Ladies and gentlemen, thank you for standing by. And welcome to the Q2 2021 EnerSys Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session [Operator Instruction]. Please be advised that today's conference is being recorded [Operator Instruction]. I would now like to hand the conference over to your speaker for today, Mr. Dave Shaffer, President and CEO. Sir, you may begin.

Thanks, Twanda. Good morning, and thank you for joining us for our second quarter 2021 earnings call. On the call with me this morning is Mike Schmidtlein, our Chief Financial Officer. Last evening, we posted slides on our Web site that we will be referencing during the call this morning. If you didn't get a chance to see this information, you can go to the webcast tab in the investors section of our Web site at www enersys.com. I'm going to ask Mike to cover information regarding forward-looking statements.

Thanks, Dave. Good morning, everyone. As a reminder, we will be presenting certain forward-looking statements on this call that are based on management's current expectations and views regarding future events and operating performance, and are subject to uncertainties and changes in circumstances, or actual results may differ materially from forward-looking statements for a number of reasons. Our forward-looking statements are applicable only as of the date of this presentation for a list of factors which could affect our future results, including our earnings estimates. See forward-looking statements included in Item II 'Management’s Discussion and Analysis of financial condition and results of operations, set forth in our quarterly report on Form 10-Q for the fiscal quarter ended October 4, 2020, which was filed with the US Securities and Exchange Commission. In addition, we will also be presenting certain non-GAAP financial measures. For an explanation of the differences between the comparable GAAP financial information and the non-GAAP information, please see our company's Form 8-K, which includes our press release dated November 11, 2020, which is located on our Web site at www.enersys.com. Now, let me turn it back to you, Dave.

Thanks, Mike. I will spend the first few minutes of this morning's call providing an overview of our solid second quarter results and the state of our business overall. Then I will take a step back and provide an update on how we're tracking against the strategic initiatives. We laid out at our 2019 Investor Day, a little more than a year ago. As we entered our second quarter, the COVID-19 pandemic continued to disrupt economic activity evenly in markets around the world. However, we began to see a rebound from the virus’s impact on our business throughout the period and actually exited the quarter with borders very close to pre-pandemic levels. US and Chinese motive power markets have recovered much faster than Western Europe, while energy systems and specialty were less impacted by COVID. We continue to build on the cost reductions, we instituted early in the first quarter, while always staying ready to flex operations backup in response to demand recovery. As you may recall, our model allows us to quickly adjust our CapEx and OpEx without impacting our revenue growth objectives or our quality of service. Many of the OpEx initiatives we have put in place will enable us to maintain an improved level of operational efficiency with our new global line of business alignment even as the demand ramps up. All of our major facilities remain open and we continue to prioritize the safety of our employees as COVID cases rise around the world. Despite the ongoing headwinds caused by COVID-19, the diversified nature of our business was evident during the quarter as we reported solid second quarter fiscal 2021 adjusted earnings of $1 per diluted share. Our specialty segment was particularly strong, especially in the transportation portion of our business. Energy systems turned in a…

Thanks, Dave. For those of you following along on our webcast, we have provided the information on Slide 8 for your reference. However, I am starting with Slide 9. Our second quarter net sales decreased 7% over the prior year to $708 million due to an 11% decrease from volume, a 1% decrease in pricing net of 1% increase from currency and 4% increase from acquisitions. On a line of business basis, our second quarter net sales in motive power were down 21% to $264 million and Energy Systems net sales were down 1% at $341 million, while Specialty increased 24% in the second quarter to $104 million. Motive Power suffered 21% decline in volume due to the pandemic and 1% decline in price, net of 1% increase in FX. Energy Systems had 4% increase from the NorthStar acquisition and 1% improvement from currency, offset by decreases of 1% and 5% in pricing and volume respectively. Specialty had 17% from the NorthStar acquisition less 9% of volume improvements and 1% increase from FX net of 3% decline in price and mix. On a geographical basis, net sales for the Americas were down 8% year-over-year to $481 million with an 11% volume drop and 1% price decline net of 4% increase from acquisitions offset by 1% decrease from currency. EMEA was down 6% to $172 million on 13% volume and 2% price declines with 5% improvements in currency and 4% from acquisitions, while Asia was up 3% to $56 million due primarily to currency. Please now refer to Slide 10. On a sequential basis, second quarter net sales were up slightly compared to the first quarter driven by translation improvements. On a line of business basis, specialty increased 17% with NorthStar starting to contribute its capacity for transportation sales, while motive…

Thanks, Mike. Twanda, we can now open the line for questions.

