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Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter Fiscal Year 2023 EnerSys Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference call is being recorded. At this time, I would like to turn the conference over to Lisa Hartman, Vice President of Investor Relations.

Lisa Hartman: Good morning, everyone. Welcome to the EnerSys’ Q3 fiscal year 2023 earnings conference call. On the call with me today are David Shaffer, EnerSys’ President and Chief Executive Officer; and Andrea Funk, EnerSys’ Executive Vice President and Chief Financial Officer. Last evening, we published our third quarter fiscal year 2023 results and filed our 10-Q with the SEC, which are available on our website. We also posted slides that will be referenced during this call. The slides are available on the Presentations page within the Investor Relations and of our website at www.enersys.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, February 09, 2023. 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 February 08, 2023.

Now I’ll turn the call over to President and CEO, Dave Shaffer.

David Shaffer: Thanks, Lisa, and good morning, everyone. Please turn to Slide 4. We delivered strong Q3 results reporting $920 million of revenue and $85 million of adjusted operating earnings, our highest revenue and highest adjusted operating earnings in the company’s history as all three lines of businesses performed well. We realized the second consecutive quarter of significant adjusted gross margin expansion, driven by impressive price/mix improvement and continued robust demand for our products in all of our end markets. Despite interest and FX rate headwinds, as well as ongoing supply chain and inflationary pressures, we reported third quarter adjusted earnings of $1.27 per diluted share, above the midpoint of our guidance and a 26% increase versus $1.01 per share in Q3 ’22.

As we’ve mentioned previously, the inflationary impact of these past two years has been truly unprecedented. For perspective, our Q3 ’23 costs were $115 million higher than in Q3 ’21 before inflation really began to rise. This annualizes to roughly $460 million of higher costs or approximately $9.00 per share of EPS pressure, which doesn’t include the incremental impact on primary operating capital and interest expense. While we’ve experienced timing delays and price recapture, our focused efforts are now becoming visible in our results with opportunities for further mix improvement in EOS, or EnerSys Operating System, savings to expand profits in upcoming quarters. While some commodity and freight cost pressures have lessened, other supply chain shortages persist.

Meanwhile, certain commodity prices remain elevated relative to and, in some cases, are even continuing to rise versus historical averages. We are mitigating our exposure to both through ongoing price recovery, increased stocking of critical raw materials and alternative sourcing. We remain vigilant in monitoring the global supply chain environment evolution, including energy allocation in Europe and commodity prices as China reopens from COVID shutdowns. Please turn to Slide 5. Backlog was up 11% versus prior year, but declined modestly for the second consecutive quarter, particularly in Energy Systems to $1.3 billion. Additionally, it is worth noting a calendar year-end is often a seasonally lower quarter for new orders in Energy Systems.

Our backlog remains healthy at near all-time highs and demand is robust across all our lines of business. Please turn to Slide 6. We are delivering on our innovation roadmap with proprietary technology solutions that are defining the future of energy transition. For example, we are excited to have received our first orders for Motive Power wireless chargers and look forward to showcasing our maintenance-free battery and wireless charger solutions at both ProMat and LogiMAT trade shows this spring. Demand for our TPPL and lithium maintenance-free batteries is growing as customers across all of our end markets nice the competitive advantage of our offerings, which help them achieve their operating efficiency and sustainability goals through higher energy density throughput, software management capabilities and value-added services.

We are advancing our fast charge and storage initiatives with our near production-grade system now fully operational at our Tech Center, including new capabilities such as bi-directional grid connection. Combined with our recent certification for OpenADR, a software standard allowing automated demand response to the grid, our system offers further value for our customers. The team has also increased focus on our supply chain as we progress on our production roadmap. I’ll now briefly walk through our business segment highlights. The slides contain additional details about each line of business that I won’t cover in my comments. Please turn to Slide 7. Continuing its positive momentum, Energy Systems saw solid demand in the quarter, particularly in broadband and data centers, reporting revenue of $434 million or 13% increase compared to the prior third quarter.

Profitability was also much improved with adjusted operating earnings increasing nearly 170% year-on-year. We anticipate our top-line growth to continue flowing down to the bottom-line as we execute our price/cost recapture strategy and see a richer sales mix with supply chains improving. There is much to be excited about in Energy Systems with many of the major cable companies announcing CapEx increases for calendar year ’23, the rollout of our new product pipeline and incremental opportunities for EnerSys such as the Rural Digital Opportunity Fund, or RDOF. RDOF momentum is building, with one of our largest cable customers being the biggest winner of dollars to date. To help to mention this opportunity, approximately 2.5% of their (ph) spend applies to network powering, which we would expect to dominate participation in over the next several years.

As a leading innovator of critical power solution to telecom and cable companies, we continue to see 5G build outs as favorable to our business over the next several years in addition to new growth opportunities and activities at MSOs. Cable customers are expected to grow their wireless businesses and invest in the next generation of DOCSIS network upgrades as they build out their own unique wireless networks. With the estimated deployment of tens of thousands of these bespoke small cells, we expect robust demand for our power and backhaul gateway products and new OSP, or Outside Plant Power, systems over the next several years. We look forward to sharing more detail in this area with you at our Investor Day on June 15. Motive Power delivered another strong quarter with third quarter ’23 revenue of $362 million increasing 7% compared to the third quarter of fiscal ’22.

