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spk01: Good day and thank you for standing by. Welcome to the Q4 2021 Earnings Conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mr. David Schaffer, President and CEO. Please go ahead.
spk03: Thanks, Lashana. Good morning, and thank you for joining us for our fourth quarter and full year 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.annersys.com. I'm going to ask Mike to cover information regarding forward-looking statements.
spk02: 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 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, set forth in our annual report on Form 10-K for the fiscal year March 31, 2021, which was filed with the U.S. Securities and Exchange Commission. In addition, we will also be presenting certain non-GAAP financial measures that 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 dated May 26, 2021, which is located on our website at www.enersys.com. Now let me turn it back to you, Dave. Thanks, Mike.
spk03: Please turn to slide 3. Consistent with our last call, we generated strong results during the period due to rapidly growing demand for our products and services. We reported fourth quarter fiscal 2021 adjusted earnings of $1.30 per diluted share, a 17% increase over the fourth quarter of last year. Our motive power business saw another quarter of solid revenue and earnings improvement, and our specialty segment continued its positive momentum, bolstered by strong demand for our transportation products. Energy systems benefited from telecom-driven 5G growth in the Americas, delivering solid revenue, but falling short on earnings, which I will soon address. Cash flow was again strong this quarter, producing a record year and leaving us on very low solid financial footing. Although the world has begun returning to some sense of normalcy, we continue to confront ongoing headwinds created by the COVID-19 pandemic. We have seen continued availability constraints in recruiting new employees and select raw material shortages, particularly in resins and electronic components. Prices have been sticky, but always lag rapid cost increases. Our team is responding to the near-term shortages and hiring challenges and expects steady improvement as the supply chain settles down and the rest of the world accelerates. I'd now like to provide a little bit more color on some of our key markets. Please turn to slide four. Let's start with our largest segment, energy systems, which face several input cost pressures during the period, including higher tariffs, increased commodity prices, and expedited freight costs. In addition, our customers continue to struggle with chip and labor shortages that have slowed their build rates, but we expect improvements from these broad upstream and downstream supply chain issues in the back half of the calendar year. Enersys is participating in the mid-spectrum wireless U.S. build-out with batteries and outdoor DC power systems. While we maintain our strong market position, we believe our results will further accelerate when customers rotate to higher-spectrum small-cell 5G build-outs and can benefit from our next-generation line-powering products. We are also very excited about US broadband MSOs building out portions of their own wireless networks with their own HFC networks. Today, these MSOs primarily wholesale lease and voice data minutes from other network wireless providers. We have a full suite of DOCSIS 3.1 gateway products that help the MSOs deploy their wireless networks much faster at a lower total cost. Recently enacted extended MSO backup power requirements in California for public safety grid shutdown resilience provide an excellent near-term opportunity for Enersys as well. If all sites currently identified are deployed, the opportunity is well in excess of $50 million. In addition to telecom, we are seeing favorable industrial utility trends as infrastructure improvements, reliability, and resiliency are expected to provide another growth driver for energy systems. Renewable markets continue to expand with the legislative and regulatory push for energy storage applications for residential solar plus storage, monetization of distributed energy resources, and numerous global climate initiatives aimed at vehicle electrification and renewable generation. We will capitalize more in this area as our next generation renewable inverters and batteries are released. We have also made substantial progress on our own battery energy storage system plus DC fast charging initiative for electric vehicles, which I will speak more about shortly. Data center markets are also improving as areas lift more COVID-related site access restrictions All in all, global megatrends continue to be favorable to energy systems growth. Please turn to slide five. Our motors power business performed very well in the quarter. We are now the only battery producer to offer both lithium and TPPL in maintenance-free, along with our traditional flooded products. This segment generated strong operating earnings from continued market demand recovery, growing maintenance-free revenues, and continued OPEX discipline. In addition, our Richmond, Kentucky facility has returned to full capacity and efficiency, while our Hagen, Germany restructuring savings are starting to be realized. We launched our lithium platform with our four variances quarter, and all of our motor power products passed their internal UL tests. This month, we will be launching two additional variants, and we continue to collaborate with multiple material handling manufacturers. While we're only in the early stages of our launch, our customers continue to find this chemistry is best suited for the toughest duty and are actively trialing our offering with excellent results. Please turn to slide six. The third segment of our business, specialty, reported another strong quarter despite the ongoing impact of COVID on