EnerSys

the second quarter fiscal 2025 results. On the call with me today are David Schaffer, NRCIS Chief Executive Officer, Sean O'Connell, NRCIS President and Chief Operating Officer, and Andrea Funk, NRCIS Executive Vice President and Chief Financial Officer. Last evening, we published an announcement about a planned leadership succession, our second quarter 2025 results, and our 10-Q 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. As a result, 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. These statements are made only as of today. 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 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 exclude 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 November 6, 2024. Now I'll turn the call over to Enersys CEO, Dave Schaefer.

Thank you, Lisa, and good morning. Please turn to slide four. Before we dive into our quarterly results, I'd like to share some personal news. Last night, we announced that after much thought and reflection, I have made the decision to retire as President and CEO of Enersys, effective in May, It's a decision I do not take lightly, but it feels like the right time for both me and Enersys. We have a solid foundation, strong momentum, and a clear path forward, and I'm confident in the opportunities that lie ahead for this great company. I am pleased to announce that our board of directors has named Sean O'Connell, our president of Energy Systems Global, as my successor. Sean will assume the role of President and CEO and join the Enersys Board of Directors upon my retirement in May. To ensure a seamless transition, Sean has been promoted from President of Energy Systems Global to President and Chief Operating Officer, effective immediately. Sean will continue to serve as President Energy Systems Global until his successor is named. A search for his successor is underway. Sean has held key executive positions in each of our core businesses in international operating regions. As President Energy Systems Global since November 2023, Sean has led a significant business transformation, including reshaping the go-to market and operating strategies and reducing annual costs by nearly $50 million. Previously, as President Motive Power, Sean introduced several transformative initiatives that delivered 20% operating earnings growth and 210 basis points of margin expansion. But what gives me the steadfast confidence in Sean's CEO candidacy is his ethics and character. Sean's unwavering commitment to doing things the right way and natural leadership capabilities have supported our customer and supplier relationships and added to our culture. Over the past 11 years, He has successfully executed every challenge presented, and his deep understanding of our business and strategic vision make him the ideal leader to build on our success. With Veterans Day soon upon us, I would be remiss not to mention that Sean started his career serving the Armed Forces as a member of the US Army's 82nd Airborne Division, and to thank Sean and our other dedicated veterans for their brave service to our country. Over the next six months, I'll work closely with Sean to ensure a smooth transition. Together, we remain fully focused on maintaining our operational excellence and strong customer relationships and supporting our ongoing initiatives with continuity and dedication. I'll now turn it over to Sean for a few comments.

Thanks, Dave. And hello, everyone. I'm honored to succeed Dave as NRSA's CEO and thank our board for their trust and confidence in me. Having been a part of this incredible company for 21 years, including the decade prior to joining Enersys as an outside reseller of Enersys products within my own company, I've had the privilege of working with some of the most talented people in the industry and witnessed tremendous progress made under Dave's leadership, for which I am deeply grateful. Under Dave's leadership, Enersys has transformed from a traditional lead acid battery company with limited scale into a global leader in energy system solutions, growing revenue by some 35% through strategic acquisitions and groundbreaking product innovations. His efforts have built a unique portfolio of smart battery and energy management technologies, including both lithium ion and lead chemistries, leaving an indelible mark on the company and our industry. I look forward to building on that strong foundation we've established, working with our team to continue our journey of innovation and growth as we pursue new opportunities that align with our long-term vision in delivering stakeholder value. As Dave mentioned, we will be working closely together to ensure a seamless transition. Over the next six months, I will be conducting a listening tour across the organization and with other key stakeholders, including customers, partners, our analysts, and investors, as I get up to speed on my expanded role and responsibilities. For now, it's business as usual. Our goals, initiatives, and day-to-day operations remain our focus with minimal changes. Now I'll turn it back over to Dave to discuss the results of our second quarter.

