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spk00: 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.
spk01: 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.
spk03: 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.
spk02: Thanks, Dave. I will focus my discussion this morning on the key financial metrics and takeaways for the quarter. For more detailed information about our results, please refer to our first quarter 2023 press release and the supplemental slides that were posted to our website last night. For those of you following along on our PowerPoint slides, I will begin on slide 11. Our first quarter fiscal 23 net sales increased more than 10% over the prior quarter to $899 million due to an 8% increase from price mix improvement and 7% from organic volume growth, partially offset by a 5% decrease in foreign currency translation impact. The Missouri shutdowns Dave mentioned reduced revenue by approximately $10 million, with a $3 million drag on operating earnings due to a richer mix of revenue being impacted, and with $2 million of incremental costs from the shutdowns being deferred until Q2 23 when the inventory will be sold. Adjusted operating income was $65 million in the first quarter, down slightly from the $67 million reported in the fourth quarter of fiscal 22, net of an increased FX drag, and down $10 million over Q1 22, net of over $4 million of FX pressure, with the remainder due largely to the price-cost recapture lag. Adjusted EBITDA for the first quarter was $86 million and 9.5% of net sales. compared to $94 million and 11.5% of net sales in the prior year first quarter, with over $5 million of the erosion due to increased FX drag on EBITDA. It is worth noting that our margins are artificially deflated from the margin mass impact of cost pass-through. A reconciliation of net earnings to adjusted EBITDA is available in the appendix of our supplemental presentation for your reference. Our adjusted EPS was $1.15 in the first quarter of fiscal 23, which was the midpoint of our guidance, compared to $1.20 in the fourth quarter. I will present a reconciliation of Q1 23's sequential and year-on-year EPS shortly. Please turn to slide 12. On a segment basis, compared to prior year, all lines of business posted significant revenue driven by dramatic price-mix improvements as our pricing actions continue to aggressively chase the unprecedented cost increases we've incurred over the past year and will provide tailwinds when costs stabilize and we recapture margins from the pricing lag. More detailed sequential and geographic results can be found in our press release and in the supplemental slides. Please turn to slide 13 for more detail on our price-cost recapture trend. On a sequential basis, We incurred approximately $0.50 per share of volume-adjusted incremental costs in Q123, which were mostly negated by $0.40 per share of improvement in price mix. While the price mix improvements were significant, pricing lagged costs by approximately $0.10 per share in the quarter. We offset this impact with tight spending discipline, reducing OPX by $0.15 per share sequentially. Cost increases in the first quarter were driven by higher manufacturing costs due to spikes in energy rates, particularly in our European plants as a result of the ongoing war in Ukraine, as well as higher costs from labor challenges and supply disruptions, increased freight and tariffs as we replenished inventory from China after the COVID shutdown was lifted, and persisting lead and non-lead commodity inflation. Taking a step back puts the massive inflationary pressures into even greater perspective. Compared to the first quarter of fiscal 21, we've incurred aggregate cost increases of over $1.70 per share, with $1.35 per share having been offset by price mix improvements, leaving approximately $0.35 per share of quarterly price cost recapture opportunity when costs stabilize. On top of the impact of future mix improvements, when supply chains become balanced. Despite the difficulty of predicting when supply chains and inflation will normalize, history tells us they will. And when they do, these current margin headwinds will become tailwinds as our onshoring initiatives take hold, mixed improvement opportunities emerge, and our pricing actions finally catch up from the multi-quarter lags. Please turn to slide 14. Looking at our quarterly sequential EPS adjusted EPS bridge. Q123 adjusted EPS was in line with expectations, coming in at $1.15 per diluted share. As previously mentioned, the sequential price-cost recovery lag pressured earnings by approximately 10 cents per share, and we incurred a 5 cents per share reduction from volume due to normal seasonality declines on top of the Missouri closures. A strict focus on OPEX restraint contributed a sequential boost of 15 cents per diluted share to achieve our guidance for the quarter, despite 5 cents per share pressure from FX and interest expense net of our lower share count. As with all multinationals, we've been increasingly impacted by the recent dramatic foreign exchange movement. Regarding the impact of FX on our Q1 results, in Q1 23, operating earnings were reduced by approximately 7 cents per share after tax from the weak Euro, which was fully offset by the favorable impact of FX revaluation in other income and expense from the declining Euro. Note that operating earnings is impacted by the relative value of foreign currencies to the dollar, where other income and expense is impacted by the movements of currencies within the period. Therefore, We anticipate that we will