Good morning and welcome back to day four of Oppenheimer's 20th Annual Industrial Growth Conference. We're delighted to welcome back the management team of EnerSys to our conference. We have President and CEO, Shawn O'Connell and CFO, Andi Funk. Thank you both for being here.
Thank you so much for having us, Noah.
Now, I want to give Andi the opportunity to make a few Safe Harbor-related statements, just given where we sit in the earnings cycle. Andi?
Appreciate that. Just before we begin, I want to point out that we are reporting earnings on May 21st, followed by a conference call on May 22nd. We will not be able to, in this meeting, provide a current quarter update during this conference. I also just want to remind everyone about our Safe Harbor. We may be presenting certain forward-looking statements on this call that are subject to uncertainties and changes in circumstances, and our actual results may differ materially from these forward-looking statements for a number of reasons. For a list of our forward-looking statements which could affect our future results, please refer to our recent Form 8-K and 10-K filed with the SEC. Back over to you, Noah.
Thanks, Andi. I will now throw out all of my forward-looking questions. You know, maybe we can start with you, Shawn, kind of coming into the President and CEO role with a little over, I think, 20 years' experience with the company. Just give us a sense of immediate near-term priorities for you and any shifts you would call out in the medium-term strategy for the company.
Yeah, thanks, Noah. First of all, I'm very excited about the opportunity. I just want to say that the macros in our business, I don't think have ever been as strong in our career. I really think the job of EnerSys is to do two main things. It's to help our customers who operate critical infrastructures through this question of energy security and being able to operate, and through labor security and being able to perform missions with less people, less qualified people, or less cost to people.
As I look at that, and being an insider, to your point, being in every one of our businesses, my main goal has been to use the six-month transition period to take some of the hypotheses we've had, test them, and make sure that we're going to be crisping up and being very clear about how we address those two main challenges. I'll give you some color, just to make sure as an insider I wasn't breathing my own exhaust and we were pressure testing my hypotheses. We brought in one of the big consulting firms, and they've given us a lot of benchmarking, a lot of outside-in view, a lot of their view of industry and footprint, and that's been extremely helpful. Again, we've made good use of the six months in the transition.
Just to further answer the question, near-term strategy will be focused on navigating what is going on with this administration, mitigating tariffs, that sort of thing, and just focusing very heavily on execution. In my listening tour, I have heard acutely that what our investors want from the new CEO is building credibility over time. We are going to focus very, very carefully on that. In the midterm and longer term, we are going to go after those macros and make sure we are being very sharp and very meaningful about where we are going to pick our spots.
One of the things that's also happened is bringing in Keith Fisher to fill your role at the head of energy systems. Maybe can you offer some color on the perspective he brings to that business and where he might be extending initiatives that started under your leadership and where there might be some incremental efforts to flag?
Sure. I was just talking to Keith this morning, and Honeywell got a nice bump, largely because of the business he was running, the industrial sector, which looks a lot like our motive power business. He was complaining to me I pulled him out too soon. Anyway, Keith has got great experience across multiple industries. One of them, previous to the Intelligrated experience, he was in the building management side of Honeywell. If you look at what I said about our macros in terms of building an energy-secure future for our customers, there is no such thing as a battery in an application that is not critical. Keith brings really intimate experience in helping manage energy journeys for certain customers. He is going to be very helpful with that. He is going to be very helpful in that he has managed through service transitions.
If our job is to help mitigate the labor exposure of our customers and to assume more of the control of their environments to help with that, he's got primary experience there. I would just tell you he's a phenomenal operator. He sees the world through the lens of accretive growth, of managed OpEx structures. He grew up in the operation side of the Honeywell business. He's been a great partner in terms of the cost control measures that I started, but not just doing it for the sake of cost, really building towards the future that we want to operate. Probably the biggest compliment I've gotten about Keith, we were at a recent meeting, and somebody said to me that we could not discern that Keith is a new player on your team. Seems like he's been with you guys a long time already.
