EnerSys (ENS) Q4 2022 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to the Q4 2022 EnerSys Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advise that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker, Lisa Hartman, Vice President, Investor Relations. Please go ahead.

Thank you. Good morning, everyone. Thank you for joining us today to discuss EnerSys fourth quarter and full year fiscal 2022 results. On the call with me this morning 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 fourth quarter and fiscal year 2022 results and filed our 10-K 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 Presentation's page within the Investor Relations section 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 made as of today even if this presentation is replayed at a different time. 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 difference between the GAAP and the non-GAAP financial metrics, please see our company’s Form 8-K, which includes our press release dated May 25, 2022. Now, I will turn call over to EnerSys' President and CEO, Dave Shaffer.

Thanks Lisa. Please turn to slide four. The March quarter marked a strong finish to a challenging year. Demand across all segments continued to surge with fourth quarter net sales of $907 million, an increase of more than 11% over Q4, 2021, surpassing $900 million for the first time in the company's history. As orders eclipsed sales by 17% in Q4, 2022, our backlog increased sequentially by $150 million to $1.3 billion, breaking new records for the third consecutive quarter. Our backlog is healthy with over half of our total backlog attributable to longer term projects related to 5G deployments, California Public Utility Commission mandates and defense. Our customers understand the supply environment we are facing, and we remain confident in our ability to deliver the industry-leading products they need. We continue to monitor the risk of an economic slowdown and the quality of our backlog insulates us to a certain extent as telecom, broadband and defense markets tend to follow their own cycles independent of GDP. For example, in fiscal year 2021, when COVID caused a significant economic downturn Motive Power revenues decreased 14%, but A&D only decreased 5% largely due to government shutdowns, and Energy Systems actually increased 2%. These dynamics, although not identical, were similar to what occurred in 2008 financial crisis. Further, while Motive Power revenues track closer to GDP, history has told us that a decline in lead prices and other commodity costs is also likely during recession, which provides both the release of working capital from the balance sheet, as well as tailwinds from input costs. The inverse is what we are experiencing FY 2022 with significant inflation and recapture lags. The price recapture lag has been our focus in fiscal year 2022 and will continue to be in 2023. Our pricing actions in the fourth quarter gained additional traction against the significant cost increases contributing to a 19% sequential increase in adjusted diluted EPS to $1.20 per share despite continuing supply chain headwinds, labor shortages, and historic inflation levels. While pricing has not yet fully caught up with the persisting inflation, we experienced this fiscal year. We are pleased with the trajectory our teams are making to realize our underlying financial potential in quarters to come. We continue to focus on the elements of the business within our control. Looking forward, we are confident in our strategy and excited about our opportunities ahead, as our proprietary technologies provide unique value propositions for our customers, that position us well to benefit from the growing mega trends, fueling the markets we serve. I'll now walk through our business segment highlights. Please turn to slide five. Energy Systems strong revenue momentum in fiscal year 2022 continued in the fourth quarter, with an increase of 18% versus Q4 2021, bringing the full year revenue growth to 11% over prior year. While adjusted operating margins were lower in fiscal year 2022 versus 2021, as Andi will review with you later, Energy Systems fourth quarter margins improved for the second quarter in a row as our significant pricing actions are beginning to catch up on the substantial cost increases we experienced throughout the year. Q4, 2022 order rates increase 20% compared to Q4, 2021. And our backlog in the segment grew by more than $100 million in the fourth quarter alone. The robust market conditions are attributable to significant infrastructure spending, network upgrades and resiliency CapEx. While lithium is gaining momentum, all participants are finding sourcing challenges, which has provided some increased TPPL opportunities and data center markets as we leverage our strategic advantage of offering multiple technology options to our customers. The 5G communications build out continues to have an incremental, extended and mounting tailwind as customer CapEx spending has been reprioritized from small cell tower buildouts to expanding mid-band's capabilities. While we play in all aspects of the 5G spectrum, we have unique position in the small cell powering due to our technological advantages. Small cell buildouts are now expected to ramp in the 2023, 2024 accelerating into 2025 and 2026. We are seeing ongoing progress with the California Public Utility Commissions grid shutdown and extended network backup mandate, booking nearly 140 million in related orders in fiscal year 2022 and already beginning some deliveries. We expect our net sales to ramp up in fiscal Q3 2023 and accelerate in Q4 and beyond. We have also seen an acceleration in our Rural Digital Opportunity Fund, or RDOF, projects with orders being received on a regular basis, which we expect to continue as significant funding becomes available over the upcoming years. In addition, our Fast Charge & Storage initiative has seen further momentum in both software development and customer specification design. Despite the strong product demand trends, EnerSys continues to face significant supply chain and cost headwinds, which have been exacerbated by the much publicized shortage of microchips as well as recent geopolitical tensions. Our team continues to mitigate cost escalations with additional price increases. Our engineering and operations have been working closely to overcome shortages through product redesign and onshoring of contract manufacturing. As we navigate through the current cost and supply chain environment, and these pressures begin to subside, we expect continued robust demand for Energy Systems products to drive durable long-term growth. As a reminder, pricing catch up in this business segment was delayed compared to our other segments due to contractual