our capacity ramp. Our transportation business is performing well as the OEM Class 8 vehicle market recovers. However, we, along with many of our competitors, have been dealing with hiring challenges and supply constraints, causing our backlog to remain stubbornly high as demand continues to grow faster than we can supply. As a result, our focus remains on expanding TPPL production, particularly in our three Missouri factories. Our Springfield ramp is behind schedule due to COVID, but we added a second shift to the high-speed line and increased oxide and pasting capacity. High-speed line production doubled in the last three months and continues to improve. Our Warrensburg facility made a significant improvement from the last two years' performance as well. Lastly, our aerospace and defense team had another great quarter executing on submarine, tactical vehicles, and munitions projects. We won several space contracts with a variety of customers and programs. Please turn to slide six. I am pleased that we officially kicked off our battery energy storage system plus DC fast charge initiative during the quarter, and we are moving fast. Early momentum has been driven by two commercial real estate partners, and our engineering team has exceeded my expectation by delivering a 285-kilowatt-hour prototype up and running at our tech center here at corporate in just a few months. Our launch real estate partner has identified over $1 billion of multi-year revenue opportunity starting early calendar year 22 if we hit the reasonable cost and performance targets. Our goal is to deliver an EV charger that charges any electric passenger car as fast as the car can handle, often changing hours into minutes. By using a large storage battery to quickly charge the EVs, we can dramatically reduce system installation costs at many sites, including the size of the AC transformer and high voltage cabling from the utility interconnect. The energy system can also reduce operating costs by lowering peak demand from vehicle charging. In addition to fast-charging EVs, the bidirectional energy system can also help the host site use electricity more cost-effectively for its commercial operations and can provide emergency backup power during power outages. The system is solar-compatible and largely made from existing Enersys lithium battery modules and charging technology. Our goal from the beginning of our lithium program is to use standardized modular products and use these building blocks across all of our lines of business. This drives economies of scale and accelerates our time to market. We are lining up software partners for artificial intelligence and cloud services and reviewed preliminary business plans with our board last week. We will provide more color on this exciting opportunity over the summer. With fiscal year 2021 behind us, I wanted to lay out what we're seeing in the market and the opportunities ahead of us. Despite the challenges of the past year, many caused by the global pandemic, we are well positioned for long-term success. We are on the precipice of a massive 5G build-out that will provide a strong, long-term tailwind for our business. Recent commentary by the largest telecoms and equipment manufacturers has been unanimous. 5G is gearing up, and we should begin seeing the accelerated ramp in the second half of calendar year 2021, with the build-out continuing for five years or many more thereafter. The factors leading to this 5G growth include T-Mobile's acceleration post-sprint, universal and competitive 5G deployments for all carriers, including AT&T, which is expected to spend $24 billion a year on its network, DISH's entry into the marketplace with an FCC requirement to deploy 70% of the U.S. population by June 2023. And finally, government-sponsored rural fiber broadband initiatives being rolled out at the federal and state levels throughout the U.S. There are some potential hurdles that could slow the ramp up, including the success of the C-band auction completed in February for more than $81 billion, which could limit some carriers' financial resources to deploy it. The second hurdle relates to supply chain shortages discussed by the 5G manufacturers, particularly a lack of semiconductors. We will keep a close eye on these developments with the U.S. leading Europe but remain confident we're at the door of a major 5G expansion in the quarters and years ahead. In addition, the Biden administration has proposed a nearly $2 trillion bill, which includes upgrades to traditional infrastructure like U.S. highways and bridges, and would also make significant investments in nontraditional areas that should benefit Enersys directly, such as the electric grid, EV charging, and high-speed broadband. While it is far from a done deal, there is bipartisan support for several areas of the bill that we are prepared to act on. Our strategic initiatives outlined in our investor day nearly two years ago are worth repeating. One, to accelerate higher margin maintenance-free motor power sales with Nexus Ion and Nexus Pure. Two, to grow the portfolio of products in our energy systems business, particularly in telecom, with fully integrated DC power systems and small cell power powering solutions, which will accelerate our growth from 5G. Third, to increase TPPL capacity, particularly for transportation market share in our specialty business. And finally, to reduce waste through the continued rollout of the Intersys operating system. In addition, we're now adding our energy system plus fast charging to the above initiatives. We feel it is a core competency from decades of experience charging electric forklifts and we believe it represents an immense opportunity. We will work hard executing each of these areas and to deliver the long-term value our customers and shareholders deserve. With that, I'll now ask Mike to provide further information on our fourth quarter results and go-forward guidance.
