Hello, and thank you for standing by. My name is Bella, and I will be your conference operator today. At this time, I would like to welcome everyone to EnerSys' Q3 Fiscal '26 Earnings Webcast and Conference Call. [Operator Instructions] I would now like to turn the conference over to Lisa Langell, Vice President, Investor Relations and Corporate Communications. You may begin.

Good morning, everyone. Thank you for joining us today to discuss EnerSys fiscal third quarter results. On the call with me are Shawn O'Connell, EnerSys' President and Chief Executive Officer; and Andi Funk, EnerSys' Executive Vice President and Chief Financial Officer. Last evening, we published our third quarter results with the SEC, which are available on our website. We also posted slides that we'll be referring to during this call. The slides are available on the Presentations page within the Investor Relations section of our website. As a reminder, we will be presenting certain forward-looking statements on this call that are subject to uncertainties and changes in circumstances. Our actual results may differ materially from these forward-looking statements for a number of reasons. These statements are made only as of today. For a list of forward-looking statements and factors which could affect our future results, please refer to our recent Form 8-K and 10-Q filed with the SEC. In addition, we will be presenting certain non-GAAP financial metrics, particularly concerning our adjusted consolidated operating earnings performance, free cash flow, adjusted diluted earnings per share and adjusted EBITDA, which excludes certain items. For an explanation of the difference between the GAAP and non-GAAP financial metrics, please see our company's Form 8-K, which includes our press release dated February 4, 2026. Now I'll turn the call over to our CEO, Shawn O'Connell.

Thank you, Lisa, and good morning. Please turn to Slide 4. During the call today, we will provide an overview of our third quarter results, share progress on our energized strategic framework, update you on the latest demand trends we are seeing in our diverse end markets and provide guidance for our fourth quarter. Please turn to Slide 5. We delivered strong earnings in the third quarter with adjusted diluted EPS ex 45X of $1.84, up 50% year-over-year and a company record for our third fiscal quarter. Net sales were up 1%, in line with the low end of our guidance range as strong price/mix and favorable FX offset lower volumes. Earnings growth outpaced revenue growth, driven by favorable product mix, pricing discipline and our cost improvement efforts resulted in adjusted operating earnings up 34% and adjusted EBITDA up 30%, both excluding 45X. We continue to be excited about mounting growth catalysts across all of our end markets, though near-term softness persists in Motive Power & Transportation. A few highlights from our lines of business. Energy Systems delivered its first double-digit AOE margin on modest sales growth. Despite slightly lower year-on-year sales, Motive Power margins remained in line with prior year. And finally, Specialty delivered remarkable performance improvement with sales up high single digits and AOE more than twice that of prior year, resuming double-digit AOE margins for the first time in 3 years. Free cash flow in the quarter was also particularly strong, and we are pleased to return $94 million in capital to our shareholders this quarter through share repurchases and dividends. Please turn to Slide 6. Through our energized strategic framework, we are continuing to further optimize our core, invigorate our operating model and accelerate our growth. We are capturing realignment savings as planned, and our centers…

Thanks, Shawn. Please turn to Slide 10. Net sales came in at $919 million, up 1% from prior year, driven by a 3% benefit from price/mix, a 2% benefit from foreign currency translation, partially offset by a 4% decrease in organic volumes. We achieved adjusted gross profit of $278 million, down $22 million year-on-year, but up $19 million or 8%, excluding 45X benefits. Note that 45X credits in the third quarter of last year were $75 million and included a onetime catch-up of $36 million compared to $35 million in the third quarter of this year. The prior year catch-up impacts the year-over-year comparison of our adjusted gross margins and adjusted earnings, clouding the impressive year-on-year improvement, excluding these benefits. Q3 '26 adjusted gross margin of 30.2% was up 110 basis points sequentially and down 280 basis points versus the prior year. Excluding 45X, adjusted gross margin was up 150 basis points sequentially and up 170 basis points versus prior year. OpEx in the quarter improved as a result of our cost reduction initiatives. As expected, we realized approximately $15 million in Q3 from these actions and anticipate similar savings in Q4. Our adjusted operating earnings were $142 million in the quarter, up $13 million versus the prior quarter and down $13 million versus the prior year with an adjusted operating margin of 15.5%. Excluding 45X benefits, adjusted operating earnings increased $28 million or 34% with a record adjusted operating margin of 11.7%, up 290 basis points versus the prior year. Adjusted EBITDA was $160 million, a decrease of $12 million versus prior year, while adjusted EBITDA margin was 17.4%, down 150 basis points versus prior year. Excluding 45X, adjusted EBITDA of $125 million, a company high, was up $29 million or 30% year-on-year with a company record adjusted EBITDA…

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

Let's start with data center. You commented on the growth in the quarter, but also what you said is sort of healthy demand. I think looking at the pretty eye-popping CapEx expectations from the hypers and some of the orders growth rates we're seeing, healthy feels like an understatement. So can you talk about your own data center pipeline and how you think about that scaling in the quarters ahead?