limitations and customer concentricity. However, we have made incremental progress with price outpacing costs for the second quarter in a row. Motive Power delivered solid revenue growth, up 17% for fiscal year 2022 versus fiscal year 2021, and has been able to offset significant cost increases with ongoing pricing actions in the favorable mix impact of our higher margin maintenance free sales. Our results reflect the continued customer enthusiasm of our prior or -- proprietary NexSys TPPL and lithium-ion maintenance free product offerings. We achieved a key milestone in the fourth quarter with a launch in UL safety listings of our high performance NexSys lithium-ion batteries, which feature an integrated battery management system that performs auto diagnosis, voltage limitation, and communication and performance data. We are proud to be the first energy storage solution provider to bring this level of compliance standard to the material handling industry. Overall, market dynamics point to a strong and steady growth for Motive Power with benefits from the trend automation and electrification material handling equipment, along with the value of our maintenance free technologies and advanced charging solutions expected to have a lasting and positive impact on our growth in years to come. Our Specialty segment's full year revenue increased 6% versus fiscal year 2021, mostly on price. However, this segment's true potential continued to be held back by supply challenges. While we have been able to increase our overall TPPL capacity significantly in line with our strategic plan, our TPPL demand continues to outpace our capacity, forcing us to allocate production between all three lines of business. Due to supply chain issues, we made the strategic decision to allocate more of our capacity to our 5G customers at the expense of our transportation market share growth. Specialty's adjusted operating margins were nearly 10% for fiscal year 2022, despite facing these pressures. As productivity and capacity enhancements take hold in our TPPL factories, more capacity can be allocated to this segment with lowered manufacturing costs. In our transportation business, we continue to increase our share of the Class 8 market with the OEMs, while the OEMs are constrained by supply chain and labor headwinds of their own. Inflation has persisted, which has been able to offset through additional pricing actions. Despite the current environment, the large transportation market is a significant long-term growth opportunity for us, as we focus on taking share with our proprietary TPPL technology. Aerospace and defense also provides significant growth opportunities given the current geopolitical environment. Please turn to slide six. Despite macro headwinds, our global TPPL production outpace -- output pace increased 24% in our fiscal Q4, 2022 compared to our FY 2021 average with each TPPL factory increasing production in the double-digits in the fourth quarter. We achieved our goal of 1.2 billion annual run rate of TPPL capacity in the second half of the fiscal year, and have hit this watermark repeatedly in the third and fourth quarters. Although, cost and supply have been volatile we are in much better position from a production standpoint than we were when the year began with plans in place for continued capacity expansion of $200 million per year for the next five years. As previously mentioned, TPPL capacity is distributed across all three of the lines of business in which demand of our proprietary technology cannot be satisfied. We continue to make strategic investments in our technology and innovation roadmap, partnering with customers to ensure we are delivering the solutions needed for years to come. The new products we are delivering today, combined with our future technologies, are squarely focused on retaining our leadership position and growing share in the markets we serve. Please turn to slide seven. We also made significant progress on our ESG goals in the fiscal year, including several sustainability and environmental updates that culminated in the publication of our first comprehensive sustainability report last month. The report highlights the critical role our power and energy solutions play in building a resilient low-carbon future and how they are key component to decarbonization globally. While our products and services are critical to the energy transition, our role in reducing the impact of our manufacturing and distribution processes is equally important. Our sustainability initiatives push us to be more efficient, develop innovative solutions for our customers and build a stronger, more diverse and engaging workplace for all of our employees. We set meaningful goals to reduce our water and energy intensity and increase the diversity of our leadership team and workforce. We will work toward each of these goals and others to further position us as an environmentally and socially responsible global organization. Please turn to slide eight. As we enter fiscal year 2023, we expect to face ongoing challenges with continued supply chain constraints, inflation exacerbated by the senseless conflict between Russia and Ukraine and the resurgence of COVID shutdowns in China. We remain focused on what we can control. Catching inflation with ongoing price increases, redesigning our products for supply chain components, such as chips and resins, reducing costs through our EnerSys operating systems lean and footprint optimization ongoing efforts, expanding our portfolio with more technologically advanced products, growing profitably through TPPL capacity increases in new product introductions, and finally mitigating risk to supply chain disruptions by contract manufacturing, onshoring efforts, dual sourcing, and strategically building inventory. I am proud of our employee's resilience and proven ability to address these challenges head on. Despite these near-term headwinds, we are optimistic about our ability to persevere and capitalize on the opportunities ahead of us. Our world class technologies and capabilities position us to win in the growing markets we serve. Leveraging our proprietary technologies across all of our energy solutions, we are able to offer our diverse set of customers the best options to meet the needs of their specific use cases. We are confident in our ability to continue to deliver sequential profit improvements once the macro headwind subside and remain on track to realize our strategic plan. We're committed to being a good corporate citizens and delivering long-term valued or shareholders through profitable growth and a disciplined capital application strategy. With that, I'll now ask Andi to provide further information on our fourth quarter and F 2022 results and go-forward guidance.

