ENS - NYSE

Good day and thank you for standing by. Welcome to the Quarter Two 2025 EnerSys Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there'll be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Lisa Hartman, VP of Investor Relations. Please go ahead.

Good morning, everyone. Thank you for joining us today to discuss EnerSys' second quarter fiscal 2025 results. On the call with me today are David Shaffer, EnerSys' Chief Executive Officer; Shawn O'Connell EnerSys' President and Chief Operating Officer; and Andrea Funk EnerSys' Executive Vice President and Chief Financial Officer. Last evening, we published an announcement about a planned leadership succession, our second quarter 2025 results, and our 10-Q with the SEC, which are available on our website. We also posted slides that we will be referencing during this call. The slides are available on the presentations page within the Investor Relations section of our website. As a result we will be presenting certain forward-looking statements on this call that are subject to uncertainties and changes in circumstances. Our actual results may differ materially from these forward-looking statements for a number of reasons. These statements are made only as of today. For a list of forward-looking statements and factors, which could affect our future results, please refer to our recent 10-K filed with the SEC. In addition, we will be presenting certain non-GAAP financial measures particularly concerning our adjusted consolidated operating earnings performance, free cash flow, adjusted diluted earnings per share, and adjusted EBITDA, which excludes certain items. For an explanation of the difference between the GAAP and non-GAAP financial metrics, please see our company's form 8-K, which includes our press release dated November 6, 2024. Now I'll turn the call over to EnerSys' CEO, Dave Shaffer.

Thank you, Lisa, and good morning. Please turn to slide 4. Before we dive into our quarterly results, I'd like to share some personal news. Last night, we announced that after much thought and reflection, I have made the decision to retire as President and CEO of EnerSys effective in May 2025. It's a decision I do not take lightly, but it feels like the right time for both me and EnerSys. We have a solid foundation, strong momentum and a clear path forward and I'm confident in the opportunities that lie ahead for this great company. I am pleased to announce that our Board of Directors has named Shawn O'Connell, our President of Energy Systems Global as my successor. Shawn will assume the role of President and CEO and join the EnerSys Board of Directors upon my retirement in May. To ensure a seamless transition, Shawn has been promoted from President of Energy Systems Global to President and Chief Operating Officer effective immediately. Shawn will continue to serve as President Energy Systems Global until his successor is named. A search for his successor is underway. Shawn has held key executive positions in each of our core businesses and international operating regions. As President, Energy Systems Global since November 2023, Shawn has led a significant business transformation including reshaping the go-to-market and operating strategies and reducing annual costs by nearly $50 million. Previously as President Motive Power, Shawn introduced several transformative initiatives that delivered 20% operating earnings growth and 210 basis points of margin expansion. But what gives me the steadfast confidence in Shawn's CEO candidacy is his ethics and character. Shawn's unwavering commitment to doing things the right way and natural leadership capabilities have supported our customer and supplier relationships and added to our culture. Over the past 11 years, he has successfully executed every challenge presented and his deep understanding of our business and strategic vision make him the ideal leader to build on our success. With Veterans Day soon upon us, I would be remiss not to mention that Shawn started his career serving the Armed Forces as a member of the US Army's 82nd Airborne Division and to thank Shawn and our other dedicated veterans for their brave service to our country. Over the next six months, I'll work closely with Shawn to ensure a smooth transition. Together, we remain fully focused on maintaining our operational excellence and strong customer relationships and supporting our ongoing initiatives with continuity and dedication. I'll now turn it over to Shawn, for a few comments.