I was listening to what you said in both of your responses now, Shawn, about helping with labor productivity and reducing labor intensity. I do think, for example, of the maintenance-free offerings that EnerSys has in Motive as an example. Can you maybe unpack for us a little bit more some of the types of value props and offerings that speak to that?
Unequivocally. Right now, one of our largest opportunities that we're implementing is with a wireless carrier, a major wireless carrier. They are beginning to see their networks, not only increasing demand with things like AI and processing all the data, but they're beginning to see their networks in terms of energy, energy footprint, energy spend. For the first time ever, our products, we have this great controller called our Insight controller. They're managing the power, and they're giving all sorts of other diagnostics in the cell site. For example, we have, through that controller, the ability to now look at power associated with traffic patterns, where we're providing, for the first time ever, the association between traffic and energy.
On top of that, we have something called our energy router, which is smart distribution, where we're actually throttling energy based on traffic to each one of the loads in the sites. With the advent of lithium batteries, we are now far exceeding their need for FCC regulations for backup. We're actually giving them optionality back. If you think about the thousands of cell sites they might have in the utility sector, they now have the ability to go back and make a deal with a utility, a particular utility, to enable themselves to be curtailed so that they get better rates or a more favorable tariff rate across that volume of sites for that particular utility.
Instead of seeing us now just as a necessary evil and a cost driver, they're seeing us as an unlock for revenue potential on top of this operational security issue.
It's a great example, Shawn. Thanks. I want to ask you a little bit about investment priorities. I think you might be the only company within our Industrials Conference that's actually announced closure of capacity in Mexico in favor of expanding U.S. capacity, the tariffs were announced. I would love to get a sense of what drove that decision and how important kind of the carrot of, say, 45x benefits versus a stick of tariffs was in determining your decision.
Yeah. In actuality, by publicly stating that we're strengthening U.S. supply chain and those things, we're the largest supplier to the Department of Defense for battery in the United States. Of course, we get some optical benefit for doing that. The reality is, with our maintenance-free conversion over time and going to things like TPPL and new technologies, we knew all along that we would be reducing the flooded lead-acid battery footprint as we converted these technologies. It was always in the plan. Right now, it just seemed to make more sense to do it to capture the remaining portion benefits of IRA, potential tariff mitigation, and to increase absorption in Kentucky. The other thing I'll tell you, we've actually been very diligent about how we've spent the IRA money. We've kept it separate from our pricing.
We haven't returned that to customers at all. We've done what the law has intended and expanded manufacturing footprint and invested in our facilities. The throughput in Kentucky today is higher than it's ever been. We've given ourselves that optionality. This is more about going sooner and taking some of the benefits of going sooner, but not really any different than the decision we would have taken maybe a year from now or two years from now.
Now, we do view 45x as relatively low in terms of being at risk in the budget process for some obvious reasons. I do think it's fair to say that the market is discounting the 45x portion of your earnings. Outside of the Gigafactory, which I'm sure we'll discuss, what do you see as the best opportunities for deploying $45x in order to grow earnings? Is it M&A? Is it R&D? Talk to us a little bit about how you're using the money.
Yeah, I think it's all of the above. You saw the Bren-Tronics acquisition and the lift that it's giving us. That's outperforming our expectations, frankly. As a part of our strategic vectoring, we're looking very carefully at this aerospace and defense space because we just had this amazing footprint with the Department of Defense and the U.S. government, as well as other ministries of defense around the world. I think there's a lot of opportunity manifesting in that space. Some of the near-term pressure on businesses is providing even more motivation for M&A and for smaller players to get with larger players. Certainly, having some dry powder for M&A is going to be very helpful for us. You mentioned R&D and some of those types of investments. We have been on this journey.