continue to experience operating earnings pressure from foreign exchange, but the favorable FX revaluation will not repeat in future quarters if the euro remains at current levels. Compared to the fourth quarter, the net impact of FX created approximately 3 cents of incremental drag on both OE and our earnings per share, and compared to the prior year, OE was pressured by approximately 9 cents per share of incremental impact with the 3 cent per share incremental net drag on EPS from foreign exchange after the favorable FX benefit in other income and expense. Approximating the impact of foreign exchange using the euro as a proxy for foreign currencies in a constant currency basket, we estimate that the current relative exchange rates create approximately 7 to 8 cents per share of OE pressure. and every additional one cent movement in the Euro versus the dollar impacts operating earnings by a little less than a penny per share on an after-tax basis. This is obviously not an exact science due to other currencies and their respective weightings, as well as tax rates and share counts, but it is the best directional information we can provide at this time. Please turn to slide 15. Our balance sheet remains strong and positions us well to navigate the current economic environment. At July 3, 2022, we had over $380 million of cash on hand. Our credit agreement leverage ratio was at three times EBITDA, which was at the high end of our target range, as expected. The quarterly increase in our leverage ratio was primarily due to a $109 million increase in primary working capital. Working capital increases were necessary to support our strong revenue growth and were also a result of our strategic decision to invest in inventory. We have increased inventory almost $225 million in the past fiscal year, $61 million of which was in the first quarter due to increased sales volumes, higher costs and lead times, and a focus on lithium cells, lead, and other raw material components to mitigate supply disruptions. We view this as a significant cash flow cushion when markets stabilize. We expect our leverage to remain near the high end of our target range of two to three times EBITDA for the second fiscal quarter of 2023 as we continue to prioritize supporting revenue growth and mitigating our risk of ongoing supply chain headwinds, and to return to the midpoint of our target range when price catches cost and supply chains stabilize. Capital expenditures were $23 million in fiscal Q1 23, and we are largely on track with our capital projects despite sustained supply chain headwinds. Building off our capacity expansion success in fiscal 22, we remain confident in our multi-year planned TPPL capacity targets. Our capital allocation strategy remains focused on three key priorities, investing in organic growth, strategic M&A, and returning excess cash to shareholders through consistent dividends and opportunistic share buybacks. In Q1 2022, we repurchased $23 million of shares, and we plan to continue buying back shares after our leverage returns to the midpoint of our target range. As a reminder, early this year, our Board authorized an additional $150 million to our repurchase program, which was augmented by approximately $30 million in April through our annual evergreen dilution authorization, leaving us with approximately $190 million available for future stock repurchases. Our strong balance sheet, strict focus on managing our operating costs, and our ability to quickly adapt to changing market conditions positions us well for the quarters ahead and also enables us to retain tremendous upside as supply chain and inflation headwinds recede. Please turn to slide 16. While we have not yet seen signs of a slowdown in our business, we remain sensitive to the possibility that numerous economists have been predicting, and we are poised to act accordingly. In addition to the obvious benefits of a strong balance sheet and conservative capital structure, Enersys has a number of structural advantages that have mitigated the financial impact to us in past economic downturns. Our current business conditions offer unique advantages that would shelter us more so now than in past recessions. For example, a larger portion, over 60%, of our business follows GDP-independent cycles, which tend to be minimally impacted by an economic slowdown and are fueled by large megatrends, including 5G, that are expected to continue regardless of the macro environment. Our record backlog and robust demand should delay the impact of a slowdown on our financial results. The subsequent easing of supply chain disruptions should help power profits and also offer mixed benefits. Stable costs should drive price recovery catch-up improvement opportunities, with potentially lower costs creating tailwings from lagging price-cost dynamics. The subsequent easing of supply chain disruptions would help power profits and also offer mixed benefits. and our investment in primary working capital has historically been a cash generator during recessionary periods, providing a very effective natural hedge on our balance sheet that would only be exaggerated by the strategic investments we've made in inventory this past year. We have spent considerable time, as you would expect, conducting a variety of modeling scenarios, analyzing what they would mean for the business, and looking at what we should be doing today to get in front of potential issues if a recession were to come. For example, we've been disciplined with holding OPEX at conservative levels and have kicked off targeted inventory reduction