Thanks Dave. In an effort to leave more time for Q&A, my scripted remarks will be more streamlined than in past periods. I will focus my discussion this morning on the key financial metrics and takeaways. For more detailed information about our results, please refer to our press release on our fourth quarter and full year fiscal 2022 financial results and the supplemental slides, which were posted to our website last night. For those of you following along on our PowerPoint slides, I will begin on slide 10. Our fourth quarter net sales increased in excess of 11% over the prior year to $907 million due to an 8% increase from volume and 6% from improved price net of mix, partially offset by a 2% erosion from foreign exchange. Full year net sales increased 13% over the prior year to $3.4 billion due to a 10% increase from volume and 3% improvement from price net of mix. Adjusted operating income was $67 million in the fourth quarter and $264 million for the full year of fiscal 2022. This represented a sequential improvement of over $6 million in the quarter, as our price recapture has begun to catch up to the unprecedented cost increases we incurred this fiscal year. Also as a reminder, when considering our full year results, in fiscal 2021, we had $12 million of business interruption insurance recovery for the fire in our Richmond manufacturing facility that occurred in fiscal 2020. Excluding that impact, our adjusted operating income eroded $8 million in fiscal 2022 versus fiscal year 2021 due to approximately $50 million of lagging price recapture are nearly $150 million of cost increases this year, the impact of which overshadows the improvement from volume and productivity gains. Please note this quarter, we began reporting EBITDA and adjusted EBITDA. We believe these metrics will be useful for investors when analyzing our core operating performance and cash flows. Adjusted EBITDA for the fourth quarter was $88 million and 9.7% of net sales compared to $97 million and 11.9% of net sales in the prior year fourth quarter. For the full year fiscal 2022, adjusted EBITDA was $340 million and 10.1% of net sales compared to $334 million and 11.2% of net sales in the prior year when you exclude the impact of last year's business interruption insurance recovery. It is worth noting that our margins are artificially deflated from the margin math impact of cost pass-through. A reconciliation of net earnings to adjusted EBITDA is presented in the appendix of our supplemental presentation for your reference. Our adjusted EPS was $1.20 in the fourth quarter of fiscal 2022, up from $1.01 in the third quarter due to the improvements in adjusted operating income previously mentioned as well as FX gains and other income and expense from a weaker euro. Please turn to slide 11. On a segment basis compared to prior year, our fourth quarter net sales in Energy Systems were up 18% to $410 million. Motive Power revenues were up 10% to $365 million and Specialty revenue was essentially flat year-over-year at $132 million. All lines of business posted substantial year-on-year price/mix improvements as our pricing actions are sticking and beginning to catch up to the unprecedented cost increases we have incurred this year. More detailed sequential and geographic results can be found in our press release and in the supplemental slides. Before I continue, I would like to note that in slides 12 through 16, I will present some information relevant to this quarter's results that I don't intend to necessarily include every quarter. Please turn to slide 12. While robust demand remained the most important headline of the quarter, supply chain disruptions and inflationary pressures continue to impact our financial results. On a sequential basis, we incurred approximately $0.35 per share of volume adjusted incremental costs, which were more than offset by almost $0.40 per share of improvement in price and mix. Cost increases in the quarter were driven by both lead and non-lead commodity inflation, as well as higher manufacturing costs from labor challenges, supply disruptions, freight and tariff cost increases and higher utility costs. Energy costs were particularly impacted in our European plants this quarter as a result of the senseless Russia/Ukraine war. This brings our fiscal 2022 volume adjusted cost increases to nearly $3 per share year-over-year, with almost two-thirds having been offset by price/mix improvements, leaving approximately $1 per share not yet recaptured. Lead, non-lead commodities and freight tariff inflation each comprise approximately one-third of the volume adjusted cost increases, with plant labor and utility inflation mounting and offsetting most of the productivity improvements we made during the year. As a reminder, current margin headwinds will become tailwind when supply chain inflation stabilize, our onshoring initiatives take hold and our pricing actions catch up from the multi-quarter lags. Please turn to slide 13. Looking at our quarterly sequential adjusted EPS bridge, Q4 2022 benefited from the net favorable price recapture previously discussed, approximately $0.20 per share of organic volume growth and FX gains and other income and expense from a weaker euro, which were partially offset by higher OpEx, raised our adjusted EPS from $0.19 from $1.01 in Q3 2022 to $1.20 per diluted share in our fourth fiscal quarter. For the full year adjusted EPS, as just reviewed, our net price/mix lag has not yet recaptured approximately $1 of the unprecedented cost increases. Volume growth from robust markets increased our full year adjusted EPS by approximately $1.40 per share. It should be noted that a large portion of our massive backlog growth was due to our suppliers and our customer suppliers' inability to ship. As such, the volume impact could and indeed should have been even greater, but instead will be pushed into upcoming quarters as supply chains normalize. Fiscal year 2022 also did not benefit from the $0.22 per share of last year's business interruption insurance recovery. OpEx was higher year-on-year due to investments in engineering, increases in wages and some resumption of travel. Finally, we enjoyed favorable FX gains and other income and expense during fiscal year 2022 compared to FX losses in fiscal year 2021, which added almost $0.30 per share, as well as less shares outstanding. These massive changes largely offset to a $0.02 decline from $4.49 in fiscal year 2021 to $4.47 of earnings per diluted share in fiscal year 2022. Please turn to slide 14. As Dave mentioned, the combination of strong demand and supply chain constraints led to a sequential rise in our