EnerSys

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2022 Inertius Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will 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, Lisa Hartman, Vice President, Investor Relations. Please go ahead.

Thank you. Good morning, everyone. Thank you for joining us today to discuss Enersys' fourth quarter and full year fiscal 2022 results. On the call with me this morning are David Schaefer, Enersys' President and Chief Executive Officer, and Andrea Funk, Enersys' Executive Vice President and Chief Financial Officer. Last evening, we published our fourth quarter and fiscal year 2022 results and filed our 10-K with the SEC, which are available on our website. We also posted slides that we will be referencing during this call. The slides are available on the presentations page within the investor relations section of our website at www.annersys.com. As a reminder, we will be presenting certain forward-looking statements on this call that are subject to uncertainties and changes in circumstances. Our actual results may differ materially from these forward-looking statements for a number of reasons. Our forward-looking statements are made as of today, even if this presentation is replayed at a different time. For a list of forward-looking statements and factors which could affect our future results, please refer to our recent 10-K filed with the SEC. In addition, we will also be presenting certain non-GAAP financial measures, particularly concerning our adjusted consolidated operating earnings performance, adjusted diluted earnings per share, and adjusted EBITDA, which excludes certain items. For an explanation of the difference between the GAAP and non-GAAP financial metrics, please hear our company's Form 8K, which includes our press release dated May 25, 2022. Now I'll turn the call over to EnerSys' President and CEO, Dave Schaefer.