Backlog and demand trends are strong with order rates in the Americas near record levels. And while EMEA order rates were somewhat soft in the quarter, we believe our order and backlog strength position us well for growth overall. We are monitoring this business very closely as it is our segment that is most vulnerable to economic slowdowns. Our positive Motive Power results reflect the strong customer demand for our proprietary NexSys TPPL and lithium-ion maintenance-free product offerings, which were up 140 basis points year-over-year as a percentage of Motive Power revenue mix. We expect these solutions to keep increasing as a percentage of revenue as the trend towards automation and electrification of material handling equipment requires technology-enabled power solutions.

Our Specialty segment reported revenue of $124 million in the quarter, up 4% year-over-year, primarily driven by the continued pricing actions and improved mix. Though demand is still strong, this line of business is still challenged by our TPPL capacity constraints in our Missouri plants. With the team fully assembled and retention improving, we are laser-focused on driving operational efficiency improvement in these facilities and further realizing the financial benefits of strong product demand. Q3 started slowly for our Springfield factories with attendance and equipment issues, and as a result, we were unable to close the gap even with a strong push in December. However, positive momentum has carried over to a record Springfield January production.

In Transportation, backlog was on par with the prior third quarter and Class 8 truck OEM demand signals are strong. We also remain very well positioned in our aerospace business and the recently announced 9% increase in the fiscal year ’23 defense budget should provide an additional tailwind for our U.S. defense market, which is anchored by our premium TPPL and lithium technology. Moving on to some updates in our production capacity and operational efficiencies. The operations team continues to be confronted by a mix of headwinds, including ongoing inflation and productivity challenges. Utility inflation in EMEA and increased COVID cases in China have also presented some challenges, while we work with ongoing instability in our supply chain and elevated costs in the business.

Putting the EMEA utility inflation into perspective, we anticipate our fiscal year ’23 energy costs in EMEA will be 150% higher versus fiscal year ’21, and for the first time in our history, is expected to exceed the annual cost of our direct labor force. On the positive front, we are seeing utility costs coming down from the peak in August, signs of cost stabilization and freight rates coming down, chip allocations improving with certain suppliers and better availability of raw materials, all of which begin to generate benefits in future quarters. Collaboration across operations, sales, finance and IT remained strong, with efficiency and capacity improvements in Missouri the top priority heading into the end of the fiscal year. Our two new lithium-ion module assembly lines are running as planned and the Ooltewah transition to Richmond is already paying dividends through greater operational efficiencies.

We exited Q3 ’23 stronger than last quarter although there remain significant opportunities to reach our full potential. Please turn to Slide 8. As one of the world’s largest energy storage companies, corporate responsibility is a key area of focus for EnerSys. We had several ESG announcements in the quarter, including the appointment of Ms. Tammi Morytko to our Board of Directors. Tammi is the President of the Pumps Division at Flowserve Corporation, where she has established a reputation in the industry as an enterprise operating leader and a supply chain subject matter expert. Tammi’s decades of experience with global industrial manufacturing operations will provide excellent support for the EnerSys’ leadership team and our strategic objectives.

Please turn to Slide 9. In closing, we are increasingly optimistic that our strong Q3 ’23 results reflect the continued progression toward achieving our long-term financial and operational goals. While we are not out of the woods yet with inflation and supply chain unpredictability and there remains considerable uncertainty in global markets, demand remains strong with secular trends in our end markets that, along with a strong balance sheet and superior products and services, provides us a buffer from the impact of a potential economic pullback. 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, which provides us near- and long-term growth opportunities that are starting to materialize 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, such as broadband expansion through the Rural Digital Opportunity Fund. We are still waiting for clarification on the Inflation Reduction Act, but we are cautiously optimistic that a substantial amount of our batteries could qualify for the Section 45X tax benefit, which would provide meaningful upside to our profitability. I look forward to ongoing progress during the remainder of this year and in fiscal 2024 as the true potential of our business that continues to present itself. I want to thank our employees for their dedication and hard work, consistently capitalizing on opportunities and confronting a myriad of challenges head on.

We, as a unified team with a common goal, have positioned EnerSys for long-term success, and look forward to updating our shareholders on that success in the quarters and years ahead. With that, I’ll now ask Andi to provide further information on our third quarter results and go-forward guidance.

Andrea Funk: 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 third quarter 2023 10-Q, press release and 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 third quarter fiscal ’23 net sales increased 9% over the prior year to a record $920 million, even after absorbing roughly $35 million of foreign exchange offsets. This record was achieved through 5% organic volume growth and 8% price/mix improvement, partially offset by the 4% decrease from foreign currency translation just mentioned. Adjusted operating earnings were also a record for the company at $85 million in the third quarter, up 41% from Q3 ’22 and 30% higher than Q2.