spk02: Thanks, Dave. For those of you following along on our webcast, we have provided the information on slide 9 for your reference. I am starting with slide 10. Our fourth quarter net sales increased 4% over the prior year to $814 million due to a 4% increase from volume and 2% from currency gains, net of a 2% decrease in pricing. On a line of business basis, our fourth quarter net sales in energy systems were up 11% to $349 million, and specialty was up 16% to $132 million, while motive power revenues increased were down 6% to $333 million. Motive Power suffered an 8% decline in volume, along with a 1% decrease in pricing, net of a 3% increase in FX. The prior year Motive Power fourth quarter revenues benefited from our recovery of the September 2019 fire in our Richmond, Kentucky facility. Energy Systems had a 12% increase from volume and a 2% improvement from currency, net of a 3% decrease in pricing. Specialty had 16% in volume improvements, along with 2% offsetting impacts from positive currency and lower pricing. We had no impact from acquisitions in this quarter. On a geographical basis, our net sales for the Americas were up 4% year-over-year to $557 million with a 6% more volume and 2% less pricing. EMEA was up 2% to $203 million despite 3% volume and pricing declines due to an 8% improvement in currency, while Asia was up 19% at $55 million on 9% volume and 10% currency improvements. Please now refer to slide 11. On a sequential basis, fourth quarter net sales were up 8% compared to the third quarter driven by 9% volume improvements net of a 1% price decline. On a line of business basis, specialty increased 21% with our TPPL continuing to provide more capacity for transportation sales, while motive power was up 9% as it rebounds from the pandemic and energy systems was up 3%. On a geographical basis, Americas was up 12% sequentially, while EMEA was up 5%, but Asia was down 7%. 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, my later comments concerning diluted earnings per share, exclude all highlighted items. Please refer to our company's Form 8-K, which includes our press release dated May 26th, for details concerning these highlighted items. Please now turn to Slide 12. On a year-over-year basis, adjusted consolidated operating earnings in the fourth quarter increased approximately $7 million to $78 million with the operating margin of 50 basis points. On a sequential basis, our fourth quarter operating earnings dollars were flat at $78 million, while our OE margin dropped 80 basis points to 9.6%, primarily due to energy systems results, which I will address shortly. Operating expenses when excluding highlighted items were at 14.6% of sales for the quarter compared to 16.4% in the prior year, as we reduced our spending by $9 million year-over-year and by 10 basis points sequentially. Excluded from operating expenses recorded on a gap basis in Q4 are pre-tax charges of $27 million, primarily related to $6 million in alpha and North Star amortization and $21 million in restructuring charges for the previously announced closure of our flooded Motive Power factory in Hagen, Germany. Excluding those highlighted charges, our Motive Power business generated operating earnings of 15.6% or 300 basis points higher than the 12.6% in the fourth quarter of last year due primarily to improvements in manufacturing costs and lower operating expenses. OE dollars for Motive Power increased over $7 million from the prior year. On a sequential basis, Motive Power's fourth quarter OE decreased 230 basis points from the 13.3, excuse me, increased 230 basis points from the 13.3% margin posted in the third quarter, again due primarily to improved manufacturing and operating costs along with better price mix. Energy systems operating earnings percentage of 2.6% was down from last year's 4.1% and from last quarter's 7.4%. OE dollars decreased $4 million from the prior year and decreased $16 million from the prior quarter, despite slightly higher volume on lower margins and higher input costs. These costs range from higher tariffs, freight, materials, and manufacturing costs. Specialty operating earnings percentage of 13.2% was up from last year's 11.7% and up from last quarter's 11.9%. OE dollars increased over $4 million from both the prior year and prior quarter on higher volume and lower operating expenses. Please move to slide 13. As previously reflected on slide 12, our fourth quarter adjusted consolidated operating earnings of $78 million was an increase of $7 million or 10% from the prior year. Our adjusted consolidated net earnings of $56.5 million was $9 million higher than the prior year. The improvement in adjusted net earnings reflects primarily the rise in operating earnings along with lower interest expense. Our adjusted effective income tax rate of 19% for the fourth quarter was slightly higher than the prior year's rate of 18% and higher than the prior quarter's rate of 17%. Discrete tax items caused most of these variations. Fiscal 2021's tax rate of 18% was consistent with that of the prior year. Fourth quarter EPS increased 17% to $1.30, which was near the top of our guidance range. We expect our weighted average shares for the first fiscal quarter of 2022 to remain relatively constant to the approximate $43.5 million of the fourth quarter. As a reminder, we now have over $75 million of share buybacks authorized and we have made modest purchases recently. Last week, we announced our quarterly dividend, which remains unchanged from prior levels. We have included our year-to-date results on slides 14 and 15 for your information, but I do not intend to cover these details. Please now turn to slide 16. Our balance sheet remains strong and positions us well to navigate the current economic environment. We have $452 million of cash on hand, and our credit agreements leverage ratio is 1.7 times, which allows over $600 million in additional borrowing capacity. We expect our leverage to remain below 2.0 times in fiscal 2022. We generated a record $288 million in free cash flow in fiscal 2021. Capital expenditures of $70 million were in line with our prior guidance. Our CapEx expectation for fiscal 2022 is $100 million and reflects major investment programs in lithium battery development and continued expansion of our TPPL capacity, including the North Star integration. Even with these investments, we've also retained the agility to flex our manufacturing footprint as needed. Our decision announced last November to close our Hagen, Germany facility has progressed better than our expectation in terms of speed and cost. The expected $20 million in annual savings are starting to be felt already, with the full benefit arriving by our fourth fiscal quarter of this year. We anticipate our gross profit rates remain near 24% in Q1 of fiscal 2022, and we expect expanding margins thereafter. As Dave has described, we believe all three of our lines of business are well-positioned, and their diversity provides us with a stable earnings platform. Despite some concerns over the potential for late-arising shortages, We feel we have enough visibility to provide guidance in the range of $1.15 to $1.25 in our first fiscal quarter of year 2022. Now let me turn the call back to Dave.
