Well, good morning, everyone, and welcome back to day three of Oppenheimer's 21st Annual Industrial Growth Conference. I'm Noah Kaye, managing director in Oppenheimer's Industrial Innovation Research Practice. We're very happy to welcome back to the conference, the management team of EnerSys, President and CEO, Shawn O'Connell, CFO, Andrea Funk. You know, Charlotte is on and as well with the slides. You know, this is obviously a pre-quiet period discussion, we're attentive to that and did want to acknowledge that. What we're gonna do is, I'm gonna actually ask Shawn to go with some opening remarks, and then we're gonna get into Q&A. There's a lot to talk about, a lot of exciting things happening with the business. Shawn?
Yeah. Thank you, Noah. I'm really thrilled to be here and talk about our story a little bit. Just quickly about us, you know, as you can see on the slide, EnerSys does stored energy solutions at a time when battery energy storage is all the rage. We've been quietly doing this for a century and a half. We only serve the most mission-critical applications on the planet, and we do this across a technology stack that starts with the key element of energy storage, the battery, but also involves power electronics, and just think of this as the way to keep those batteries charged and then distribute their power to the applications that we serve.
The software systems that control these systems and enable us to manage a lot of them in a network and the services that EnerSys provides when we can't handle those systems remotely. The opportunity for us at the moment is that we're really exposed to two major super cycles. We're exposed to the what's happening not just in the data centers themselves relative to AI, but what's happening to the entire network and communications infrastructure relative to demand on the grid. Certainly data centers are doubling, and we have a commanding position there. Also the communications companies now need to refresh their networks to be able to process all that data. We have a commanding position in power utility and substation and substation switchgear control applications.
The grid needs to get bigger and more sophisticated to handle all this power. It's really giving us tailwinds across that segment. On the other hand, we're exposed to the aerospace and defense super cycle. We're the largest battery provider to the Department of Defense, and we serve allied militaries around the world and they are rapidly trying to address what they're going to do with battlefield electrification with drones and unmanned vehicle. At the same time, EnerSys has a commanding presence in soldier power, in defense-type weapons, and things that would lead into Golden Dome, for example. We're really right in the right spot and a key contributor to that conversation.
In our third segment, warehousing and logistics, that shouldn't be forgotten because we're in more than, in the U.S., for example, we're more than 1 out of 2 warehouses, and we're managing the electric forklifts in those warehouses. Those warehouse operators are facing the same challenges on the grid that everybody else is, only they're not Microsoft. They can't go restart Three Mile Island, they need a lot of help and different help. We can provide battery energy storage systems to the warehouse that we can have work together with forklift batteries to offset costs and provide energy security to those customers. The other big challenge in the world right now is labor, and I'll just take a spin on something Larry Fink said and say we're gonna run out of electricians before electrons.
The reality is it's tough to get qualified labor to administer some of these networks. EnerSys can help there in two ways. One, the software systems that we're enabling, less human touch in our systems. Two, when that's not possible, it's actually an EnerSys employee, not a contractor that shows up to work on our systems. If you look at the opportunity for us, we're competing in areas where we have, again, very high moat in terms of these are high customer trust environments. We have a real right to win. We have decades, if not centuries, of deep industry knowledge that we apply.
Another point I'll make in this area, we're not subject to, you know, you have big cost pressures that come in in the electric vehicle supply chain for battery and lithium battery, and you see those numbers out in the ether that say, a battery pack for EV might be $50 a kilowatt hour or $100 a kilowatt hour. For EnerSys, because we're very specialized in these niche markets, all of our value add happens after the sell. It's how do we get our systems to communicate in the environments that they're in? How do they communicate with the equipment downstream? How do they function specifically to that application? What are the other IEEE regulatory hurdles that we have to clear to make systems safe in those environments, and how do we address customer issues for the solution?
Very, very specialized. A lot of industry knowledge there. Our markets, our SAM is very interesting to us, our service addressable market, but it isn't interesting to people like Tesla, for example, who are many times our size and aren't gonna put the work in to develop those points of industry knowledge to compete in our space. On top of that, Noah, I'll just tell you what we're doing since I took over as CEO a year ago, we've reorganized the company to do a couple of things. We're calling this our EnerGize framework, and what it means is that we've redistributed our internal resources in the company around some key items.