Foreign exchange negatively impacted our year-on-year and sequential comparisons by approximately $6 million and $2 million respectively. In constant currency, Q3 ’23 adjusted OE improved nearly 50% versus the third quarter of the prior year. Adjusted EBITDA for the third quarter was $98 million and 10.7% of net sales, compared to $79 million and 9.4% of net sales in the prior year third quarter. FX pressured the year-on-year comparison by approximately $7 million. Please recall that our margins are artificially deflated from the margin math impact of the unprecedented significant cost pass-through that Dave mentioned. A reconciliation of net earnings to adjusted EBITDA is presented in the appendix of our slides for your reference. Our adjusted EPS was $1.27 in the third quarter of fiscal ’23, up 26% from $1.01 in Q3 ’22 and up 14% from the $1.11 in the second quarter.

It is worth highlighting the significant headwinds we are facing from foreign exchange and interest rates. Excluding the impact of FX and interest, our Q3 ’23 adjusted EPS increased nearly 60% versus prior year. I will present a reconciliation of the third quarter sequential and year-on-year EPS shortly. Please turn to Slide 12. On a segment basis, compared to the prior year, all lines of business posted strong revenue growth, driven by substantial price/mix improvements, which were partially offset by foreign exchange headwinds. The favorable impact of price/mix improvements on adjusted operating earnings more than offset the higher costs and $6 million of unfavorable FX year-on-year. As Dave mentioned, Energy Systems delivered significant improvement to adjusted operating earnings as a result of impressive price/mix cost recapture taking hold for the second consecutive quarter, with nearly 170% adjusted OE improvement versus prior year and over 60% improvement sequentially.

We are pleased with the recapture momentum in Energy Systems is becoming increasingly evident on our bottom-line as it had been slower to manifest versus our other segments due to the contractual nature and historically Asian-based supply chains inherent in this business. On another positive note, Motive Power adjusted operating earnings improved approximately 20% over both prior year and prior quarter, driven by mix improvements in maintenance-free sales, as well as positive price/cost recapture. And finally, AOE in our Specialty segment, while muted due to constraints in our Missouri plants, was still up over 20% sequentially and nearly in line with the prior year. Accomplishments across all of our lines of business coupled with healthy market dynamics resulted in solid improvement in our quarterly adjusted OE results and increasing momentum going forward.

More detailed sequential and geographic results can be found in our press release and in the supplemental slides. Please turn to Slide 13. On a sequential basis, in the third quarter of fiscal ’23, we realized $32 million or $0.65 per share of improvements in price/mix, adding on to an exceptional Q2 with nearly $30 million of sequential price/mix improvement as well. Q3 ’23 sequential price/mix improvement more than offset the $12 million or $0.25 per share of volume adjusted incremental costs incurred during the quarter. While we are still incurring significant cost increases, Q3’s $0.40 per share of price/mix cost recapture is our second consecutive quarter of significant improvement, further closing the gap on the unprecedented cost increases we have endured over the past two years.

Cost increases in the third quarter were driven by continued inflation, including commodity and energy rates, particularly in Europe, as well as productivity challenges in our Missouri plants. While we are beginning to see costs stabilize, it is important to remember that there is a delay in realizing product costs in our P&L until the related inventory is sold. Fortunately, this accounting treatment, coupled with lagging price/cost adjustments, should provide very nice margin tailwinds if and when inflation turns to deflation and costs normalize. We are cautiously optimistic that inflation is near an inflection point. After six consecutive quarters of gross margin erosion from steeply escalating costs, we have now seen two consecutive quarters of solid improvement.

Our adjusted gross margin expanded 130 bps in Q3 ’23 after a similar increase the quarter before, posting a total of 250 basis point improvement over the first quarter of fiscal ’23 despite the margin math impact from higher cost pass-through. Going forward, price/mix gains should continue to surpass cost increases due to ongoing price/cost pass-through, mix improvement from supply chain loosening, especially for our higher margin electronics products, and the margin benefit of maintenance-free conversions, as well as savings realization from our EOS accomplishments, such as cost reductions from footprint rationalization, all of which should drop to the bottom-line. Please turn to Slide 14. Looking at our quarterly sequential adjusted EPS bridge, Q3 ’23 adjusted EPS came in $0.02 higher than the midpoint of our guidance at $1.27 per diluted share.

Our sequential results were driven by the impressive $0.40 per share of net price/mix/cost impact previously discussed, which was partially diluted by the substantial $0.25 per share of net pressure from foreign exchange and higher interest expense from rate increases. The FX headwinds were primarily a result of the weak euro throughout the quarter negatively impacting transactional FX and AOE, as well as the revaluation impact in other income and expense when the euro strengthened at the end of the quarter. Year-over-year, Q3 ’23 adjusted EPS has approximately $0.35 per share of drag in the quarter from FX and interest expense headwinds. Please turn to Slide 15. Our balance sheet remains very healthy with improved liquidity, positioning us even better to navigate both the current economic environment and the potential downturn.

