EnerSys

Ladies and gentlemen, thank you for standing by, and welcome to the first quarter fiscal year 2023 Interest 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 this session, you will need to press star 1-1 on your telephone. Please be advised that today's conference is being recorded. I would now like to turn the call over to Lisa Hartman, Vice President of Investor Relations. Please go ahead.

Thank you operator and good morning everyone. On the call with me this morning are David Schaffer, NRCSIS President and Chief Executive Officer, and Andrea Funk, NRCSIS Executive Vice President and Chief Financial Officer. Last evening, we published our first quarter fiscal year 2023 results and filed our 10-Q with the SEC, which are available on our website. We also posted slides that we'll be referencing during this call. The slides are available on the presentations page within the investor relations section of our website at www.NRSIS.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 applicable only as of today, August 11, 2022. 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 differences between the GAAP and non-GAAP financial metrics, please see our company's Form 8-K, which includes our press release, dated August 10, 2022. Now I'll turn the call over to our President and CEO, Dave Schaffer.

Thanks, Lisa. Please turn to slide four. The first quarter of fiscal year 2023 was a continuation of many of the trends we saw in the back half of fiscal year 22. Demand for our products was robust across all segments. Our backlog grew to yet another record high, and ongoing supply chain and inflationary pressures masked the inherent profitability of our business. First quarter net sales were $899 million, an increase of more than 10% over Q1-22, driven primarily by our strong volumes and ongoing aggressive pricing actions, partially offset by FX headwinds. We also reported first quarter adjusted earnings of $1.15 per diluted share, which was in line with our guidance. Excluding the FX headwinds and shutdowns in our Missouri plants due to serious supply chain issues, our first quarter revenue would have been approximately $40 million higher. A record $1 billion first quarter of orders continued to outpace sales in the quarter, growing our backlog by more than $150 million to $1.5 billion and 70% higher than Q1 fiscal 22, and a staggering 165% higher than Q1 fiscal 21. We had our third consecutive quarter of over $1 billion of new orders in the quarter, which were 113% of our sales. Our backlog is healthy, with nearly half attributable to program wins for discrete energy systems projects and organic volumes. More details about the composition of our backlog are shown on slide 5. As noted, there is a lot of value trapped in our backlog. We incur OPEX to get orders, not when we ship them. Therefore, minimum incremental OPEX will be incurred once backlog is released, resulting in higher margins largely attributable to energy systems. We have a reputation in the industry for exceptional customer service, and we've backed that up in this challenging macro environment by staying in constant communication with our customers regarding material shortages, inflationary pressures, and product availability. We're committed to meeting their needs to the greatest degree possible, and in return, they have remained loyal to Anarsys with their business. Similar to recent quarters, Q1 23 endured a staggering amount of volume adjusted sequential cost increases that were mostly offset by incremental price mix, which Andy will discuss further. In addition to historic inflation and labor shortages, supply chain challenges continue to rear their ugly head in the quarter. Nowhere was that more apparent than in our Missouri facilities, where supply shortages caused outages in Q1, reducing revenue by roughly $10 million of higher margin TPPL sales. In addition to ambiguities regarding when supply chains and inflation will normalize, there is considerable uncertainty in Europe as to how energy will be allocated and what the ensuing impact will be. To counter the ongoing pressures, our pricing actions continue to take hold and we are pleased with the significant progress our teams are making to realize our underlying financial potential. We are laser-focused on the areas of our business that we can control, including delivering innovation and enhanced technology in our product portfolio that will set us apart from our competitors, both in the near and long term. Global megatrends such as 5G World Digital Opportunity Fund, growing data centers, material handling electrification and automation, grid stabilization, and electric vehicle charging continue to have long tailwinds that we believe will fuel our future growth. With all that as a backdrop, I remain more confident than ever we will continue to manage through today's unique and challenging market, and we will emerge well positioned to deliver exceptional value for our customers and our shareholders. I'll now walk through our business segment highlights. Please turn to slide six. Energy systems saw continued strong demand and volumes in the quarter, reporting revenue of $409 million, or more than a 10% increase compared to the same prior year period. Adjusted operating margins took a slight step back in Q123 due primarily to the previously mentioned headwinds, including the Missouri labor and supply shortages, some isolated delays in price recovery, and elevated freight and tariff expenses from higher interplant volumes as China opened back up. These headwinds were partially offset by tight OPEX controls. The team is extremely focused on resuming the margin recovery momentum we saw throughout the second half of fiscal 22, with continued price increases in an environment that is challenged by ongoing cost increases and supply headwinds. Once again, demand was extremely strong in energy systems, with backlog increasing from $740 million at fiscal year end to $847 million at the end of Q123. This compares to $397 million at the end of Q122 and $260 million at the end of Q121. Infrastructure spending and network upgrades resiliency capex funding continue to fuel an even more robust marketplace. The California Public Utility Commission's program, which includes the grid shutdown and extended network backup mandate, is continuing to do well. We are ramping our field deployments of these systems with the network operators per the California mandates. Our fast charge and storage initiative saw additional momentum in the quarter as well, both on software development and customer specification design, and we remain confident we will book our first orders towards the end of this fiscal year. Finally, recent legislation, including the Rural Development Fund, is helping to drive demand for our products. The 5G communications build-out also continues to move forward, as evidenced by positive public commentary by many of the large telecoms. We are benefiting from customer capex spending focused on expanding mid-band capabilities and expect to take additional wallet share when those dollars are allocated more towards small-cell build-outs. We are well-positioned in small-cell powering due to our technological strengths and go-to-market strategy. Our forecast for small-cell build-outs is unchanged from last quarter, with an expected ramp-up in 2023-2024 accelerating into 2025-2026. Despite the strong product demand trends, Energy Systems continues to face significant supply chain and cost headwinds, particularly with higher-margin electronics. which we are chasing with