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

Thanks Shawn. Before I go into an overview of the quarter, I would like to extend our sympathies to those impacted by the devastating hurricanes in the southeast. I would also like to thank and recognize our EnerSys service teams, for working tirelessly to maintain power continuity for our customers affected by the storms. Please turn to slide 5, for a review of our second-quarter performance. In the second quarter, we delivered revenue and EPS in line with our guidance ranges and demonstrated our ability to generate strong and accelerating financial results in an uncertain market environment. Our balanced business portfolio has proven resilient allowing us to leverage exciting areas of profitable growth, while weathering softer demand in other end markets. Adjusted gross margin of 28.7% up, 210 basis points over prior year with adjusted operating earnings up 11% year-over-year and 8% sequentially, these results were attributable to impressive motor power performance on continued customer enthusiasm for our maintenance-free offerings; growth in our A&D business including the accretive addition of Bren-Tronics; solid cost discipline, particularly in our energy systems line of business; as well as increased IRA benefits, despite ongoing but easing headwinds in our communications and transportation markets and FX pressure. While we've adjusted our full-year revenue guidance modestly, to account for the spending weakness in the Class 8 OEM truck market and deployment delays in fast charge and storage, we remain confident in our core strategy and the significant opportunities across our entire portfolio visible on the horizon. Our focus remains on delivering results. We're maintaining price and developing higher value products that lift our portfolio mix and create enhanced customer intimacy. We're optimizing our cost structure to adapt through cycles. We're improving productivity with investments in automation and flexibility and perhaps what I'm most excited about, we're advancing our transformative strategic priorities. This quarter we achieved several key milestones in our transformative strategy. We were pleased to have been selected for a $200 million Department of Energy Award to partially fund our planned lithium giga factory and have received formal Board approval to proceed with this important project. The integration work and results of the Bren-Tronics acquisition are exceeding our expectations and we've installed our first fast charge and storage system at our launch customer site. We are seeing promising demand indicators and positive momentum across our business, which gives us optimism heading into the second half of the fiscal year. Overall, orders were up year over year, with particular strength in energy systems Americas, in which we received a 30% increase in orders this quarter on 10% lower revenue, clearly indicating the inflection points in both years and driving the second consecutive quarter of increases in energy systems backlog. Andy will give details on our second-quarter fiscal 2025 financial performance and outlook, but I will first provide a few more highlights and business drivers behind the results. Starting with energy systems, we saw a sequential increase in revenue for the first time in six quarters, driven by improvements in communications and we were pleased to deliver higher adjusted operating earnings for the third consecutive quarter. Sales were down $40 million versus prior year but up $21 million sequentially driven by the softer but recovering spending by our communications customer as well as robust data center demand. Service revenue was notably challenged this quarter due to timing of projects, which we expect to come back in the second half of the year. We were particularly pleased to see the increase in communications orders in Q2. As we have previously mentioned, network resiliency can only be deferred so long. And that spending resumption is what we are witnessing in our order book. We are not yet seeing significant investments in network expansion but with lower interest rates and increasing last-mile delivery volumes on higher traffic spurred by the surge in AI we're confident it is imminent. Motive Power was once again a bright spot, with increasing volumes and margins versus the prior year. Our warehouse and logistics customers recognize the value of our higher margin proprietary maintenance-free offerings, seeing us not only as the power provider but as an energy solutions provider who helps them address their profit and labor challenges and achieve their sustainability goals. We are seeing more inbound customer interest in our lithium solutions and the announcement of our own lithium-ion cell factory to supply our products has gained customer attention and support. In Q2, sales of our maintenance-free product offerings grew up 24% compared to the prior year, representing 26% of total Motive Power sales compared to 22% in the prior year. This growth underscores our competitive positioning and reinforces Motive Power's ongoing success. Industry data continues to support our expectations of mid- and long-term market growth opportunities. A leading industry association's research conveyed a 50% increase in current conditions' confidence levels compared to the last quarter. And industry experts are anticipating lift truck shipments to reach near double-digit growth for next calendar year. Although dealer truck inventory is currently elevated, we expect to enjoy heightened battery orders when our dealer sales pick up and the excess inventory is depleted. We believe that the uncertainty associated with the Presidential election has delayed decision-making and should now begin to resume momentum. In Specialty, revenue and adjusted operating earnings growth was driven by strong performance in aerospace and defense, bolstered by the accretive impact of our Bren-Tronics acquisition but offset by continued softness in Class 8 truck OEM demand, which is not specific to EnerSys and reflects the broader truck market. A&D demand remained very healthy with a solid order book and several aerospace and defense opportunities – Department of Defense opportunities in the pipeline. Despite the year-over-year and sequential improvements in this business, our transportation volumes were below our expectations for the quarter. Although we grew our US transportation aftermarket revenue 31% in the first half of fiscal 2025 versus the first half of 2024, we were not able to fully offset the ongoing softness in Class 8 truck OEM revenue, which was down 37% first half of fiscal 2025 versus prior year. Class 8 truck demand is expected to remain suppressed through the end of our fiscal year due to high truck inventory and flat tonnage delaying OEM requirements. Encouragingly, US Class 8 net truck orders picked up in September, and our fleet customers indicate plans to increase truck procurement toward the end of our fiscal year, which should boost battery demand with a one quarter lag. Combined with the historical battery cycle data, we anticipate stronger transportation demand entering our next fiscal year. Additionally, much of our aftermarket value comes from premium automotive sales with customers such as Auto