Thanks, Sean. Before I go into an overview of the quarter, I would like to extend our sympathies to those impacted by the devastating hurricanes in the Southeast. I would also like to thank and recognize our NRCSIS service teams for working tirelessly to maintain power continuity for our customers affected by the storms. Please turn to slide five for a review of our second quarter performance. In the second quarter, we delivered revenue and EPS in line with our guidance ranges and demonstrated our ability to generate strong and accelerating financial results in an uncircuit market environment. Our balanced business portfolio has proven resilient, allowing us to leverage exciting areas of profitable growth while weathering softer demand in other end markets. Adjusted gross margin of 28.7%, up 210 basis points over prior year, with adjusted operating earnings of 11% year over year and 8% sequentially. These results were attributable to impressive motor power performance on continued customer enthusiasm for our maintenance-free offerings, growth in our A&D business, including the accretive addition of Brentronics, solid cost discipline, particularly in our energy systems line of business, as well as increased IRA benefits, despite ongoing but easing headwinds in our communications and transportation markets and FX pressure. While we've adjusted our full-year revenue guidance modestly to account for the spending weakness in the Class 8 OEM truck market, and deployment delays in fast charge and storage, we remain confident in our core strategy and the significant opportunities across our entire portfolio visible on the horizon. Our focus remains on delivering results. We're maintaining price and developing higher value products that lift our portfolio mix and create enhanced customer intimacy. We're optimizing our cost structure to adapt through cycles, We're improving productivity with investments in automation and flexibility. And perhaps what I'm most excited about, we're advancing our transformative strategic priorities. This quarter, we achieved several key milestones in our transformative strategy. We were pleased to have been selected for a $200 million Department of Energy award to partially fund our planned lithium gigafactory and have received formal board approval to proceed with this important project. The integration work and results of the Breadtronics acquisition are exceeding our expectations, and we've installed our first fast charge and storage system at our launch customer site. We are seeing promising demand indicators and positive momentum across our business, which gives us optimism heading into the second half of the fiscal year. Overall, orders were up year over year, with particular strength in Energy Systems Americas in which we received a 30% increase in orders this quarter on 10% lower revenue, clearly indicating the inflection points in both years and driving the second consecutive quarter of increases in energy systems backlog. Andy will give details on our second quarter fiscal 25 financial performance and outlook, but I will first provide a few more highlights and business drivers behind the results. Starting with energy systems, we saw a sequential increase in revenue for the first time in six quarters, driven by improvements in communications, and we were pleased to deliver higher adjusted operating earnings for the third consecutive quarter. Sales were down $40 million versus prior year, but up $21 million sequentially, driven by the softer but recovering spending by our communications customer, as well as robust data center demand. Service revenue was notably challenged this quarter due to timing of projects, which we expect to come back in the second half of the year. We were particularly pleased to see the increase in communications orders in Q2. As we have previously mentioned, network resiliency can only be deferred so long, and that spending resumption is what we are witnessing in our order book. We are not yet seeing significant investments in network expansion, but with lower interest rates and increasing last mile delivery volumes on higher traffic spurred by the surge in AI, we are confident it is imminent. Motive Power was once again a bright spot, with increasing volumes and margins versus the prior year. Our warehouse and logistics customers recognized the value of our higher margin proprietary maintenance-free offerings, seeing us not only as the power provider, but as an energy solutions provider who helps them address their profit and labor challenges and achieve their sustainability goals. We are seeing more inbound customer interest in our lithium solutions, and the announcement of our own lithium ion cell factory to supply our products has gained customer attention and support. In Q2, sales of our maintenance-free product offerings grew up 24% compared to the prior year, representing 26% of total Motive Power sales compared to 22% in the prior year. This growth underscores our competitive positioning and reinforces Motive Power's ongoing success. Industry data continues to support our expectations of mid- and long-term market growth opportunities. A leading industry association's research conveyed a 50% increase in current conditions confidence levels compared to last quarter. And industry experts are anticipating lift truck shipments to reach their double digit growth for next calendar year. Although dealer truck inventory is currently elevated, we expect to enjoy heightened battery orders when our dealer sales pick up and the excess inventory is depleted. We believe that the uncertainty associated with the presidential election has delayed decision making and should now begin to resume momentum. In specialty, revenue and adjusted operating earnings growth was driven by strong performance in aerospace and defense, bolstered by the accretive impact of our Brentronics acquisition, but offset by continued softness in Class A truck OEM demand, which is not specific to Enersys and reflects the broader truck market. A&D demand remained very healthy with a solid order book and several aerospace and defense opportunities, Department of Defense opportunities in the pipeline. Despite the