[Operator Instructions] Our first question comes from the line of Noah Kaye with Oppenheimer.

I guess I'll start with Dave and Mike. Last quarter, you provided a very helpful kind of commentary on orders cadence and how that trended during the quarter. I think you did some disaggregation amongst the segments and regions. I wonder, you mentioned, obviously, the headline here seems to be that orders are close to pre-pandemic levels. Can you maybe just aggregate that a little bit and provide us some color if you want, either by segments or geographic trends of how that has trended over the course of this past fiscal quarter and maybe even into October or November?

I would say over the last 12 weeks orders have stabilized and so it's not just one week phenomenon. And as you know, most of the gap in the orders previous to that was in the motive power segment. So that's where most of the improvement has occurred. It's broad based. As I said in my prepared remarks, China and the US seem to be coming back faster in motive than Western Europe, even though we do see recovery there as well. It's just not as fast. And it's a moving landscape with the transition to maintenance free. We've done some really good things in our Polish factory. So there's just a lot of moving pieces that precipitated the Hagen decision. But overall, the order flow environment has been solid. Actually, as I noted in my prepared remarks, Energy Systems rest of world had a very good quarter. So it's broad based. Mike, is there anything I missed there?

No, I think the order intake has been very consistent with prior year levels, and it's been there for three, maybe four months now.

I want to ask you, I think you provided some color on the decision to close the German facility. I want to ask you about that decision in the larger context of the technology shifts. You mentioned that even you've been maybe seeing a faster than expected acceleration in demand for the maintenance free batteries and away from flooded lead acid. Would you say, first of all, that there seems to be more demand specifically for lithium in this environment and that's supporting some of your launches? And then also, how do you think about potential vertical integration risk for any of the OEMs, whether it's in the Americas or in EMEA on the lithium-ion side if they do decide to go further in that direction?

Noah, most of the demand is TPPL actually. And I've told you for many quarters now, we're trying to create a common experience for the customer, whether they're using our TPPL technology or lithium. So whatever is inside the box, they shouldn't care about because the way it 's charged, the way it's managed is the same and it's proving out the way we wanted it to. And most of the orders, if not all of them in the recent quarters have been for the TPPL. We think that as we push deeper into some of these real heavy duty customers, the folks that run their trucks 24/7 365, that's going to be an opportunity for us to pick up more sales in the lithium side. But we're actually doing extremely well with tinplate Pure led, and it's a high quality problem. But right now, we're still in that situation where we're limited in how much we can do as we bring on this additional capacity. So yes, I would say it's mostly a TPPL story today. And we're hoping that the new lithium products are going to take the maintenance even further. And again, the Hagen decision wasn't -- it wasn't just about the technology shift, Noah. If you remember, there was the Sunlight fire and the Sunlight recovery. It's always been a low growth market. We've expanded production, productivity and capacity in Poland. So it was a complex, difficult decision, an emotional decision, but it was more than just the conversion to maintenance free.

And I would say that while the pandemic may have influenced the timing of that decision, I don't think it changed the decision. The first two items that being the conversion to maintenance free and the collective supply from the entire industry of flooded products versus its demand, we're simply in an oversupply situation I believe.

Let me just sneak one more in here. Dave, I think you mentioned that there has been a nice uptick here really in some of these 5G related revenue streams coming in here, and it's been masked a little bit by broadband. Just considering all the different pieces and customers that you have. How soon do you think we actually get back to significant year-over-year growth in Energy Systems. Is that a 3Q event, a 4Q event? When do you really feel like we're going to start to see some true kind of top line inflection here in the business?

