EnerSys

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 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 the question during this time, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I will now like to turn the conference over to Lisa Hartman, Vice President of Investor Relations. You may begin.

Thank you and good morning, everyone. Thank you for joining us today to discuss NRSIS fourth quarter and full year fiscal 2023 results. On the call with me this morning are David Schaffer, NRSIS President and Chief Executive Officer Andrea Funk, NRCIS Executive Vice President and Chief Financial Officer. Last evening, we published our fourth quarter and fiscal year 2023 results and filed our 10-K with the SEC, which are currently 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. 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. For a list of forward-looking statements and factors which could affect our future results, please refer to our recent Gen K filed with the SEC. In addition, we will be presenting certain non-GAAP financial measures, particularly concerning our adjusted consolidated operating earnings performance, free cash flow, 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 see our company's form 8K, which includes our press release dated May 24, 2024. Now I'll turn the call over to NRCS President and CEO, Dave Schaffer.

Thanks, Lisa. Please turn to slide four. We were pleased to have delivered an outstanding fourth quarter and full year fiscal 23. I'm proud of our team's performance, achieving record revenue and operating earnings as demand remains steady across our markets and we continue to build momentum on our strategic objectives. Before I walk through our results, there is some good news I want to report regarding the impact to Enersys from the Inflation Reduction Act. Enersys is a leader in driving the global energy transition and our eligibility for IRC 45X credits of the IRA reinforces the critical nature of the products and services we provide. Andy will provide background on these credits and discuss the financial implications for NRCIS in more detail following the rest of my prepared remarks. However, I want to be clear that we plan to use funds we receive from the IRA as intended by the law to make investments that accelerate our capacity and domestic sourcing of lithium-ion and other energy-dense battery technologies. Now, to provide more color on our fourth quarter results. Record revenue in the fourth quarter was driven by organic growth and strong price-mix realization. We maintained solid gross margins, offsetting continued but leveling pressure from inflation, representing significant year-over-year margin improvement even before the additional benefit of the 45X credits. Longer term, we are well positioned to benefit from the IRA, growing demand for energy efficiency, electrification, 5G small cell build-out, the $1 trillion infrastructure law, and defense spending. These trends are driving demand for battery technologies and energy systems that we are uniquely positioned to supply. We are staying on alert for signs of a slowdown, particularly in motive power, especially in EMEA. motive power orders overall remain in line with pre-COVID levels. Supply chain headwinds are finally beginning to ease. We were able to reduce inventory in Q4 after seven consecutive quarters of inventory builds from higher costs and strategic buffers against supply disruptions. we had a strong cash flow quarter with free cash flow of $113 million on improved earnings and primary operating capital transitioning to a net source of cash. This allowed us to reduce our leverage and further strengthen our balance sheet. We expect our cash flow to continue to improve with higher earnings and additional POC reductions from the leveling of inflation and ongoing targeted inventory reduction efforts, as well as the projected IRA cash benefits. Please turn to slide five. Backlog eased slightly from the prior quarter to just below 1.3 billion, but remains healthy and currently sits roughly two times above pre-COVID levels with healthy order rates. Orders were up 9% compared to Q3 23 and down 11% versus the prior year. As a reminder, in 2022, we had received large program orders in energy systems and Motive Power's order intake was elevated from supply chain disruptions and COVID-related lockdowns, opening back up, which impacted customer order patterns and skews year-on-year comps. We view this as a positive, with loosening supply chains making it possible for us to satisfy customer demand. We continue to see stable demand across our lines of business and believe operational improvements will continue to direct backlog to normalized levels over the next few quarters. Please turn to slide six. We believe we are at the forefront of technology for our industry and continue to make significant strides on our innovation roadmap. On our journey to deliver the most advanced power systems, safety is always a top priority. This is why many of our technologies, such as our advanced lithium systems and wireless charging, are among the first to pursue safety testing and certification from industry bodies such as Intertek and UL. For example, rigorous safety testing is underway for our TouchSafe product, with customer field trials planned for early calendar 2024. We also shipped our first EMEA customer unit of our Nexus Lithium Ion 80 Volt, which received authorization to mark CE, certifying that we met EU health, safety, and environmental requirements, ensuring customer safety. We were proud to receive the 2023 Power Project of the Year Award at the Electrical Review and Data Center Review Excellence Awards last week. This recognition is a testament to our commitment to excellence, innovation, and sustainability in data center, energy storage, and power management. Our fast charge and storage initiatives are advancing with good progress on our production roadmap and supply chain initiatives, and are designed for manufacturing now complete. Sourcing