year-over-year and sequential improvements in this business, our transportation volumes were below our expectations for the quarter. Although we grew our U.S. transportation aftermarket revenue 31% in the first half of fiscal 2025 versus the first half of 24, we were not able to fully offset the ongoing softness in Class A truck OEM revenue, which was down 37% first half of fiscal 2025 versus prior year. Class 8 truck demand is expected to remain suppressed through the end of our fiscal year due to high truck inventory and flat tonnage delaying OEM requirements. Encouragingly, U.S. Class 8 net truck orders picked up in September, and our fleet customers indicate plans to increase truck procurement toward the end of our fiscal year, which should boost battery demand with a one-quarter lag. Combined with the historical battery cycle data, we anticipate stronger transportation demand entering our next fiscal year. Additionally, much of our aftermarket value comes from premium automotive sales with customers such as AutoZone in Napa enthusiastic about the superior performance of our Odyssey batteries. We're actively negotiating new retail contracts and anticipate increasing our spot by activities until these contracts are in place later in the fiscal year, positioning us for both volume and margin expansion, as timing is well aligned with the completion of our Missouri Plant I investments. In our new Ventures business, we are excited to have delivered our first fast-charge and storage system at the end of the second quarter. This marks an important milestone, signaling the beginning of a new chapter in energy management solutions for Enersys. The system installation was executed within four hours and as expected. Please turn to slide six. Let me share some highlights from our progress on our strategic priorities during the second quarter, starting with Innovate. We continue to deliver cutting-edge new product introductions, including software-driven energy management systems, providing customers with flexible and efficient solutions that meet their evolving needs. In September, our Envision Connect solution for wireless system monitoring and optimization of network batteries was recognized by LightWave plus Broadband Technology Report as among the best in the industry for cable broadband innovation. With a small Bluetooth chip embedded into the battery, Envision Connect enables our customers to proactively manage and monitor their battery assets with real-time data. In October, The Enersys ABSL lithium-ion space battery was successfully launched onboard NASA's Europa Clipper spacecraft. Our battery powers the spacecraft's flight and scientific instrumentation. The battery provides over 540 amp-hours of capacity through a 28-volt system, performing various charge and discharge cycles throughout the mission's duration. The lithium battery was specifically designed and minimizes the magnetic interference within the spacecraft. This achievement underscores our lithium engineering excellence and decades of experience collaborating with NASA to develop custom, high-performance energy storage solutions for space exploration. We continue to focus on optimizing the business as well. Our investments in TPPL production flexibility across our Missouri plants are progressing according to plan and will be complete by the end of the fiscal year. This initiative, including the installation of two new automated lines in Plant 1, will double production capacity while requiring only half the labor, enhancing our production flexibility and reducing operating costs. The increased volume and improved cost absorption will further drive earnings expansion, delivering meaningful benefits to our business. And accelerating. The highlight of the quarter is the advancement on the new phase of construction plans for our lithium ion cell Gigafactory, for which I will now provide a brief overview. Please turn to slide seven. We discussed our Gigafactory in detail during our recent tech talk, and I will summarize a few key points today. Our new factory will be approximately 500,000 square feet in size, with an initial capacity to produce 5 gigawatt hours of lithium ion cells annually located in Greenville, South Carolina. Our total investment is estimated at $665 million and will be partially funded by federal, state, and local incentives, including the $199 million DOE award. From a strategic perspective, this new factory provides a reliable domestic supply of lithium ion cells for Enersys lithium battery production, supporting our mix shift to higher performance lithium solutions. It has the scale and flexibility to meet our customers' diverse needs, and importantly, will meet stringent DOD requirements, strengthening our relationship with this important customer. From a financial perspective, benefits include de-risking our long-term revenue and earnings growth, reducing our input costs, and unlocking additional and incremental high margin revenue opportunities, which collectively drive a strong financial return profile for our shareholders. We are forging ahead with our plans and will provide ongoing updates as we progress with this strategic investment. Please turn to slide eight. We also continue to progress on our sustainability journey and recently published our detailed climate action plan roadmap to achieve Scope 1 neutrality by 2040 and Scope 2 neutrality by 2050. We are unwavering in our dedication to collaborate with our customers and suppliers in decarbonizing our value chain and are excited to share our continued progress on this path. In closing, while we expect that market uncertainty will persist through the coming months, we are confident our second half of the fiscal year is on track for continued top-line and profit expansion. We are bullish about our strong position as the leading provider of energy storage solutions as we continue to deliver innovative products and services in growing end markets where the needs for access to reliable power is increasing exponentially. We remain focused on delivering profitable long-term growth to our shareholders. I will now turn it over to Andy to take you through our results and outlook in greater detail. Andy?

