the board. It's really happening. They all have a different spin on it. Everybody's working in the different spectrums. Some is lower, mid-band, high-band, and we're trying to participate everywhere. The DISH opportunity is a little unique given in some ways they're starting from scratch. So every one of them is a different story, but every one of those accounts is We have good momentum with a little not the same story in Europe, definitely not where we are in the U.S. market. But, you know, maybe a year from now, that piece of the business is going to start to pick up as well. So very exciting, and it's just starting now in real earnest for us.

In Europe, is that COVID-related, or is it more just the market or your competitors?

I think the Huawei situation is important. I think that these decisions on which telecom equipment OEMs to build their networks out with is a very important decision in the U.K. and France. So that's a piece of the story, as I said in my prepared remarks. I think that there's political reasons. There's spectrum issues. So it's behind, but it will come. It's just the nature and the evolution. And what we've said for many, many quarters is our lives will only become more digitized. COVID, I think, is – and this is something we talk about as a management team all the time – it's going to change how we view telecommuting. It's going to change, especially with some of our younger employees, this work from home. And all of these things are going to put more pressure on networks, not less. So very – in that sense. But, you know, certainly the carriers are having their own challenges getting their crafts out in the field. You know, they've had some absentee issues, absenteeism issues to deal with. So COVID, we can't say we've been COVID-proof in that part of our business by any stretch. But in general, there's a lot of momentum building. Okay. Thanks for all the detail. All right.

Our next question comes from John Franthrope with Sedodian Company. Hey, Dave and Mike. I'm going to combine this question into one because we're pressed for time here. But, Dave, can you expand on the motive headwinds? You touched on that the motive of Europe has been weak for a while. E-commerce was good. You said food was good. In light of what I'm seeing in some other, I don't know, call it economic-related equipment, such as the Class A truck market, which orders are the best of the year in July, Now, how come we're not seeing a similar kind of rebound in the forklift market? And also, can you address what you think about the Class 8 OEM truck, given that order statement I just gave you?

Yeah, that's good. That's certainly improving. I mean, if you look at the different pieces where electric forklift trucks are used heavily, light vehicle production, you know, cars, sedans, That really got punched really hard with a lot of forced closures. So that's an impact. But how sustainable is that? I don't know. I don't have a good answer for you. But that's a big place. Warehouse construction, we mentioned, looks fine. But in general, if you look at the non-defense capital goods, You know, and that's sort of a broad, you know, if you take out the aircraft. It's just hard for me right now to tell you how much of this is going to drag beyond or into our H-2. I just will remind you that we don't have any acute exposures into oil and gas, aviation, leisure. But economic activity is economic activity. And as you've noted for years, that our motive tends to ebb and flow with general industrial production statistics, things like that. So, Mike, do you have anything you want to add on that?

No, outside of I actually hadn't seen the July width data yet, but I'm encouraged to hear John say that it was.

He said Class 8, right? That was Class 8.

That was a Class 8 truck. That was kind of alluding to the fact that other economically sensitive equipment, you know, vehicle equipment is rebounding sharply. And I was kind of curious why you're not seeing it in the forklift market.

Well, again, as we noted, we've clawed halfway back on our order pattern. So we'll see how far we get by the end of this quarter. But it is improving. Don't get me wrong. It's just it's still we watch the same news you do, and we still don't know if there's going to be a second round of closures or anything. So we're just being careful.

Okay. And if I can, about the coining relationship, how does that change the economics for you going forward?

We think that from a gross margin standpoint, that will be an accretive business. From a revenue standpoint, we think it potentially could be very material to our business. We've already invested in scores of engineers. That's already a drag on the P&L. to do all the work and the approvals. We're through the early phases of approvals now. There's a lot of pressure from our big end user customer. And it does change things from an Enersys perspective because the wallet share is different than we've ever participated in before. And it really embodies where I wanted this part of the business to be. And we wanted to elevate, we wanted to be able to provide a fully engineered turnkey system, which has the energy conversion, the enclosure, the energy storage with the batteries. It's exactly where, it just embodies where we've been trying to get to with this business, and we're very excited about it. It really is kind of what the future of Enersys is going to look like more and more.

Okay, and one quick one. Is there any chance we can get an 8K filing with the restatement or reclassification of the segment data?

Well, you bring up a good point, John, in that if we left it to the current – way we would do our reporting would be the balance of the year before you had a full year's worth of prior year restated for those segment changes. What I can do in the short term, and this is for any of the analysts or anyone who's on the call that would like to have that information, this is to restate last year's what were geographical lines of business back down into a or geographical area segmentation into a line of business, you can contact Steve Ayer, our investor relations VP, and you can find his contact information on our website, and he can provide you that breakdown.