requirements related to EV tax credit qualification for our customers is top of mind as we qualify our domestic and global supply chain and production partners. And we've already secured all components with log lead times which are being held in inventory at our contract manufacturer. We are excited about our progress and look forward to featuring our Nexus Air wireless charger and fast charge and storage system among other technologies during our product showcase at investor day on June 15th. I'll now briefly walk through our business segment highlights. Please turn to slide seven. Please note I will discuss our segment adjusted operating earnings excluding IRA benefit we recorded in cost of goods sold in the fourth quarter. We believe reviewing the results without this credit provides a better view and comparability into the operating performance of each line of business. Energy systems had strong full-year sales of $1.7 billion, up 13%, and adjusted operating earnings were up over 80% versus fiscal year 22, driven primarily by growth in broadband, data center, and telecom, and our pricing actions catching up with the unprecedented cost increases we've endured the past two years. While getting better, chip supply unpredictability continued to impact our production plants. Backlog is normalizing toward a run rate that we anticipate will settle to approximately one quarter of bookings, modestly higher than pre-COVID levels. Our CPUC lithium-ion installations, which account for a large portion of our $70 million of CPUC backlog, are on track to begin deployments in the second quarter. While current demand trends are healthy, we are monitoring our key customer CapEx spending plans closely. We remain excited about the long-term opportunity for energy systems driven by the global megatrends for which our critical power solutions are a key enabler. Our emotive power business had a strong year with revenue up 7% and adjusted operating earnings up 5% year-on-year. Despite pressures in EMEA and the potential of recession, this business remains healthy. Demand trends are stable and approximate normalized pre-COVID levels with backlog more than two times that of pre-COVID. EMEA lead times were stable and European on-time deliveries hit a record high despite a softening order book. Maintenance free was 19% of revenue mix at the end of fiscal year 23 up from 15% in fiscal year 21 driven by customer enthusiasm over our proprietary TPPL technology. Lithium order rates continue to climb and the CE rating for our new 80 volt variant has resulted in new customer trials in EMEA. Specialty full year sales were up an impressive 13% over the previous year though adjusted operating earnings was down 14% over prior year, impacted by productivity headwinds in our Missouri factories and temporary cost pressures from our Silmar facility, which we are vacating at the end of the first quarter. We continue to rationalize our footprint and are transitioning our Silmar activities to other existing sites. Missouri TPPL output and costs are improving, although it remains an area of focus and significant opportunity as we see incredibly unmet demand for this technology with our transportation customers. As such, transportation revenue continues to be paced only by capacity. We saw strong U.S. transportation orders in Q4 with a book-to-bill ratio greater than one, on top of achieving record deliveries in the quarter. Class A truck production is stable, up 12% year on year, and growth projections remain positive. Aerospace and defense demand strength continues. Our unique capability to combine commercial and defense production at scale has resulted in several exciting projects in our pipeline, which Mark will be talking about at Investor Day. Please turn to slide eight. We achieved impressive milestones toward the ESG goals we announced last year and continue to ensure that our metrics are accurate and auditable. Last week, we published our 2022 sustainability update, which includes solid progress towards our long-term goals. On the leadership front, we announced Shannon Thomas as our new Chief Human Resources Officer. I'm delighted to have Shannon join our executive leadership team where I believe her strategic vision and leadership will be instrumental as we continue to attract, develop, and retain top talent from around the world while fostering a culture that values diversity, equity, and inclusion, and supports our ongoing goal of being the employer of choice for our valued employees. We will continue to update you on these important objectives. Please turn to slide nine. In closing, I'm pleased that our excellent Q4 and full-year 2023 results demonstrate continued progress towards achieving our long-term financial and operational goals. We believe the steps we have taken over the past three years better position our business to benefit from global megatrends such as 5G, data center growth, material handling electrification and automation, grid stabilization, and electric vehicle fast charging, all of which provide us both near and long-term growth opportunities that are materializing in our financial results and outlook. In addition to these trends, we are excited about our opportunities to benefit from U.S. government mandates and funding that are driving markets to us because of the criticality of the goods and services we provide, such as broadband expansion through the Rural Digital Operating Fund and the IRA. I am proud of everything our team achieved in fiscal year 2023, despite lingering uncertainties from geopolitical tensions and potential recession, as well as ongoing headwinds from supply chains, inflation, interest rates, and FX. I want to thank our employees for their dedication and hard work, consistently capitalizing on opportunities and confronting challenges head-on. I look forward to seeing you in the next few weeks at our Investor Day on June 15th, New York City. I'll now ask Andy to provide further information on our fourth quarter and fiscal 23 results and go-forward guidance.