Thanks, Dave. Please turn to slide 10. Second quarter net sales of $884 million were down 2% from prior year, driven by a 3% decrease in organic volume from the headwinds in communications and Class 8 OEM markets Dave mentioned, as well as 1% price mix pressure from lower proportionate sales of higher margin power electronics to our communications customers which were partially offset by a 2% positive impact from the Brentronics acquisition. We achieved adjusted gross profit of $254 million, up $14 million year-on-year, including IRA benefits booked as a reduction to cost of goods sold in the quarter. Q2 adjusted gross margin improved by over 200 basis points versus prior year to 28.7%, of which nearly half was due to an increase in higher-margin motor power revenue and the accretive impact of Brentronics, with the balance being attributable to higher IRA benefits. Our adjusted operating earnings were $115 million in the quarter, up over $10 million versus prior year, with an adjusted operating margin of 13%. Excluding the IRA benefits, adjusted operating margin increased approximately 20 basis points year-on-year. adjusted operating earnings benefited from the realization of our cost-improvement actions in energy systems. Adjusted EBITDA was $129 million, an increase of approximately $13 million versus prior year, while adjusted EBITDA margin was 14.6%, up 170 basis points versus the prior year. Adjusted EPS for the second quarter came in above the midpoint of our guidance range at $2.12 per share, an increase of 15% over prior year. In the second quarter of fiscal 25, our effective tax rate was 2.3% on an as-reported basis and 19.4% on an as-adjusted basis before the benefit of the IRA, compared to 18.3% in Q2 of 24. Let me now provide details by segment. Please turn to slide 11. In the second quarter, energy systems revenue declined 10% from prior year to $382 million, primarily driven by the lower volumes and price mix pressures previously mentioned. Revenue was up over $20 million sequentially, the first increase in six quarters, as we began to see improvement in these challenged end markets. Adjusted operating earnings of $24 million improved for the third consecutive quarter, reflecting the increased revenue on top of the optimized cost structure, and were in line with prior year despite the softer market conditions and lower revenue. Adjusted operating margin of 6.4% was up over 100 basis points sequentially and increased 30 basis points versus prior year. We exited the quarter with very encouraging order trends in communications resilience spending, and we expect to be able to hold OPEX restraint even as revenue further recovers. Please turn to slide 12. Versus prior year, Motive Power revenue increased 3% to $367 million, largely driven by volume growth. Motive Power again reported strong adjusted operating earnings this quarter, contributing $58 million, up 8% over prior year, representing our highest Q2 ever Adjusted operating margins were at record highs of 15.7%, up 70 basis points over Q2 24. We remain optimistic coming out of a seasonally slow Q2 with good visibility from industry-ordered data. As lithium product sales increase, we expect healthy margins, but in the near term, the growth will be reflected as higher volume increases with suppressed price mix due to the elevated ramp-up cost pass-through impact of these batteries. Please turn to slide 13. Specialty revenue increased 9% from prior year to $135 million, driven by a 12% positive impact from the Brentronics acquisition and a 1% increase in price mix, partially offset by a 4% decline in organic volume. Q2 2025 adjusted operating earnings of $8 million were up approximately $2 million versus prior year, with an adjusted operating margin of 5.4% up 90 basis points. Margins remain below our target range of low double digits due to pressure from lower Class VIII OEM transportation volumes and the impact of underabsorption in our Missouri plants. However, we are seeing the early benefits from the Brentronics acquisition and beginning to grow our higher margin transportation aftermarket volumes. Given the incremental transportation aftermarket opportunities and the broad strength of ANDN Combined with the enhanced high-speed flexible capacity expansion and the full contributions from Branchonics, we remain optimistic about our opportunities and specialty and expect to see ongoing improvements over the next several quarters. Please turn to slide 14. Positive operating cash flow of $34 million, offset by CapEx of $30 million, resulted in free cash flow of over $3 million in the quarter. Operating cash flow absorbed a transition tax payment of $11 million and over $40 million of investment in primary operating capital as sales accelerated during Q2 25, leaning into a more robust second half of the year versus softening demand in the prior year. In addition, we increased capital spending by $11 million year on year, primarily from the incremental Missouri investments previously mentioned. Note that the benefit of our IRA credits will not have the full positive impact on our cash flow until our fiscal year 2024 tax filings are finalized and we receive our first 45X tax refund of over $100 million, which we expect to get near the end of this fiscal year. During the quarter, final Section 45X regulations were issued by the U.S. Treasury Department and made public on October 24th. We believe these align with and support our current interpretation and application of the law. As of September 29, 2024, we had $408 million of cash and cash equivalents on hand and net debt of $840 million, representing an increase of approximately $329 million since the end of fiscal 24. This increase is primarily attributable to the $206 million acquisition of Brentronics, $75 million of stock buybacks, $19 million of dividends, $66 million of CapEx, including the Missouri production investments and the purchase of land for a planned lithium plant, and a $58 million investment in primary operating capital to support the underlying business ramp as we anticipate in the second half of this fiscal year. Our credit agreement leverage ratio is 1.6 times EBITDA, our balance sheet remains strong and positions us to invest in growth and navigate the current economic environment. Although our leverage increased modestly during the quarter, we anticipate maintaining our net leverage at or below the low end of our two to three times target range, providing us with ample dry powder for our capital allocation decisions. Please turn to slide 15. During the quarter, we paid $10 million in dividends and repurchased $64 million in shares. We currently have approximately $258 million remaining on our buyback authorization, including $200 million incremental authorization approved by our board yesterday. We continue to screen for additional attractive bolt-on acquisition opportunities, such as Brentronics, which meet our discipline, strategic, and financial criteria. Please turn to slide 16. We are seeing encouraging demand trends in the majority of our end markets, including healthy trends in our Motus Power data center and aerospace and defense businesses, and while still challenged, nicely improving orders in our communications markets and positive early demand signals in Class 8 truck OEM markets, which we expect to improve steadily over the next several quarters. We are excited about our progress in new ventures, delivering our first fast charge and storage system at the end of the second quarter although deployments have taken longer than originally expected. Our fiscal third quarter 2025 guidance range is $920 million to $960 million of net sales, with adjusted diluted EPS of $2.20 to $2.30 per share. Our guidance anticipates a modest sequential improvement in both communication spending and transportation aftermarket volume, incremental revenue and earnings from Brentronics, and ongoing revenue growth in modus power. In consideration of the current market conditions and delays in fast charge and storage, we are modestly lowering our fiscal 2025 revenue guidance range now set at $3,675,000,000 to $3,765,000,000 of net sales versus prior guidance of $3,735,000,000 to $3,885,000,000. As we enter the second half of the year, we expect the profitability of our business to deliver accelerating returns driven by improving volume, favorable product mix, the accretive contribution of Brentronics, continued cost improvements, and benefits from operational efficiencies flowing through to our bottom line. With recent board approval, we are excited to advance the next phase of construction plans for a lithium ion gigafactory in Greenville and expect to incur modest related noncapitalizable expenses in the second half of the year as we move forward with this strategic project. As a result, we are tightening our fiscal 2025 EPS guidance range on increased confidence in previous earnings expectations, but slightly lowering the midpoint by 10 cents per share to account for these increased expenditures. Our expected adjusted diluted EPS range is now $8.75 to $9.05 per share versus our prior guidance of $8.80 to $9.20 per share with a pre-IRA tax rate of 20% to 21%. Our CapEx expectation for the full fiscal year 2025 remains in the range of $100 to $120 after absorbing incremental spending on our planned domestic lithium plant. Although we expect that end markets may remain uncertain during near term, given the dynamic macro environment, we are excited to be standing on the threshold of our future. During Dave's impactful tenure as our CEO, he has established EnerSys as a leading provider of energy systems and storage solutions. We are confident in our positioning and strategy and we are extremely optimistic about the tremendous growth opportunities ahead of us. I'm grateful for Dave's leadership and mentoring and look forward to beginning the next leg of our journey under Sean's strong leadership in May. We remain focused on delivering long-term value to our stockholders. With this, let's open it up for questions. Operator?

Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A roster. Our first question comes from Brian Drab of William Blair. Your line is now open.

Good morning. Thanks for taking my questions. And Dave, it's been great working with you. Congrats on your decision. And Sean, looking forward to getting to know you better. Thanks, Brian.

Good morning, Brian.

Thank you, Brian.

Good morning. Yeah, maybe we could just start with the question on the fast charging and storage. Can you give a little more detail around what is – causing some delay there? And how many units have shipped from that initial order of 50? And is this still just the one customer landmark that we're talking about at this point?

Yes. Brian, we're still just talking about landmark to start. And I think there's the technical elements of the UL certification process, which we've completed. I think what we underestimated a little bit was sort of the bureaucratic part of the certification process, getting all the documents on file and through the system. So that's the main source of some of the delays. And then there's been some site prep issues from the customer's perspective as well. So we've got one system in the ground. We've got a few more ready to go. And our goal continues to be to get 15 have 15 ready to go this fiscal year. That's what we're continuing to drive on. And as you can imagine, a system, especially one as complicated as this, the early phases are a little choppy and probably impact some of the modeling that I know Lisa and Andy are working with you guys on. The key for me is the continued confidence by the end user about the business justifications or rationale for this investment, which is the energy management mitigating demand charges. And there's just continued, I don't even want to say excitement, but pressure from the end customer about this project. So we're going to push through these UL issues and It's just been hard to get the timing right from a modeling perspective, but the momentum is still very much going forward. Andy, is there anything else there?

I think you hit it. Again, we've been focusing on this initial launch customer, and that's going to allow us really to develop our pipeline more when we have the systems installed, and it's exciting.

Yeah. Brian, the installation went extremely well. They pre-wire everything at the CM, and so they just hoisted it right down, and they had that big old system installed in four hours. It was really impressive.

Okay. Thanks. I guess you said it might change the modeling a little bit. I guess I'm looking at fiscal 27 doesn't seem that far away anymore. That's basically calendar 26. I don't want to put words in your mouth, but I would imagine it looks a little bit tougher to get to, you know, like a 400 to 700 million revenue run rate by with this product category by that time or no?

Brian, I think it's just these are startup issues. And it's the, I don't think there's any, we will certainly update models and let you folks know if we think there's any sort of major departure. As far as I'm concerned, most of the issues we're talking about today are related to getting these first 15 systems in the ground and up and running.

The other thing I'd comment, Brian, is there's growing enthusiasm across our other lines of businesses for things like a BESS system and warehousing and motive power. So there's plenty of opportunity. I think it's just early ramp of a very large, complicated project that we're excited. The installations went very well for the first one. Just got to get the paperwork for the UON certification, even though the tests are all done. We've got 15 locations that, you know, we're ready to get the product installed in. And then the balance of those 50 systems, as we talked about, we'll follow after that.

Okay, thanks. And then can you just put a little bit of a finer point on what you're seeing in the communications market in telecom? And it sounds like orders are picking up, and I might have missed – a growth rate in orders, maybe sequentially, if you could give us an idea of how much orders improve sequentially or year-over-year.

We're definitely seeing a recovery in orders. And, Andy, what's the sequential number?

The revenue is down 10% year-on-year, but orders were up 30% year-on-year. If I look at comms in particular, Brian, you mentioned America Comms, booked a bill with 1.09 in Q2 of 2025. It was 0.57 in Q2 of 24, to give you an idea. 1.09 last quarter as well, but that's leaning into, on a sequential basis, going up 1.09 is a healthy increase. So we're mostly seeing it in network resilience. We're not yet seeing as much of the network expansion. So I think we're leaning into a return to normalcy on the base business. As we've talked about before, our target is to be at 8% to 10% during these down cycles, when it's really just resilience spending. and 12 to 15 when it's expansionary, the peak of these cycles, and 10 to 12 overall. So as things continue to return to a normal baseline, we expect to be in that range, you know, that 8 to 10 by the end of this fiscal year with upside opportunity as a lot of this, you know, expansion starts to kick in.

And there's certainly, Brian, with some pent-up demand as it relates to the resilience, network resilience. We've said all along you can only defer that for so long. And so that's, but in terms of the big, new, exciting projects, even though we've got several, small cell area, you know, we've got the advantage of having Sean on the call with us today. Sean, is there any additional information you want to provide to Brian as it relates to some of the kind of, not the network resilience projects, but maybe some of the new network expansion projects?

Sure, Dave, and good morning, Brian. You know, there are several sales in the wind that we have for network expansion. And as Dave mentioned earlier, these are in their early stages, but they're good signs nonetheless. And just to give you a little color, the first to be in our hyper boost area, and we've socialized that previously, but we've been shipping beginning in January of this year, a great deal of our hyper boost modules. And this is allowing greater traffic to be handled by the antennas without climbing the tower. So doing power upgrades in the base stations. And we have about 4,000 HyperBoost modules and growing in our pipeline. So that's the first. And as Dave mentioned, it's not the next G level build, if you will, but it's a good building sign that some of this is coming back. And then in our, if you look at our DPX area, uh formerly called touch safe we've completed our first right-of-way trial public right-of-way trial for one of the major carriers small cells that trial was in dallas texas using the direct cable berry method and went extremely well we have two more trials in process at the moment a small cell trial of a node on the east coast and then another one on the west coast with with about 15 nodes both with different carriers, which is very encouraging for us. And we're continuing to see excitement building around the specific use case of DPX in those applications. So we've got a stocking program we're working on for our OEM partner. We're getting them about 100 nodes now so they can have a rolling stock and begin to deploy more of these as the interest builds. And then the final one I'll talk about and really mention are our ATOM gateways. So our Alpha DOCSIS OEM module and gateway programs. So Charter and Comcast continue to deploy gateway connected devices to support both the 5G, CBRS, and Wi-Fi segments. And we're seeing consistently building demand for the next year. And we're continuing those deployments. Tad Piper- And then, and then sort of as a subset sub segment of that we're seeing rural broadband beginning to really pick back up again, this was this was sort of. Tad Piper- shut off during the last part of last year when we saw this the the general order book decline, but we're seeing several thousand new broadband powering systems being provisioned, which is largely going to build in the next calendar year. So, again, across the board, some good indications that some of these network builds are forthcoming.

Yeah, there's a lot going on. Thanks for sharing all that detail. Okay.

You're very welcome.