Yes. So Noah, it's Shawn. Good to hear your voice. Listen, we're very excited about this opportunity, obviously. And if we look at it from a lead acid perspective, let me start there. We have a commanding market share in data center. It's over 50% in the United States as an example. And we serve those same hyperscalers around the world. And we're seeing grower demand -- growing demand for higher density products. And so TPPL for us in this space is doing very well. What we're most excited about, though, for all of that strength and all of that growth, we have yet to release a lithium battery product into the marketplace. So for over 50% market share in the lead acid for all the greenfield data centers that are going lithium, today, we have 0% market share. So our product teams under Mark Matthews are doing a tremendous job to get that product over the finish line. We're not being very public about dates and that kind of thing because we'd rather have done it and told you about it than foreshadow something that we didn't deliver on. But that is a massive growth opportunity for us. And it's the exact same customers that we're serving with that great growth in lead acid. So it's just a lot -- a tremendous amount of upside for us and a tremendous amount of willingness on the side of the customer because with EnerSys, you get -- it's not just the product, you get the before and after sales services and care, the logistics support, the staging support. So our customers are very keen to get us involved in that. And it's probably our largest opportunity to date.

That's helpful. A hat tip to the team on the Energy Systems margins getting above 10%. I think the slide deck talks about sort of normalized margin improvement in 4Q. Maybe we can sort of put a little bit more context around what that normalized means? I know you don't quantitatively guide to segment margins. But just help us think about some of the puts and takes of what normalized could look like given some of the comments around product mix shift and the like.

Sure. Noah, this is Andi. Nice to hear from you. Consistent with what we've said in the past, as you know, our Energy Systems business is very project oriented, which also has some mix opportunities that can cause it not to be a pure linear progression. And as we talked about in Q3, we both had some pull-ins into Q2 that we had talked about on our last call. And then we had a couple of customers that pushed out one customer in particular in order at the end of the calendar year into our Q4. So that put a little bit of pressure on our volumes in Q3 in Energy Systems, but also aided the margins a little bit. So what I would look at is if we normalize for that, we would continue with the improvement trajectory, but probably a little bit of that 10.5% OE margin in ES, some of that probably should have propped up Q2 a little more and propped up Q4. So if you normalize for that, you would continue to see an improvement and we might be sub-10%, but not much. It will still be in that -- trending in that direction. But I would expect probably a little bit of a step back in Q4, but a continuation of the improvement that we've seen so far to date. Does that make sense?

It does. It's very helpful. And maybe for the last one, just to touch on Motive Power. We have seen some really strong demand trends in e-commerce and warehouse automation trend that seems like it should play into your wheelhouse. So when do you think kind of this destocking ends? And when do you think you start to see some inflection in Motive order rates?

It's -- I'll take that again. Noah, it's Shawn. This is why we've been so reticent for full year guidance because it's just all the leading indicators have been tough for our forklift manufacturer OEMs, let alone us on how to gauge this market. And of course, there was tariff exposure particularly in heavy steel and then there were the interest rates and just all sorts of things that affect these heavy capital purchases. With that being said, as we said in the prepared remarks, we know for sure, this is pent-up demand that as these trucks age, if there was 0 growth in logistics, which there won't be, that just to keep the fleet moving today that exists, they have to order trucks. We saw evidence of this in December. We mentioned a 40% increase in December in the Americas in the trucking orders. To put that in perspective, about 22,000 units. That's a record December. We've never seen that kind of number. And it's not that the market just decided to grow that much. That's that pent-up demand. So where we're being careful, though, is we saw earlier this year, we talked about some strength coming back in. And historically, when Motive turns, it's basically a linear climb out. This has been a little more choppy for us. But that 40% new truck order number is a big one for us. And typically -- and the reason we're saying, hey, it may take a couple of quarters of fiscal '27 to iron out, that's usually the lag time between trucks being ordered and our batteries being ordered, but it's a very positive sign for us.