My predecessor, Dave Shaffer, always says putting the Sys in EnerSys, now managing those systems in that environment for customers is going to require just slightly different, we put most of the pieces in place, but it is going to require more emphasis on software and controls and those types of things. We are going to continue to invest in that area of our business for sure. We are going to be, I would tell you, we are going to be fairly opportunistic with capital allocation as we move forward. When opportunities present themselves, we want to be very agile and be able to go after them.
I was really struck when we visited at ProMat around some of the innovation and product quality improvements for the next generation of NexSys iON. I would love to understand the lithium sourcing strategy with the Gigafactory seemingly on hold for the time being. How are you approaching lithium-ion cell sourcing? Do the China tariffs require you to change anything you're doing, reevaluate the supply chain? Maybe just talk to that a little bit.
I think I'll start the comment by saying we deal and buy nine chemistries of lithium batteries in our aerospace and defense business today. We have robust supply chains that go all throughout the world, including Korea, Japan, China, and other sovereign areas. What I would tell you is we have a lot of experience in this area. Depending upon what the application is, I would tell you that there's a great deal of optionality. With that said, China controls 90% or better of the world's supply chain in lithium. Even with the advent of the Gigafactory, if we hadn't paused, our earliest production dates would have been calendar 2027 or better. It is important to remember that we were always going to be buying cells.
With that said, we sort of looked over the hill a little bit at the end of last year and said, you know we're going to take some action. We put some additional inventory on hand just to mitigate. We were not so worried as much about the total cost of cells because of their relative percentage in the overall system. We were more worried about the movement of costs and being able to get that right and be able to price right to market. We have at least three months of inventory on hand or better and a pretty fixed supply chain based on what is going to happen with lithium.
The other thing that we've done, just to give you some color on lithium, remember that TPPL gets you most of the way of lithium without the risk, without the technology risk, some of the safety issues, and without some of these. We have TPPL factories in Europe and in the United States. Should the market turn adverse to lithium, we believe we're in an excellent opportunity to capitalize more on the investments we've made in TPPL. Again, either way that it comes, we feel very good about it.
It's a great point around your chemistry and mixed optionality there. Can we talk a little bit about the overall exposure to the current tariff regime and what risk mitigation plans you have in place?
Yeah. Look, in the wake of COVID, we were sort of fat, dumb, and happy with a fixed supply chain that we'd enjoyed for years and years. What it told us is, guys, you got to get off your butts, get back to work, and develop some flexibility in that supply chain. We've spent a tremendous amount of time, effort, and energy moving things around the world, doing a better job for in-market, for market. For example, our two TPPL factories in Europe are largely 90% for the European market today. We've done that work. Some of our strategies, we'll see how they play out. For example, we moved a lot of stuff from China to Vietnam and Mexico. We never thought Mexico would be at risk with USMCA and that sort of thing. Mexico's had a few bumps lately.
All in all, I think we've, I don't want to say that we don't have tariff exposure. We certainly do. We're in a much more flexible position to deal with it today than we've been. I think what you saw from me in Motive now is that I'm a fairly disciplined operator by nature. We're going to make sure that any tariffs that we can't reprice, oh, that's the other thing I'll mention. We've really scrubbed through the contractual side and given ourselves a lot more optionality in some of those legacy contracts. Anything that we're not going to be able to capture through pricing or mitigation strategies, we're going to attack on the OpEx side.
That's such a good, yeah, go ahead, Andi. Sorry.
I'd just add a little bit to that as well. Shawn has been, just like he was in both Motive Power and ES, I think swift to action on this. We have a dedicated task force team where we have individuals from finance, SIOP, supply chain and procurement that are taken out of their day-to-day roles and put on as a dedicated team to address this. They're doing a weekly executive team readout where we're talking not just about the tariffs that we're exposed to and what our mitigating activities are up to price, which we're being much swifter on making pricing actions and supply chain movements. Let's talk about the market dynamics, even more importantly. What's the elasticity of demand in the markets we compete in? Both the headwinds as well as where we're competitively positioned.