Thank you. Our next question comes from Chip Moore of Roth Capital Partners. Your line is now open.

Hi, Chip. Good morning. Thanks for taking the question. I'll echo my congratulations, Shawn. Maybe just a follow-up there on energy systems. Can you expand a bit more on what you're seeing in the data center market?

Yeah, sure. Happy to go. Data centers is a bright spot for us. You know, Q2 was up high single digits year-on-year, and we do expect fiscal 25 to be up double digits. The orders are healthy. We've had strong year-on-year gains, particularly in the Americas. Our Americas orders are up, and I almost hate to say it, 50% year-on-year, although these have long lead times. So the project nature tends to be these longer lead times with new construction being much longer than the replacement. The DC build-outs are facing extended lead times due to the power issues. Some of the critical components like transformers, the new utility build-outs and switch gear to bring the power to the DC can have lead times more than a year and some components even as much as two to three years, which impacts the battery sales. We're doing builds for going through calendar 29 being planned. They're much larger than the previous new installs, like a recent large order that we had was for 224 UPS systems versus historically a huge order with 10 to 15 UPS systems. So that's what's driving really this order book that's going to be longer term in nature. This is one of the reasons why a mix of both doing replacements, which is more book and ship, as well as these project aspect of these new larger installs. helps to balance some of the choppiness that you can have with this project activity. But we expect robust DC demand to continue as a multi-year trend.

And I think longer term, Chip, it's nice that we've got Sean leaning in here because he has a lot of background in this particular area. And we've actually added some talent to the team recently with a lot of depth in data centers. And really, my focus with Sean over the next few months is we're really looking at bolt-on acquisition opportunities in this space and certainly working with Yearn, our CTO, on some new product opportunities in this area as well. So it's an exciting space, and Sean shares with me often some of the demand outlooks for electricity, mostly associated with artificial intelligence, and it's staggering how much the availability of electricity is going to drive this market, and to Andy's point, will create some choppiness in terms of when we see the orders, which come sort of, we're sort of the very last, Sean, you'd say we're sort of the last thing that gets installed in a data center?

Yeah, we tend to be fairly down the line in that procurement cycle, you know, long after transformers and those other high-tent hold items are, you know, made their way through. Okay, good.

All right. No, that's Yeah, that's very helpful. And can you give us any insight on, I guess, chemistry mix in that market or how you see chemistry mix shifting over time?

Chip, lead's really holding on, and I think TPPL is where we're seeing the most interest and opportunity. Of course, on our NPI side, it's mostly lithium. We're looking at to fill in some of the gaps. It depends on every customer, but we haven't seen the same, maybe, momentum across all elements of the data center space with lithium as we see in other markets. So it's really mixed. Sean, did I miss anything there?

No, Dave, I think you captured it well. And I think that TPPL portion is an important piece. If you look at it analogous to motive power and what TPPL has done for price mix and motive power, we're enjoying some of the same uh, type of lift in, uh, in TPPL data center. And Tripp, if you think about it, it gets you a lot of the way of lithium TPPL we we've said in the past without some of the risk. And, you know, there's still, we're still seeing, uh, uh, some of the, you know, some of the uglier stuff in, in globally and data centers where we've had some fires and other things, not, not we as Enersys, but the industry. And TPPL is really allaying that risk with much better performance characteristics. So ArchAger is really quite nice in that space.

Great. That's very helpful. Appreciate it. If I could sneak one more in, just on motive power, staying very resilient, it sounds like. Just any more color. And I think you called out, I missed it, some dealer inventory dynamics. what's going on there, and then, you know, how do you see order trends playing out near term?

I think most of the feedback we're getting is not dissimilar from what we hear from the transportation group. There's been a, I would say, the economic activity over the past two quarters has been somewhat muted. I think that's exacerbated some of these inventory positions. Most of the feedback I received, and I was just with a bunch of these folks not too long ago, is that I think some of the uncertainty related to the election, we're going to clear that pretty quickly now. It feels like things are going to improve. And so I think a lot of the same dynamics. But what we're leaning into mostly, you know, with some of the choppiness and the volume, it's just been mixed. and just operating excellence. The factories have been doing a fantastic job around time deliveries. So I'm just impressed as heck with that team. And we look forward to a bit smoothing out orders. We've got some good, as I noted in my prepared remarks, we've got some great indicators from some trade association data reports that we look at. And really for us, it's just pushing maintenance-free and technology and higher margin solutions into this market. And the team's been doing a fantastic job.

I can follow up with some data as well. I want to stress again, this is a record second quarter AOE for Motive Power and record AOE percent for the LOB. They just continue to knock it out of the park. And that's on Q2, which tends to be our seasonally slow quarter with the new holidays, so all the more impressive. One of our OEMs has projected some modest declines, mostly in EMEA, but I think it's important to remember that we sell both replacement and to the OEMs, and that our profit is improving despite the market being somewhat stagnant, and I think having a lot of opportunity for growth in front of it. On a positive note, ITA July-September lift truck orders were up 12% over prior year. And, you know, getting to some of this volatility that's largely behind us, but I would say not 100% back to normal. So, you know, again, I think there's a lot more growth in front of us. Our backlog is still about 50% higher than pre-pandemic levels. We exited Q2 25 with $286 million of motive power backlog versus 196 million in Q2 of 20. Our backlog coverage right now is 0.8 versus about 0.6 pre-pandemic. Book to bill was 0.9 in both Q1 and Q2. So, you know, you always wonder when it's below one, what's causing that. That's because of a lot of this return to more of a book and ship type of an environment. Our orders in October, our strongest book to ship rate in 18 months at around, I think it was around 35% or so. So, you know, there's a little bit of that return to normalcy till we get, you know, a steady line. And I think the slope is going to continue to improve.