In Q3, we had $188 million of positive free cash flow with our net bank leverage improving to 2.3 times EBITDA at the end of Q3 ’23 from 2.9 times at Q2 ’23. This was driven by strong earnings improvement and reductions in working capital investment due primarily to the initiation of a $150 million asset securitization program in December. In addition to reducing bank leverage by 0.4 times EBITDA, this program will reduce interest expense by approximately $1.4 million per year beginning in Q4 ’23. In constant currency, our inventory was flat despite investments to support Q4 volumes and maintained strategic inventory levels to mitigate ongoing unpredictability in supply chains. At the end of Q3 ’23, we had approximately $300 million of cash on hand.

After a period of investing in working and increasing inventory to create targeted buffers and absorb the impact of longer lead times and higher costs, we are now focused on reducing inventory were prudent. Excluding the impact of our $150 million asset securitization program, we believe the leveling off of our primary operating capital levels in Q3 ’23 represents an inflection point in which further efficiencies should positively impact cash by the end of fiscal ’23, with significant cash generation opportunities when supply chain volatility and costs begin returning to pre-pandemic levels. That said, we are fortunate that we are able and will continue to prioritize minimizing risk to our business and customers with investments in strategic inventory when necessary.

Capital expenditures were roughly $18 million in Q3 ’23 and $58 million year-to-date. We remain confident in our multi-year plan TPPL capacity targets, building off our capacity expansion success in fiscal ’22. Our prudent capital allocation strategy remains unchanged. Considering higher interest rates, the new 1% tax on buybacks already in effect and global economic uncertainty, we have tightened our target to remain below the midpoint of our 2 times to 3 times EBITDA bank leverage for the remainder of fiscal year ’23. In Q3 ’23, we did not repurchase any shares and currently have $185 million authorized in our share buyback program. Please turn to Slide 16. Our business remains well positioned as demand for our products continues to be robust, supported by mega trends providing ongoing tailwinds for the business.

Given prevailing economic predictions and some slowdown in other industries outside of ours, we remain vigilant and are making conservative capital allocation decisions. As a reminder, we have a strong balance sheet and a number of structural advantages that have mitigated the financial impact to us in past economic downturns and which position us even better at this time. The diversity of our revenue model includes large portions of our business that are cycle independent and we have enjoyed significant cash flow generation during past recessionary periods. While I don’t intend to review it again on this call, our recession playbook remains intact, and is included in the appendix of our slides. For the fourth quarter of fiscal ’23, our adjusted diluted EPS guidance range is $1.33 to $1.43, which at the midpoint is up 9% from the $1.27 per share we just reported.

Year-on-year, our midpoint adjusted EPS guide reflects a 15% improvement over the $1.20 per share we reported in Q4 ’22. However, while our year-on-year improvement is commendable, it significantly understates the impressive operational improvement of our business, as our guidance reflects our expectation of continued sequential volume and net price/mix/cost gains, but our strong financial performance will again be muted by FX and interest rate headwinds similar to what we saw in Q3 ’23. We expect our gross margin to be in the range of 22% to 24%, and we are refining our CapEx expectation for the full fiscal year ’23 to approximately $90 million, reflecting investments in new products, including lithium production lines, continued expansion of our TPPL capacity and cost improvement in automation initiatives.

We look forward to updating you on our continued progress and providing an overview of our refreshed strategic plan at our Investor Day on June 15 in New York City. This concludes our prepared remarks. Operator, you may now open the call for questions.

Operator: Our first question or comment comes from the line of Noah Kaye from Oppenheimer Corporation. Mr. Kaye, your line is open.

Noah Kaye: Good morning. Thanks so much for taking the questions. I’d love to just start with order rates and lead times within Energy Systems. Can you comment on the characterization of the orders you’re seeing coming in? Are we kind of passed double ordering or longer lead times? And just with the supply chain starting to loosen, how are product lead times trending now?

David Shaffer: Yes, I would say that there is — and good morning, Noah. I would say there is definitely a normalization of buying behavior. I think there’s a little bit less pre ordering. I don’t know that people were double ordering per se, but they were ordering very early whenever they had any visibility for a project. And of course, just like us, it puts pressure on your balance sheet, these inventory balances. And so, there just seems to be a general getting back to normal. As you know, we’re coming off some tough comps. We had some big wins like the CPUC project. But I would say even relative to historical norms, I’m very pleased with our order rates. Our book-to-bill in January was 1.2 in ES. So, still very strong — just this January, which we just closed.

So, in general, I think Drew feels really good about the business. And then, in the other parts of the business, we reference Europe. I would say, we’ve looked at kind of Europe’s on the Motive Power side is the other area where orders maybe are a little bit soft. I’d say revenue is actually dead flat. But we do have some price increases in there. So, from a volume standpoint, I would say, it is a little bit soft. But in general, we feel pretty good about the overall demand for all the businesses.