I think relative to a lot of the other players in this market, we've got a global footprint of manufacturing operations that we can leverage, and we've got diverse end markets. There are a lot of levers that we can pull, and we're proactively looking to get ahead of all of those.
Can I double-click on that for the ES segment in particular? Because I remember during supply chain crunch, I mean, that was really when ES faced a lot of challenges and realizing the price recovery of inflation in a timely manner. I think you started to allude to it, both of you, but help us understand better what's changed since then in contracting structures that would enable you to absorb tariff impacts. Are there pre-negotiated pass-throughs? Is it something that you have to open up as commercial discussion? How does it impact volumes? Just trying to understand how it works now.
Yeah, it's interesting. To answer your question, you're precisely right. We've had to get smarter about how we price and the length of the supply chain and the timing of the supply chain. As you mentioned, during that whole COVID period, we are most broadly exposed to tariffs in the ES segment. We had the most work to do in that area to mitigate. That's where we've spent a tremendous amount of our energies since COVID moving things around. That business, if you look at the enclosures or power electronics or the things that go into the ES business, they're broadly exposed to contract manufacturing. Those are the areas that we've taken additional actions and offshored, moved out of China. We've near-shored or put in more optionality around the world.
In fact, I would tell you, in spite of the pressures, some of that now is providing a potential for lift as well as customers are sort of coming back to us and saying, "We did not migrate away from those supply chains as quickly. Can you help us out now that you have developed this other capability?" We see opportunity in it too. You hit the nail on the head. The contract work and the supply chain work in ES has been, for that business, the most important work. For EnerSys, our broadest exposures to tariff pressure in the past.
I'm sure we'll hear more about that in the coming weeks with earnings. I want to ask you about the end markets there. Data center, I think we've heard from companies all throughout earnings and at our conference that just the productivity continues to be really robust. Telecom seems to be getting a little bit more traction on the recovery. Just give us your broad view of the markets and the opportunity in both of those verticals.
Yeah, I'll start with communications. As we mentioned in our previous remarks, we see continued strengthening in the communications space. I can point to public statements by Hans Vestberg where he feels pretty good about where things are trending. If you just think about it broadly now, and this gets into the data center space, Satya Nadella has reaffirmed his position on $80 billion in spend this year for data center and what that looks like. The data environment is increasing. The communications environment, they're going to be the last mile delivery for that data. They've got to synergistically increase their network during the whole when we had the sort of the fallout at the end of calendar 2023, they paused tech spend, they paused break fix, they paused everything to bleed down inventories.
Those things are always pay me now, pay me later type events. They have got to get back after the ability for those networks to process that data. We are getting the same lift in lead and TPPL in the data center space that you are seeing with some of our customers that report publicly. We are getting, I think, a synergistic benefit in the communications networks that have to be ready to process the data. Certainly, data center is more robust at the moment. We have not seen telecom turn back on as a full build cycle environment like we have seen with some of the G spends and that sort of thing. With that said, though, I think we have seen a lot of positive macros that we are keeping an eye on and making sure that we are ready to respond to when they hit.
Yeah, it was only a matter of time, right? I mean, I think the spend was at like a 20-year low. You had talked about this in some of our prior discussions, like you can't defer maintenance spend and certain upgrades forever. If what we're really just seeing now is kind of that deferred spend starting to come through and there's still a build cycle to go, I mean, we could be in really the top of the first inning on a multi-year recovery for your business there. That's what our view is. You can feel free to disagree.
I think the macros are incredible. There's no way that we've become so spoiled with our handsets that we're going to settle for an environment where we don't get all of the AI functionality at our handset. If you just think about it in those terms, you have to be very excited. You think about the ramifications on grid. I was just at a conference where just reshoring and reindustrialization, if that's the goal of this tariff environment were to happen, it would need two times today's grid capacity to power all of that before you considered the first data center. Even if you look at the material handling space, that is not as sexy, certainly in some cases as data center, AI, communications.