We've come up with our asset-light contract manufacturing, sort of electronic supply chain center of excellence, and that's helping us move very fast and scale in places where we're integrating. We have our lead-acid center of excellence, where we've taken all of the supply chain, engineering, process control, management, operational management, and focused them on this area where we're heavy capital intensive in our legacy lead business, and we're achieving a lot of cost synergies that way. We've got our lithium center of excellence, and a lot of people don't know this, but we've made 9 chemistries of lithium at EnerSys for decades. We have deep lithium expertise that we can now apply broadly to the other markets and use that knowledge to move faster and with less costly structures.
It's really helping us focus in key areas of the company where we're gonna be placing key bets. It's helping us strip out cost and give us OpEx leverage so we can grow faster, we're really pleased with how that's working so far. I can tell you that we've changed out certain members of the management team in my first year. The team's working together. They're to lack of a better term, energized. We're working together with clarity and focus to solve these major customer challenges of energy, security, and labor scarcity. As our results the first year have shown, we're delivering higher performance. That's kind of the elevator pitch for the story.
Yeah, it's a great place to start for us. You know, you talk your markets, the company. I appreciate you breaking it out this way. Can you sort of help us level set on how much, what percentage of revenue those end markets present for the company today?
Yeah. If you look at our network infrastructure business, that would be telecommunications, utility, data center, that's about 42% of sales. If you look at our warehousing logistics business, it's about 41% of sales. Our specialty business for A&D is currently today about 17% of sales.
Very good. To slice things slightly differently, with these centers of excellence, lead-acid, power electronics, lithium ion, how could we think about the amount of revenue each of those categories are responsible for today?
Yeah. I think what we've said publicly, you know, when we set out to do systems, and now we're moving from systems into solutions, we, you know, we were probably 95% or more dependent upon a lead-acid battery in our path to monetization. Now, if you look at it, we're trending much, much lower than that. Total concentration of revenue is around lead-acid, which means that, and Andi, you can tell me the specific number we've socialized so I don't screw up our quiet period here.
What that means is all of the other things we've done from a system perspective, and, Noah, you've been around, so you know the Alpha acquisition and bringing on the broadband power supplies and telecom power supplies, the growth in our lithium business, growth in that section of maintenance-free, but also the growth in A&D. Andi, are we 60/40 today in terms of lead acid to non-lead acid? What's the, what's the mix?
That's probably close enough. Yeah, we haven't really given anything specific, but that's directionally correct, Shawn.
Oh.
That's okay. That's good.
All right. It was.
I'm organizing, I'm sorry.
No problem. Can we talk a little bit about the goals for this Investor Day? You know, broadly speaking, it's gonna be your first, Shawn, since taking over the helm.
Yeah. Well, we've been listening, Noah, and we know the first thing we need to do is deliver clarity around our story. We intend to very much simplify what it is that we're doing. We vowed that clarity. We've been working on that clarity internally with our team. We want you to know why it isn't such a challenge to serve these markets, because the technology we're using can be broadly applied. We're gonna tell you what the key bets that we're making that are gonna help us grow above the traditional industrial, you know, growth rate, and we hope to communicate that in a way that it's very clear to you how we're going to monetize.
The other thing I'd really hope to convey, you know, I was at a recent conference, and somebody sat down with Andi and I and said, "Don't you and Tesla do the same thing? So, you know, if I had to bet, I'd bet on Elon." It made me realize they don't really know, you know, we don't do what Elon does. Fortunately for us, he doesn't do what we do, because he's got much bigger fish to fry. We need to communicate why we really are different. These are niche markets. When we talk about battery energy storage, we're not going after the open C&I market with ABB and Siemens and everybody. We're going after our markets, like the warehouse, where we have a right to win, decades of knowledge.
We know how all the forklift manufacturers' batteries are functioning, what the operational needs are, and how to combine that with the best system for the best operational outcome from that warehouse. We know that better than anybody on the planet, we're gonna exploit those areas. We hope to give you that clarity. Kind of a final thing, What's gonna happen in five years? I think the counsel we've gotten and what we hope to do is show you the levers that we're going to use to build a credible and replicable model to deliver EPS growth year after year. We're gonna spend a little time demonstrating what those areas are, how we feel about them, how we're gonna continue to leverage disciplined OpEx, leverage NPI for market growth, and inorganic M&A.