initiatives to minimize potential risk of obsolescence if demand softens in more exposed areas of our business. We are in a very solid position because of the significant pent-up demand for our products and the robust product lineup we have on tap and our experienced leadership team's recessionary playbook, which has prepared us to respond to any economic cycle. Please turn to slide 17. Our fiscal second quarter 2023 guidance range is $1.05 to $1.15 adjusted earnings per share, up from $1.01 per share in Q2-22. Our guidance reflects the seasonally slower quarter due to holidays in Europe and is also absorbing $0.04 per share hit from the Q1-23 Missouri closures and approximately $0.08 per share pressure from FX on op earnings as we assume the Euro-dollar relationship will remain at Q1 2023 levels, and we won't benefit from the other income and expense gain we experienced this past quarter when the Euro value declined. We expect our growth margin to be in the range of 21 to 23%. Our CapEx expectation for the full fiscal 2023 remains at approximately $100 million, reflecting investments in new products, including lithium production lines, continued expansion of our TPPL capacity, and cost improvement and automation initiative. We continue to execute on our EOS program with savings generated from lean initiatives and our hog and plant closure, although the favorable impact of these efforts have been overshadowed by tight labor markets, persisting inflation, and supply chain challenges. The closure of our ULTOA facility is expected to save us approximately $8 million per year with $2 million of savings beginning in the back half of fiscal 23. We will continue to identify opportunities such as this to optimize our operations footprint. As Dave mentioned, we're in the process of our annual strategic plan refresh. While timing and market conditions have been volatile this past year, our market opportunities have only continued to grow. We are confident the true profitability of our business and advancements we have made against our strategic plan will be evident when market conditions stabilize, and we look forward to providing you our update later this fiscal year. This concludes our prepared remarks. Operator, you may now open the call for questions.
spk00: Thank you. As a reminder, to ask a question, you'll need to press star 1 1 on your telephone. Please stand by while we compile the Q&A roster. Our first question comes from Noah Kay with Oppenheimer. Your line is open.
spk06: Good morning. Thanks for all the details. First question really around price-cost expectations. Andy, what is the price-cost expectation embedded in the midpoint of the two-cube guide? And follow-up is, given the easing in the commodity complex, would you expect price-cost to inflect depositors? for the second half of the fiscal year, just based off of your pricing initiatives, the date, and where the commodity complex is trending?
spk03: You know, Noah, while she's looking up the numbers, I would say the commodity started to roll over this spring, for sure. We've seen steel and copper and a lot of the things we buy have come down significantly. It's going to take some time, especially for our ES business, to flush through the contract manufacturers and their supply chain and the and the transit times and so forth. But I totally agree with you that that should start to show itself later in our fiscal year. So, Andy, on the price-cost question.
spk02: Yeah, thanks, Noah, and obviously it's an important question. We're thinking that costs, and we've got a pretty good feel on costs. I mean, I think we were dead on this quarter. We're looking at next quarter costs will probably be about a $10 million to $15 million increase. So that's, you know, in the range of, you know, 25 cents per share. So obviously there's a few items that we don't – it depends on where our inventory levels are from a FIFO roll-off. We have some period costs, but in that range. So it is starting to get a little better. You know, one thing to keep in mind, especially in a segment like energy systems, so many of our products – so many of our items that we source are through contract manufacturers. So when costs lower, in addition, it has to go through a lot of pockets until it ends up on our P&L in addition to the inventory being worked through. So we're starting to see signs of costs coming down. We're seeing good signals in commodity baskets, like Dave mentioned, of looking like things have started to level off in April, but we're not yet seeing it on our bottom line. One other thing, just to point out with guidance, You know, if we start from Q123, $1.15, right away we're absorbing 14 cents between the OID not repeat, higher interest, not repeating the discrete tax benefits we had. So you get $1.01, you start, then you have maybe, you know, the cost increase and you've got slightly lower volumes. You know, that's what bridges you through.
spk06: Okay, that's all very helpful. It seems like you don't actually need a lot of sequential price increase then to offset the cost increase. So, you know, I'm not trying to pin you down, but it seems like getting pretty close to neutral on a sequential is within your sights. Feel free to disagree with me.
spk03: I think that's a fair comment. And I know that the teams are actively and aggressively Going through the backlog, repricing, I mean, there's literally thousands of orders that have to be repriced. It's been – it's an intense focus. So, certainly, I think your comment is fair.
spk06: Okay. And, Dave, I want to take a – oh, sorry. Go ahead, Andy.