If you look at it in terms of how are those folks going to continue to guarantee operational continuity without more local ability to manage power? You were at ProMat. You saw the BESS system in our booth. That was the star of the show. Our new Motive Power chargers are bidirectional. They can provide power to the battery or they can turn the forklift battery into a component of energy storage for our BESS system and provide more operation or more optionality for operations back to the warehouse operator. Those macros we see are very strong across those segments.
I'm glad you brought that up. I wanted to ask you about that because it was really notable that you were able to kind of take the BESS and redeploy it with some adaptations into Motive. One would think the same would be possible in ES, and particularly with some of these mission-critical customers that are dealing with increasing power constraints. Can you talk a little bit about the roadmap and the opportunity for the BESS offering across segments?
We see it the way you see it. Just incidentally, forklifts are classified as off-road electric vehicles. If you take that broadest interpretation and you think of the work that we have done in DC fast charge and storage, what we have really done is given ourselves the ability to manage energy in a vehicle charging environment. Forklifts are just another vehicle charging environment. We are really excited about that. All of the work we have done, if this current administration sours on EV and they have taken some of the wind out of those sails, we have a very, very strong roadmap in material handling, warehouse operations to help our customers in that regard. The excitement at ProMat was palpable from our customers around that. At the same time, you mentioned it can be taken into other segments.
Years ago, I remember when the phone company started shutting down central offices because we were no longer going to need landlines. Now, a lot of that brick and mortar is still there. The operators have said, "You know what those are? Those are mini data centers. Those are AI enablement centers." They are no longer being, now they are being repurposed for data. All of those sites are going to require more power, being that they are very old brick and mortar. They have less optionality because they have been there a while. They have not been provisioned with new transformers and all of those things. There is a lot of opportunity there to help them manage power and be able to perform that mission. We are excited about the communication space. We are very excited about the material handling space.
We have our aerospace and defense component where the bases are looking at their optionality and how they're going to manage through grid challenges. Certainly in theater and forward expeditionary power, which Bren-Tronics has set the stage for that. We have our eyes on a few other targets for that.
You mentioned the Motive business earlier in the context of the optionality around TPPL versus lithium. There has clearly been an ongoing mix shift towards maintenance-free. It seems like that's going to continue here with some of the portfolio decisions. Certainly seemed like demand was pretty resilient based off of what we saw at ProMat and what some others have reported. Maybe talk to that and the ability to the extent volume weakness might manifest, the extent you have of an ability to offset any weakness from an ongoing mix shift.
We have always said we are a GDP plus business in Motive Power, and we trend with GDP. I think what would be helpful to how to look at us a bit differently and why we tend to weather recessions a little bit better. First of all, we are on this maintenance-free conversion, as you mentioned, but we are also on the conversion from internal combustion trucks to electric trucks. That has been a steady march since, let's say, the 1950s, 1960s. There is still a lot of meat on that bone to convert internal combustion to electric. That is not just a green energy thing. That is an OSHA thing. Nobody wants noxious fumes in the warehouse. Electric applications have come a long way. You get a lot more benefit from going to electric in many of the end applications and warehouses.
We have this internal combustion to electric conversion. Then we have the flooded to maintenance-free conversion that is providing us lift over and above the market. Remember, growth is always associated with new trucks. The batteries have a replacement component to them. When you see when GDP turns negative, if we turn negative, we never really bottom as far as the rest of the market. Because of all those factors I just mentioned, within a quarter or two of GDP turning positive again, we're back and running. We recover very quickly. The other thing I would say in those recessionary cycles is we tend to generate a lot of cash. We tend to do really well and it helps us with the dry powder scenario that we discussed. We have that playbook. We can't tell if there's intermittency in the supply chain.