spk03: Thanks, Mike. LaShonna, we will now open the line for any questions.
spk01: At this time, ladies and gentlemen, if you would like to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Noah Kay.
spk06: Well, good morning and thanks for taking the questions. So lots of details here and a fair amount of commentary on an eyesight to improving supply chain constraints in the back half of the year. the calendar year. And so I wonder how that might set up, you know, sort of on a cadence basis, you know, some of your top line recovery trends, you know, historically, I think your 2Q has been a bit soft just due to the European holidays. But if indeed there's going to be some de-bottlenecking here and you think that's going to take place in the September and December quarters, How do you think about the setup for a sequential revenue improvement over the course of the year?
spk03: Thanks, Don. Mike, you want to help Noah?
spk02: Yeah, I would say, you know, we are in the low $800 million range, and that will probably stay $820 million, $830 million in the first half of the year, and that will probably expand significantly. in H2 by at least $50 million per quarter. So we would expect that kind of not quite a 10%, maybe a 7% to 8% improvement sequentially from H1 to H2.
spk03: And now with the supply chain issues, as I noted, we're upstream and downstream. So we're getting some pressure, but our customers are getting some pressure too. So one of our big telcos couldn't get chips for their radios, so they put a lot of their order for the power systems on hold. So I think we're feeling it the same way as everybody else. The business just came back too fast. But the feedback we're getting is mostly, as we noted, it should slowly improve.
spk06: Yep. Yep. And maybe just sort of on the internal side, do you think you could give us a little bit of the impact of some of the cost headwinds you mentioned around expedited freight and and increased commodities. I know the manufacturing inefficiencies are part of this as well, right? But just in terms of materials and site, can you give us those numbers?
spk03: Yeah, I'm sure Mike can give you some direction on that. I bet you're right. The manufacturing piece was a big part.
spk02: Yeah, you know, depending on which piece you are comparing it to or what base period. But typically the drag we are seeing is – You know, the tariffs add a couple million dollars per quarter. The freight, which is primarily a freight rate increase, is probably in that same footprint. Some of the manufacturing variances, which at least in Q4, still have the incurred variances from as early as October of last year when we were still a little deeper in the grips of the pandemic. So as we move forward, Beyond there, those manufacturing variances going into, let's say, particularly as we move into Q2, where we have the current levels of operations and volume benefiting, you're going to see a nice expansion there. Some of the other things that will drive margin expansion as we go through the course of this year is going to be a number of price increases, which we have done. recently, which as they move through the order book will start to impact late in, let's say, June of this year. So starting this upcoming month, you'll start to see some pricing moving through. You're going to see the fact that for all of our factories moving up from some let's call them deep in COVID-type utilization rates where you were running at 50% to 70% capacity will move back into their normal 80-plus percent capacity. So across our factories, you would expect to see that. And the one that's been the biggest drag, and this has been well-known and well-publicized, when we bought the Northstar business, which included two factories in Springfield, Missouri – We knew that those factories based on the North Star Book of Business were drying up quickly, but we bought them for their TPPL capacity and not their Book of Business. So as we've made that integration, moved some of Enris' product in there, done some transitions of their product to be closer to their end customers, and then we've added the high-speed line in the end. the second of their two factories, you know, right now that drag has been $5 million to $6 million per quarter, which we expect to abate as we go through the end of this fiscal year. So that's a big piece. The energy systems took a big chunk of that. Yeah. They have in terms of their allocation of that variance. You know, as I mentioned in my remarks, the Hagen restructuring will be generating $20 million of benefit, one-fourth of $20 million of benefit in our fourth quarter, so that's a big upside. We've made some transfers in our contract manufacturers to move them out of China, to move them into other non-Chinese locations, including Mexico, where we would therefore not have to pay the tariffs, which are now 25% to 30%. We would shorten that supply chain, cut down our freight costs, So we think that is going to add to our benefit. And we do think from a mixed standpoint, some of our highest, you know, the best business we have typically is in our outside plant in the energy systems, particularly alpha. And that outside plant revenue has been mostly weather related, but for other COVID reasons has been slower than normal. We would expect that to expand now that it's, you know, the time where that kind of work does go on, and we've seen evidence of that. So we would expect a normal margin improvement just from the normal cycle, seasonal cycle that we'd see.