You know, leverage the normal growth rates for our industry along with our tailwinds and talk about how we add in capital allocation on top of that, and we get you to a pretty good model. Those are the things we hope to accomplish that day.
All right. Very, very helpful, Sean. We're looking forward to it. I wanna ask you a little bit about supply chain management. You know, the company's announced a number of factory consolidation initiatives. You're making more stuff in the U.S., you're reducing your Mexico exposure. You know, where do you see the opportunity for additional consolidation of your footprint? Conversely, where do you see the most need for expansion?
Yeah. That's a great question. There's a couple of benefits for us in the consolidation of footprint. For example, our data center business just continues to grow in the lead side substantially, and we've socialized some of those numbers externally. It's great growth. We were capacity constrained in Tijuana. We've put all these investments into Missouri to increase our TPPL capacity, and the product, actually, TPPL actually gives you much better density than the old lead-calcium book-mould format battery that was being made in Tijuana for data center. We've done two things. We've unrestrained our capacity for growth in data center, and we're giving the user a better battery.
We're making decisions like that where we're sort of, you know, closing the door a little bit on old technology and making sure that everything we're doing is forward-looking. In terms of managing the old lead apparatus, we've done yeoman's work. There's still some opportunity out there and how you should look at it is Our job is to deliver, as I said in our model, replicable results year after year. As we see markets, we don't wanna be ahead of market. As we see markets trending to different technologies, you should expect this management team to just have a steady diet of reducing the areas that we don't think will represent the future and expanding in the areas that we do. We've socialized, we're gonna build a lithium plant in Greenville.
We thought we'd have an announcement by now. We're moving it at the pace of government. We still feel very good, very strongly about that. There's when we release that model to you and talk about the intricate parts of it or the constituent parts of it, I think you're gonna find we've done a really nice job de-risking what that looks like. A really nice job in, you know, getting absorption and pre-loading absorption and de-risking technology. You'll see expansion in areas like that lithium plant that represent the future and where our lithium roadmap's heading. You'll see expansion into areas that are near-term adjacencies, like we've talked about battery energy storage systems, starting with motive power in the warehouse.
You'll see us expanding to accommodate the munitions backlog we've socialized. The nice thing is we have real partnership with the defense apparatus to help us fund equipment and do different things. It's not just on EnerSys' shoulders to do that from a capital allocation perspective, although we got lots of dry powder if we needed to go it alone. Those are the areas that you'll see strategic bets on growth on where the future is heading.
Well, you know, we don't wanna jump in front of that announcement around the lithium plant. We did note that DOE included funding for it in the list of kind of projects that are retained here from kind of the original funding source. you know, so maybe just comment a little bit on that and how it might impact your thinking on sort of the size of the or the scope of the facility.
Yeah. It'll be a bit different than what we would've said a year ago, and we've spent that year being very mindful about what that looks like. As we point this towards the defense apparatus, you know, the emphasis won't be on an electric vehicle cell format that was for EV charging. It'll be more for, you know, in line with helping the Department of Defense consolidate things like drone and soldier power platforms, which incidentally, over 90% of the supply chain or the war fighter originates in China today. It gives you an idea of why this is such a strategic imperative.
When we do that, when we point it at those markets, we're also dealing with program sales where we're not subject to weekly commercial fluctuations in the EV battery supply chain market, for example. It's really a lot of what you're, what you should hope to see from us and what I think you'll see, a massive de-risk in what that project looks like and a very smart way of going about it.
I guess in the interim, just talk about your sourcing strategy on lithium today. You know, the recent rise in lithium pricing, we've taken note of. Any impact to your cost structure? I guess more importantly, you know, does your existing supply base support, you know, at least in the, in the near term before the factories build a ramp on things like lithium UPS offering?