Andrea Funk: One other comment, Noah — and good morning. It’s good to talk to you. One other comment I think that’s worth noting in our slide deck you can see, our quarterly backlog coverage historically was a little under 1. Q3 ’21, it was 0.8. Our backlog coverage is still at 1.4. And Motive Power was 0.5, now it’s 1.1. Energy Systems was 0.7, now it’s 1.6. So, we really do still have a lot of ground to cover.

David Shaffer: Yes. But I think Noah’s question is right. I think the things are getting a little back, more normal in terms of lead times and expectations.

Noah Kaye: That’s very helpful. Thanks. And then, you mentioned commodities a couple of times in the prepared remarks, and then we can see what’s happening with lead prices. And I think we understand there’s some lag on commodities because of FIFO accounting. But just high level, what are your expectations in terms of how commodities impact margin profile going forward? Maybe you could mention that in terms of what contemplated in the 4Q guide and then, as we look out maybe a quarter or two?

David Shaffer: Right. Well, commodities have come — the commodities that are important to us, lead being one of them obviously, with steel, copper, the ones that are important to us, most of them have come off some pretty significant highs. I think the — so the go-forward and it should — and I think Andi touched on this in her prepared remarks, the go-forward should continue to help us as we run more of these inventories at the higher cost through the P&L and off the balance sheet. And in general, as I said in my remarks, the one thing we’ve got our eye on, obviously, is China kind of reawakening and what impact that could have on commodities, coming out of the COVID shutdown. That’s certainly something we have our eye on.

What we continue to do is focus on recovering those through our pricing actions, wherever it — and unfortunately, I know it’s frustrating for all of us that it just doesn’t happen overnight. But I think we are starting to demonstrate our ability to recover those commodity impacts, freight impacts, inflationary impacts with our pricing mechanisms. So, yes, I’d say the general outlook is things are better. We’re looking for some stability. We’ve got our eye on commodities with China, kind of coming back after the shutdowns. But in general, I think there’s some tailwind there.

Noah Kaye: It seems like you’re in a trajectory where you’ve (ph) positively on net recapture and that’s going to continue in the quarters ahead, is that a fair assumption?

David Shaffer: Yes, we’re really focused and I’m proud of my sales people. I think it took us a little while, so — to get where we needed to be. But I think there’s a clear acceptance that the inflationary pressures belong to the salespeople. They own them, and whether it’s wage inflation or commodity inflation, as we just discussed, they need to offset these with pricing actions. And it’s just — we’re just trying to stay level from a dollar standpoint and we’ve talked about that it’s dilutive obviously on margin math. But we fought like tigers to just protect our margins. And I’m very proud of the teams. And those — we’ve got different pricing strategies for different markets, whether it’s surcharges for energy in Europe, whether it’s list price changes, whether it’s gains of high stakes chicken with certain big OEM customers, we’ve had to run the full gamut, the full playbook over the last few quarters, but you can see some of that starting to catch up.

Noah Kaye: Yes, very helpful. I’ll take the rest of my questions offline.

David Shaffer: Thank you.

Operator: Thank you. Our next question or comment comes from the line of Greg Wasikowski from Weber Research. Standby. Mr. Wesikoski, your line is now open.

Greg Wasikowski: Hey, good morning, Dave and Andi. Thanks for taking the questions. I’ll stay with the backlog. I was just curious, can you talk about how you view kind of moving through that backlog? I mean, usually growing the backlog is unanimously a good thing, but at a certain point you want to be able to kind of convert it to sales and then reduction also becomes a good thing in its own special way. So, just curious, how are you guys thinking about that moving through the year? Where — quantitatively, where could maybe be a happy place to settle for the backlog? And talk us through your thoughts like are you happy when you see backlog go down because you’re converting it? Are you happy to see it go up because you’re getting new orders? Just how are you thinking about that for this year?

David Shaffer: It’s a great question. And I’m happy when the customers are happy usually. And I don’t think our customers have been really happy with us because of our supply chain delays. And that’s been such a struggle for us. So, certainly, we want to reach some stability. What I always do is I always go back to sort of pre-COVID to see what the normal order rates were, what were the long-term trajectories, what did we have as CAGRs in our five-year model, and compare the order rates against that and try to isolate all these buying behaviors that Noah talked about some of these the hoarding, some of the advanced ordering, trying to isolate that. So, to your point, for us, I definitely want to see our contract manufacturing partners, our chip suppliers pick up the pace.

We had a very reshoring. We are way behind the original schedules we had laid out to bring contract manufacturing out of the Chinese tariff zone. We’re very late on that. We’re really frustrated, but that’s gotten better. We’ve had to redesign everything. We’re really now at the point where one of the chipsets that we’re still struggling to this day to get, we’re really trying to move all of our customers off of that product range. So, there’s so many moving pieces to your question. I don’t really have a good number for you. I do — the electronics and chip allocations is improving. So, we should see as we go in the F ’24 better tariff performance, because we’re going to be doing more onshore. We should be seeing a little bit shorter lead times, which again can impact the backlog, to your question, is a lot of our customers just say no.

