Well, good afternoon, everyone, and welcome to day one of Oppenheimer's Nineteenth Annual Industrial Growth Conference. I'm Noah Kaye, managing director in Oppenheimer's Sustainable Growth and Resource Optimization Research practice. We're delighted to welcome back to the conference the management team of EnerSys, CEO David Shaffer, CFO Andy Funk, VP of IR, Lisa Hart. Welcome to you all. Thanks so much for being here.
Thank you for having us, Noah.
Thanks for having us, Noah. Thanks, Noah.
All right. There's news to talk about. You know, you announced some significant M&A last week, and we will get to that in a few minutes. I wanna start with Energy Systems. While the segment has obviously faced some challenges related to telecom CapEx slowdown, we look at the other markets served by Energy Systems, data center and industrial power and utilities, seeing extremely strong CapEx growth. So can you sort of benchmark for us the sales dynamics in these segments and their ability to support top-line growth within the segment overall?
Mm-hmm. The telco broadband is our largest constituent part of our energy systems business, and that is the business or the segment of the business that's seen the most market impact on in terms of the CapEx spending cycle you had mentioned. So the data center space and utility space and many of these areas that are impacted by the same key macro drivers are in very good positions. Our data center space is largely a battery story, so it's production capacity and allocation in our different factories. It's traditional products. It's our Thin Plate Pure Lead products. So we just feel very good about the data center market.
And then in terms of the utility and the other traditional markets, we've continued to see some good benefits that again, to your point, electrification is driving a lot of the markets and end markets that we serve. So, it's the particular pressure, and it's been acute, as you referenced, a telco broadband segment, and it was really the rate at which the spending slowed down. That's what caught us and impacted us most acutely was just the rate at which we have to retool and reposition some of our fixed assets over to new markets, like data center, like the transportation segment.
It's our ability to rotate, to retool. It's been the real challenge for us the last two or three quarters.
Yeah.
That said, again, these electrification initiatives. If you just look at the projections for the spend associated just with the artificial intelligence, the impact that's having on power and the energy needs, it's just crossing a lot of our different segments. So, we're managing through this part of the business, and as such, we just came through a strat session and an M&A review. And certainly we have to look in the long run to work towards continuing to dilute that telco broadband as part of our long-term mix-
Yeah
... because of this volatility that's inevitable in this portion of the business. So as we grow in these other areas, that's something that strategically we always wanna be in a position to do.
Well, let me pull on that a little bit more. It's a really interesting point. You know, you talked at Investor Day last June about targeting 68% revenue CAGR through 2027 for ES. You know, given this headwind from telcos, I guess, how do we think about line of sight to that target? And then picking up on what you just said, how much can you control your own destiny through share gains or diversification of your own markets?
Right. Well, I think that's as it relates to specifically the long run. I still feel very good about the telco broadband segments. For no other point than the point we discussed earlier is that with this amazing investment that's going on in data in data centers right now, that data has to be transported and moved, which is gonna continue to stress the available network bandwidths that are out there. So we're gonna always see very high long-term growth rates associated with digitization and data, and that will impact that segment. But it's that and specifically when I was just talking about this part of our business, it's the cyclicality piece that we have to adjust to.
So in the long run, that business, we feel very confident. We just know that even when it relates to 5G, there's so much work yet to be done in terms of just broad coverage, especially in the areas of the higher frequency, stressing the real capabilities of 5G, the Internet of Things, and all the promises that were made associated with 5G. I don't know that we've ever really fully experienced yet as 5G was sold to us or promised to us. And a lot of that will come when they can start to layer in this higher spectrum and start to build out the ultra-wideband, as Verizon refers to it, and other folks have different names for it.
But building out those business cases, and certainly that's a sweet spot for the EnerSys product portfolio is small cell powering.
You know, Dave, as you mentioned, data center is predominantly a battery business for the company. And we've gotten questions from investors who see that, you know, on the power management side in telecom, you're competing with many peers who are also doing power management in the data center market. Now, I know it's different products and offerings, but maybe just help us understand what the opportunity could be, or whether there is an opportunity for you to expand wallet share in the data center space. Is that something that you're pursuing today?
No, I think we're thinking even a kind of a step beyond the traditional architecture for a data center. As you know, the traditional architecture was like a battleship, and it was a belt and suspenders battleship, where you have an untold amount of generators on site, and you have battery backups, and it's all about the nines of reliability. And then you want it to survive an F4 tornado strike or a seismic zone four earthquake. That's what's been the predominant mindset forever of data center construction.