spk03: Yeah, and Noah, just a couple points just to add to what Mike said, is the energy systems business, the quote cycle is much longer than the other two businesses. So, you know, we'll put proposal up because it's very project-oriented So the price changes have always been slower in that business to push through. So there's some lag on that that bears some note. And then clearly our energy systems business is with a higher inclusion of electronics has been exposed much more to the tariff pressures. So that business has caught a lot of this. But as Mike ticked off, we've got good line of sight and a lot of pressure on the teams. COVID made competition for CMs, you know, moving out of China. It just slowed everything down. But we do have good line of sight, and that's why we remain confident things are going to slowly get better.
spk06: Yeah, a lot of questions that I'll probably take offline, I guess, in the interest of sharing the bulk. But let me ask just one more that I've been getting from some investors. You know, I think November 2019 feels to a lot of us like a really long time ago. But you did mention the Investor Day, Dave. And so, you know, maybe can you just help us calibrate, you know, where we are now, you know, versus sort of that outlook from Investor Day. You know, is it fair to say that some of those targets for 2024 have been pushed a few years to the right? You know, how would you kind of gauge the trajectory the company's on here in terms of earnings power?
spk02: No, it's Mike. I would say, because we refreshed this last September, October, which was, you know, not completely through the pandemic, but had most of it in our rearview mirror. So our assessment was that it probably pushed us a year out overall. And none of the premises that we or the takeaways that Dave enumerated in his remarks about, you know, increasing maintenance-free motor power sales with Nexus Ion and Pure, you know, growing the portfolio of products and energy systems, increasing TPPL for transportation, reducing waste through EOS. All of those were still there. You know, we are, and Dave's remarks commented about how important he thought that the new, I'll call it battery storage and DC fast charge initiative is, how much potential is out there. So I would say, you know, beyond the fact that the pandemic year kind of was just a, you know, dead space in some respects for advancing some of these initiatives, I would say you can still take that model and add a year to it, and you'd be there. Yeah.
spk06: That's super helpful, guys. Thank you.
spk02: Okay.
spk03: Thanks, Noah.
spk01: Your next question comes from the line of Greg Wasikowski.
spk05: Hey, good morning, guys. How are you?
spk01: Good, Greg.
spk05: Thanks for taking the question. Could you elaborate a little bit more on the labor shortages you're seeing just across the different segments? We've seen similar issues with the availability of skilled labor following the stimulus checks. I'm just curious, is that driving the majority of the labor shortages you're seeing, or are there other contributing factors there?
spk03: I think the biggest pressure for us is the ramp in Springfield, Missouri. We've just needed to hire a lot of folks. And this is direct labor, mostly direct skilled labor. And, yeah, it's just I think it's the same issues that many companies are facing in the U.S. right now. You know, obviously the COVID fears of returning to work, some of the benefits, the extended unemployment benefits, you know, we're not immune from all of those pressures. So it's the same thing for us. Most acutely felt in Springfield, though we see it in Poland, we see it in France, we see it around the world, but for us the most acute pressure is in Missouri.
spk02: And don't forget the acute pressure that our suppliers are feeling, you know, because piece part availability can become, you know, fire drill distractions as you try to do workarounds for that. So it's not just us. It includes our supply chain, including getting drivers and trucks aligned for getting shipments out in a timely fashion.
spk05: Got it. Yeah, that's helpful, Culler. And then for the lithium ion, last quarter we talked about ramping in material handling through Fiscal 22, you know, with introductions coming in, resi storage and telecom, you know, presumably over the course of the next year with meaningful revenue contributions towards, you know, the end of fiscal 22 into fiscal 23. Is that still the general timeline or, you know, could we see these supply chain constraints and labor issues meaningfully affect that rollout? Or alternatively, if you continue to see positive reception there, could you maybe accelerate that timeline and roll out into other business lines?
spk03: I'm not hearing the labor narrative on any of those initiatives. We currently have our lithium facility in the U.S. is handling everything, but We are ramping up a site in Asia and also a site in Europe. So we're going full steam ahead. The feedback on the motive side has been very positive. And as you noted, it's the same core technology we're using in telecom and data center and And really, that system I spoke of, the energy system with the fast charging capability, is also based on the same technology. So, you know, it's broad-based, and I would say, if anything, we're more excited than we've ever been about the potential.
spk05: Great. Okay. Thanks for the time, guys. I'll turn it over.
spk01: Thank you. That's great. Your next question comes from the line of John Frangerev.
spk04: Good morning, Dave and Mike. Guys, I want to talk about pricing. You touched a little bit on it. But in slide 10, all three segments were down year over year. And best I can tell, most of the commodity costs are up and volume is up. Can you just explain to me why that happened?