Great. Thanks a lot, Mike. I'll get back into Q. Thanks.

Our next question comes from Greg Wasikowski with Weber Research.

Hey, guys. Thanks for squeezing me in. How are you doing? Good. So I appreciate the new business line reporting. I just wanted to start with the chart on slide three. I was curious if you guys had any, like, long-term objectives or goals for each of these segments. And then also, you know, how do you see this pie chart evolving over the years?

I think you're going to see higher growth in the specialty sector. as we bring on more of this, as we absorb more of this thin plate pure lead capacity. So I think you're going to see that slice of the pie grow. I think the motive power revenue story, as we've alluded to, is not particularly a huge story, but we think the margins, really on the motive slice, it's really going to be more of a margin focus with some of our more advanced maintenance-free products. And then on the energy system side, we should see some meaningful growth there as well as these 5G pieces grow. So, yeah, I would say the energy systems and the specialty should both grow faster than the mode of specialty growing the fastest.

Okay, got it. That's helpful. And then your answer on margins before was really helpful, so thanks for that. I want to dig in a little bit more on specialty, and particularly defense. I find it's really interesting work, and to the extent you're able to, can you talk a little bit more about the new contracts and the new work you're doing, and then also what kind of margins you typically see for that?

The margin profile in that business tends to be highly accretive. And so a lot of the awards we've talked about are new contracts, new orders that have yet to show up in the revenue line. And there's a lot of engineering, obviously, that goes into supporting these types of programs. But in general, and then the specialty business, transportation-wise, the sub-segment of transportation under there is an accretive business as well. So margin-wise, that is the specialty in the long run, I think, is going to be right at or higher than the other two business segments. But it's being dragged right now with this North Star acquisition and kind of lining up the strategy. And we are, I mean, we can't hide from the fact that COVID has slowed those plans down, but it's coming quickly.

Yeah, and I would say, Greg, that on some of these new awards, there typically is a period on the front end for qualification where you may be doing some non-recurring engineering, and that's not really, that's done more on a cost basis to you know, validate that the product works in the application. So they're not a smooth profit margin. You may see it restricted on the front end, and once it goes into full production, you would see the normalized margins that we would anticipate from the programs.

Got it. All right. Thanks, guys.

All right. Great. Again, ladies and gentlemen, if you have a question or a comment at this time, please press the star, then the one key on your touchtone telephone. Our next question comes from Greg Lewis with BTIG.

Yes, thank you, and good morning, and thanks for taking my question. I realize the calls are on a little bit late. I just had one question. I mean, as I think about the, you know, over the last two weeks, you know, there's a lot of power outages across the, you know, the East Coast related to the tropical storm. You know, thinking about potential opportunities, whether for energy storage with utilities or industrial power customers, is there any way to think about that? Like, you know, just given you guys have been through these before, does that, like, kind of result in any kind of opportunities or step up in business, you know, a couple quarters down the road? Or is it something where, you know, these businesses, customers generally have a good sense for what they're doing and just kind of any kind of color around that would be appreciated.

It's a great question. And in my experience, what these outages do is they prioritize network resiliency, power resiliency at the C-suite of the carriers in the telecom world at the utilities. So it tends to bring heightened focus to Things like Y2K was an area where the condition of batteries, the condition of networks brought on a lot of business. The big power outages on the East Coast years ago. This year, you know, we've certainly paid attention to the number of storms that are being anticipated. So it certainly brings heightened focus to the need for the kind of products that we provide. Historically, we've definitely seen more attention being paid, more capex being allocated to power resiliency after a storm like this. One of the things they've gotten better about in In the old days, oftentimes the tidal surge would just wipe out some of the equipment and it would have to be replaced. But I think all of the carriers have done a better job of putting their base stations on platforms and things like that. So it's really mostly now just a question of heightened focus and allocation of CapEx dollars. So, yeah, it should be a good thing for us.

Okay, thank you very much.

Thank you for the question. Thanks, Greg.

And I'm not showing any further questions at this time. I'd like to turn the call back over to David Schaefer.

All right, well, thank you all for taking your time today to attend the call. We look forward to providing further updates on our progress on our second quarter 2021 call in November. Have a great day, everyone. Bye-bye.

Ladies and gentlemen, so that concludes today's presentation. You may now disconnect and have a wonderful day.