Thanks Dave. Please turn to slide 10. Second quarter net sales of $884 million were down 2% from prior year, driven by a 3% decrease in organic volume from the headwinds and communications and Class 8 OEM markets Dave mentioned, as well as 1% price mix pressure from lower proportionate sales of higher margin power electronics to our communications customers, which were partially offset by 2% positive impact from the Bren-Tronics acquisition. We achieved adjusted gross profit of $254 million, up $14 million year-on-year including IRA benefits booked as a reduction to cost of goods sold in the quarter due to adjusted gross margin improved by over 200 basis points versus prior year to 28.7%, of which nearly half was due to the increase in higher margin Motive Power revenue and the accretive impact of Bren-Tronics with the balance being attributable to higher IRA benefits. Our adjusted operating earnings were $115 million in the quarter, up over $10 million versus prior year with an adjusted operating margin of 13%. Excluding the IRA benefits, adjusted operating margin increased approximately 20 basis points year-on-year. Adjusted operating earnings benefited from the realization of our cost improvement actions and Energy Systems. Adjusted EBITDA was $129 million, an increase of approximately $13 million versus prior year, while adjusted EBITDA margin was 14.6%, up 170 basis points versus the prior year. Adjusted EPS for the second quarter came in above the midpoint of our guidance range at $2.12 per share, an increase of 15% over prior year. In the second quarter of fiscal 2025, our effective tax rate was 2.3% on an as reported basis and 19.4% on an as adjusted basis before the benefit of the IRA compared to 18.3% in Q2 of 2024. Let me now provide details by segment. Please turn to slide 11. In the second quarter, Energy Systems revenue declined 10% from prior year to $382 million, primarily driven by the lower volumes and price mix pressures previously mentioned. Revenue was up over $20 million sequentially, the first increase in six quarters as we began to see improvement in these challenged end markets. Adjusted operating earnings of $24 million improved for the third consecutive quarter, reflecting the increased revenue on top of the optimized cost structure and were in line with prior year despite the softer market conditions and lower revenue. Adjusted operating margin of 6.4% was up over 100 basis points sequentially and increased 30 basis points versus prior year. We exited the quarter with very encouraging order trends and communications resilient spending and we expect to be able to hold OpEx restraint even as revenue further recovered. Please turn to slide 12. Versus prior year, Motive Power revenue increased 3% to $367 million, largely driven by volume growth. Motive Power again reported strong adjusted operating earnings this quarter, contributing $58 million up 8% over prior year representing our highest Q2 ever. Adjusted operating margins were at record highs of 15.7% up 70 basis points over Q2 2024. We remain optimistic coming out of a seasonally slow Q2 with good visibility from industry order data. As lithium product sales increased, we expect healthy margins but in the near-term the growth will be reflected as higher volume increases with suppressed price mix due to the elevated ramp up cost pass-through impact of these batteries. Please turn to slide 13. Specialty revenue increased 9% from prior year to $135 million driven by a 12% positive impact from the Bren-Tronics acquisition and a 1% increase in price mix partially offset by a 4% decline in organic volume. Q2 2025 adjusted operating earnings of $8 million were up approximately $2 million versus prior year with an adjusted operating margin of 5.4% up 90 basis points. Margins remain below our target range of low double-digits due to pressure from lower Class 8 OEM transportation volumes and the impact of under-absorption in our Missouri plants. However, we are seeing the early benefits from the Bren-Tronics acquisition and beginning to grow our higher margin transportation aftermarket volume. Given the incremental transportation aftermarket opportunities and the broad strength of A&D end markets combined with the enhanced highspeed flexible capacity expansion and the full contributions from Bren-Tronics, we remain optimistic about our opportunities in specialty and expect to see ongoing improvements over the next several quarters. Please turn to slide 14. Positive operating cash flow of $34 million offset by CapEx of $30 million resulted in free cash flow of over $3 million in the quarter. Operating cash flow absorbed the transition tax payment of $11 million and over $40 million of investment in primary operating capital as sales accelerated during Q2 2025 leading into a more robust second half of the year versus softening demand in the prior year. In addition, we increased capital spending by $11 million year-on-year primarily from the incremental Missouri investments previously mentioned. Note that the