Enersys Q1 2026 Earnings Call Transcript

Quartr
Provided by Quartr
August 7, 2025

Key Takeaways

  • Positive Sentiment: Launch of Energize strategic framework with three pillars and organizational realignment into lead acid, power electronics and lithium-ion COEs, targeting $80 million in annual savings and faster decision-making.
  • Negative Sentiment: Tariff uncertainty affecting 22% of U.S. sourcing disrupted Motive Power volumes and customer buying behavior, although management expects to fully offset related costs over time.
  • Positive Sentiment: Q1 net sales rose 5% to $893 million, adjusted operating earnings climbed 8%, and the Board approved a $1 billion share repurchase authorization plus a 9% dividend increase.
  • Positive Sentiment: Capital allocation remains disciplined with net leverage maintained below 2×, preserving dry powder for tuck-in acquisitions like Rebel Systems and planned lithium cell facility investment.
  • Positive Sentiment: Q2 guidance forecasts net sales of $870–910 million and adjusted EPS of $1.34–1.44 (excluding 45X benefits), signaling expected EPS growth as tariff clarity improves.
AI Generated. May Contain Errors.
Earnings Conference Call
Enersys Q1 2026
00:00 / 00:00

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Operator

Good morning, ladies and gentlemen, and thank you for standing by. My name is Kelvin, and I will be your conference operator today. At this time, I would like to welcome everyone to the EnerSys Q1 Fiscal Year twenty twenty six Earnings Webcast and Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. I would now like to turn the call over to Lisa Hartman, Vice President of Investor Relations. Please go ahead.

Lisa Hartman
Lisa Hartman
VP - IR & Corporate Communications at EnerSys

Good morning, everyone. Thank you for joining us today to discuss EnerSys' first quarter results. On the call with me today are Sean O'Connell, EnerSys' President and Chief Executive Officer and Andy Funk, EnerSys' Executive Vice President and Chief Financial Officer. Last evening, we published our first quarter results with the SEC, which are available on our website. We also posted slides that we'll be referring to during this call.

Lisa Hartman
Lisa Hartman
VP - IR & Corporate Communications at EnerSys

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 eight ks and 10 Q filed with the SEC.

Lisa Hartman
Lisa Hartman
VP - IR & Corporate Communications at EnerSys

In addition, we will be presenting certain non GAAP financial measures, 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 eight ks, which includes our press release dated 08/06/2025. Now I'll turn the call over to Endrisa's CEO, Sean O'Connell.

Shawn O'Connell
Shawn O'Connell
President & CEO at EnerSys

Thank you, Lisa, and good morning. Please turn to Slide four. Here's what we'll cover today. First, I would like to introduce Energize, our strategic framework to transform and grow our company. Second, we will provide an overview of our first quarter results third, we will provide an update on potential tariff impacts fourth, we will report out on our capital allocation actions And finally, we will provide color on our Q2 guidance.

Shawn O'Connell
Shawn O'Connell
President & CEO at EnerSys

Please turn to Slide five. In the first quarter, we launched Energize, our strategic framework to shape the next era of growth for EnerSys. Energize builds on the hypothesis we have developed to unlock EnerSys value. This framework focuses on three pillars: optimizing our core, invigorating our operating model and accelerating growth. Optimizing our core consists of restructuring our organization to enhance our operational efficiency and effectiveness with a focus on maximizing returns on capital.

Shawn O'Connell
Shawn O'Connell
President & CEO at EnerSys

We recognize that we need to be faster and more efficient to lead the way in our markets, and so we recently announced a strategic organizational realignment. Through this program, we are reducing 11% of our nonproduction workforce, generating $80,000,000 in annualized savings beginning in fiscal year twenty twenty six. With this effort well underway, we expect to realize $30,000,000 to $35,000,000 in savings in the second half of this fiscal year. More importantly, this isn't just about cost savings. This restructuring is about speed and focus.

Shawn O'Connell
Shawn O'Connell
President & CEO at EnerSys

We've reduced layers of management to make our our teams more agile and decision making more direct. We are also shifting our manufacturing organization from a centralized model to three centers of excellence or COEs aligned to our core technologies, lead acid, power electronics, and lithium ion, which require very different skill sets. These teams are designed to drive operational clarity and deepen functional competency and will be managed within the lines of business for stronger alignment of sales. By removing management layers and taking manufacturing supply chains out of a corporate silo, we are reducing complexities and sharpening skills to drive better and faster decisions to better serve our customers while lowering cost of operations. The second pillar of our strategy is to invigorate our operating model.