Today, if you look at some of the statistics related to the energy consumption of data centers, if you look at the forecast for data center construction and overlay that with electrical generation capacity, there's simply not enough electricity to do all the things we wanna do in terms of AI data center growth. Couple on that with electric vehicles and some of these other electrification initiatives that are so crucial to the decarbonization journey, that we're gonna have to do something different. And I think that difference in thinking is something that the data center folks are really talking about.
So it's a different mindset, and no, I feel like the data centers of the future are gonna look a lot more like a battery energy storage system, which, you know, we've spent a lot of time over the last few years building our capabilities in that space.
Yeah.
That's my view, is that the future of data center powering is gonna have to, beyond just the number of nines of reliability, the powering solutions for the future for data centers are gonna have to be cognizant of the impact that this power consumption is having on grids. And of course, if we don't wanna add capacity of coal-fired power plants, and we don't wanna add nuclear power plants, and we don't really don't wanna get too excited about adding gas plants, then we have to lean into renewable energy. And as you know, renewable energy is best served when it's coupled with energy storage systems like, and specifically battery energy storage.
So, that's how we're approaching it, and we just, you know, again, we just came out of an M&A meeting, Andy and I, and Lisa was on the call too, and these are exactly the discussions we're having.
Well, we'll stay tuned for more there. And you know, we're doing a lot of work ourselves on, you know, BESS and microgrids in the context of these data center build-outs that are just power hungry. So we'll look forward to more there. I guess for the time being, you know, the company has talked in its recent call, for example, earnings call, about targeting a floor of 10% return on sales across segments. Let's assume telecom recovery doesn't happen until, you know, 2025, calendar 2025. How much progress do you think, you know, Shawn and his team can make within the ES segment on margins ahead of that inflection in customer spending?
I think, you know, it's unfortunate, and it just happens with our cycle, we take a little longer to close out our fourth quarter. It always overlays with this conference so that we're in a little bit of a dark period. But I can tell you that the answer to that question is gonna be coming out in just a couple weeks. So you're gonna be able to see that tangible progress, and then you're gonna hear in terms of our go-forward forecast, the rate at which we expect to see that progress. So, I don't wanna reveal too much, obviously, with us being in this kind of quiet period.
But, if from an overall perspective, I have all the confidence in the world that in the long-term growth of this business and in the short run, between footprint consolidations and some headcount moves, that we're gonna be able to get this on the right track.
Okay, everyone, tune in May 23rd to the earnings call. You heard it here first. So let's talk to Motive. You recently highlighted the increasing penetration of maintenance-free within the segment.
Mm-hmm.
How should we think about the mixed impacts of that trend on sales growth and margins over time in the segment?
Yep. So the average selling price for, let's say, a lithium versus a traditional flooded is, it's a significant revenue multiplier. So for that same forklift truck, the battery may be two or three times the same price of a given lead-acid battery on a first sale. Clearly, there's replacement intervals and so forth. So that all has to factor in. So there, you're gonna see the impact from a CAGR, and that's what we've used in a lot of those average selling price, ASP assumptions, is what we've modeled into our long-term projections. And we still feel very good about that maintenance-free penetration, and we've managed it. As you know, we've managed that maintenance-free conversion with two different product types.
One is our Thin Plate Pure Lead batteries, and then, our lithium batteries. As I've noted in the past, the lithium is still relatively new for us. We're a few years in on Thin Plate Pure Lead, and we've gotten most of the kinks out of that, from a gross margin standpoint. On the lithium side of the business, there's gonna be issues in the beginning related to the ramp as we start to build because of the electronics content that's in these relative to traditional lead batteries. There's a ton of electronics, and as you know, in the electronics world, your costing is related to your volume. It's just...
So in the early stages, when you're buying at low quantities as you're building your ramp, you just don't have the buying leverage that you're going to get to. So we feel in the long run, the answer will be, it's an accretive margin target for all of the product segments. In the short run, there's certainly gonna be some things that we have to manage through. But the other piece to it, as I've noted prior, is that the lithium batteries specifically tend to be sold with bigger chargers.
Right.
And that's that has a favorable impact. So that's part of the mitigation in terms of some of these ramp issues related to the volume. But in the long run, certainly we feel... When I took over as CEO and I made this commitment, we're gonna just put all of our product roadmap and focus is not gonna be on chemistry or leveraging existing assets or anything like that. We are gonna say, "What is the product solution that provides the lowest total cost of ownership for the end user customer?" That's, and that's what's driven our product roadmap. And we'll see where the ultimate mix is between TPPL and lithium.