Adding a little bit to what Shawn said as well, Noah, if it's okay. One thing, while we're not thrilled with obviously the volume being down, what I do feel good about is we know that we are outperforming the market. It's not lost share. Our industry data that we received showed that while our volume was down high single digits, the industry indicators were down low double digits in the quarter. So I think we're doing better than the market. Motive Power is not a segment I really worry about. Chad does a tremendous job managing it. We know over time, as long as materials are moving, our products are needed. And there's -- as Shawn mentioned, it will come back. It's a question of when, and I think the team does a great job managing through it.

Your next question comes from the line of Chip Moore with ROTH Capital.

Maybe I could ask about lithium battery. I know you're limited on what you can say, but you sort of alluded to expecting -- I think it was a favorable outcome. Just anything you can share there and how we might think about how the strategy has evolved and when we might see a final decision?

Yes, I'd be happy to do that. Thank you, and good to hear from you. We are very encouraged, I'll just say that, of where we're at in our discussions with the Department of Energy and the overall administration. If you recall, and we go back to the beginning of this administration, what we saw were grants being canceled, projects being canceled. And we didn't know at the time that the batteries would survive the One Big Beautiful Bill Act. And all that is sort of ironed out, the government priorities being clarified and then putting the people in place that they wanted to put in place on their side to get these initiatives across is what's taken all the time. But I'll tell you that our grant has remained intact. It was never canceled. And we had a really strong audience with the government to talk about their new priorities. And what is that? It's secure domestic supply chains free from foreign entity of concern, content, particularly for the U.S. military and the Department of War. And of course, grid resiliency and electrification is still there, U.S. manufacturing and job creation. But the really interesting thing for us is this has been a bipartisan supported issue. And I've said previously that if we could -- in terms of what the plant does and what its purpose is, if we could point the whole thing at a secure supply chain for the military, we would. I'm not saying that, that's where we're going to end up. And I don't want to get in front of the administration and determining yet what that looks like. What I can tell you right now is it's very positive. We believe we're in the final stages. We were hoping to have some information by -- a little more concrete by this call, but we can only go as fast as the customer on the other side, which in this case, is the government, but we remain very optimistic about where this is trending.

Understood. I appreciate all that color. And just maybe for my follow-up, just maybe more of a follow-up on Noah's question for Motive and some of the pent-up demand. I mean maybe a similar dynamics for Class 8, I think, that you called out. Just maybe talk about your ability in both those markets, how you think about the back half of next fiscal year if some of that demand starts to come back?

Yes. Well, we are well positioned. The actions we've taken in our factories to be more efficient, to increase the effectiveness of our supply chains, the work we've done through tariff mitigation, we're ready. I mean there's no question about it. And just to give you -- you mentioned Transportation, I didn't really give that color. We have a fleet operator, who is one of the largest in the U.S., and they operate over 400,000 tractors. And they told us today, they have -- they told us if they had to order today, they have some 50,000 tractors to order just to maintain the fleet as it is without any additional growth. Think about that. So they've just delayed and nobody wants to go first because they don't know when this is going to turn back on. But they told us all of their conversations now with the OEM tractor providers and Class 8 OEMs is how fast can you restart? What does that look like? What does that pipeline look like? Because they know -- and they represent just a bit of color, that 412,000 tractors or 450,000 -- whatever that number is, they represent a number approaching 20% of their portion of the market. So it just gives you an idea of the dimensionality of the number of tractors that need to be ordered now just to sustain the fleets out there due to the aging issue, let alone growth. So we're ready. We have ample capacity. We've got Missouri up and running. We've hit all of our milestones there that we committed to. We've got scrap coming down, productivity increasing. OEE looks good at our bottleneck points. So when those drivers turn back on for us, we can execute pretty quickly.

Yes. I'll just add a little bit more on to that. One thing that's interesting, Chip, and good to hear from you is you mentioned Transportation right after Motive Power. With invigorating our operating model, one of the things that we've been looking at is having Chad, who does a great job leading our Motive Power business, also begin to look at synergies that we have with our Transportation business. And there's immense synergies there because as you can imagine, you've got warehousing and distribution. You have both forklifts and trucking in there. We actually had a really nice quarter for Transportation with the market still being soft. And I think that's aided by some of the benefits from this invigorated operating model as well as the improvements the COE are having in our manufacturing costs, both absorption with a little bit of the volume pickup we had and Shawn's monthly trips that he's taking out to Missouri, I think you're really seeing improvements across the board. And only other thing I'd mention since we're talking about Transportation as you get into the whole specialty line of business, we couldn't be more pleased with our A&D business. That's an area where we mentioned our A&D backlog, I think, up 27% year-on-year. Munitions, in particular, has had a 230% growth in their backlog year-to-date, really a 29% CAGR since we acquired the business in fiscal '19. So lots of opportunity in front of us with the geopolitical environment continuing to drive this increase in defense budgets as well. So bright spot there for us.