Thanks, Lisa. Please turn to slide four. The March quarter marked a strong finish to a challenging year. Demand across all segments continued to surge with fourth quarter net sales of $907 million, an increase of more than 11% over Q4 21, surpassing $900 million for the first time in the company's history. As orders eclipsed sales by 17% in Q4-22, our backlog increased sequentially by $150 million to $1.3 billion, breaking new records for the third consecutive quarter. Our backlog is healthy, with over half of our total backlog attributable to longer-term projects related to 5G deployments, California Public Utility Commission mandates, and defense. Our customers understand the supply environment we are facing, and we remain confident in our ability to deliver the industry-leading products they need. We continue to monitor the risk of an economic slowdown, and the quality of our backlog insulates us to a certain extent, as telecom, broadband, and defense markets tend to follow their own cycles independent of GDP. For example, in fiscal year 2021, When COVID caused a significant economic downturn, motive power revenues decreased 14%, but A&D only decreased 5%, largely due to government shutdowns, and energy systems actually increased 2%. These dynamics, although not identical, were similar to what occurred in 2008 financial crisis. Further, while motive power revenues tracked closer to GDP, History has told us that a decline in lead prices and other commodity costs is also likely during a recession, which provides both the release of working capital from the balance sheet as well as tailwinds from input costs. The inverse is what we are experiencing in FY22 with significant inflation and recapture lags. The price recapture lag has been our focus in fiscal year 22 and will continue to be in 23. Our pricing actions in the fourth quarter gained additional traction against the significant cost increases, contributing to a 19% sequential increase in adjusted diluted EPS to $1.20 per share, despite continuing supply chain headwinds, labor shortages, and historic inflation levels. While pricing has not yet fully caught up with the persisting inflation we experienced this fiscal year, We are pleased with the trajectory our teams are making to realize our underlying financial potential in quarters to come. We continue to focus on the elements of the business within our control. Looking forward, we are confident in our strategy and excited about our opportunities ahead as our proprietary technologies provide unique value propositions for our customers that position us well to benefit from the growing megatrends fueling the markets we serve. I'll now walk through our business segment highlights. Please turn to slide five. Energy Systems' strong revenue momentum in fiscal year 22 continued in the fourth quarter with an increase of 18% versus Q4 21, bringing the full year revenue growth to 11% over prior year. While adjusted operating margins were lower in fiscal year 22 versus 21, as Andy will review with you later, Energy Systems' fourth quarter margins improved for the second quarter in a row as our significant pricing actions are beginning to catch up on the substantial cost increases we experienced throughout the year. Q422 order rates increased 20% compared to Q421, and our backlog in this segment grew by more than $100 million in the fourth quarter alone. The robust market conditions are attributable to significant infrastructure spending, network upgrades, and resiliency capex. While lithium is gaining momentum, all participants are finding sourcing challenges, which has provided some increased TPPL opportunities in data center markets as we leverage our strategic advantage of offering multiple technology options to our customers. The 5G communications build-out continues to have an incremental, extended, and mounting tailwind as customer capex spending has been reprioritized from small cell tower build-outs to expanding mid-band capabilities. While we play in all aspects of the 5G spectrum, we have a unique position in the small cell powering due to our technological advantages. Small cell buildouts are now expected to ramp in the 23-24, accelerating into 2025 and 2026. We are seeing ongoing progress with the California Public Utility Commission's grid shutdown and extended network backup mandate, booking nearly $140 million in related orders in fiscal year 22 and already beginning some deliveries. We expect our net sales to ramp up in fiscal Q3-23 and accelerate in Q4 and beyond. We have also seen an acceleration in our Rural Digital Opportunity Fund, or RDOF, projects, with orders being received on a regular basis, which we expect to continue as significant funding becomes available over the upcoming years. In addition, our fast charge and storage initiative has seen further momentum in both software development and customer specification design. Despite the strong product demand trends, Enersys continues to face significant supply chain and cost headwinds, which have been exacerbated by the much publicized shortage of microchips as well as recent geopolitical tensions. Our team continues to mitigate cost escalations with additional price increases. Our engineering and operations have been working closely to overcome shortages through product redesign and onshoring of contract manufacturing. As we navigate through the current cost and supply chain environment and these pressures begin to subside, we expect continued robust demand for energy systems products to drive durable long-term growth. As a reminder, pricing catch up in this business segment was delayed compared to our other segments due to contractual limitations and customer concentricity. However, we have made incremental progress with price outpacing costs for the second quarter in a row. Motive Power delivered solid revenue growth of 17% for fiscal year 22 versus fiscal year 21 and has been able to offset significant cost increases with ongoing pricing actions in the favorable mixed impact of our higher margin maintenance-free sales. Our results reflect the continued customer enthusiasm of our proprietary Nexus TPPL and lithium ion maintenance-free product offerings. We achieved a key milestone in the fourth quarter with the launch and UL safety listings of our high-performance Nexus lithium ion batteries which feature an integrated battery management system that performs auto diagnosis, voltage limitation, and communication of performance data. We are proud to be the first energy storage solution provider to bring this level of compliance standard to the material handling industry. Overall market dynamics point to strong and steady growth for Motive Power with benefits from the trend automation and electrification material handling equipment along with the value of our maintenance-free technologies and advanced charging solutions expected to have a lasting and positive impact on our growth in years to come. Our specialty segment's full-year revenue increased 6% versus fiscal year 21, mostly on price. However, this segment's true potential continued to be held back by supply challenges. While we have been able to increase our overall TPPL capacity significantly in line with our strategic plan, our TPPL demand continues to outpace our capacity, forcing us to allocate production between all three lines of business. Due to supply chain issues, we made the strategic decision to allocate more of our capacity to our 5G customers at the expense of our transportation market share growth. Specialties adjusted operating margins were nearly 10% for fiscal year 22, despite facing these pressures. As productivity and capacity enhancements take hold in our TPPO factories, more capacity can be allocated to this segment with lowered manufacturing costs. In our transportation business, we continue to increase our share of the Class 8 market with the OEMs while the OEMs are constrained by supply chain and labor headwinds of their own. Inflation has persisted, which has been able to offset through additional pricing actions. Despite the current environment, the large transportation market is a significant long-term growth opportunity for us as we focus on taking share with our proprietary TPPL technology. Aerospace and defense also provide significant growth opportunities given the current geopolitical environment. Please turn to slide six. Despite macro headwinds, our global TPPL production output pace increased 24% in our fiscal Q4-22 compared to our FY21 average, with each TPPL factory increasing production in the double digits in the fourth quarter. We achieved our goal of $1.2 billion annual run rate of TPPL capacity in the second half of the fiscal year and have hit this watermark repeatedly in the third and fourth quarters. Although cost and supply have been volatile, we're in a much better position from a production standpoint than we were when the year began, with plans in place for continued capacity expansion of $200 million per year for the next five years. As previously mentioned, TPPL capacity is distributed across all three of of the lines of business in which demand of our proprietary technology cannot be satisfied. We continue to make strategic investments in our technology and innovation roadmap, partnering with customers to ensure we are delivering the solutions needed for years to come. The new products we are delivering today, combined with our future technologies, are squarely focused on retaining our leadership position and growing share in the markets we serve. Please turn to slide seven. We also made significant progress on our ESG goals in the fiscal year, including several sustainability and environmental updates that culminated in the publication of our first comprehensive sustainability report last month. The report highlights the critical role our power and energy solutions play in building a resilient, low-carbon future and how they are a key component to decarbonization globally. While our products and services are critical to the energy transition, our role in reducing the impact of our manufacturing and distribution processes is equally important. Our sustainability initiatives push us to be more efficient, develop innovative solutions for our customers, and build a stronger, more diverse, and engaging workplace for all of our employees. We set meaningful goals to reduce our water and energy intensity and increase the diversity of our leadership team and workforce. We will work toward each of these goals and others to further position us as an environmentally and socially responsible global organization. please turn to slide eight. As we enter fiscal year 23, we expect to face ongoing challenges with continued supply chain constraints, inflation exacerbated by the senseless conflict between Russia and Ukraine, and the resurgence of COVID shutdowns in China. We remain focused on what we can control, catching inflation with ongoing price increases, redesigning our products for supply chain components such as chips and resins, reducing costs through our NRSIS operating systems lean and footprint optimization ongoing efforts, expanding our portfolio with more technologically advanced products, growing profitably through TPPL capacity increases and new product introductions, and finally, mitigating risk to supply chain disruptions by contract manufacturing onshoring efforts, dual sourcing, and strategically building inventory. I am proud of our employees' resilience and proven ability to address these challenges head-on. Despite these near-term headwinds, we are optimistic about our ability to persevere and capitalize on the opportunities ahead of us. Our world-class technologies and capabilities position us to win in the growing markets we serve. Leveraging our proprietary technologies across all of our energy solutions, we are able to offer our diverse set of customers the best options to meet the needs of their specific use cases. We are confident in our ability to continue to deliver sequential profit improvements once the macro headwinds subside and remain on track to realize our strategic plan. We are committed to being good corporate citizens and delivering long-term value to our shareholders through profitable growth and a disciplined capital allocation strategy. With that, I'll now ask Andy to provide further information on our fourth quarter and F-22 results and go-forward guidance.