Yes. I would tell you that for us, all things being equal, you know, in this make versus buy analysis that we do, because of the fact, by merit of the fact that all of our value add and part of our strategic premise comes after the cell, that the cell, whatever the cost of the cell is, it's equal for everybody. That's sort of level setting in the marketplace. On top of that, you have to make sure that the communications, in the case of a data center with the UPS and the, you know, the site management system is there. You have to make sure the cybersecurity and gateways are there. There's a different set of testing and UL requirements to the data center space versus the EV space.
That's all the secret sauce and process knowledge and customer knowledge EnerSys is bringing after the cell. If the cell cost goes up, it goes up for everybody, and it's up to us to manage then our part of the value add to ensure we have the winning solution. The other thing is, if the cost gets prohibitive on the lithium side for data center, we're gonna sell a lot more TPPL batteries and currently, you know, continue to enjoy very nice CAGRs and what that looks like on the lead side. We sort of have a hedge there. The final part of your question was about supply chain. We are working with suppliers that can grow and scale with us and, you know, some of the most credible in the world.
We believe that we have the ability to move pretty fast and support our customers. We have one other thing, Noah, that I think might be a little underappreciated in the market. There's a lot of startups out there that can't that won't make inventory investments to be able to serve customers because they can't. EnerSys has the ability to do that, so we can put some of that dry powder to work to bolster our supply chain and make sure that we have plenty of ability to service our customer.
That's helpful. Look, we're all tired of talking about tariffs. I know you are, that you've had a, I think a tariff, task force in place now for quite a while. Maybe just sort of a refresh on, your manufacturing footprint and supply chain and commodities exposure to the current tariff regime.
Yeah. Incidentally, I'm super proud of that team. I mean, they have, they've really mitigated substantial, if not all impacts to our shareholders in the work that they've done. You know, you bring up the point about a global footprint. You know, we're distributed across three major regions. APAC with a couple of factories still in China, facilities and production facilities in places like Melbourne, Australia. Then we have a concentration in Europe and where we manufacture predominantly in the north of France, U.K., and in Poland. Then we have multiple factories in the U.S. and multiple facilities, depending upon whether they're lithium for A&D or lead facilities or electronics facilities. The team has done a nice job on a couple of fronts.
They've diversified our supply chain in ways that never existed going into COVID or the big supply disruptions that we've seen. They've gotten the engineering teams involved to design in more microprocessors, for example, in the electronic supply chain to give us optionality there. They've done really yeoman's work in the lead apparatus to, as we saw antimony go crazy last year, they worked with our engineers to change some of the metallurgy to defray costs there. The team has gotten very good.
I will tell you, Noah Kaye, with the centers of excellence, now that we have specific deep expertise on the electronic supply chain, on the lead supply chain, on the lithium supply chain, and they're focused, they're moving much faster and solving these problems at a rate that is unremarkable because we haven't come to you with big failures to talk about. They've mitigated the problem. We feel very good about that. What we don't know, and clearly where everybody will have exposure, I filled up my car this morning, and it requires high octane, and I was shocked. I paid, like, $6 a gallon. You know, if depending upon the, you know, these energy prices, On one hand, it'll give us tailwinds.
You know, the, you know, when the cost of fuel goes up, you typically see motive power, you know, fleet operators move to electrification faster from their old gas trucks. That provides a little tailwind. In general, energy prices going up for everybody across the board is problematic. What net effects and trickle-down effects it'll have in our markets is yet to be seen. I think there's still some uncertainty there for us around this issue of Strait of Hormuz energy. Fortunately for us, we don't have a lot of our dependent supply chains moving through the Strait of Hormuz, where it's going to restrict production, although we could pay more for overland freight in some cases.
I can give you a little bit of dimension if you'd like. About 22% of our U.S. sourcing is exposed to tariffs. I think we've shared previously, we've got about $70 million of annualized exposure because it went into effect during 2026. I think we have about $50 million-$60 million of ex- direct exposure fiscal year 2026, about $10 million-$15 million indirect, of which we've mitigated from supply chain mitigations, you know, maybe $25 million-$30 million, leaving us with about $40 million of net tariff exposure, which to Shawn's point, we proactively, that tariff task force, fully offset. They're now onto the inflation. While we can't control the macro, we feel very good about our ability to be proactive there.