With some of the struggles we’ve had on lead times, they’ve been ordering early. I think, when they get more consistent that we can deliver in an eight, ten-week kind of period consistently, they probably won’t order as often. So, I will kind of be happy as long as we stay at those long-term CAGRs that we laid out in our five-year model, stay above the sort of order rates, and really want to get this — we still have a lot of electronics trapped in the backlog and that tends to be accretive to the mix. So, I know that’s a long-winded answer to a very important question. But like I said, January orders were good. I think we’ll see how they go for the rest of the quarter. There’s some seasonality to this as well that we can’t ignore. But — between the RDOF projects, finishing up the CPUC project, the 5G small cell, there’s plenty of opportunities for us in this business.

Greg Wasikowski: Yes, got it. Thanks, Dave. That’s helpful color. Next one, two-parter here on capital deployment. So, first part, just on the CapEx guidance going down a bit, I mean, nothing major, but can you maybe speak to that? And what you’re expecting for the year forward just in terms of investing in growth versus being disciplined on CapEx side, and how you’re thinking about that? And then, second part is that kind of leading into M&A. Obviously, focus is on reducing that net leverage number, but it’s been a while since we’ve seen some M&A. So, just gauging your appetite there, what kinds of things you guys could be looking at or focusing on in terms of application or geography, et cetera?

David Shaffer: Yes, I’ll start on the CapEx and then Andi can talk about the rest of the cap structure. But on the CapEx, we’re a little disappointed that we’re not getting it spent fast enough on some of these big projects, some of these big productivity improvement projects, expansion projects, just because equipment lead times have been insane. Things that we’re supposed to take six months to build and ship from the equipment suppliers are taking two years. So, some of that is just frustration on our part that these equipment guys, they can’t get — it’s not their fault. They can’t get the PLCs and other issues. That’s starting to unwind a little bit, which is helpful. So, hopefully, we’re going to see some CapEx pick up.

But we’ve been pretty rigorous about that. But typically, with CapEx with us, it’s a question how much we can digest as opposed to how much we have available. And then, regarding the other uses of cash, certainly, I’ll start with M&A. We always have our eyes open. We have the bankers in here, pitching ideas regularly. And you’re right, when the leverage is closer to 3, your appetite is probably a little less, but things — as the look forward as things start to improve. Obviously, the high cost of debt — higher cost of debt has — paying down some debt has some intrinsic value as well. So, there’s lots of lots of things for Andi to juggle. But Andi, how are you looking at it?

Andrea Funk: Yes, I mean I think one of the things we’ve — first of all, the CapEx on your first question, Greg, I think that’s just timing. As Dave mentioned, that wasn’t any kind of strategic pullback or anything. As far as capital allocation, we’re very fortunate that we’ve got a business that kicks off a lot of cash. And that said, given the current market conditions, interest rates being higher, uncertainty, we are taking a little bit more conservative view on targeting leverage more in the lower end of our 2 to 3 times EBITDA that will save a little more in interest expense. You’ve got the stock buyback, 1% tax that’s already in effect. So, we’re — and we want to have a little bit more dry powder. With that said, our business continues to kick off a lot of cash, so no change first to invest internally.

As — if there is a slowdown, PwC should kick off a lot of cash. We’re still being intentional about making sure that we’ve got buffers for customers. But if things move and there’s deflation, that’ll certainly turn into a lot of cash. And acquisitions were always just up opportunistic. I don’t think we have any real change in strategy there. Nothing to announce at this time. Does that answer your question?

Greg Wasikowski: Yes, it’s perfect.

Andrea Funk: One thing, Greg, I think might be worth mentioning as well, we’ve talked about just a significant impact of FX and interest. I mean year-on-year, it might be an impact as much as close to $1.00 a share of the change. So, it’s been significant. I think one thing I’m really proud of our team here is while there’s a lot that’s outside of our control, we’re not being victims in this. So, there’s a lot we’re doing to try to mitigate. As you recall, we entered into $300 million FX swap that was saving $4 million of annual interest expense. We terminated that, received proceeds, paid down a revolver, that was $2 million of interest expense savings. Then we re-entered into another $150 million swap, that saving is about $3 million.

We repatriated (ph) from EMEA to pay down a revolver. That will save us about $9 million of interest. And we had to do a lot of — we got cash out of China. We had about $100 million of cash. We took almost half of that out trying to work closely with tax on making sure we can minimize any impact of doing some of that repatriation. We mentioned the change in kind of our capital allocation strategy. We’re getting out of pension plan that we had that taking advantage of where FX and interest rates are at right now to buy out one from $20 million to $4 million, so we initiated that. So, there’s a lot that we’re doing. We’ve got some FX hedges that we put in place. It is a lot of headwinds, but I think we’re not — the asset securitizations that we mentioned will save us significant amount of interest, but burns down on the — on our grid on our pricing structure and also gives us a little more dry powder.

So, there’s definitely significant headwinds, but our team is doing a lot to mitigate it where possible.

Greg Wasikowski: Yes, great, and very helpful. I’ll turn it over. Thanks, guys.

Operator: Thank you very much. Our next question or comment comes from the line of Brian Drab from William Blair. Mr. Drab, your line is now open.