benefit of our IRA credit will not have the full positive impact on our cash flow until our fiscal year 2024 tax filings are finalized and we receive our first 45x tax refund of over $100 million which we expect to get near the end of this fiscal year. During the quarter final section 45x regulations were issued by the US Treasury Department and made public on October 24. We believe these align with and support our current interpretation and application of the law. As of September 29, 2024 we had $408 million of cash and cash equivalents on hand and net debt of $840 million representing an increase of approximately $329 million since the end of fiscal 2024. This increase is primarily attributable to the $206 million acquisition of Bren-Tronics, $75 million of stock buybacks, $19 million of dividends, $66 million of CapEx including the Missouri production investments and the purchase of land for a planned lithium plant, and a $58 million investment in primary operating capital to support the underlying business ramp as we anticipate in the second half of this fiscal year. Our credit agreement leverage ratio is 1.6 times EBITDA. Our balance sheet remains strong and positions us to invest in growth and navigate the current economic environment. Although, our leverage increased modestly during the quarter we anticipate maintaining our net leverage at or below the low end of our two time to three times target range providing us with ample dry powder for our capital allocation decisions. Please turn to slide 15. During the quarter, we paid $10 million in dividends and repurchased $64 million in shares. We currently have approximately $258 million remaining on our buyback authorization including a $200 million incremental authorization approved by our Board yesterday. We continue to screen for additional attractive bolt-on acquisition opportunities such as Bren-Tronics which meet our disciplined strategic and financial criteria. Please turn to slide 16. We are seeing encouraging demand trends in the majority of our end markets including healthy trends in our Motive Power data center and aerospace and defense businesses and while still challenged nicely improving orders in our communications market and positive early demand signals in Class 8 truck OEM markets, which we expect to improve steadily over the next several quarters. We're excited about our progress in new ventures delivering our first fast charge and storage system at the end of the second quarter, although deployments have taken longer than originally expected. Our fiscal third quarter 2025 guidance range is $920 million to $960 million of net sales with adjusted diluted EPS of $2.20 to $2.30 per share. Our guidance anticipates a modest sequential improvement in both communication spending and transportation aftermarket volume incremental revenue and earnings from Bren-Tronics and ongoing revenue growth in Motive Power. In consideration of the current market conditions and delays in fast charge and storage, we are modestly lowering our fiscal 2025 revenue guidance range now set at $3,675 million $3,765 million of net sales versus prior guidance of $3,735 million to $3,885 million. As we enter the second half of the year, we expect the profitability of our business to deliver accelerating returns driven by improving volume, favorable product mix, the accretive contribution of Bren-Tronics, continued cost improvements and benefits from operational efficiencies, flowing through to our bottom line. With recent Board approval, we are excited to advance the next phase of construction plans for a lithium-ion gigafactory in Greenville, and expect to incur modest-related non-capitalizable expenses in the second half of the year as we move forward with this strategic project. As a result, we are tightening our fiscal 2025 EPS guidance range on increased confidence in previous earnings expectations, but slightly lowering the midpoint by $0.10 per share to account for these increased expenditures. Our expected adjusted diluted EPS range is now $8.75 to $9.05 per share versus our prior guidance of $8.80 to $9.20 per share with a pre-IRA tax rate of 20% to 21%. Our CapEx expectation for the full fiscal year 2025 remains in the range of $100 million to $120 million, after absorbing incremental spending on our planned domestic lithium plant. Although, we expect that end markets may remain uncertain during near term given the dynamic macro environment, we are excited to be standing on the threshold of our future. During Dave's impactful tenure as our CEO, he has established EnerSys as a leading provider of energy systems and storage solutions. We are confident in our positioning and strategy and we are extremely optimistic about the tremendous growth opportunities ahead of us. I'm grateful for Dave's leadership and mentoring and look forward to beginning the next leg of our journey under Shawn's strong leadership in May. We remain focused on delivering long term value to our stockholders. With this, let's open it up for questions. Operator?