The other thing you got to think about, if tariffs are being announced, being repealed, being announced, customers are doing things like putting material in bonded warehouses. Why? So they can pull the material at a point in time that they think the tariff situation is favorable. That's not a permanent supply shock, but it's an intermittency that gives us fits in the planning. If we see some of that, we'll keep a close eye on it. Andi mentioned the weekly tiger team that we have. I would tell you from a macro level, all of those drivers for EnerSys gives us a lot of confidence that we can weather a down cycle. There's still a great degree of opportunity in up cycles. We're, I'll quote Hyster-Yale, since they've already announced publicly, cautiously optimistic about the marketplace.
Yeah, I just want to put a little data behind that real quick. If you look at COVID year when everything shut down, Motive Power being the one that's GDP indexed revenue fiscal year 2020, which with a 3/31 year end, that end of that year was right when COVID took off. Motive Power revenue went from $1.348 billion to down to $1.164 billion. But the operating earnings went from $149 million to $144 million. We had two quarters where we felt pressure. What excites me is this was under Shawn's leadership, where he really made swift action, put pricing, tightened the belt. We had the maintenance-free conversion continue during that cycle.
To give you an idea, as we round out fiscal 2025, I can't give specific numbers, but revenue up from fiscal 2020 up to 2025 is going to be up in the range of 10% during that five-year period because of a lot of the other headwinds. Operating earnings for that segment up is going to be up over 50%. That just speaks to really, in my mind, the robustness of our maintenance-free options, the ability under Shawn's leadership to index costs during challenging periods. I think there's a lot of exciting times in front of us.
Andi, that's great color. Thank you. I want to ask about specialty, which now spans several markets, aerospace, defense, transportation business. I think you mentioned earlier, Shawn, some of the opportunities around A&D, but maybe just speak to leveraging capabilities across those different verticals and how we should think about the opportunity strategically for growth.
Yeah, I think we feel very good about it. I did not mention transportation, but we have a very compelling value proposition in terms of particularly in the fleet area and in that aftermarket segment that we have targeted. We have really gained a lot of traction because we are talking about managing across a broad fleet asset base. You are talking about the cost of downtime again, where revenue is involved. It is not as acute as the cost of downtime in a data center, but it is still well understood, well known. Our value proposition for TPPL makes a lot of sense in those areas. With that being said, transportation has exposure to GDP. There again, we have this replacement component that whether you are buying a new truck or not, you have to keep the existing fleet running. We tend to have a better bottom in that.
We still feel very good, and we've seen a lot of activity around that aftermarket space in transportation. I already spoke to A&D, but we have a very good relationship with the U.S. government, with the Department of Defense. We've just been such a reliable and meaningful supplier to them that they continue to look for opportunities to increase their footprint with EnerSys.
We did have a question for the audience that I just want to use in this forum. Somebody asked, do electric forklifts take advantage of EV tax credits domestically, just given your commentary that they're electric off-road vehicles? My understanding is no. You can clarify that, please.
In certain municipalities or certain states, there have been some incentives for EV conversion. California was one of them. There was a couple of states like that. Broadly, no. Broadly, the economics, well, not broadly, entirely, the economics make sense on the electric conversion without any incentive. Incentives would just be sort of icing on the cake. We have not really factored that into our models at all because it is just not that material for us.
Yeah, I mean, to clarify, they're not getting the $7,500 EV tax credit, right?
No, no, no. It's more on the energy side. It's all on the energy side. There's no tax credit for the device itself, but there is an energy mitigation and certainly a tariff offset or a tariffing offset. I don't mean tariff in the current sense we're talking about, I mean an energy tariff and a peak energy rate offset that they're getting if they manage their energy better on site. We are helping customers realize that.
Yep. Yep. We just had to make sure we clear that up publicly. We want to thank you both for a great discussion. We have meetings going on the rest of the day and look forward to those. Shawn, Andi will speak again, of course, publicly in a couple of weeks. Looking forward to your earnings. Thank you for taking the time today.
Thank you for the opportunity. No, great to be with you.
Oh, it's great.