Brian Drab: Hi, good morning. Thanks for taking my question.

David Shaffer: Hi, Brian.

Andrea Funk: Hi, Brian.

Brian Drab: Hi. So, I’d like to focus on the fork truck market for a minute. Can you update us on what percentage of the overall business or what percentage of Motive is related to fork truck? And then, this is the area of the business that I think people are — if there are concerns, maybe there are — they are around the outlook for fork trucks given the macro. And the latest data — I guess, we don’t have the fourth quarter reports from some of the fork truck guys, but latest data is declining orders there. And I’m just wondering if you could give us any insight into like what kind of conversations you’re having with the fork truck manufacturers? And if you have the (ph) data at your fingertips, that would be really interesting to see what the latest trends are in electric fork trucks?

David Shaffer: Yes, I don’t have the WITS data, I apologize. That’s my fault. But in terms of what we’re hearing from the customers and conversations we’re having, in Europe, what we talk a lot about still are supply chain constraints at our customers. So, they — that’s really the prevailing narrative. And so, really, it’s a question of how much they’re forecasting then. We haven’t had a lot of beyond the Russia, Ukraine markets. We haven’t had a lot of narrative about the — oh thanks, Andi. Appreciate that. The WITS is delayed six months. So, the stuff we have is not very fresh, but I do have some WITS data here. But in terms of the narrative we get from them, it’s still mostly about their frustrations of getting enough parts, whether it’s steering mechanisms or whatever the issues they’re having.

It’s different for each of them. So that’s the dominant narrative. And then the U.S. markets, I think the supply chain narratives are there as well. But there seems to be a little bit more. They don’t have the high energy overhang like we do in Europe. So, there just seems to be a little bit more buoyancy in the U.S. We just went through the budgeting process with the Board last week and Shawn gave a cautiously optimistic outlook with the go-forward. And if you know Shawn, you would know that he’s not going to get too far over a skis. So, the — we end that business we — I feel a little bit better if things do turn down with the Ooltewah move, the Hagen move, we’ll be in definitely a better — from a fixed cost absorption standpoint, we’ll be in a much better place than we were in prior slowdowns.

But that’s just — it’s really mostly still about all of these chronic nagging supply chain issues that are driving most of the narrative.

Brian Drab: Okay.

David Shaffer: And in terms of WITS statistic, so I don’t read the wrong column or anything. I’m going to have Lisa just send you whatever information you want.

Brian Drab: Thanks. Dave, what — within Motive, how much does fork truck account for that…

David Shaffer: That’s dominant, the dominant. I mean there’s floor scrubbers and a little bit of rail and stuff. But you could say 80% plus is related a fork lifts.

Brian Drab: Yes. So, that hasn’t evolved dramatically there in terms of that percentage. Okay. And then, I’ll just ask one other question maybe for now. The opportunity with the — for 5G and small cells for EnerSys, we’ve been talking about it for, I guess, four, almost five years now. And I know the way that, that — the 5G has evolved hasn’t been as favorable as you initially expected. But today on the call, I think you said something about tens of thousands of 5G cells. I think we’re — are you still hoping that your — the opportunity is 1 million plus or is this — how has that changed and how are you looking at the timing of when that impacts EnerSys?

David Shaffer: All right. Well, the tens of thousands was specifically for some of the DOCSIS modem-enabled strand mounted. So that’s kind of part of our product portfolio. So, when the cable companies are building their own networks out, they like to use the strand for the backhaul and the powering. So that piece is going well and has accelerated. And then, what we did — so that’s just part of it. And then, the bigger, obviously, is the big wireless companies like T-Mo, and Verizon and AT&T, and what their strategies are. It’s interesting timing. We had a guest speaker at the Board meeting last week and he is kind of one of the leading industry experts in this small cell area. And so, we took the Board through a deep dive.

And the key topic was the timing and why are things off of where we had originally predicted, especially as we did the Alpha acquisition. It was certainly a key part of our deal logic was small cell powering. Because as you probably remember, 5G spending is a good thing for EnerSys. So, whether it’s the central offices, whether it’s the big cell towers, we have content throughout the network. We just have — we were excited about small cell just because we think we’ve got a very interesting product portfolio there. And we have a chance to command more market share in the small cell arena. So that — and then as we’ve noted, in the past, it literally takes 1 million plus small cells to match the coverage and the speed. I don’t think any of us are satisfied yet with 5G.

In terms of the incremental speed and benefit of 5G versus LTE, I don’t think many people are satisfied. And so that real change in performance will be when they can start to build out these small cell, these densification initiatives and use the higher frequencies. And it’s been a technical challenge and we had a deep dive with the expert. Lot of the issues were COVID related last week. So, we went through this. And we have Caroline Chan on our Board from Intel and she’s really one of the thought leaders in this space. And she knew this consultant pretty well. And there was just — I don’t think there was anybody that’s on our Board or in our management team that’s happy with these delays. But in the meantime, we haven’t stopped on the product portfolio and we’re getting really close on some UL approvals that will be critical in this space.