One of our customers, Andy, on the reach trucks is still that's kind of really, I would say, abnormally long lead times. But the other major customer in that area has gotten sort of back to normal. So I think we're almost through this disrupted phase and order rates and is really starting to feel like it did in the old days, I guess, pre-COVID.

Exactly. Perfect.

Yeah, no, appreciate all that color. I'll hop back in queue. Thanks very much.

Thank you. Our next question comes from Greg Lewis of BTIG. Your line is now open.

Hey, thank you, and good morning, everybody. And, hey, Dave, yeah, reiterate everybody. I'll say thanks for all that you've helped me learn over the last couple years. It's really been great. I was hoping to talk a little bit more around the Class A market and specialty. On the prepared remarks, it sounds like we're kind of bottoming. It seems like it's picking up. Just as we think about specialty margins, which are up sequentially and margins across the board are improving, kind of looking back and trying to see You know, how can we think about margin progression kind of from this kind of mid-single digits to, you know, that kind of high single digit, low double digits that we saw a couple years ago? And is that how contingent on that is really that class A recovery that we're talking to versus, you know, maybe some other drivers that could see that those margins, you know, start getting back to that? 10% range?

Well, it's a great question. As we said, the Class 8 situation was really sort of a slowdown overall. But what really caught maybe our customers off guard was their level of inventory. So we saw a very abrupt reduction in order activity as a result. And I would say the inventory situation is improving. And again, similar to our comments earlier on motive, I think in this post-election environment, we think the overall tonnage. At least our customers are telling us that they expect that things are going to improve as we get through the uncertainties around this period. The transportation elements are going to improve largely as that volume returns and also as the new lines come up, ramp up in Springfield Plant 1. I think those are going to be the major drivers of as we've modeled into our own forecast for the board. And then, of course, just as a reminder, the other piece to specialty beyond transportation is the aerospace and defense. And we just see continued buoyancy in terms of that piece of the business. The macros are all favorable. Brentronics has gone extremely well to date. And so those are going to be the key drivers, that margin progression. Andy, any more detail?

Sure, I'll add a little bit more to that too, Greg. And I'll tell you, I'm sure you're disappointed, but we're even more disappointed in Mark especially, who does just a great job running this business at the OE percent because we know just how much potential there is here. And we're very confident that we're going to be getting back, you know, at or near that double digit by the end of this year. And I'll give you a little bit of feedback. As Dave mentioned, Remember that it's specialties made up of both the aerospace and defense, which we have a very healthy order book, and now adding Brentronics, which we only keep in mind this past quarter was only a partial impact. So we'll have, in addition to an accelerating business, full impact going forward, as well as the transportation. And remember that transportation is made up of both OEM and the aftermarket. So as we mentioned, afterbuy spot buys are growing. It's plus 31%. But on a smaller base, it has trouble offsetting that 37% decline that we had in the OEM business. Year-to-date, we built about $20 million of inventory to be able to accept that aftermarket business. As a reminder, we have three Missouri plants, Warrensburg, Springfield 1, which was Springfield 2, both the Springfield plants we bought from the North Star acquisitions. Plant 2 performance has turned a corner and is performing well, but to really see that financial impact, that both ES and specialty are absorbing from that underabsorption. We need more loading. That loading, when it's back at normalized levels, is probably about $10 million or 20 cents per share of opportunity. And we've talked about some of the growth in ES as well as this more aftermarket and then eventually the Class A coming back. But these two new lines, just to give you some perspective, it cost about $25 million. That's part of the increase in our capex that we had this year. Most of that spending is behind us. These new lines will provide flexibility, incremental capacity, and lower costs. So as Dave mentioned, we'll be able to produce 2x the volume with half the people. To give you some dimensions on that, that revenue is about an incremental $150 million of revenue capacity. And the less cost is about $30 million less cost, so $0.60 a share. Now, that probably will take us two to three years max until those lines are installed, until we get the OEE at the level that we need, and then we fill that capacity. but significant opportunities for improvement that will fall through to both ES and transportation over time. And that, I think, is really consistent with the story Patrice shared at our investor day. Some of that capacity also is going to be used to meet the search and data center demand that we talked about before. So, the timing of that installation is very well aligned. Again, we said it should largely be complete by the end of this fiscal year. And that'll be lined well with DC growth, comps coming up, the incremental aftermarket, and then going into fiscal 26, the resumption of the Class 8 OEM demand. So, you know, it's not going to happen overnight, but we do expect ongoing incremental improvement in revenue earnings and OE percent in specialty as a result of this. And it's really a great business.

No, no, that's great to hear. Thank you both for the thoughts. Have a great day.

You too. See you, Greg.

Thank you. Our next question comes from Noah Kay of Oppenheimer & Co. Your line is now open.

Dave, I wish you well in retirement. Thanks for all the dialogue over the years. And, Sean, a big congratulations to you and wish you luck. Thanks, Noah.

Thank you, Noah.

Let me just start with the GigaFactory question. we had a little bit of political news in the last couple of days. At this point, you know, just want to understand because I think with the outlook for tariffs and you know, the implications for developing a strong domestic manufacturing base, I mean, the gigafactory probably makes more sense than ever before from a strategic standpoint, but on the funding side and the development, just, Help us understand a little bit finer point what the schedule should look like here. How could this transition administration impact both the finalization and the timing on funding of the contract?