additional price increases. Our engineering and operations team members have been working closely to overcome shortages through product redesign and onshoring of contract manufacturing. As we navigate through the current cost and supply environment, and as we release and monetize the backlog, we expect robust demand for energy systems products and catch-up of price-cost recapture to drive long-term profitable growth. Motive Power once again delivered a solid quarter with revenue growth over 9% compared to Q1 2022 and has been able to offset significant cost increases with ongoing pricing actions, tight expense controls, and the favorable mix impact of our higher margin maintenance-free sales. Our results reflect the continued customer enthusiasm over our proprietary Nexus TPPL and lithium ion maintenance-free product offerings. We also overcame a dramatic decline in the Euro during the quarter, which translated into a $3 million quarterly operating earnings impact on Q1 from currency alone. Overall market dynamics point to a strong and steady growth for Motive Power, with benefits from the trend to automation and electrification of material handling equipment, along with the value of our maintenance-free technologies and advanced wireless charging solutions, expected to have a lasting impact on our growth in years to come. Motive Power should also benefit from improved maintenance-free and charger mix, additional price recapture, and structural cost improvements, such as the announcements of our Ottawa, Tennessee plant closure and our Richmond, Kentucky Mega Motive Power DC opening. Additionally, while price recapture has been steadily improving, we're continuing to catch up with the costs absorbed in recent quarters and remain committed to recovering ongoing cost headwinds in this segment. Our specialty segment reported revenue of $123 million in the quarter, a 14% increase year-over-year, which was driven by strong volume and improved price mix despite the continued challenges of labor and supply shortages, including the Missouri shutdown mentioned earlier, along with the normal seasonality in both transportation and aerospace and defense. To counter these headwinds, we have remained aggressive with our pricing actions and are maintaining tight OPEX controls. Similar to our other segments, demand continues to be strong throughout the specialty business. In transportation, we further increased our share of the Class 8 markets as the OEMs remain constrained by supply chains and labor headwinds. However, we sense their supply chain disruptions are somewhat receding with their ordering patterns beginning to normalize as they begin to clear their backlogs, and we are not hearing about a slowdown from our Class 8 customers. We are also progressing exciting battery programs with Class 8 OEMs for their next-generation drivetrains that will increase Enersys's TPPL and lithium content. There are many opportunities for growth among the large auto parts companies, which our team is diligently pursuing and in aerospace and defense given the combination of leading-edge products and the current geopolitical environment. Our best-in-class technology sets us apart in the large transportation and A&D markets, giving us incredible confidence in the long-term growth opportunity for Enersys as we focus on taking share with our proprietary TPPL and lithium technologies. Moving on to some developments in our production capacity and operational efficiencies, Despite macro headwinds, our global TPPL production output pace increased 13% in Q123 versus Q122 and would have grown 17% on-year if not for the Missouri outages. Although costs and supplies have been volatile, we are much better positioned from a production standpoint than we were when the calendar year began, with plans in place for continued annual TPPL capacity expansion. As we've previously discussed, TPPL capacity is distributed across all three lines of business in which demand for our proprietary technology cannot be satisfied. From an operational efficiency standpoint, in June we announced the closure of our Udawah facility. The transition process is going well so far with a favorable inventory position and key employees taking positions elsewhere within the company. We will continue to seek out opportunities to improve our overall cost structure, enhance manufacturing efficiencies, and fully leverage our global footprint to create exceptional earnings leverage. This leverage will be much more pronounced when the current inflationary and supply chain environment normalizes. Please turn to slide seven. We also 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. We believe we must always be investing and innovating, regardless of market conditions, to maintain our leadership position and know our customers will continue to come back to us for their energy storage needs because of this approach. Please turn to slide 8. On the ESG front, we made several recent announcements related to governance and our climate initiatives. I am pleased to welcome Mr. Rudy Winter to our Board of Directors. Rudy is the president of National Grid's New York business, leading National Grid's regulatory energy delivery portfolio that provides electricity and natural gas services to customers across the state of New York. The breadth and depth of Rudy's experience in the utility industry, particularly with clean energy and electric grid resilience, will provide immeasurable value to Enersys' leadership team. We also announced our climate neutrality goals to achieve Scope 1 greenhouse gas neutrality by 2040 and Scope 2 neutrality by 2050 as part of our commitment to building a sustainable future. Our operations team has already identified initial CAPEX requirements to achieve these goals, which will be included in our upcoming strategic plan. Last but not least, we submitted our first carbon disclosure project questionnaire response in late July. We look forward to feedback from the CDP and our shareholders once the report is publicly available. Please turn to slide nine. I'm very excited about where the company is going. While we expect to face ongoing challenges with supply chain constraints and inflationary pressures, we remain focused on what is in our control. I'm extremely proud of our employees' continued dedication, hard work, creativity, and flexibility in addressing each of the macro challenges they faced. They have a proven track record of meeting the unique needs of our customers and have the utmost confidence that they will continue to do so regardless of what the market throws our way. Not only are we managing through the current environment, but we are setting ourselves up for long-term success as well. In the past several quarters, we have maintained, or in many cases gained, market share in all of the business segments, aggressively pushed through pricing actions that will ultimately catch up with inflation, maintained a disciplined focus on operating expenses, and placed a major emphasis on technology and innovation to ensure we stay ahead of the curve and our customers' needs. Pulling each of these levers, combined with long-term industry tailwinds and historical demand for our products, positions Enersys for incredibly strong results as the supply chain and inflationary challenges subside. We are in the process of completing our annual strategic plan update, and I look forward to providing you with a brief refresh later in the fiscal year. With that, I'll now ask Andy to provide further information on our first quarter results and go-forward guidance.