spk02: I was going to say, you know, I think one thing with how significant we're seeing these cost increases, I don't know if it makes sense to walk through what we look at when we talk about the margin math. It's pretty straightforward, but, you know, you look at Q123, obviously we come in at a 20.6% gross margin. It's disappointing. But when you take into consideration the impact of cost, so I'll just walk you through how we look at it. If we have sales of $899 million and you pull out the price increases that we had that only went part of the way to offset costs, compared to Q1 of 22, that would bring you down to $815 million. So if the price just offsets costs, gross profit would be the same. So then you'd have $185 million of gross profit on $815 million of revenue. So you end up with a 22.8% gross profit instead of the 26%. And then when you pick up the additional price cost miss that we had from last year, so when we catch up, you end up getting to a 23.7% growth margin. So this margin math with the significant cost increases that we're talking about, when it's just a pass-through, it really does have a dramatic impact on our margins. Yeah.
spk06: It's true. Yep. Yep. So almost 300 basis points there just on the margin of math. Understood. Dave, I'll make this my last question. It's not to hog the spotlight, but your comments around Europe and the energy situation there, I just want to pick up on that because I know that's... And the question is, are your plants generally in these industrial clusters that would typically get priority in terms of energy allocation? I mean, how real is the disruption risk potential as we prepare for a difficult winter in the European energy world?
spk03: You know, the teams are working on that. Obviously, I think both of the major factories that would be of chief concern are in industrial clusters, as you stated. So we don't have a full readout yet. I don't think anybody does. And certainly many of our customers in Europe are also having these same question marks. So as we get more details on that risk or the sharpening of that risk, we'll let you know. And let's just hope saner heads prevail over there.
spk02: And, Noah, there's obviously the allocation, which the teams are working on, and then there's the cost impact. I mean, just to give you an idea, our costs, our utility costs in our plants were a little over $11 million in Q1 of 2022. and we're over $17 million in Q1 of 23. So just to give you an idea, you know, you're absorbing, you know, an extra $20 million of utility costs just from last year. And even the last year being lower, it went from $11 million in Q1 up to over $16 million in Q4. And we look to offset that with price, but obviously, of course, there's always just a lag as we look to catch up.
spk03: Yes.
spk06: Very helpful. Thank you.
spk00: We have a question from Brian Drab from William Blair. Your line is open.
spk05: Hi. Good morning. Thanks for taking my questions. Good morning, Brian. Good morning. So there's a lot of talk there about price-cost. One thing that, Dave, you said in the opening remarks that caught my attention was just that a lot of the, if not all of the selling and marketing op-ex associated with a lot of the sales that resulted in this large backlog, that's already, you know, that's happened. And you're going to get a lot of leverage on those fixed costs as you're able to shift. So can you quantify or talk a little bit more about how big a deal that can be down the road for you guys? I don't know if it's a couple quarters from now in terms of operating margin expansion.
spk03: Yeah, the drop through should be good. So we are repricing backlog actively. We've got two lines of defense. One we're physically going in and then we also have folks at the shipping docks trying to make sure that everything gets shipped out at the updated prices. So we're trying to get to the point where the backlog has you know, the same margins, gross margins, standard margins that we have going forward. And then to your point, and my comment, and I'm glad you picked up on that, a lot of the OPEX numbers are selling and engineering related. We have caps on almost all of our selling incentive programs. So even fully capped, they're not going to have a material impact on the numbers. So there is great drop through opportunity as we start to unload that. And then the third piece of that, as we've noted to you, a big chunk of that backlog are in the product portfolio that are constrained, which is typically electronics and TPPL, which both typically have accretive margins. So it's good rich mix in there. We are repricing. And there should be good operating leverage or operating expense leverage as that drops through. So it is a great opportunity. We have to demonstrate that we can get it shipped, that we need to get more chips allocated to us from our suppliers. We need to get the engineers continuing to redesign. We need our onshore contract manufacturers to pick up the pace a little bit. We're still dragging way too much tariff. than we planned because our onshore CMs just aren't moving fast enough, which is putting a lot of pressure on the ESPNL. So we've got a lot of work to do. But to your point, there is a tremendous opportunity. And I think if you were to assume that at least two-thirds of our OPEX is selling in engineering and just work it back from there.
spk05: Okay. Okay, thanks. And a bigger picture question. You know, you spent a lot of time, years really, getting the high-speed line up and running and to where you wanted it. I was wondering if you could just step back and look at, you know, how that line is running, you know, what kind of grade would you give that project relative to what your expectations were? And is there the opportunity to replace more of your capacity with the high-speed line if you're really happy with how that is going?