spk02: Well, John, remember on that slide, it's a combination of both pricing and it is a combination of mix. So it's a little bit of a tale of two stories. On the pricing side, our pricing typically lags the lead cost structure by about three to four months. And lead costs have more recently risen, but if you went back four or five months, they were declining. So you've got that tail, which is while your lead costs are going up in the near term, the revenue adjuster is reflecting a period earlier, which is putting a little bit of compression, particularly in those lines of business that use those pass-through mechanisms, which is about 30% of our revenue now. So it's not huge, but... But it is, you know, notable. And then, you know, the other piece is mix and what you're selling and the service work that you're doing and what margins that you have. Dave, you can probably.
spk03: Yeah, I would say on the energy systems piece, what we've experienced is some of the shortages we've been feeling have been on some of our higher margin products. So we've been pushing more because of availability, and it's the work we have to do right now on service and some of the lower margin stuff. So, yeah, I'm glad Mike cleared that up because it's really price slash mix. And so that's been a big part of it on the energy system side.
spk04: Okay. So it's not a competitive landscape issue or anything of that nature?
spk03: No, I would say it's more COVID-related, supply chain related, and then the other big piece, as I noted, especially in energy systems, is just timing on getting things through. I tell you, freight, it's not insignificant. It's millions of dollars, the freight rate changes we're seeing, and that's why we're pushing price increases across the board to recover because everything's gone up.
spk02: And we did have one of the things that the North Star sellers did slightly before they started their process was engaged or contracted with a couple of good-sized players in a couple different markets for pricing to get a healthy book of business, which was that low-margin business. And for one of those big players, that term or that agreement is pretty much up. And so we anticipate... a significant either increase in price or the ability to take the volume which we had to dedicate it to higher margin business. So we're going to see a nice, just in that one alone, because it's a fairly good-sized entity, that we should see an improvement on that one just based on a lapse of time and being able to move out of a pre-acquisition agreement on the North Star side.
spk03: And that contract would have been there's one in specialty and one in ES. So it's an excellent point. We're starting to get out from underneath those.
spk04: That actually helps a lot, Dave and Mike. And then just shifting over, I guess, specifically to the motive segment, with your backlog up strongly and the WITS data through the roof, but shipments are down at the OE side, How long is it going to take you to catch up and reach equilibrium? Is this going to be into the 2023 year, or is it going to be back half 2022?
spk03: It's hard to judge. The order data, which we usually provide on widths, is extraordinary. But when you look at the shipments data, it tells a much different story. In fact, I think throughout the course of the year to date shipments are actually down because of supply chain shortages at the truck OEMs. I know that they're working through that. They have very complicated supply chains and so the feedback we're getting is pressure. All of the OEMs are putting more pressure on us and asking us to ramp and be ready to handle it as they can expand their production capabilities. And then there was some recent announcement about some internal combustion engine business on forklifts in the news that is going to maybe even put more pressure on electric demand for electric forklift trucks, some emissions issues. So Yeah, the signals are all very positive. The backlog is very strong, and it's just a question of how quickly these OEMs can get their supply chain stuff ironed out.
spk02: Yeah, and they've made that point that some of the truck data is up as high as 86% year over year on a three-month trailing, but their orders have actually slightly declined. Their shipments. it's taking them time to catch up. And obviously, our battery sales are more linked to their shipments than their order intake.
spk04: Right. Great. Okay. And I guess one last question, just on the fast charging technologies, can you just give me a sense of context of how quick your fast charging existing technologies and how much, how much quicker to make it in order to be, for it to be viable for a commercial electrical vehicle. Yeah.
spk03: You know, it's, it's, I probably need to get a good way of simplifying it because, you know, the engineering me, I, it just depends on how state of charge of the battery, the, The type of car, all of the cars charge at much different rates. Like the Porsche Taycan can really charge extremely well, but other cars can't handle it. But in general, you can think roughly, most electric cars have like an 18-kilowatt charger on board. So typically what people are doing is just plugging that charger into AC power. And it takes literally hours to fully recharge a battery. What we're doing is we're actually charging the battery directly. So it's DC fast charging. So we're going around that onboard AC charger. We're charging the battery directly. And again, as I said in my remarks, our goal is to be able to provide as much juice as any car can handle. But at their fastest charge rates, You can see people starting to get enough range added to their vehicle in 10 or 15 minutes, which, again, we're trying to create that experience more similar to refueling at a fuel station. But, yeah, as I said, it's going to turn hours into minutes in most cases. It's very, very exciting. But, John, what's really great about the project is, That same investment, that same energy system also has a day job. It's also helping the customer save electricity. It's also being a renewable integration. It can be slaved with other systems to create a virtual power plant for the utility. It's amazing all the functionality this one investment can handle, and that's why these commercial real estate guys are so keenly interested in And they're pushing us, and they're pushing us hard.