I made a bet with our CTO many years ago, where I thought it was gonna land, and so far I'm winning the bet. And we'll just be in a position where we really don't care. And certainly part of that and a lot of this underlies some of our thinking as it relates to being, you know, being able to manufacture cells ourselves. That's all part of that same decision process.
So, when do you and Joern settle up that bet, dude?
We'll see. But it should be soon.
All right, all right. Well, we are gonna talk a little bit more about lithium. But actually a good lead in for that is to talk about this agreement to acquire Bren-Tronics. Maybe you can just talk to us about how the opportunity presented, the deal rationale, and the fit within the company's portfolio.
The opportunity presented through close, I would say, personal relationships, as well as business relationships between the two companies that date back many years. So, Bren-Tronics is an organization well known to us. It's someone we've run across in that market segment for defense, in the defense arena. They've just been a very active and admirable competitor. But not so, not so much a direct competitor as much as we operated in the similar markets, but their focus has been more at the soldier powering level, which is different than where our focus, you know, is. Our defense tends to be on submarines.
Munitions. Yep, yep.
Munitions. Those are sort of the key areas. Whereas their focus has been more at the soldier powering level, which again gives us confidence about the synergies. We have a good understanding of the end markets. We have a very good understanding of their product portfolio and their roadmap, most importantly, their product roadmap. So in terms of the deal logic, it's mostly around again we talked about getting outside of the telco broadband box. We wanna do more. It's a market we understand extremely well. It's a very close adjacency, and what we're really excited about is the ability to learn from each other and to combine the engineering capabilities and supply chain capabilities even further between the different segments.
So it's a, it's a very natural tuck-in type of business justification rationale. It's textbook in all the different areas of a tuck-in, but it's buttressed between, I think, a deep trust and understanding. And one of the things that struck me when I spent time with the teams is the cultural closeness of the two companies.
Mm.
I know that anyone who's been through M&A in the past knows how important that aspect of it is. So, we feel very good, and they're gonna respond extremely well to Mark's leadership, and just a lot of positive energy and a lot of excitement. The portfolio and the roadmap, and again, this is part of the deal logic, is the U.S. government and once a standard building block size to be the 6T battery, that's the go forward, not only for vehicle electrification initiatives, but it's also the standard building block size they wanna use for forward-based powering initiatives or you know, centralized, like microgrids. Whatever the roadmap is, put yourself in their shoes.
Obviously, you wanna have standard building blocks of energy and energy storage so that you don't have your soldiers dragging 13 different types of batteries to a forward-based scenario. They have to have some standardization. So the 6T format, and as you know, we're the leader in the world on making 6T batteries in a lead format. But a lot of the go-forward applications that the Department of Defense wants to standardize on in the 6T format is more related to applications that are more conducive to the lithium technology, and Bren-Tronics is a leader in 6T lithium.
Yeah.
And so, it gives us an ability to really prime the pump and then work together to take the BMS and the packaging and the hardening that's associated with mil-spec products. All this hard work, you know, decade plus of effort that Bren-Tronics has put into this, and then layering on top of that, what our cell supply capabilities are gonna be in our economies of scale, and blending these two together to make sure that Department of Defense has a locally made and sourced best-in-class lithium building block that they can use for all of their needs, all of their energy storage needs.
Well, that, that's very clear, Dave. It makes a lot of sense. And you can see it in Bren-Tronics' portfolio, right, that they have these lithium capabilities and that format down. Just a financial question related to the company. I mean, looking at the margin profile of Bren-Tronics, it would certainly be accretive based off of last year's results, from a margin perspective. Could you tell us a little bit more about the financial history of the target, how stable margins have been over time? We talked a little bit about reducing cyclicality within EnerSys. You know, how cyclical has this business been? What kind of revenue growth trajectory has it had?
I can give some. We're not gonna give too many specifics, as it's a private company and hasn't been disclosed, but they've had steady growth and steady margins over their history, which was a question that, of course, our board inquired about as well. Wanted to make sure we're not buying them on an upswing. But we see this as having additional growth potential, both in revenue and margin in front of them, and have not seen big fluctuations in their past.
Noah, I think similar to us, a lot of their historic margins comes from tried-and-true products. So they have inside of their portfolio this good base of good growth, positive cash flow contribution-type products. And then layered on top of that is this go-forward look in areas like lithium 6T, as well as larger battery packs for things like directed energy weapons, like basically laser beams to shoot down drones. So again, similar to EnerSys in that it's not just a pure startup play, and then it's not just a pure low growth commodity play. It's somewhere twixt in between, and that's what really attracts me about Bren-Tronics.