Shawn O'Connell
Shawn O'Connell
President & CEO at EnerSys

This includes enhancing our strategic planning processes and operational excellence metrics throughout the organization, enabling decisions to be made with greater urgency, accountability and coordination. We are confident these changes will enable us to bring new products to market faster, increase our productivity and be more focused with our capital allocation choices. These first two pillars are part of a transformation that will fuel our ability to accelerate growth. We believe we are uniquely positioned to leverage our leading market positions in diverse end markets to deliver new products and services that play a key role in solving two of our customers' biggest common challenges, energy security and labor scarcity. We will be focused on accelerating new product development that our customers are asking us for, such as battery energy storage systems, predictive analytics and services in markets that we know well and have a right to win.

Shawn O'Connell
Shawn O'Connell
President & CEO at EnerSys

We will be rigorous with capital allocation choices tied to returns and future cash flow with a focus on accelerating our growth in current and adjacent end markets. To help lead this next chapter, we've officially named Mark Matthews our chief technology officer. Mark joined EnerSys in 2016 and has over thirty years of experience in energy storage and battery technology, specializing in lithium ion solutions. Mark co developed breakthrough BESS technologies earlier in his career and has a proven customer centered approach to new product development. Mark brings stronger alignment with sales and an outside in perspective with his customer experiences, and he knows what it takes to bring high performance solutions to market fast.

Shawn O'Connell
Shawn O'Connell
President & CEO at EnerSys

As interim CTO, he has already realigned our engineering team to better focus on growth. We're excited about what's next under his leadership. Now I'd like to share a few more details on our center of excellence or COEs. Please turn to slide six. Our COEs will serve as a cornerstone for how we operate.

Shawn O'Connell
Shawn O'Connell
President & CEO at EnerSys

There are unique needs and expertise required to win in each of these technologies, which, when operated centrally, left value on the table in terms of cost and speed we are now looking to unlock. Our lead acid COE will drive global operational excellence and consistency across our lead acid and TPPL plants as well as strategic sourcing, supply chain and distribution activities to improve productivity and enhance delivery reliability to our customers. This team will implement standard work, benchmark performance and continuously balance production requirements to optimize our more stable, capital intensive lead acid manufacturing team. Our power electronics COE will manage contract manufacturing, assembly operations, strategic sourcing and supply chain management of our power electronics offerings into one cohesive, highly skilled structure. This team will leverage strong external partnerships across our entire organization to accelerate speed to market and optimize the nimbleness and working capital requirements of this highly technical asset light portion of our company.

Shawn O'Connell
Shawn O'Connell
President & CEO at EnerSys

And the third, our lithium ion COE, will enable us to leverage deep lithium expertise and customer relationships we have across the company to accelerate innovation and improve execution in this high-tech landscape. This team will be focused on developing and aligning the evolving sourcing, engineering and manufacturing skills required, especially as we prepare for future investments like our planned lithium cell facility. Their mission, deliver the next generation of products our customers are already asking for. Please turn to Slide seven. The value of this new organizational design is visible in the strategic bolt on acquisition we completed in June, Rebel Systems.

Shawn O'Connell
Shawn O'Connell
President & CEO at EnerSys

While new to the market, the team at Rebel has quickly become a trusted solutions provider to The U. S. Military, specializing in cost effective, technology driven lithium ion based hybrid power and energy storage systems and communication solutions for the defense industry. Combined with our 2024 acquisition of Brentronics and leveraging EnerSys' leading position in the defense sector, we now offer a fully integrated portfolio designed to meet the evolving demands of modern military operations. This strategic acquisition will not only provide an additional product stream in the A and D portion of our specialty LOB, but is also an example of how we are leveraging disciplined M and A to enhance our talent and skills that will benefit us across the company in both our new lithium COE and our battery energy storage systems product development.

Shawn O'Connell
Shawn O'Connell
President & CEO at EnerSys

Overall, we are committed to ensuring our transformation initiatives and refresh strategy deliver stronger organic growth, higher margins and higher returns on invested capital. We will continue to provide updates on Energize over the next several quarters. Please turn to Slide eight. Net sales were up 5% year over year with a book to bill greater than one. Adjusted operating earnings were up 8% and adjusted EBITDA was up 2%.

Shawn O'Connell
Shawn O'Connell
President & CEO at EnerSys

Excluding 45X benefits, adjusted diluted EPS on our base business was down versus prior year on FX and the anticipated impact of lower organic volumes, which are temporarily pressured by tariff uncertainty. Year over year revenue growth in the quarter was driven by strength from the Medtronic acquisition, which once again outperformed and is increasing our wallet share of the defense market. We also saw early recovery in U. S. Communications end market and continued strong data center deployments.