Yeah. Thank you, Andi. That's very helpful. You know, let's dive in on the data center market. The business does seem, you know, very healthy growth. You know, even if lithium adoption is growing faster than lead acid, the fact that you've been able to see the growth rates you have in lead acid is commendable. The question we've gotten from folks is, you know, where does lead have an advantage versus lithium UPS in the data center market? How does EnerSys differentiate today between kind of traditional compute and high density or AI compute?
Well, you know, you it's a very smart question because you've appreciated that there are within the realm of data center, there are clearly different objectives, and so there's different architectures. A large language training data center may only require 4 nines of reliability versus 5 nines of reliability because it isn't the same criticality around the loss of data, whereas a financial institution is still 5 nines of reliability. We are still seeing greenfield builds in lead acid, and they tend to be in areas where they, there are constraints either by the authority having jurisdiction, the local municipality and their attitudes toward lithium. They could be constraints for the building architecture and limitations on fire suppression because lithium is a volatile chemistry.
It may just be the risk tolerance of that particular user, but it also could be cost. Lead acid, even TPPL selling at a premium to traditional lead, is still below the low end of LFP or some of the other lithium technologies when you see it come in. Remember all of that value add stuff that happens on top of LFP, so you can't When I make that statement, it's LFP in the data center application, not the LFP raw price that you see in the EV supply chain. There's a lot of factors that go into that. We're still seeing a tremendous amount of lead acid going to greenfield.
The other thing that you can do with TPPL that you wouldn't do with lithium is you can replace traditional lead acid with TPPL in a replacement cycle because the form factors are very similar. The charging is very similar. The fire suppression is the same.
Yeah.
You don't have to modify the site. We can actually cannibalize traditional lead-acid with TPPL, where lithium would not do that. That's also where some of the lift is coming from.
Can I sort of double-click then on kind of the mix of TPPL versus traditional lead acid?
Sure
coming to this market for you?
I don't know, Andi, if we've socialized that yet externally, mix between lead-calcium TPPL.
We haven't.
Well, we'll look forward to more color on that. Certainly the, you know, advantages make sense from a performance standpoint. You know, you've recently started talking, of course, about developing the UPS offering with lithium. Maybe can you just size how you see the lithium UPS opportunity and how you plan to win share in the market?
It's massive. You know, our UPS business today, our revenues are about, correct me if I'm wrong, Andi, approaching about $450 million. You know, that's the chunk that's data center today, and it's all lead acid. I you know, if you know, 60% of greenfield data center is now going lithium and you're still dealing with a cost delta of 3-5 times out of lead acid, you know, you're talking about a very large opportunity with data center doubling. It, you know, I look at it and just think if I had the same type of market share that I had in lead acid, you know, we could at some point, you know, we would be more than double our size today.
Now, I don't want you to put that in a model because we have to go out and prove our system. You know, we have 0 market share in lithium today. There's no reason why, you know, our SAM couldn't be well above $1 billion in that area or our right to win. We're very excited about that opportunity.
Yeah. If, if you look at where it could go, I can just give you a little bit of data to kind of frame it. We, we look at, because there's a pricing delta as well as just the growth in the overall market. About 1 gig of stationary UPS systems using EnerSys batteries is about $100 million in sales, and most of the new builds are going in for lithium for stationary UPS. If you see the hyperscalers right size the backup to perform, that requires continuity. About 60%-80%, as we mentioned, is of the, of total load is battery backed up in modern AI facilities, reduces the battery hardware per gigawatt versus the legacy designs, particularly with stationary UPS, but raises the performance, services, and lifestyle value for the installation system.
The overall data center capacity is expected to be by 2030 about 100 gigawatts. We're focusing on the centralized UPS, so that portion of the addressable market, probably using the ratio, is gonna be in the vicinity of $7 billion by 2030. Massive opportunity for us, again, where we have a leading market share position in the lead acid piece. Same customers who are now going after lithium.
Andi just messed up all of my sandbagging.
It's gonna take time to ramp up, but, you know, we've kind of gone through that math and communicated that externally already, so.