Thank you. [Operator Instructions] Our first question comes from Brian Drab of William Blair. Your line is now open.

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

Thanks, Brian

Good morning, Brian.

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

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

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

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

Okay. Thanks. And I guess you said it might change the modeling a little bit. If I'm looking at it fiscal 2027, doesn't seem that far away anymore. That's basically calendar 2026. And I don't want to put words in your mouth, but I would imagine it looks a little bit tougher to get to like a $400 million to $700 million revenue run rate by -- with this product category by that time or not.

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

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

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

We're definitely seeing a recovery in orders. And Andy…

Yeah. So revenue was down 10% year-on-year but orders were up 30% year-on-year. If I look at Comms in particular Brian you mentioned America Comm book-to-bill was 1.09 in Q2 of 2025. It was 0.57 in Q2 of 2024 to give you an idea. 0.09 last quarter as well but that's leaning into -- on a sequential basis going up 1.09 is the healthy increase. So we're mostly seeing it in network resilience. We're not yet seeing as much of the network expansion. So I think we're leaning into a return to normalcy on the base business. As we've talked about before our target is to be at 8% to 10% during these down cycles when it's really just resilient spending and 12% to 15% when it's expansionary at the peak of these cycles, and 10% to 12% overall. So as things continue to return to a normal baseline, we expect to be in that range that 8% to 10% by the end of this fiscal year with upside opportunity as a lot of this expansion starts to kick in.

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

Sure, Dave, and good morning, Brian. There's several sales in the wind that we have for network expansion. And as Dave mentioned earlier, these are in their early stages, but they're good signs nonetheless. And just to give you a little color the first to be in our Hyperboost area. And we've socialized that previously, but we've been shipping beginning in January of this year a great deal of our Hyperboost modules and this is allowing greater traffic to be handled by the antennas without climbing the tower. So doing power upgrades in the base stations. And we have about 4,000 Hyperboost modules and growing in our pipeline. So that's the first. And as Dave mentioned, it's not the next G level build if you will, but it's a good building sign that some of this is coming back. And then if you look at our DPX area formerly called touchsafe, we've completed our first right of way trial -- public right of way trial for one of the major carriers small cells. That trial was in Dallas, Texas using the direct cable bury method and went extremely well. We have two more trials in process at the moment, a small cell trial of a node on the East Coast and then another one on the West Coast with about 15 nodes both with different carriers, which is very encouraging for us. And we're continuing to see excitement building around the specific use case of DPX in those applications. So we've got a stocking program we're working on for our OEM partner. We're getting them about 100 nodes now so they can have a rolling stock and begin to deploy more of these as the interest builds. And then the final one I'll talk about and really mention are our ADOM gateways. So our alpha docs, OEM module and gateway programs. So Charter and Comcast continue to deploy gateway connected devices to support both the 5G, CBRS and Wi-Fi segments. And we're seeing consistently building demand for the next year. And we're continuing those deployments. And then sort of as a subset sub segment of that, we're seeing rural broadband beginning to really pick back up again. This was this was sort of shut off during the last part of last year when we saw this the general order book decline, but we're seeing several 1,000 new broadband powering systems being provisioned, which is largely going to build in the next calendar year. So, again, across the board some good indications that some of these network builds are forthcoming.

Yes. There's a lot going on. Thanks for sharing all that detail.

Okay. You're really welcome

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

Hey, Chip.

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

Yes, sure. Happy to go. Data centers is a great spot for us. We're -- Q2 was up high single digits year-on-year. And we do expect fiscal 2025 to be up double digits. The orders are healthy that strong year on year gains particularly in Americas. America's orders are up. And I almost hate to say, it's 50% year-on-year although these have long lead times. So the project nature tends to be these longer lead times with new construction being much longer than the replacement. The DC buildouts are flat face, I'm sorry, the DC buildout facing extended lead times due to the power issues some of the critical components like transformers the new utility build outs and switch gear to bring the power to the DC can have lead times more than a year and some components even as much as two to three years, which impacts the battery sales. We're doing builds for going through calendar 2029 being planned. They're much larger than the previous new installs, like a recent large order that we had was for 224 UPS systems versus historically a huge order with 10 to 15 UPS systems. So that's what's driving really this order book that's going to be longer term in nature. And this is one of the reasons why our mix of both doing replacements, which is more book and ship as well as these project aspect of these new larger installs helps to balance some of the choppiness that you can have with this project activity. But we expect robust DC demand to continue as a multiyear trend.