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

I just wanted to talk about the Energy Systems segment first and the outstanding growth that you're seeing in data center, I think you said up 28%. If I look at that segment and think about, I think data center revenue for you is over $400 million on an annual run rate now. I think, Shawn, that you had said it was around $425 million. If data center is up 28%, I guess that implies or tells us that the balance of the Energy Systems segment was down maybe low single digits to mid-single digits. And I'm just -- that's being driven, I guess, mainly by dynamics in telecom and broadband, but I don't know if I missed it, but I didn't hear a lot of comments today yet on the call around telecom and broadband. So I'm just curious what is happening in those end markets? And what's the outlook in those end markets?

Yes. And good to hear from you, Brian. We -- I think Andi went into a bit on timing and margin normalization. What I would tell you is that we see only positive signals in the rest of the segments there. Q3 to Q4 for us because we are on this April to March fiscal is always a little weird in the telecom space for us because you either have the communications folks trying to increase their year-end spend before the calendar year flip or they have -- or they're deferring CapEx based on what their CFO is wanting them to do to restart it again in the -- our fourth quarter, their first quarter. So -- and then as Andi mentioned earlier, too, we had the pull-in issue from Q2 into Q2 that if you normalize Q2 and Q3 look a little better. But all of the demand signals are good. We don't talk about it because it's a small segment for us, but we have over 50% market share in power utility. And that specific application for us is electric substation, switchgear and control. That business is up 15% and just doing very, very well. So we see very positive demand signals. I'll tell you the engineering team, particularly under the Center of Excellence realignment is doing a fantastic job with the XM product. The broadband people are under the same pressure everybody else is under. They're trying to plan for more expensive energy, more frequent outages. And so that product achieves a lot of that for them. So we've been in trials and co-developing that with a key customer partner. So I would tell you that there's all positive demand signals for us there. You're probably just picking up on a little of that year-end choppiness and project staging.

Yes. And just to echo that, Brian, and good to hear from you. As we mentioned, this business is project driven. There are some large customers. So when you look at growth rates quarter-by-quarter, both with volatility in last year as well as volatility in this year quarter-to-quarter, you see some spikes up and spikes down. But I would expect our comms business overall in '26 will be up mid-single digits. Our data centers will probably be up high teens year-on-year. So quarter-to-quarter because of some of these, you have a customer year-end, you have budgets, you got a project that completes early or you're behind, you can have some shifts quarter-to-quarter. But the trajectory is really in good shape. And I would say, while we're not in kind of this robust build-out like we've seen maybe in some of the past communications expansion, it's more slow and steady, continues to improve. This fiscal year, we probably won't be back at the fiscal '24 level, but we'll be trending towards it with opportunity in '27 to get above.

Okay. And the guidance for Energy Systems and -- or I guess the guidance for the revenue overall, does that imply for the fourth quarter, like would I be correct in thinking that Energy Systems revenue is up a little year-over-year and Motives down a little year-over-year? Or any detail there you can help with?

We don't guide specifically line of business by line of business, but I can give you a little bit of color on each, if that would be helpful, Brian. In Energy.

Whatever you want to give would be great.