I guess the follow-up question here is, you know, around Right to Win. There are two categories here where the company has historically differentiated, right? There's the niche chemistries that have been developed for bespoke duty cycles, and then there are these commodity cells you're talking about where you have your own secret sauce around controls and power electronics and ruggedization. How do we think about where the lithium UPS differentiation sits? Is it more the niche chemistry? Is it more the secret sauce? Is it some of both? Help us understand.
Yeah, there's a lot in the alchemy there, and you've elucidated it very, very well. On top of that, no, these are high trust environments, and we have a primary seat at the table with all of the hyperscalers and the names you would know through decades of earned trust. Batteries are fickle creatures, and there are always issues, right? Ohm's law is very interesting when you start subjecting it to harmonics and all sorts of other concepts. EnerSys just has a track record of solving the user issue, jumping in and helping out, and then asking whose issue was it. Again, that high trust is earned over time and experience, and we've garnered that in lead-acid.
The other thing that we do is we handle the supply chain, the installation, and the aftercare services very well. The biggest providers of lithium today into a North American data center market aren't here. They don't have those services. In fact, you hear horror stories that you're given an email address if you have a problem, and you're guaranteed a response in 72 hours. That doesn't cut it.
No.
These are 5 nines reliability. They, this is our industry association is called the 7x24 Exchange, meaning you have to be up, you know, up 24 hours a day, 7 days a week, or these systems wouldn't exist. What we have actually, it's painful for me as CEO, but we've had users come to us, large users, the largest in the world, and say, "Until you get your product up and going, would you handle your competitor's product for us? We'll pay you a markup over what we're paying them." That's not the issue. The issue is we want your service, your supply chain, the way that you address issues when we have them, and we'd like you to be involved.
All that tells me is the Right to Win is every bit as strong as I think it is, and that we just need to move faster in getting our product out there. I don't wanna go down the rabbit hole of handling somebody else's.
Yeah. To follow up on that, I mean, with UPS, it has historically generated a recurring revenue stream. Just how do you think the value of a workforce with experience servicing DC power in the data center evolves over the next five years?
Oh, I think it's gonna help us further embed stickiness. These systems have to be watched more closely than lead-acid. They have to be remotely monitored. If you're tracking the, you know, I made the Larry Fink comment earlier, but if you're tracking the trades shortage inside data centers across the board, from HVAC cooling to the electrical infrastructure, mechanical infrastructure, these data centers are more and more reliant on remote handling of their systems. There's only so much that can be addressed through the building management system. EnerSys sees this as a massive opportunity.
The other thing that's going on that I think is really important for investors to know, when lithium first came out and first started making a splash in the marketplace, there was this idea that it was going to last so much longer than lead, that it would change the economics of the industry. The problem is this. With the AI component to data centers, the loads are intermittent. You could go from 100% load to no load or 30% load in milliseconds. This is wreaking havoc on battery systems. The, you know, I first heard, as long as I've been in the industry, every time a new chemistry approach comes out, I'm hearing it's gonna be 15-20-year battery. I've heard that in my career. It's no different now with lithium.
Some of these operators are finding their lithium batteries with high intermittency are lasting two years.
three years. The nature of these loads, we think, is actually going to have very nice exponential growth factors in battery volumes in the aggregate. We're excited about that. You know, Noah, as we extend that conversation into what does high voltage DC look like, and 800 volts DC, and what's the implications for EnerSys? That just means for us, it's always been DC for us 'cause we are in the middle of the rectifier and the inverter and the UPS system. It just means for us the systems are gonna get bigger. We're gonna sell more cells. There's always gonna be a need for centralized backup in the data center space where we've been the strongest, and we think those are all great tailwinds for EnerSys.
Well, we're looking forward to hearing more about this. We've got earnings coming up in a few weeks, and then the Investor Day. A lot to be excited about here. We didn't even get to defense and, you know, some of the other growth initiatives. Plenty more for people to dig into. Of course, they can contact us, you know, or Lisa Hartman and Shawn O'Connell at the company to learn more. We've got to close it there. Shawn O'Connell, Lisa Hartman, thank you. Andrea Funk, of course, thank you very much for the discussion today, I hope you and everyone else has a great rest of your day at the conference.
Our pleasure, Noah. Thank you for including us.