Well, in the telecom sector, we're already seeing the growth and we expect it to accelerate further probably spring time, maybe starting our new fiscal year, we expect probably another uptick in telecom. So the gap right now has been the broadband, the cable TV, Comcast, Charter folks. And you can see with their spectrum auction and some of the projects we're hearing, they've got some very aggressive plans laid out to bring faster speeds and more services to their customer bases. We kind of think is the big five in the US between Verizon, AT&T, T-Mo, Charter and Comcast, those are really the big five broadband. And each of those customers, we have very good projects in the headlights. And it's broad-based and not everybody and what can be a little confusing, I guess, is each of those big five have their own strategy on how they're going to use the 5G frequencies and technologies where their initial focus is, what the longer term focus is. The good news for EnerSys shareholders is we have a broad suite of products. And we have reach, and services, and relationships and brand awareness across all five of those major accounts. And then I think the real longer term opportunity still exists globally for us to take these successes that we're starting to enjoy today in the US into the broader international markets. So no, we couldn't be happier with the Alpha acquisition, the plan. I think the timing has been disrupted from when we did the original acquisition. But by enlarge it's going to plan and we couldn't be more excited about the 5G opportunities.

Our next question comes from the line of Greg Lewis with BTIG.

So I just wanted to talk a little bit about the specialty, the kind of the defense area. Just kind of as we think about it and the potential for new administration? What is that -- like you could give us some sort of context. Does that kind of changed that business in terms of pace or ramp, or is it more around product life cycle updates or changes? So I'm just kind of curious as we -- I mean, because clearly, it was a good quarter you guys called it out. As you kind of look out over whatever time period you want, like how should we be thinking about that kind of as we move forward into a potential change in government?

It's a growing important sector for us. And I think our success of late has mostly the change of trajectory and focus for us is a result of an acquisition we did a few years ago when we acquired the cobalt sulfide technology, the Enser deal, thermal batteries and so that's where we've seen the biggest stair steps. But based on the feedback we're receiving, and actually I have to say that part of our defense business, the first half of our fiscal year was disappointing. So it's a mixed story there but other parts are really going very strong. So by enlarge, we haven't heard from anybody on our sales team any sort of change in what they expect -- and some of the things we're working on are long term programs anyway. So we aren't anticipating any major impacts for our shareholders from the change administration. Mike, do you see it any differently?

No, you need to keep in mind, Greg, that the US fleet, whether it's helicopters, tactical vehicles, submarines, jet aircraft, that's a pretty fixed fleet and the US is going to do their maintenance on them and they have those weapon systems last for 20, 30 plus years. So that's a very steady stream. We can count on selling $40 million to $50 million in tactical vehicle batteries every year. So that part doesn't change. Where we've seen growth, the thermal products, the investment in precision guided munitions, missile systems, defense systems, shield, if you will, that's where we've seen growth. We've seen really great results out of our satellite business. So the core business, which is the bulk of the revenue is really steady. And although it can be -- move a little bit depending on timing of when they make their orders. And sometimes they have budget restrictions early in the pandemic, they weren't really good about ordering at that point but that always comes back and it generally always level set. So we're seeing growth on that Enser based side and in our satellite business.

And then just one more for me, and you kind of touched on it around the forklift business. And clearly, TPPL is still where there's a lot of demand but you have the iON product in I guess testing. And I think it's very topical just because you hear a lot about how hydrogen is going to change this market. Clearly, your customers aren't there yet. But as you think about the iON and the rollout of that, I guess a couple of questions around that and you I think -- in the prepared remarks. But as we think about CapEx rollout, what do you see the path for the rollout of that and really customer acceptance in any kind of way that moves the needle, it doesn't necessarily sound like it's a 12-month type window, it sounds like it's more going to be a little bit farther out. Any kind of color you could give around that, I think, would be pretty helpful.

Yes. I think what's most important to our customers and what's changing the dynamic is how heavy the equipment is utilized. So in traditional kind of manufacturing and distribution centers, they didn't push the equipment historically as hard as they do today. And they're trying to go to fewer and fewer manning human beings in these facilities. So there's less human interaction and they want to push the equipment to operate more hours of the day. And so the key issue for them is maintenance free, it's uptime of the equipment. So the hydrogen options are certainly out there as one alternative. We think that our new maintenance free batteries, especially when coupled with wireless charging opportunities is another answer, because again, it's that lack of human beings and that it's really just keeping that truck in service. And fuel cells, we worked with fuel cells a year ago, we had made an acquisition or a venture into that area, and it has its own sets of issues. So we chose the battery, to stick with the battery route in this market. And we feel very, very good about our capability, which we think is unique in the market. We know it's unique in the market is that we have an engineering group here that not only does all of the battery design work, all of the charger design work, all of the canned bus and integration design work. So we really have a total comprehensive systems capability that none of our competitors do. And we think that given any challenge, we can find a solution and the maintenance free is an integral part of that. And certainly, the hydrogen guys are going to find their places in the market. Historically, we've seen those pencil in the extremely large sites with many trucks. But we think that we're on the right track with our new maintenance free products.