So, in a sense, it’s given us some time to do some things that we may not have had time to do. So — but there’s still a tremendous upside expected at least from this industry consultant on 5G spending. And what he essentially showed us was a chart where things slid over three years to the right. I mean, it was literally three years where everything has just been in the stasis on these small cell builds, but it’s getting better.

Andrea Funk: The only other comment that I would just add because, as Dave mentioned, we have some really great proprietary products that solve customers’ problems, high electronics content. These are our higher margin products for the business as well.

David Shaffer: Yes. The mix here is favorable. And then, the other thing as we noted is we think we’ve got some unique value propositions and that should help as well. But again, I share everybody’s frustration with this, but it’s not us. And it’s nothing that the team has done wrong. It’s just really the focus of the big telcos has been on building those macro cell sites up. And that’s helped us. Don’t get me wrong. We’ve got a lot of those orders as well.

Brian Drab: Yes. Okay. Thanks for going through that. That’s very helpful. Thanks.

Operator: Thank you. Our next question or comment comes from the line of Tyler DiMatteo from BTIG. Mr. DiMatteo, your line is open.

Tyler DiMatteo: Hi, everyone. Thanks for taking the question here. Dave, can we go back to the TPPL capacity constraints, especially — just wanted to get a better sense of that Missouri plan and kind of how you’re thinking about it. And just any other color there, we’ll really appreciate that.

David Shaffer: Sure, Tyler. Thanks for the question. I would say at the highest level, we are hanging in with our demand and TPPL growth. But it has been painfully expensive to do it so far. So, we have generated a tremendous amount of manufacturing variances on the way there. And some of that is not in our control per se. Like for example, the wage pressures. And I think the sales guys, like I mentioned earlier, have owned that portion of the manufacturing variances. But the other part of the manufacturing variances, equipment delays from suppliers has been a huge issue, absenteeism, training, just the tenure. We’re trying to hire a lot of people in a job market that’s really tight in an area of the country with especially low unemployment.

So, we’ve just done every trick in the book that we can think of to get the folks to come to the factory. We had a little bit of COVID scare that hurt us a little bit on some of the tenants issues. So, as I noted, the quarter started off really rough. And then, I would say, Andi, for Mark’s group, the Specialty group, we probably left $15 million of revenue on the dock in a sense. That’s about the right number, right Andi?

Andrea Funk: Yes, that’s correct, Dave.

David Shaffer: That’s about the right number. So, we — December was pretty good. And January is really good. And so, we just have to keep these — but we got ourselves into a pretty deep hole. And a lot of this, Tyler, has just — it’s a new team that’s there, and we just need to get it stabilized. And every day we just need to make some improvement. So, I think we’re going to — between the CapEx investments between the demand, bringing on new customers and demand, we’re still very confident that we can achieve what we’ve laid out historically as part of our long-term growth initiatives. What I need the team to do is get there without so much pain and it’s literally, Andi, that — (ph) the inflationary stuff, it’s still tens of millions of dollars of productivity scrap related things that as we’ve ramped up this factory that we’ve left on the table.

Andrea Funk: Yes. If we look at think the comment that we’ve made in the past, Tyler, that might be helpful, and this is just pure data. If we compare our Arras plant, which is our most highly-performing thin plate pure lead plant to our Missouri plant, we’ve called out we probably have $40 million of delta between performance, scrap, productivity, efficiency. Now that takes a longer time. You’ve got some of it as CapEx investment. You have to train people. So, it’s a multiyear project. But I would say we run the Arras plant and we know how to do it. So, it’s not an engineered number…

David Shaffer: It’s same managers. It’s same engineers. It’s same equipment. Now, one of the big gaps is the Arras factory is farther along on automation. And we have struggled. In defense of my team, we have struggled with these equipment suppliers. We’ve ordered equipment years ago that’s still just now getting commissioned. So, it’s been — we have not escaped COVID pressures, hiring pressures, labor pressures, where — and I would say, for EnerSys as a company, our Missouri factories are right at the epicenter of those challenges. But every day is getting better. One of the metrics we use in HR reports on is just that the average tenure of our folks and 90 days seems to be a magic number, and we definitely have a lot more folks now that have at least 90 days tenure with the factory.

So, we just — we’ve got a lot of work to do, but I think the general question in terms of our CapEx deployment and generating enough demand to continue the growth in TPPL, I think we’re — everything’s full steam ahead in that area.

Tyler DiMatteo: Okay, great. Thank you. I know we’re out of time here. I’ll take the rest of my questions offline. Thanks for the time.

Andrea Funk: Great. Thanks.

David Shaffer: Thank you.

Operator: Thank you. I’m showing no additional questions in the queue at this time. I’d like to turn the conference back over to Mr. Shaffer for any closing remarks.

David Shaffer: Well, I just want to thank everyone for joining us today and we look forward to providing further updates on our progress on our fourth quarter fiscal year-end call 2023, that’s in May. So, have a good day everyone.

Andrea Funk: Thank you.

Operator: Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.