backlog, which broke another record level to $1.3 billion at quarter-end, an increase of approximately $150 million over Q3 2022 and double prior year. The fourth quarter backlog was driven by over $1.6 billion of new orders, which were 117% of our sales level. Approximately 50% of the year-over-year backlog growth was driven by both organic volume and longer duration program wins, such as the CPUC backup mandate, while the remaining 50% was comprised of increases from price, advanced order by customers, often due to their supply chain challenges and our delayed shipments due to our internal supply chain challenges. Please turn to slide 15. Our balance sheet remains strong and positions us well to navigate the current economic environment. At March 31, 2022, we had just over $400 million of cash on hand, and our credit agreement leverage ratio was at 2.5 times EBITDA, which is at the midpoint of our target range. The year-over-year increase in our leverage ratio is due to our opportunistic share repurchase as well as our strategic decision to build $200 million of inventory, $50 million of which was in the fourth quarter of 2022. The inventory growth was attributable to higher cost and lead times as well as an intentional focus on lithium cells, lead and other raw material component build to mitigate against supply chain disruptions. We expect our leverage to be at the higher end of our target range of two to three x EBITDA for the first fiscal quarter of 2023 as we continue to reprioritize mitigating our risk to ongoing supply chain headwinds. It is important to note that our investment in primary working capital has historically been a significant cash generator during recessionary periods, providing a very effective natural hedge against the risk of a downturn on our balance sheet. In addition, our capital expenditures of $74 million in fiscal 2022 would below our original full year guidance due to the impact of supply chain headwinds on our capital projects. We remain on track for a strategic models planned continued expansion of our TPPL capacity for fiscal 2022 and the incremental $200 million per annum increases thereafter. Our capital allocation strategy remains focused on three key priorities; investing in organic growth, complemented by strategic M&A, and finally, returning excess cash to shareholders through consistent dividends and opportunistic share buybacks. Our fiscal year 2022 capital allocation demonstrated our flexibility to thoughtfully invest in organic growth and return more cash to shareholders during a period of little to no M&A activity. We repurchased approximately $160 million of shares in fiscal 2022, nearly half of the total amount repurchased in the past five years. In March, our Board authorized $150 million to our repurchase program, which was augmented by $25 million in April through our annual evergreen dilution authorization. In the first quarter of fiscal 2023 to date, we've repurchased $20 million of shares, leaving $188 million of authorization remaining. We are entering fiscal 2023 with ample room on our balance sheet to remain flexible to meet our business needs, and we'll continue to allocate capital with the goal of delivering the best long-term returns to our shareholders. Please turn to slide 16. We believe we have set a solid foundation for a strong financial future. Our fiscal first quarter 2023 guidance range of $1.10 to $1.20 adjusted EPS, with a gross margin of 21% to 23% reflects our expectations that our accelerating price actions and cost recapture catch up will more than offset the sequential impact of significant incremental inflation and also that the FX gains we enjoyed in the fourth quarter will not repeat in Q1 2023. Our CapEx expectation for the full year fiscal 2023 is approximately $100 million, reflecting investments in new products, including lithium production lines and continued expansion of our TPPL capacity. Looking ahead, the pillars of our strategy remain unchanged. Our priorities are on track and trending to our initial investment thesis, and we are confident fiscal year 2023 will demonstrate continued progress on our journey. We have learned a lot over the past year and anticipate ongoing sequential margin improvement in the upcoming quarters as the true underlying profitability of our business emerges. In revisiting our strategic plan, COVID and its related supply chain challenges have occurred and have been disruptive. While we did not plan for these volatile supply chain conditions and do not know when they will stabilize, we will remain focused on the things we can control and we'll continue to make progress on the strategic initiatives we have laid out. Our estimate of the incremental value these priorities will deliver at the exit of our strategic plan period remains unchanged. The variable is timing. As Dave described earlier, demand remains robust. And in fact, our end market opportunities have been further spurred by exciting mega trends and the accelerating energy transition toward low-carbon alternatives from fossil fuels. We are on track for our planned TPPL capacity increases. And despite the distractions of product redesigns and component shortages, we are making significant progress on our new product initiatives that will continue to elevate EnerSys from a traditional lead acid battery company to a fully integrated energy systems provider. These proprietary technology platforms can be leveraged across all three of our segments with higher margin products that meet our customers' needs in dynamic markets, including the initiation of additional programs such as DC Fast Charge & Storage, which have not been contemplated when we last updated our strategic plan. We continue to execute on our EOS program with savings generated from lean initiatives and our Hagen plant closure. Although, the favorable impact of these efforts has been overshadowed by labor inflation and supply chain challenges. We've restrained OpEx growth to provide leverage against our revenue growth and our share buybacks have returned value to shareholders, which will bolster earnings per share. We will provide a more comprehensive refresh of our strategic plan, including projected timing when market conditions stabilize. But for now, we remain excited by our end market opportunities. We are pleased with the progress we are making against our strategic priorities. And finally, we are confident in our ability to create the shareholder value we committed in our strategic plan at our 2019 Investor Day and reiterated in our update last fall. This concludes our prepared remarks. Operator, you may now open the call for questions.