Our next question comes from the line of Brian Drab with William Blair.

Can I ask you to think for a second, just about next year like fiscal '22, and you have these kind of budding opportunities here, several of them, transportation, in the auto, in particular. I'm interested in your thoughts in that lithium and then also 5G. And if you think about the incremental revenue opportunities from each of those three for next year, what could that be? Are you expecting to sell $10 million in lithium products or $50 million? And if you could just try to quantify even with some broad ranges for those three categories for incremental revenue over the next year?

I'll take the lithium piece, and then Mike can maybe take -- because we just came through all this -- we just redid the model with all the sales guys. So he has everything. I wouldn't put high expectations, Brian, for lithium on the EPS line in the near future. We've got to get the kinks out and the cost down. And we have the roadmaps. But when you start up, the volume is low. We're not getting all of the -- we're still in soft tools on some of these things. We still have a lot of work to do on lithium piece. So it's not nearly going to have the impact that TPPL has at the earnings line. And on the revenue line, it's going to be in the tens of millions of dollars we expect in fiscal year '22. But I can tell you, the sales guys are super excited about it and they're pushing us every day, because they want to have a maintenance free solution for every nook and cranny of the marketplace. And today, we need that lithium to go after the real heavy duty users, as I referenced earlier. So that's the focus. But I wouldn't put too much in the model right now on the bottom line as we sort through the start-up and ramp-up issues. And then Mike, on the transportation piece, Do you want to…

Dave, can I just ask before you move on from that. Longer term, I believe you said in the past that you think lithium margins should be in line or even above the corporate average margins. Is that still the case and is that like after year one or what's the time?

Yes, I would say that's about the right time. So the guys -- and the only reason I don't want to commit to it sooner is we've got to -- once you make all these design changes, you've got to go through the UL approvals and everything again. So I don't want to get too far out over my skis on that. So I think for F '22, let's just be cautious. But going forward, it will absolutely be an accretive margin business. Michael?

So Brian, with regard to 5G opportunities, I think Dave in his remarks said it's worth noting that we already see $50 million of 5G related revenue lift during this year, and that was supposed to be not a year-to-date reference but a full year reference, just for clarification. But as we said, we believe that that real growth in 5G for us, and everybody is -- all the vendors in this exercise have different timing for when they may have a part to play in it. But we think that this is probably going to happen in the late spring, early summer of next year as the outdoor plant, which is mostly what we're working on. It's not a real -- winter is not a good big time for doing that kind of work. So we really see next spring -- early spring, we're going to see a lot of order activity, we hope. And then by late spring, early summer, I think we will be busy on the 5G front. And we really do feel good on whether you're a telecom player or a broadband player that we have solutions that will work for you to build out a small cell network.

And Brian, the other thing you've got to remember that's unique about 5G, the speeds are so fast that the power required to move those 1s and 0s at that speed is very high. So the power consumption of this equipment is for, however you want to view it, per bit of data transmitted, the power requirements are very high. But everybody is doing it differently, whether it's CBRS spectrum or the millimeter wave, is it a fixed broadband initiative, is it to move from an MVNO model to doing their own wireless networks. Each one of these folks is committed to their own strategy. But in each of these cases, the power requirements will increase regardless of whatever their particular strategy is every one of these higher-speed networks, higher-capacity networks is going to require more power.

Which is obviously good for Alpha you're saying just tie bow on that.

Right, that's good for us.

And then auto, what's the incremental revenue opportunity in '21 -- '22 versus '21?