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

Yes. We tend to be fairly down the line in that procurement cycle long after transformers and those other high tentpole items are made their way through.

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

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

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

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

I think most of the feedback we're getting is not dissimilar from what we hear from the transportation group. There's been, I would say, the economic activity over the past 2 quarters has been somewhat muted. I think that's exacerbated some of these inventory positions. Most of the feedback I received, and I was just with a bunch of these folks not too long ago, is that I think some of the uncertainty related to the election, we're going to clear that pretty quickly now. It feels like things are going to improve. And so I think a lot of the same dynamics. But what we're leaning into mostly with some of the choppiness in the volume has just been mix and just operation -- operating excellence. The factories have been doing a fantastic job our on-time deliveries. So I'm just impressed as heck with that team and we look forward to a bit smoothing out orders. We've got some good as I noted in my prepared remarks. We've got some great indicators from some trade association data reports that we look at. And really for us it's just pushing maintenance free and technology and higher margin solutions into this market and the team's been doing a fantastic job. Yeah.

I can follow up with some data as well. I want to stress again, this is a record second quarter AOE for Motive Power and record AOE percent for the LOB they just consider continue to knock it out of the park. And that's on Q2, which tends to be our seasonally slow quarter with the holidays. So all the more impressive. One of our OEMs has projected some modest clients mostly declines mostly in EMEA but I think it's important to remember that we sell both replacement and the OEM and that our profit is improving, despite the market being somewhat stagnant. And I think having a lot of opportunity for growth in front of it. On a positive note, ITA July, September lift truck orders were up 12% over prior year. And getting to some of this volatility that's largely behind us, but I would say not 100% back to normal. So again, I think there's a lot more growth in front of us. Our backlog is still about 50% higher than pre-pandemic levels. We exited Q2 2025 with $286 million of Motive Power backlog versus $196 million in Q2 of 2020. Our backlog coverage right now is 0.8 versus about 0.6 pre-pandemic. Book-to-bill was 0.9 in both Q1 and Q2. So you always wonder when it's below one, what's causing that. That's because of a lot of this return to more of a book and ship type of an environment. Our orders in October had our strongest book-to-ship rate in 18 months at around -- I think it was around 35% or so. So there's a little bit of that return to normalcy until we get a steady line, and I think the slope is going to continue to improve.

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

Exactly.

Yes, appreciate all the color. I’ll hop back in queue. Thanks very much.

Thanks.

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

Hey, thank you and good morning, everybody. And hey, Dave, yes, I reiterate everybody else say thanks for all that you've helped me learn over the last couple of years. It's really been great. I was hoping to talk a little bit more around the Class 8 market and Specialty. On the prepared remarks, it sounds like we're kind of bottoming. It seems like it's picking up. Just as we think about Specialty margins, which have been -- are up sequentially and margins across the board are improving. Kind of looking back and trying to see how can we think about margin progression kind of from this kind of mid-single digits to that kind of high single-digit, low double digits that we saw a couple of years ago? And is that -- how contingent on that is really that Class 8 recovery that we're talking to versus maybe some other drivers that could see that those margins start getting back to that 10% range?