Thank you. [Operator Instructions] Our first question comes from Noah Kaye with Oppenheimer. Please go ahead.

Good morning and thanks for taking the questions. Andi, you provided a lot of great color on some of the price cost considerations. So, I appreciate those disclosures. Can you maybe pose dimensionally what you're thinking about in terms of price cost for 1Q? You mentioned some incremental costs to energy. But if you could just give us a little bit more detail around that and maybe possibly even quantify where you expect price cost to be? And then, I guess, the second part of this is, since a lot of the backlog is really in longer lead time projects, do you have visibility on where price cost might head for the back half of the year?

Okay. Thanks Noah. It's obviously the area that we spend a good deal of our time. Looking forward for the first quarter, as Dave mentioned, we incur a lot of our costs this fiscal year and then they roll off. So, we do get pretty good visibility into much of those costs. We expect it to be another quarter of significant cost increases, probably in the range of $25 million to $30 million of incremental costs. But we anticipate that we will more than offset that with pricing actions. It was higher than we had originally expected. If you recall, on our last call, we had thought costs were stabilizing. And indeed, they got worse. But we continue to put incremental price increases on top of that. So, that was the question on the price recapture. I think you had another question on backlog.

Yeah. Just really given that a lot of your backlog seems to be for longer lead time projects. Just what kind of visibility do you have into -- assuming we don't get any further cost increases, which is a dangerous assumption, I know at this point. But if you just sort of look at the cost structure today and then you look at where price and mix can get you based off of what's in backlog, what would that imply in terms of potential uplift in the back half of the year?

Yeah. Well, there are two pieces. Obviously, there's the price and there's a mix. So, as electronics have continued to be constrained by supply chain headwinds, our mix has been dampened, especially in Energy Systems. On the pricing, one of the things as we've learned throughout the course of this year, we've become much more aggressive in pricing and reached into our backlog and taken price actions even on our backlog as we're able to. So, our backlog is not stale on pricing. So that -- we will continue to have the catch up. The issue is the lag. And I think that's one of the things that was meaningful for us and showing the quarterly price cost view for the -- for you, you can see that the cost started to grow and then the price came later. So, when costs stabilize, and that's the uncertainty, you'll start to see that catch up. And as we mentioned, the lag was about $1 in this fiscal year. So that's what you could imagine would be the full potential.

And Noah, as we noted in the remarks, we got a late jump on price recovery in the Energy Systems business. So that really put a lot of pressure on us. That's improving. That situation is improving. And we feel much better about where we're headed. But that was one of the headline issues obviously for fiscal year 2022 is we just got pounded on costs for the first half without a lot of price recovery, but I can tell you that that's getting better.

Great. Thanks Dave. Maybe one, just touching on the comments you made during your prepared remarks around the unique cycles for the telecom folks. They are sort of off the macro cycle. What do you think happens to the carriers' 5G expansion plans if we do indeed go to a recession? And I guess, what are you hearing from them in terms of focus areas plant buildout and the kind of sensitivity planning that might be doing around an economic slowdown?