So I think that the demand is there. We're only limited probably by our ability to execute on that one. So the high-speed line comes up and assuming that, that is initially directed at automotive type of resources. We got to make sure that the front and back end of that factory in Springfield, Missouri is ready to run three shifts when it is, that should be able to produce an additional $150 million of revenue on a full year basis. So that benefit won't show up in FY22, it will be because that ramp up will -- starting probably in December, it's going to make that increase over the next 12 plus months. But we think that that's a great…

That's probably a good exit rate.

So just to be clear, is it now becoming clearer to you that the high speed line capacity is going to be dedicated to auto because of the traction and demand that you're seeing it sort of you can't get them on the shelves fast enough to places like AutoZone?

I think that that's where the most pressure for us, the biggest backlog pressure for us right now is in that sector. But I legitimately feel like each one of the business units is going to be screaming for more capacity, whether it's 5G network, backup power with our SBS products, whether it's TPPL, Gen 3. There's several programs that are supported, cable television, Alpha cell, we can make on that line. So yes, there's plenty of opportunities for them to fill it. I think the reason Mike is being cautious and I'm glad he is, is we just don't want to put our ops guys in a box because it's going to It's going to take time to get to ramp to those levels. We're in production now. It's just muted and we're just ramping up slow. But officially, the line is in production. We're making products and it's just going to continue to get better and bigger. But I think that $150 million is a good exit rate for the year.

And we have to balance all five of our factories. So it's not just what the high-speed line could do but it's also what the other plants can produce and how busy they are with other activities. So if we have a location that has excess capacity, then we're going to move probably that product demand to that factory, and then that might impact what the high-speed line might run on. So it's balancing the entire TPPL capacity, which is what we're going to do, which will influence the high-speed line.

And lastly, is that revenue coming off that line regardless of end market still going to be at the same -- roughly the same gross margin with auto or whether it's some other end market?

I mean, the pricing is the same. It doesn't matter, I mean, from a customer form fit and function doesn't change, but our cost per unit goes down with that line.

Just as a reminder to everyone, when we first made this investment, it was not an incremental capacity play it was a cost reduction initiative. So if the product is made off that high-speed line, that one is going to enjoy lower costs than if it was made on some of our other lines that may have the same capabilities in terms of what product they can make. They can't make it at that price.

So the TPPL that used to be 35-ish percent gross margin is higher than that coming off of the high speed line. Is that correct?

That should be a true statement, yes.

[Operator Instructions] Our next question comes from the line of Greg Lisowski with Webber Research.

So regarding the NexSys iON, you previously indicated that after introducing it to the material handling market that residential storage would be next. Is that still the case? And then could you update us on the timing of that and what markets are in line to follow that?

Actually, telecom and resi are both on the queue and in development now. We've already started that work. And I think the latter part of F '22 would be a best case scenario. So I don't think we've got a lot of non-motive lithium loaded into the F-22 model. Mike, correct me if -- I don't think -- so those NPIs like we always said, they were going to come later. So let's just say that those should be late F '22, early F '23 timing.

And then just from a modeling perspective, on the Germany factory. What kind of top line contribution should -- or quarter-over-quarter change should we kind of expect for that factory closing?

Well, the top line shouldn't change whatsoever because we're simply going to transfer that demand to our other European factories capable of making those products. Ultimately, and these -- obviously, the first step we have having made the announcement on our press release either last night or this morning, the 8-K went out this morning because yesterday was Veterans Day. There will be a negotiation with the Works Council, which will include the timing of that final closure, et cetera. So we don't have all of the answers for that. But I would say over time, you would expect that that savings of approximately $20 million a year will be, again, probably an exit rate, certainly as we leave maybe not this year, but it should be -- we should be achieving that at some point in the first half of next year, I would expect.

Okay, great. Thanks a lot guys.

Well, I've got maybe in between any questions. I just wanted to point out, I think in my final remarks concerning guidance. So I wanted to just clarify. I think I used the wrong amount for the high end of our guidance. I meant to say $1.23 so that everybody recognizes that the midpoint is $1.20 for us.

Yes, I think you said $1.21.

Thank you. I'm not showing any further questions in the queue. I will now turn the call back over to Mr. Shaffer for closing remarks.

Thank you, Twanda, and I want to thank everyone else for taking the time to attend our call today. We look forward to providing further updates on our progress on our third quarter 2021 call in February. Have a good day, everybody.

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