Yeah, it makes sense. It really does tick a lot of boxes from a fit perspective.
And maybe note, just if this helps, but the only year with the revenue decline that we saw in the period we looked at was COVID-related, and margins have stayed in a healthy band.
Hmm, okay. Thank you. Well, well, so this is a good segue into talking about the gigafactory, 'cause certainly, you know, the need for domestically sourced batteries for specialty clients was consideration within that. And we understand that, I believe final investment decision is pending on the gigafactory until a DOE funding decision, and sounds like it's gonna be August timeframe. Where do you see owning production providing incremental market access? What does having the gigafactory do for you in terms of opening up new markets?
I think time to market, I think, is critical. So when you have complete engineering control over the entirety from the cathode and the anode designs, all the way through to the packaging, the approvals. When you can control the full spectrum, there's immense value in terms of your ability to be flexible, to get products to market quicker. That's a key driver in this make versus buy decision. Control, things inevitably happen, so your ability to control quality and excursions, you know, those types of issues, is also a benefit of doing something on your own, and your ability to respond and quarantine issues when they do happen, the inevitability. So those levels of supply chain insurance.
These are the sort of, I don't wanna say soft, but, a little bit more intangible benefits that go along with this decision.
Mm.
What we had to look at, you know, the true very complicated ROIC model that Andy's put together looks at every aspect of the investment decision. You know, down, you know, including all of the building, the sources of funding from places like the DOE. But layered on top of that, you know, we have all the details and best assumptions we can make about what the go-forward buying ability is for us.
Mm.
Supply assurance, obviously, as we increase the amount of lithium that's part of our product portfolio, our ability to control our own destiny is really important.
Well, let me pick up on that, Dave. You know, as you said, lithium is a relatively small part of the sales mix today, and you can probably give us some percentages around that. But you know, does the company... Do you see the company utilizing 4 GWh of lithium-ion batteries in the products mix by the 2027 start production you're targeting? I guess, is there that demand as you look out a couple of years? Where would this demand most likely come from?
The key drivers are gonna be battery energy storage systems is gonna be a key incremental growth driver for us. I think the Department of Defense, as it starts to electrify a lot of its vehicle initiatives, and they just have so many of their projects involve batteries. So, you know, going through those forward forecasts that we've gotten through Department of Defense, the conversion rates to lithium in our maintenance-free portfolio for Motive. We talked about what's the go-forward roadmap for the data center space. We feel like it's gonna be something in the area of the battery energy storage space and leveraging a lot of the work we've already done with our fast charge and storage initiative.
Mm.
So these are all the key drivers. It's, it's not a one market that's gonna saturate all 4 gigawatt-hours. It's a, it's a combination of, of not only our traditional end markets conversion from lead to lithium, but also, for us entering new markets, especially in the area of battery energy storage systems.
What's happening as you work towards this FID? What, what's happening around the Gigafactory development, and what are you doing to kind of pre-plumb the development and be able to hit the ground running fast once you hopefully get the decision you're looking for from DOE?
The board's been extremely supportive, so we've pre-authorized certain levels of spending, land acquisition, staffing, starting to build up dedicated personnel on the team on a go-forward basis. Cell development, partnering with Verkor, doing as much of the A-sample phasing as we can in their Grenoble facility. That's been a really important part of this, is getting through those pre-production samples and getting everything built for the cell. We're trying to do as much in parallel as we can, Noah, in anticipation of this happening. But being having the ability in a controlled fashion to again, if the board decides for some reason to go another way, we've done everything we can do in parallel, and it's really these long lead time items. I'd...
So I'd say the most important of those is the engineering design and qualification with Verkor, and then the tooling up of the first production line. And it's gonna be based in France to get started, and then we will, once we've nailed it, then we can scale it into the Greenville facility. And as you know, with Verkor, their first phase of scaling is gonna be in their Dunkirk facility for an electric vehicle customer, and then we're gonna rotate from Dunkirk into Greenville with these resources. So we've been extremely active. The DOE proposal that we submitted is... I'm very proud of the effort. It's exhaustive in terms of its content.
Mm-hmm.
It's been a great deal of work and commitment, and we've dedicated, Andy and I have committed, tremendous resources to this and allocated resources in preparation of this. And the market needs—you know, the support we received from the State of South Carolina, which we've been, you know, open about. I don't know that we would've received that same support had we been, if we would've been in the electric vehicle drivetrain business, for example. You know, that's, there's just, there's this excitement about the whole project, is that, it's something that's not electric car. Because there's a need in this space for these more bespoke, lower volume type solutions and with different design philosophies.