Shawn O'Connell
Shawn O'Connell
President & CEO at EnerSys

These increases were partially offset by softer macro conditions in India across most of our businesses, additional pressure on already soft transportation market as well as lower volumes among forklift customers where tariff uncertainty disrupted customers' buying behavior. We view this variability as near term and expect improving clarity in public policy to support more stable market dynamics beginning in the second quarter and improving further as the fiscal year progresses. As typical in our first quarter, free cash flow was lower due to timing of annual payments as well as an increase in inventory despite lower sales to support our expected ramp up in revenue throughout the year. Yesterday, we announced the Board approval for a $1,000,000,000 increase in our share repurchase authorization to be executed over the next five years. This authorization provides us flexibility to repurchase our shares when undervalued as we did in Q1 while balancing our free cash flow generation with disciplined capital allocation to create shareholder value.

Shawn O'Connell
Shawn O'Connell
President & CEO at EnerSys

During this period of macro uncertainty, we intend to keep our leverage below the low end of our target range, retaining a prudent level of dry powder for future capital allocation optionality. Please turn to Slide nine. First, a few comments on public policy items impacting our business. With the passage of the One Big Beautiful Act, we saw favorable outcomes to EnerSys' 45X remains largely intact along with the enactment of other favorable tax policies. With regard to tariffs, approximately 22% of our U.

Shawn O'Connell
Shawn O'Connell
President & CEO at EnerSys

S. Sourcing is affected by direct tariff costs. Our tariff task force continues to proactively mitigate direct and tertiary exposure, enhance supply chain optionality and assess our competitive positioning's impact on demand. We remain confident we will be able to fully offset the impact of tariffs to our P and L. Please turn to Slide 10.

Shawn O'Connell
Shawn O'Connell
President & CEO at EnerSys

I will now provide some additional detail on demand trends and the dynamics across markets we serve, while Andy will provide more detail on the performance of our business segments later in the call. In Q1, orders in book to bill were up year over year with strength beginning to accelerate across the business. Backlog has moderated since the peak levels we saw in fiscal 'twenty four, but has remained stable with the quarterly backlog coverage of 1.1, consistent with our historical trends. These order patterns are indicative of ongoing steady growth but with limited visibility beyond the next quarter. We are seeing communications orders picking up, and we expect customer spending behavior to continue growing at a measured pace.

Shawn O'Connell
Shawn O'Connell
President & CEO at EnerSys

We see some network build outs emerging, but we expect customer investments to be more disciplined than prior cycles and more closely tied to their specific growth plans. Data centers, where we enjoy a large share of The U. S. Market for lead acid based uninterruptible power supplies, or UPS, is still in the early phases of the growth cycle. While orders can be uneven quarter to quarter, demand remains robust and we expect that to continue.

Shawn O'Connell
Shawn O'Connell
President & CEO at EnerSys

The timing of our deployments tends to align with the later stages of build outs, which are often paced by energy availability and infrastructure readiness. The dynamic geopolitical environment is driving an increase in global defense budgets and demand for next generation power technologies for both tactical applications and mobile soldier power applications. A and D activity is accelerating, but in the quarter, our U. S. A and D revenue, excluding Brentronics, was flat as actual spending is temporarily delayed by changes in U.

Shawn O'Connell
Shawn O'Connell
President & CEO at EnerSys

S. Personnel involved in procurement. We see this as a significant growth opportunity moving forward. Now a few comments on our operations. In our Missouri plants, our output is improving, and our new assembly lines implementation and performance schedule is on track.

Shawn O'Connell
Shawn O'Connell
President & CEO at EnerSys

As we shared last call, the first assembly line is now running and the second line is planned for the fall. However, realization of the financial benefits will be delayed due to suppressed transportation volumes. As part of our transformation efforts, our lead COE team is refining our plant load balancing cadence to ensure that we maximize productivity and efficiency across our manufacturing facilities. Our plans for a new lithium factory remain on hold and upcoming discussions with the relevant government officials are scheduled later this month. We expect to have more to report on this important effort next quarter.

Shawn O'Connell
Shawn O'Connell
President & CEO at EnerSys

In closing, we're taking clear decisive steps to improve operations and position EnerSys for growth. While the full impact of our energized strategic framework will take time, we're moving fast and seeing early progress. We're confident in our team, our solutions and our ability to deliver for customers and shareholders. Now I'll turn it over to Andy to discuss our financial results and outlook in greater detail. Andy?