Yeah. Well, I put that early in my remarks, because it's fresh on our minds piece. We just came off our Board meeting last week. And one of the things the Board wanted us really to do is pressure test the backlog. And so, we kind of cut it six ways to Sunday to look for where the vulnerabilities would be. And again, we feel good because, to your point, a lot of it is related to projects that. We think, based on our historic because it was good for Andi, I asked her to go back and because she wasn't around then. I said, go back and look at prior downturns and look at what happened with the business. And I think that, as she noted, the most vulnerability for us is probably in the Motive Power portion of our business, but that's -- it's less than a third of our backlog now. It's -- that's not the biggest piece. And in years past, the recovery has been, from a profit standpoint because, as Andi noted, commodities tend to go down in these cycles. Cash generation gets positive. So, it's not as if I'm rooting for a recession, but we are definitely getting ready. And that's why this was kind of fresh in our minds from the Board meeting last week.

Great. Thanks. I have more questions, but I'll jump back.

Thank you.

Thanks.

Thanks Noah.

Thank you. Our next question will come from Greg Wasikowski with Webber Research. Please go ahead.

Hey. Good morning, David and Andi. How are you doing?

Good.

Good morning, Greg.

So, first question, can you just remind us what the typical seasonality looks like for you guys throughout the year, and how that might differ this year in fiscal 2023 with its supply chain and just having a chunkier backlog?

Our Q2 historically, not always would have been our weakest quarter, mostly because of the summer shutdowns in Europe and some other issues. So -- but that's not always the case. And it's really hard today to comment on seasonality, because there's so much disruption across, as you noted, not just the supply chain upstream or downstream, but also upstream for our customers. So, I'm a little hesitant to comment on seasonality in this current climate. But I would say, historically, our strongest quarter was our fourth quarter and our weakest quarter was our second quarter. But again, that's not our squared of 1.0 correlation. It does change year-to-year.

Got you. Fair enough. And then next is kind of a two-parter on the EV charging. So, any updates with the sort of two, call them, anchor customers and securing a first legitimate order? And can you give us an expected time line on when you expect that to happen? And then second part of that, any updates on the broader strategy as well in terms of thinking about other applications like highway corridors and/or for fleet use.

Yeah. No, great question. So, I was hoping to have -- the documents are in legal right now between us and the customer. So, it's kind of hoping to have that wrapped up for this call, but we didn't quite get there in time. But we really want first revenues -- if our suppliers cooperate with us, we want first revenues at the end of this fiscal year. And the projects have actually the -- the units have gotten bigger. So, when we were talking about like a 500 kilowatt hour unit before, it's double that these days. So, the customer really -- as I think I said it on the last call, we've had a heck of a time getting them nailed down on exactly what they want. But that said, things are progressing well. And I like your question because we've had our business review meetings this week. And it was interesting how each of the product management leads had identified opportunities for this technology in their own lines of business. You can think of it in a distribution center environment. There's plenty of applicability here by using a combination of solar, energy storage and charging fleet of electric forklift trucks. It's a very viable option. And really the benefit, and I think this is what we have to do a better job of explaining to folks is again -- the power draw and consumption from these electric vehicles, if you want to charge them rapidly, is very, very excessive. I was at an Electrify America charging station this weekend, and there was a line and it was -- they had 400, 350 kilowatt chargers and then four 150 kilowatt. So, they had to bring in a big transformer and a big power feed to feed all those stations. And as you can probably imagine, where you want to put charging and where power is available or readily available, don't -- won't always intersect. So, by using a storage battery, you can hasten the deployment. You can get there faster without as much bureaucracy and certainly you avoid the cost of some of these big transformers and high voltage feeds. So, we're super excited about expanding this space. I've really -- maybe to a fault, but I've really tried to keep the team focused on the initial commitments to customers before we start spreading our wings too much. But it's -- each of our lines of business now is seeking opportunities for this technology. And the basic -- we've made tremendous progress -- and one of the pictures we have in the deck, you can actually see a fully functioning system. And it's all EnerSys technology. I think that's really important. It's not -- we aren't cobbling together components from other manufacturers. Those are our battery modules and our chargers, and it's just packaged differently. And we've added a pretty good drag, probably 30 software folks added to the P&L to help get this thing to market. But it's gone extremely well, and I couldn't be more excited. And clearly, the cost of fuel and some of the issues can only hasten the rate at which electric vehicles are put in service.

All right. Thanks David. I will jump back.

Thank you. Our next question will come from Greg Lewis with BTIG. Please go ahead.

Hey. Thank you and good morning. Dave, I was hoping you could talk a little bit about what's going on in the lead market. It's definitely been an interesting couple of weeks with lead pricing kind of rolling down here. I guess, two questions really. Any kind of sense for what's driving that recent weakness? And then, as we think about your lead procurement, like when should that -- that recent drop start to maybe benefit numbers?