I get back to, and again, this is my engineering heritage, but I get back to the thing I'm most confident about in the long run is the intangible ability for us to really control every element of the system, you know, from the cell design all the way through the IoT and data monitoring and service after sales support strategy. And, you know, the only other company that does that at scale is probably Tesla. Everyone else is, you know, they buy batteries from these folks, and they buy inverters from these folks, and then they kit them all together, and that's not what we're doing. It's really controlling the full element of the design, which I'm most excited about.
Now, you know, Fast Charge and Storage, you mentioned, is one of the demand buckets for the capacity coming online. This is a solution that you put a lot of care and development into. We know, we've been to see it, you know, demo. You know, you outlined this target of $400 million-$700 million in revenues for the offering by 2027, fiscal 2027. Just how do you benchmark where we're at today in terms of the visibility into the higher versus the lower end of that range? You know, what kind of trajectory are we on?
I would say we're on a very good trajectory. We're in the phase of the, again, the nail it and scale it mentality. So our initial focus is on the delivery and installation of these initial systems, both from our perspective, the customer's perspective, and their excitement is broad. And that's just one customer. That's the launch customer.
Yeah.
And then what's been probably more pressing and challenging for me as CEO of late is holding back the other customers and other businesses trying to push this business too fast and too hard. So the demand, the macro environment, Noah, that we talked about earlier, the scarcity of electricity, the need for generation, the fact that that generation is mostly gonna come from renewable energy, the fact that renewable energy is made most viable when added to energy, battery energy storage specifically.
Yeah
... these are all the elements. It's not just these; these macro issues and electrification issues aren't just about electric cars. It's about everything. It's about everything that needs a lot of power, and many of our customers do, whether it's a distribution center environment, whether it's a data center. A lot of our customers are in the same issues, where they really... Energy was never something they thought about in the past. Energy was cheap, it was plentiful, it was reliable. And with climate change and all the issues surrounding energy today, those assumptions aren't viable anymore. It's not cheap, it's not reliable, and it's not always available, and so we have to rethink the way we do energy today.
You know, so first of all, it sounds like you do have the pipeline to support visibility to that range, and please contradict me if I'm mischaracterizing your comments. But the other part of this is cell prices, lithium-ion cell prices have fallen, you know, pretty significantly since you first developed the offering. And I know the products remains in its early stages. Just wondering how changes in the BOM are impacting how you think about pricing and unit margins for the offering.
Mm-hmm. It's our assessment of building our own factory is really not so much on what cells cost, it's really the gap between what we can buy it at and land it at, with tariffs and with margins going to the supplier, and with all that. And then their ability to scale their volume may be in a bigger factory versus ours, and trying to understand that. And we've gone through an exhaustive comparison, and we've looked at, you know, what a bill of materials advantage might be of a large Chinese gigafactory, buying at a certain, you know, amount of tons of materials per year versus us.
We've gone through that exhaustive analysis and still feel very good that we can substantiate the make versus buy. In terms of the long-term downward cost profile, obviously there's a lot of geopolitical issues that go along with that. The natural cycle of the electric vehicle market, it's not... You know, it's like the train cars bumping and grinding before the train gets moving. That's the way the electric car market is today. But that's going to – and we're gonna get through this bumping and grinding period in the not-too-distant future. So, what I'm excited about is that, again, we're at this crossroads now, or where the scarcity and cost and reliability of electricity has reached this point from a demand side.
And then on the supply side, we've finally gotten battery costs down to where all of these jobs pencil. And that's why my board and me, and a lot of folks in the industry, are so bullish about Battery Energy Storage System, because it's this intersection of costs coming down and the need for electricity, and the scarcity of electricity going up. So that's the net effect. But again, for us, it really comes down to that gap in what someone who can make these at scale can buy at, and then overlay on that the freight, the duty, the tariffs, the profit, you know, that the supplier is making, and contrasting that to what our investment needs are in the factory.
Yeah. And it's a great way to end it. You know, I want to thank you all for the time, and everyone listening on the webcast. You know, the company remains very accessible. If you want to reach out to Lisa, or we're happy to put you in touch, learn more about the story, earnings call in a couple of weeks. Hope everyone has a great experience for the rest of the conference. Have a great day, everyone.
Thank you. Thanks, Noah.
Thank you, Noah.