spk04: Great. Thanks a lot, David. Appreciate the call.
spk01: Okay. Your next question comes from the line of Brian Drapp.
spk07: Hi, Brian. Hi. Hey, good morning. Can we just talk a little bit more about the second half of the fiscal year? And one thing that stood out to me in that long list of items that you gave us in terms of what could help margins in the second half of the year was 5 to 6 million, I think, you know, OPEX drag or, you know, cost drag from North Star per quarter. And that, I mean, on an after-tax basis, that seems to translate to like 8 or 10 cents a quarter just at one item. And then you listed a bunch of other items that would help margins And then you also said, I think that revenue would be potentially 50 million higher in the third and fourth quarter relative to the first half run rate. So, and then you get obviously operating leverage on that. So I'm just wondering, it seems like, you know, you could see material, a material step up in earnings in the second half of the year in terms of the quarterly run rate. And I just want to, clarify that or get you to comment further on that.
spk03: Mike can get you some better dimensions. I think it wasn't OPEX, it's manufacturing variances, so it's in the cost of sales area. And the factors were underloaded when we bought them. And we are ramping. And as I said, we're well behind our ramp schedule that we had put into the investor day model. And that's all related to COVID purely. But what we said in the Investor Day model is we were going to, by fiscal year 20, to increase our TPPL production capacity to $1.2 billion in revenue. And at that time, we were sitting at about $650. I feel pretty good right now that we will exit our fourth quarter at a $300 million-plus run rate for TPPL expansion. And so we're more than halfway of where we wanted to be. And the other thing we're trying to do, which is going to, again, help this drag, is we worked with the board last week at the meeting, and we actually got permission to accelerate some of the CapEx on TPPL to help alleviate some of this pressure. Frankly, demand has exceeded our best case expectations we use for the model. So all of this, and then the stabilization, getting the folks hired, the training, the productivity, scrap rates, everything's been really kind of lousy, frankly, from that factory. But it's getting better. It's getting better every day. And again, I'm really excited about being on that $1.2 billion pace. And then with additional CapEx, we can continue to grow that revenue. So, Mike, do you want to add any more color?
spk02: Yeah, to your question, Brian, I would anticipate, you know, we gave guidance with a midpoint of $1.20 for Q1. I would expect Q4 is going to be You know, 20% to 25% higher at the EPS level, which is, you know, the embodiment of all of those improvements that I enumerated earlier.
spk07: And so on a – you just said Q4 20% to 25% higher than Q1. Is that what you just said?
spk02: That's what I just said.
spk07: Got it. Okay. Got it. And kind of progressing – not necessarily in a linear fashion from 1Q to 4Q, but kind of stepping up in the second half. I imagine third quarter and fourth quarter might be similar. Is that fair or no?
spk02: Well, I guess, you know, it's not too, you know, you don't have a line for H1 and then a line that's higher on the board for H2. I would say that there's two lines where, you know, Q2 is better than Q1, but there is a step up to go to Q3, which then improves to Q4.
spk03: A lot comes down to resins. Some of our best margin products we're just out of, and it's because there's a shortage globally of polycarbonate, which is blended into our resins. So I think Mike's a little hesitant to tell you what the shape is because we don't really know when some of that resin availability is going to open up. We're hearing in the summertime. But, yeah, I would say largely you captured it, that probably Q3 will be better than Q2, and Q4 should be better than Q3.
spk07: Okay. Okay. Thanks. And then I'm just curious if there's any way to – size, how large this issue of the hiring constraints was in the quarter. Do you have any sense for how much that limited your capacity? Maybe like what might revenue have been in the fourth quarter if you had no hiring constraints?
spk03: We should have been by now. We should have already been on the – you know, $1.2 billion, according to the original plan. So, as such, you can say that, you know, top line has been impacted probably, let's say, you know, for the past few quarters. The top line is probably $200 million light annually, and then, you know, put that in a per-quarter basis. And then, as Mike said, the manufacturing variances have been huge, and $5 million to $6 million a quarter is a huge number.
spk02: Yeah, and sometimes it's a story, you know, you can oftentimes hire the people, but to retain them past that, say, 90-day training period where they're really starting to provide, you know, a return on that investment of training, you know, the work, you know, a lot of times people find, well, I was getting paid more than I might be able to do sitting at home, but in light of the level of work activity, I think I'm going to go back to sitting at home.
spk03: That's part of it. We don't want to get too deep into the psychology, but we fully expect with the vaccine rates, with things starting to settle down, that there's going to be a general more confidence, and our HR people are confident that things are going to get better.
spk07: Okay. So you're saying really, Dave, the $1.2 billion target, you feel like you're limited primarily, though, by hiring constraints in terms of expanding the TPPL capacity? Like you're ready to go, you just need the people?