Yeah. So, I just -- I guess, it was a couple -- two or three weeks ago, I was down at the Battery Council International Conference. And as you can imagine, lead batteries is far and away the largest use of lead these days. It's the dominant use of lead. And more specifically, the dominant use of lead is starter batteries for internal combustion engines. So, we had to see the forecast. It's usually a fairly predictable number of battery units that are manufactured for SLI, starting lighting and ignition. And I gave up years ago trying to correlate demand and the price of lead. So, my personal view is it's financially driven in many cases. It's where the flows of money go to. But I can tell you, in general, on the supply and demand standpoint, the supply certainly has been impacted somewhat with the old COVID challenges and getting folks into work in the smelters and so forth. And then, on the demand side, you can imagine it's been fairly good and steady and predictable even throughout the course of this period. So, again, I haven't been able to get there. We have led pass-through clauses or pricing mechanisms for lead with those customers. So, it flows, and it has laid down a little bit. And certainly, we should see the benefits of that in a couple of quarters. And we just have to continue to be flexible.

Okay. Great. And then, as we think about the year going forward, I realize we haven't given guidance, and we don't -- how are we -- how are -- you talked about cost recapture from inflation and logistics. As we think about our logistics needs over the next couple of quarters, how much of that is still a function? I guess, what I'm wondering is, have we kind of fixed or contracted any of that out? So, whether -- I don't know, logistics costs go up or down, we're kind of insulated at least for the next couple of quarters?

Yeah. I think we do fight for our costs. So, our incurred show up a quarter later. So, we do have a certain level of visibility at least in the next 90 days. I don't know that we fully know yet the impact of these Chinese shutdowns. I don't know that that's fully well understood. I'm nervous about freight congestion again in some other areas. So, I don't know that that's fully understood for us. One of the big drivers -- and has been disappointing, frankly, in -- because we've been talking about it too long, is repatriating or at least onshoring a lot of our electronics goods on the energy systems side of the business, because we're attracting a lot of tariffs. I mean, tens of millions of dollars of tariffs we've had to pick up. And our onshoring efforts have been delayed, because our contract manufacturers in North America have the same challenges as everybody. They can't get enough people. They can't get enough semiconductors. So, it's been -- and as you can imagine, EnerSys isn't the only company trying to get away from Chinese supply because of the tariff situation. So that's been frustrating. That's absolutely part of the pressures we feel. We have made progress there. We are probably at least a third of the way through what we wanted to onshore. But we -- by now, I would have hoped we had been -- would have been at 100%. So, our CMs are really struggling as well. So, it's -- I think the key messages we want to deliver on this call, and I think Andi did it effectively is we do feel confident in our ability to get price. We just can't get it soon enough. We're always lagging. So, price lag is something that we have to bake into the models. And -- but we have a lot of confidence and the piece to that, too, is that, that headwind will become a tailwind at some point. We have to constantly remind ourselves of that. And then the other thing we wanted to make sure the message we wanted to deliver is, we have gone back and are thinking through what a recession would mean to us. And we still feel very good about the backlog and the nature of a lot of the demand, be it defense, 5G, CPUC. There's a lot of things in there that we don't think are necessarily going to flex down. So that's sort of a long-winded answer to your question.

No, that was great. Super helpful. Everybody, thank you very much.

Thank you.

Thanks Greg.

Thank you. [Operator Instructions] Our next question will come from Brian Drab with William Blair. Please go ahead.

Hi. Good morning. This is Blake Keating on for Brian.

Hi, Blake.

Hi, Blake.

You talked about -- you touched on it a little bit in the prepared remarks, but can you elaborate on the market dynamics for the 5G small cell rollout? What's been causing the delays? And if you're adding anything to your solutions. I know you guys have mentioned frequently have been frequency interruptions within some of the challenges. So, if you're adding any of those solutions to help mitigate that.

Yeah. I would say that I think there's some technology issues that have impacted the decision to focus on the mid spectrum earlier on. I think some of those issues -- there's probably some supply chain and microprocessor issues involved in where the customer started where they wanted to. I think there was some pressure from the competitive environment. I think one of the big carriers jumped out rapidly with a mid spectrum campaign and that forced everyone sort of to refocus off of some of the small cell ultra wideband type of activities, more to the mid spectrum. So -- and then spectrum availability, obviously. I think it's -- I don't think it's an easy answer. I think what is important though is for our investors to understand is we are -- we sell power and batteries up and down these telecommunications networks. So, whether it's mid spectrum, high-frequency, small cell, we've got a place in the market. We feel particularly good about the small cell arena, simply because we think we have some very legitimate technology advantages in that space. So, we think we can command higher share as the small cell and better margins, hopefully, as the -- because of those technology advantages, as that portion of the market starts to accelerate. And as I said in my remarks, we do expect that to really pick up speed in the 2024, 2025 and ramping until then. So, we do have -- we have projects throughout our small cell portfolio. It's just not where we thought it would be a few years ago in terms of the volume. But that said, it's still a tremendous opportunity for us. And we've got plenty of backlog and plenty of demand in our Energy Systems business right now. Really for us, it's about executing on what we have already. But that the small cell opportunity is certainly still on our headlights.