We don't anticipate any change with regards to timing or likelihood of the DOE award. And in terms of the schedule, Andy, you've got the timeline in front of you.

Yeah, just to give you a little background on the schedule, Noah, as you know, we bought the Greenville land in Q1. That was about $10 million to get included in our CapEx numbers. The DOE negotiations are expected to be complete before January 25. The team is doing an excellent job progressing there. This is largely administrative. I don't want to give the impression that we're negotiating whether we get it. It's been approved. It's been authorized. It's just a question of Some of the specific logistics behind it, some things like the environmental details for the land prep, making sure we've got everything in line with what their expectations are. So we don't see that being at risk. We've already rented local space, beginning to hire staff. We had our board meeting in Greenville. Just last week, and everyone was thrilled with the economic development folks.

No, if you haven't been down there in a while, you need to. It's a dynamic city. I think the board was very happy and impressed with Greenville.

Yeah, as was I. I want to move there. We had to break ground in late calendar Q2 25, probably beginning construction in third quarter 25. We expect the building to be commissioned at the end of calendar 27. Obviously, there's still a lot being ongoing here and expect to start production, you know, Q2, Q3 of calendar 28. We're undergoing environmental site assessments. We're doing material testing. So, a lot of activity there and we couldn't be more excited and, you know, don't expect any changes on the progress. In fact, if anything, you mentioned a lot of the

the priorities of the administration I think just underscore the importance and couldn't be thrilled that they've started it I think you've alluded to when you when you started know that there's probably very few things that are agreed upon in DC these days but one of those seems to be the the importance of a domestic supply chain especially for defense related products so it's a huge priority for the current administration and we anticipate that to continue as we transition.

Just a timing question as well. I guess as you go through and spend the CapEx on the plant, would the expectation be that the DOE, I guess in local cost share funds, get dispersed to you more or less concurrently? Do you kind of net that out in terms of how you're reporting CapEx? Do you have to sort of take the growth CapEx number and net that back just How will that all work in terms of both timing of funding and then the accounting?

Yeah, and these are some of the items that the fine touches are being made during the negotiation. But as I'm sure you know, Noah, you've got such a long history with us. Mark has a long experience in doing projects like this, not this large, but with the government. And our expectation that we've modeled and that is consistent in the discussions we've been having with them is that it would likely be a reimbursement, probably on about a one-quarter delay. So we'd have outlay, and then we'd get reimbursement the second quarter when we'd be making additional investments going forward. And also what we've been able to confirm is the bulk of it would be booked as a reduction to the basis of the assets. So the capital spending would be net of that, since a lot of it is based on, again, reimbursing of spending that has occurred. So that's our current understanding. Again, all of that is being finalized in the negotiation.

Okay. Very helpful. And I guess this last one, since I walked past an Odyssey battery lying out on my street this morning, I guess I got to ask about specialty. You provided a lot of color here on the organic trends. You also mentioned Brentronics outperforms. It looks like on a partial quarter basis, about $16 million contribution to 2Q sales. you, you, you quarterize that and then annualize that, that that's kind of around a hundred million, which it did last year. So just comment on any seasonality in that business and what you expect the business to do in sales this fiscal year.

Uh, we haven't provided specifics on that. Um, as, as you know, I think I mentioned, you know, one of my roles is to be conservative. So obviously this is a new business. Um, their orders have been fantastic. Uh, We're very optimistic, but we're sticking with what we know already, so we're building into the forecast conservatively about the run rate of where they were when we bought them, but we do see there's upside potential from there. I hope that helps. Hopefully that's close enough. Obviously, we'll be reporting Brentronics revenue in our queue, so you'll get exposure to that on an ongoing basis, but without a doubt, the team is phenomenal. Dave and I were there for their... for their annual picnic. It was just a great culture, great environment. About half of the workers were wearing Enersys t-shirts, which was really fun. The orders have been great. The synergies with Enersys have been greater than we expected. We didn't bake much synergies into the plan at all. It's just been a great going off. I do more of these types of acquisitions all day if I could. The team's been fantastic and they've been beating both their financial results so far, and we have high expectations.

All right. Very good. Thanks for all the color. Thank you.

Thank you. Our next question comes from Greg Watzkowski of Weber Research and Advisory, LLC. Your line is now open.

Hey, good morning, everyone. I know we're over on time already, so I'll keep it brief. Could you just follow up to the UL certification process for clarification? Is that a once-and-done kind of issue, or does it vary by customer, geography, or product, what have you? It's a once-and-done kind of issue.

So we have to get to the point where the contract manufacturer can mark the product with the UL cert. And part of our contractual requirements with our customers is to have that UL certification marked on the unit. So that's been some of the steps we've been wrestling with on these initial units. But once we get this done, it's done for everything. And the systems that we've been quoting to other customers besides Landmark are the same unit, essentially, that we're selling to Landmark. And as Andy mentioned, there is excitement building because the same fee structures that are driving the payback for this for our customer in Canada, demand charge mitigation and energy management, energy arbitrage, those same factors appeal to our distribution center customers in California and other parts. So there's a lot of momentum building in this new line of business.

Okay, great. That's what I thought, but good to confirm. That's it for me. Thanks. And one last echo of congratulations to Dave and Sean. Thank you.

Thank you, Greg.

Thank you. This concludes the question and answer session. I would now like to turn it back to Dave Schaefer for closing remarks.

Thank you, everybody, for joining us today. And we look forward to speaking again in about 90 days. Take care.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.