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

Sure. I’ll add a little bit more to that too Greg and I and I'll tell you what I'm sure you're disappointed, but we're even more disappointed in Mark especially who does a great job running this business at the 0.8% because we know just how much potential there is here. And we're very confident that we're going to be getting back you know at or near that double digit by the end of this year. And I'll give you a little bit of feedback. As Dave mentioned remember that it's specialties made up of both the aerospace and defense which we have a very healthy order book. And now adding Bren-Tronics which we only keep in mind this past quarter was only a partial impact. So we'll have in addition to an accelerating business full impact going forward, as well as the transportation. And remember that transportation is made up of both OEM and the aftermarket. So, as we mentioned have to buy spot buys are growing, it's plus 31% but on a smaller base, it has trouble offsetting that 37% decline that we had in the OEM business. Year-to-date we build about $20 million of inventory to be able to accept that aftermarket business. As a reminder we three Missouri plants, Warrensburg, Springfield one which was Springfield two, both the Springfield plants we bought from the North Star Acquisitions. Plant two performance has turned the corner and is performing well. but to really see that financial impact that both ES and specialty are absorbing from that underabsorption, we need more loading. That loading when it's when it's back at normalized levels is probably about $10 million or $0.20 per share of opportunity. And we've talked about some of the growth in ES as well as this more aftermarket and then eventually the class a coming back. But these two new lines just to give you some perspective it cost about $25 million, it's part of the increase in our CapEx that we had this year. Most of that spending is behind us. These new lines will provide flexibility, incremental capacity and lower cost. So as Dave mentioned, we'll be able to produce two X of volume with half the people that give you some dimensions on that. That revenue is about an incremental $150 million of revenue capacity. And the less cost is about $30 million less cost of $0.60 a share. Now that probably will take us two to three years max to you know until those lines are installed. So we get the OEE at the level that we need and then we fill that capacity, but significant opportunities for improvement that will fall through to both ES and transportation over time. And that I think is really consistent with the story Patrice [ph] shared at our investor day. Some of that capacity also is going to be used to meet the search and data center demand that we talked about before. So, the timing of that installation is very well aligned. Again, we said it should largely be complete by the end of this fiscal year. And that'll be lined well with DC growth, comps coming up the incremental aftermarket and then going into fiscal '26, the resumption of the Class 8 OEM demand. So we're -- it's not going to happen overnight, but we do expect ongoing incremental improvement in revenue earnings and 8% in specialty as a result of this and it's really a great business.

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

You too. See you, Greg.

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

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

Thanks Noah.

Thank you, Noah.

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

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

Yeah you know just to give you a little background on the on the schedule. No we you know as you know we bought the Greenville land in Q1 that was about 10 million to get included in our CapEx numbers. The de negotiations are expected to be complete before January 2025. We're the team is doing an excellent job progressing there. This is largely administrative just so you know I don't want to give the impression and that's we're negotiating whether we get it. It's been approved, it's been authorized. It's just a question of some of the specific logistics behind it some things like the environmental details for the land prep, making sure we've got everything in line with what their expectations are. So, we don't see that being at risk. We've already rented local space beginning to hire staff. We had our Board meeting in Greenville just last week and everyone was thrilled with the economic development folks.

If you haven't been down there in a while you need to it's a dynamic city. I was -- I think the Board was very happy and impressed with Greenville.

Yes, I want to move there. They we had to break ground in late calendar.,Q2 2025 probably begin construction in third quarter 2025. We expect the building to be commission at the end of calendar 2027. Obviously, there's still a lot being ongoing here and expect to start production Q2, Q3 of calendar 2028. We're undergoing environment site -- environmental site assessments. We're doing material testing. So, a lot of activity there and we couldn't be more excited and don't expect any changes on the progress. In fact if anything you mentioned a lot of the priorities of the administration I think just to underscore the importance and couldn't be thrilled that they started.

I think you've alluded to when you when you started Noah that there's probably very few things that are agreed upon in DC these days. But one of those seems to be the importance of a domestic supply chain, especially for defense-related products. So, it's a huge priority for the current administration and we anticipate that to continue as we transition.

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

Yes so -- and these are some of the items that are the fine touches are being made during the negotiation. But we have -- as you -- as I'm sure you know no you've got such a long history with us. Mark has a long experience in doing projects like this not, not this large but with the government and our expectation that we've modeled and that is consistent in the discussions we've been having with them is that it would likely be a reimbursement probably on about a one quarter delay. So, we'd have outlay and then we get reimbursement the second quarter when we'd be making additional investments going forward. And are also what we've been able to confirm is the bulk of it would be booked as a reduction to the basis of the assets. So, the capital spending would be net of that since a lot of it is based on you know again reimbursing of spending that that has occurred. So that's our current understanding again all of that is being finalized in the negotiations.

Okay. Very helpful. And I guess just last one since I walked past an Odyssey battery lying out on my street this morning, I guess I got asked about specialty. You provided a lot of color here on the organic trends. You also mentioned Bren-Tronics outperformance. It looks like on a partial quarter basis about 16 million, contribution to 2Q sales. You quarterlies that and then annualize that that that's kind of around 100 million which it did last year. So just comment on any seasonality in that business and what you expect the business to do in sales this fiscal year.

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

Great. Very good. Thanks for all the colors.

Thank you.

Thank you.

Our next question comes from Greg Wasikowski of Webber Research & Advisory LLC. Your line is now open.

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

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

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

Thank you.

Thank you, Greg.

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

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