Got it. Thank you. And then just one more for me. What feedback -- early feedback have you gotten now that you've had the Mojave Home Energy system launched for a while. Any early wins or unexpected challenges there?

Yeah. Supply chain issues. Yeah. We just can't build them right now. We're really having -- we're struggling with the CMs. The CMs are really having the same problems we are. So, it's getting the chipsets, it's getting the people. And it's really a question of priority and what we have everybody working on and scrambling. So, it's -- the product is fantastic. And we -- there's another version of it coming out later that we're continuing to work on with engineering that's at a better cost point. But in the meantime, we're really struggling on the supply chain with all of the new products, because it comes down to the same issue. The chip manufacturers, the chip distributors, they're all -- they're putting everyone on allocation. So, when you're trying to bring something new to the market that you hadn't delivered in the past, it's very hard to get an allocation, because they're just -- they've got limited supply and they give it up based on your historical usage patterns. So -- and as we noted, and as Andi pointed out again that's trapping a lot of electronics in our backlog. The good news about that is it tends to be our richest margin business. And that's part of -- I mean, the biggest issue with our ES business is we got on a late jump on the price recovery. But the second biggest issue there is the mix has been -- we've been selling more batteries in service and cabinets and not enough electronics, which hurts the mix.

Got it. Thank you. I will pass it along.

All right.

Thanks Blake.

Thank you. Our next question will come from John Franzreb with Sidoti & Co. Please go ahead.

Good morning. Thanks for taking the questions. Two questions. One, it seems like the biggest concern on the recessionary front is in the Motive Power business. Historically, we have been given a glance at the order trends globally. Are anything in those order trends that give you reason for concerns?

No. Actually, no. The orders are still very robust. I think the Q4 orders were good where we're at Q1 to date. There's nothing on the -- there's no blinking lights on the dashboard. But certainly, we read all the same things you do and we wanted to be ready. But right now, orders are still strong.

Okay. And just on -- when you -- you talked about margin headwinds becoming tailwinds and the mix of electronics is holding you back on the gross margin front and price cost recapture, collectively, how would you anticipate ending the gross margin profile at the end of this fiscal year relative to the 2021 to 2022 that you put out for the first quarter?

I'll let Andi take a crack at that. It's going to be difficult for her unless she can tell -- if I can get the ops guys to tell me how many --

Can you give me a quick call?

Yeah. How many NXP chips we can get delivered this month. But -- and go ahead, Andi, you can take a crack at it.

I mean, I think, John, one thing that might be helpful just to give you an idea, when -- a quarter ago, when we were looking at what was going to happen going out this quarter, between -- in the three-month timeframe, there were $20 million more cost than we had anticipated. Now, our pricing, we were able to increase that a little bit, but then we increased our pricing that we'll see in the second quarter. So, it's constantly -- we get the surprise of $20 million additional costs. We're able to maybe get $5 million of that additional price recapture this quarter, but then the other $15 million gets layered onto the quarter after. So, it's kind of like a domino effect just because of the lag. So, I will tell you, we have in there what we see in our strat plan. And we refresh our strat plan every year. We presented at Investor Day, but every year as part of our ongoing cycle prior to setting our budget, our lines of businesses, look at all the markets, the pricing -- what's happening. And the delta is really comes in unchanged. I mean, we've got strong markets from a CAGR standpoint. There's a lot happening with 5G, maintenance free growth, transportation market share, A&D, the higher value products that we're doing, our TPPL growth, rate on plan, the lithium approvals that we've had, the UL approvals are putting us on track. Systems and technologies, everything Joern and his team are doing there. In fact, we had included Fast Charge & Storage. Those items are still real. We're making progress. The EOS opportunities we're creating that. We're doing footprint rationalizations. We're having lean initiatives. There's just been a lot of headwinds from supply chain. OpEx leverage is still real. We're realizing it. And as volume increases even more, there'll be even more of that out there. And then we have the price recapture lag that will happen. It's just a question of when. So, we've got good visibility going out of quarter. After that, it really is -- we focus on what we can control. We're trying to be more proactive getting into our backlog quicker and putting pricing actions in place. But it's hard for us to say when it's going to normalize. And one other comment I'll make is we spend a lot of time looking at liquidity and cash flow to get comfort level. We do sensitivity analysis on -- if there's a significant recession and slowdown or if there's significant continued inflation. And both are possible, and we feel very comfortable with our strong balance sheet.

We prefer the recession inflation, frankly. I hate to say it, but --

I hope that answers your question, John.

Okay. Great. Thanks for taking the questions.

All right.

I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. David Shaffer for any closing remarks.

Thanks Shari [ph]. We want to thank everyone for joining us today. And we look forward to providing further updates on our progress on our first quarter 2023 call in August. Have a good day.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.