Sure. I'll give you a little -- and hopefully, this will help. Energy Systems, we'll continue to see some growth from data centers, although, again, as we mentioned, the choppiness, prior year is probably a little bit of a tough comp. The comms network refresh will continue with the build-out to enable the AI data delivery necessary, but at this measured pace. And again, some of those pushouts that we had will be materialized, so that will benefit us. Just as the Q3 volume was pressured and margins were aided by this quarterly phasing, that will be normalized. So you'll get a little bit more of the pickup from the volumes as we talked about, but probably a little bit of pressure from the margins quarter-on-quarter. Our cost actions are holding and again, normalizing towards double-digit margins. So very pleased with the progress. And as you know, we've talked about several quarters, service having been a headwind for us. It's now -- we believe we've turned the corner and going to start to become a tailwind, an important part of our strategy going forward. In Motive Power, again, I would use hesitant as probably the best word to describe the market. We see that continuing into fiscal '27. We had a 0.9 book-to-bill in Motive Power, but we're really returning our backlog more to pre-COVID levels. So there's more book and ship business. And again, we -- as Shawn mentioned, we definitely see pent-up demand there that it's just a question of when that's going to be unloaded. There's going to be the Q4 seasonal volume lift that always happens. So we'll benefit from that. We continue to see customer enthusiasm in our maintenance-free solutions. And we will also see some higher cost pass-through from tariffs as our cost optimization opportunities and volume grows. Our Monterrey closure, as we mentioned, is ahead of plan. We substantially closed that 1 month early. You'll probably begin to see that benefit in -- starting around the middle, maybe second quarter or third quarter of next year as we work through the inventory that we had. But that along with the BESS opportunities. There's a great article we just read about how 15% of warehouse operators costs are their operating expenses or energy, and they're asking us for these solutions. So that's on the horizon for next year. And Specialty, I think not unreasonable to expect double-digit AOE for Q3 that we saw and beyond as our A&D business continues strength, aftermarket Transportation picks up and the lead acid COE is driving cost improvements in both trans through automation and the growing benefits of the restructuring. So hopefully, that was a little color that could help.

Your last question comes from the line of Greg Lewis with BTIG.

A lot has been covered. So I guess, Shawn, I'll ask a little bit about the rollout of the UPS system in lithium. I mean you mentioned that you're 50% in TPPL. I guess around the rollout, I mean, I imagine it's -- I know it's something you've been looking at since last year. As we think about the go-to-market strategy, I guess a couple of things is, clearly, there's demand. How should we think about EnerSys entering this market as a new entrant? Is this going to be -- like how competitive is that landscape? Clearly, there's a lot of growth to be had. And then just also around that, I'm kind of curious how we can think about that ramping, i.e., hey, we start having a solution maybe this spring. Are we selling out that quickly and then we ramp? Or like just if you could kind of talk about how we should be thinking about the rollout of that the lithium UPS solution later this year?

Thank you for calling in and joining us. It's a great question and the right question. Lithium as a technology does some very interesting things for the user, but also carries risks that lead acid does not carry. And as such, it's the adoption rate for it, to your point, I think to your question, is that you get trials in the field and these centers are so large, that the amount of power that you're generating or the amount of power that are going through the systems is substantial. So what you would expect to see for us is trials, which have already pretty much been pre-agreed by our customer base. Again, I mentioned earlier, there's a lot of pull-through from our customers, and it's more than just the product. It's how we handle them, it's how we service them. It's our global presence. So there's a high desire for our customers. This isn't something we're going out and trying to pitch. But with that being said, we have to get through these trials. They have to get comfortable with the technology. We have to be sure that we're making the little tweaks because our battery doesn't go in isolation. It's communicating with the OEMs UPS systems, and you know the big names and who they are. So that all takes a little bit of time. So what we suspect is that when the trials come in, that will be probably a, let's call it, a 6-month period for that fine-tuning and that customer comfort and then we begin to get into the project queue. And then, of course, the other issue there for us that we have to mitigate is that these data centers are planned a long time in advance and lead times are long. So when we get into that queue, you shouldn't expect a hockey stick ramp in the first year, but a steady growth for us climbing out. And just to give you some context, there are really only 1 to 2 other credible lithium providers in the space today. And so it's not a crowded or mature field. And again, we have a lot of pull-through from customers. But I don't want to dimension it that there will be this astronomic ramp for UPS. It will take a bit of time.

Okay. Great. And then, Andi, real quick on Motive in terms of the upward price. I know you called out in the slide deck about the maintenance-free solution growing. Just kind of curious what drove that price mix? And I'm curious, was any of that kind of just tariff pass-through?

Well, tariff pass-through would be at a lower margin, and we are starting to begin to see more of the tariff impact coming through. We had a nice margin in Q3 '26, again, at 14.9%, up year-on-year and up sequentially. A lot of the volume softness that we saw was in our flooded business. And so that mix really helped us. We think those are the smaller manufacturers, smaller warehouses that are feeling some of the pressure. And those are the ones we think that are kind of holding back and driving some of the mix benefit we're seeing. But of course, our restructuring efforts are holding.

There are no further questions at this time. I will now turn the call back over to Shawn O'Connell, President and CEO, for closing remarks.

Thank you, Bella. I'd like to thank you all for joining us today. We look forward to updating you again next quarter. Hope you have a great day. Thanks again.

That concludes our conference call today. Thank you all for joining. You may now disconnect. Everyone, have a great day.