spk03: I think absolutely the majority of the issues have been personnel-related.
spk02: But it is mostly personnel-related. There are some capital spend issues. gating items, which in our most recent board of directors meeting, our board authorized the acceleration of some of that spend so that we could meet that. But to Dave's earlier point, we expect to exit nearly at full capacity.
spk07: Okay. Got it. And then just one last question for now. I'm just curious. where we are in terms of alpha's opportunity for small cell sites. My sense is that that still really hasn't started yet. And has alpha enabled any small cell antenna sites at this point? And do you still see this as a $1 billion revenue opportunity for alpha?
spk03: Yes, I do. I think small cell has been deprioritized by data. a couple of the big carriers, everyone's put more emphasis on mid-spectrum versus where we thought we would be with small cells when we did the alpha acquisition. We've been plenty busy on the mid-spectrum building, so we're fine. We just need the supply chain issues to settle down. On the small cell, we got two good plays, two good shots on goal. One is The Gateway products, and we just got our first significant order yesterday, frankly, for some Gateway products for one of our MSO carriers to start to install radios right on their HFC backbone. So the Gateway gives them not only a way to backhaul the call traffic, but also provides the power. So yesterday was a big day. Drew was really excited. And then on the flip side, the other major project we have on small cell is our project with Corning. And they've been an unbelievable partner. I even have sort of regular calls with their CEO so that we stay calibrated. And I think Wendell and I are both extremely excited about the program. And again, though, the millimeter wave spectrum has been a little bit behind schedule where we thought it was going to be prior. Mike, is there anything you want to add?
spk02: Well, and don't forget we also mentioned in Dave's remarks about the opportunity that just really recently came up through the California Public Utility Commission for some of that grid resiliency and network resiliency that is really going to fill a lot of the gap, the hole that that higher spectrum range, if it gets pushed out, would nicely fill in.
spk03: Yeah, I think that'll help. That's mostly related to the wildfires and the power shutdown. So the CPUC is asking for longer standby at network critical sites. It's well over a $50 million opportunity. It's here and now. And I think that just kind of gets to the... I made this comment many quarters ago, and it's This business is a little bit peaky. It's, you know, there's high watermarks, and we're going into one of those periods with alpha right now, so that's why we have to get some of the supply chain stuff ironed out. So we expect to come back off this low cycle we've been on, and unfortunately – You know, everybody's trying to come back too fast, and it's just catching all the supply chains off guard. But I think that opportunity alone, even without the 5G narrative, is big.
spk07: Okay, thanks very much.
spk03: Okay.
spk01: Once again, ladies and gentlemen, if you have a question, please press star, followed by the number one on your telephone keypad. Your next question comes from the line of Jacob Green.
spk06: Thank you. So a lot has already been asked, so I'll just keep it quick. Just trying to frame the bigger picture on the energy storage side and kind of the microgrid opportunity. How should we think about your charging station progression over the next few years? And on the margin side, is there an opportunity to, say, utilize any of your recycled motive batteries that may be at, call it, 80% of a new capacity, so not ideal for motive, but would work just fine for energy storage?
spk03: It's a great question, frankly, and it would, you know, mechanically it would work because they're the same modules. So it's not something we're focused on right now. That's but it's great food for thought. The way this is rolling out, the system we included a picture of, we need to get 100 of those systems done quickly, and that's what we're working on. We've got a nice supply chain partner, a nice contract manufacturing partner lined up, and they've been fantastic. We've got to get 100 systems out as fast as we can, And then, as I noted, if things go well and they go according to plan, this customer has identified, you know, a billion dollars of potential sites where they want to install this kind of system. So a lot's going to depend on how these first 100 go. And then after the first 100, we, the engineering team, And we just put in Rex for hiring a new group just dedicated to going to a costed down version. So the initial prototype is probably much more expensive than what we'll be selling in the end because we just wanted to get something out fast. And everything I'm talking about is just one customer. And as I said in my remarks, I think the Biden administration is wildly committed. I think this new EV incentive that they're talking about, Mike, was it $12,000? $12,500. We think that that incentive can have a very meaningful impact on how many people choose electric. So we think that this administration is very committed. So we like the timing here and And, again, it's really the system is amazingly similar to, frankly, one of our forklift batteries.
spk06: Great. Thanks for that. I'll turn it back. All right.
spk01: There are no additional questions in queue at this time. I'll turn it back to Mr. David Schaefer for closing remarks.
spk03: Well, thank everyone for attending our call today, and we look forward to providing further updates on our progress on our first quarter 2022 call in August. Have a good day and a good holiday weekend.
spk01: Ladies and gentlemen, this does conclude today's conference call. You may now disconnect. Thank you for your participation.
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