spk03: The high-speed line itself is not the issue. The issue we're having today is providing enough plates to feed it. So it makes batteries at an alarming rate, I guess, compared to where we were. It's our ability to provide enough plates. And as we had a significant supplier disruption this quarter, which was unanticipated and not included in our guidance, But in addition to that, we still have ways to go in terms of stabilizing our employment forces there. So I would say most of the issues today outside of the shutdown we were given by our supplier are just about training and productivity. It's just getting that workforce stabilized. That part of Missouri, as I've noted on prior calls, has exceptionally low unemployment. So as the as the GDP and the market start to stabilize and we can get that workforce stabilized, we should be able to feed enough plates to continue to grow. That said, we have grown, as noted, even with the shutdown, we're up double budgets versus year on year in terms of volume. So it's just an ongoing, but I would say principally, most of the issues today are related to people in Missouri. It's not the equipment itself. So I guess we give it a grade of an incomplete because there's still work to do.
spk05: Okay. And then just quickly, are you generating material revenue now in the EV market? And what's the outlook for that revenue opportunity? And is that mainly lead acid or lithium or both?
spk03: In the EV market, we have no material revenue. Our biggest project is our DC fast charge project. It's lithium based. And we've made, again, continued, as I noted in the prepared remarks, we've made continued progress with a customer. We had hoped, as I said last call, to have it, the MOU signed. It hit a, it tripped the spending authority level, so it's up to their board level. So it had to go in for a next level of signature. So it's, as I said, we still hope this, later this fiscal year to start to book our first revenue in this area and we're just tremendously excited about the project and there's just any number of green shoots that can develop from this program and we just have to continue to focus on and even starting to take advantage of some of the legislation that's probably going to pass I think there's significant funding that's been outlined for bidirectional charging, which is within our capability. So, again, a great opportunity for us, and it's going to be lithium-based.
spk06: Got it. Okay. Thank you.
spk00: Thank you. As a reminder, to ask a question, you'll need to press star 11 on your telephone. Our next question comes from Greg Wachowski with Weber Research. Your line is open.
spk04: Hey, good morning, Dave and Andy. How you doing?
spk00: Hi, Greg. Good morning.
spk04: So I'll volunteer as tribute to ask about Inflation Reduction Act. Dave, you just kind of touched on it, but obviously a lot to get our arms around when thinking about everybody in the space. It would just be nice to hear Your take on it, what gets you most excited when you look at what's potentially included there?
spk03: I think in general, it's just the commitment by DC to continue to advance electric vehicles. And as we've said to you, we've identified our niche of that space as being those folks that want to recharge their electric vehicles quickly. I think Noah and I had a conversation a year and a half ago that most EV folks charge at night, just like I do in my electric vehicle. But there is times when you do have to charge quickly. And we are focused on providing... a charging system that charges the car as fast as the car can accept the energy. So we're focused on the hyper-fast markets and we're also focused on those areas of the country where there's not the available AC power to directly tie that charger to the grid. So you need to put a shock absorber, in a sense, between the grid and the vehicle to to dampen that severe impact that that electric vehicle charging has. So we're using a large lithium battery bank to absorb that shock and moderate the impact on the grid. So we've gotten tremendous impact. As I noted earlier, we keep having to push back because the opportunities I've really challenged the team to get this first job out the door before we start chasing too many others and get the technology right. But these just become building blocks and can be applied in so many ways. And we're extremely excited, continue to be, about the impact this can have for all of us in the future.
spk04: Awesome. Great. And that kind of leads right into my next one. On the EV charging product, outside of the one or two major customers, I'm just curious what the commercial backlog is looking like there. Are you guys kind of waiting to get that first one over the line before opening it up? Or would you do pilot programs or demonstration programs with other customers? that maybe wouldn't get publicly announced. But is that something that you guys are focusing on in the background or kind of waiting until that first one gets over the line?
spk03: The sales funnel is filling up, without a doubt. There's some fleet charging opportunities we've entertained that go in addition to our initial focus, which is on these commercial real estate folks. But to your point, I've really – resisted and have even held the sales folks back from making any sort of commitments until we deliver the technique. And so that's the initial focus right now. And even this first opportunity, which, again, we should be in a position at some point soon to mention the opportunity, even this first opportunity is very significant. We'll have a very measurable impact on NRCSIS.
spk04: Great. Awesome. Thanks, Dave. Thank you.
spk00: Thank you. And I'm showing no further questions at this time. I'd like to turn the call back for management for any closing remarks.
spk03: Great. Well, thank you, everyone, for joining us today. And we look forward to providing further updates on our progress on our second quarter 2023 call in November. Have a good day, everyone.
spk00: This concludes today's conference call. Thank you for participating. You may now disconnect.
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