Andrea Funk
Andrea Funk
EVP & CFO at EnerSys

Thanks, Sean. Please turn to Slide 12. First quarter net sales came in at $893,000,000 up 5% from prior year, driven by a 4% positive impact from the Brintronics acquisition, a 1% gain from positive price mix and a 1% increase from FX tailwinds, partially offset by an expected 1% decrease in organic volume as continuing data center robustness and recovery in communications was more than offset by decreases in the forklift and Class eight OEM markets. We achieved gross profit of $253,000,000 up $15,000,000 year on year and up $9,000,000 excluding 45X benefits. Q1 twenty six gross margin of 28.4% was up 40 basis points versus the prior year.

Andrea Funk
Andrea Funk
EVP & CFO at EnerSys

Excluding 45X, gross margin was mostly flat. Our gross margins in the quarter were temporarily pressured by lower volumes and mix resulting from our customers' uncertainty regarding U. S. Policy and hesitation to make significant investments, particularly in Motive Power, which I will discuss in more detail shortly. Our adjusted operating earnings were $114,000,000 in the quarter, up $9,000,000 from prior year with an adjusted operating margin of 12.8%.

Andrea Funk
Andrea Funk
EVP & CFO at EnerSys

We benefited from $38,000,000 from 45X. And excluding these benefits, adjusted operating earnings increased $3,000,000 or 4% with an adjusted operating margin of 8.5% roughly in line with the prior year. Adjusted EBITDA was $123,000,000 an increase of $2,000,000 versus prior year, while adjusted EBITDA margin was 13.8%, down 40 basis points versus the prior year. Adjusted EPS for the first quarter was $2.08 per share, an increase of 5% over prior year. Excluding 45X, adjusted EPS was $1.11 per share, down 6% versus prior year, primarily due to the impact of FX, which added $0.15 of pressure below the line.

Andrea Funk
Andrea Funk
EVP & CFO at EnerSys

For the 2026, our effective tax rate was 12.5% on an as reported basis and 21.4% on an as adjusted basis before the benefit of 45X compared to 20.8% in 2025 and twenty point four percent in the prior quarter. Let me now provide details by segment. Please turn to Slide 13. In the first quarter, Energy Systems revenue increased 8% from prior year to $391,000,000 primarily driven by greater volume, pricemix and positive FX. Adjusted operating earnings increased 44% from prior year to $27,000,000 reflecting the benefits of increased volume and favorable pricemix.

Andrea Funk
Andrea Funk
EVP & CFO at EnerSys

Adjusted operating margin of seven percent increased 170 basis points versus the prior year. As Sean mentioned, we exited the quarter with encouraging order trends in this business. We expect year over year margin expansion as revenue increases driven by data center demand and ongoing communications recovery, though partially offset by continued softness in EMEA. Structural improvements should also continue to support performance. Motive Power revenue decreased 5% from prior year to $349,000,000 as lower volumes more than offset slightly favorable price mix and FX tailwinds.

Andrea Funk
Andrea Funk
EVP & CFO at EnerSys

Motive Power adjusted operating earnings were $47,000,000 down $9,000,000 versus the prior year on the lower volumes and higher inflationary costs. Adjusted operating margins were 13.4%, down 190 basis points versus prior year. Market wide tariff disruptions disproportionately affected smaller higher margin customer sales and installations of new distribution centers, which typically include higher margin charger sales. Along with the low cost leverage and the volume pressure, these dynamics temporarily weighed on margins sequentially and versus prior year. However, maintenance free product sales increased 9% year on year and were 27.1% of Motive Power revenue mix compared to 23.8% in 2025, providing optimism that margins will recover in Motive Power once the macro uncertainty settles.

Andrea Funk
Andrea Funk
EVP & CFO at EnerSys

We expect new lift truck demand to improve, though Q2 will remain impacted as customers continue to navigate this trade uncertainty. Longer term, Motive Power is well positioned for growth, supported by electrification, automation and strong demand for our maintenance free and charger solutions. Specialty revenue increased 18% from prior year to $149,000,000 driven by a 24% positive impact from the Brimtradix acquisition as well as a 1% increase from FX, which more than offset a 7% decrease in organic volumes, primarily from transportation and flat price mix. Q1 'twenty six adjusted operating earnings of $10,000,000 were nearly double that of the prior year when we entered the transportation down cycle. Adjusted operating margin of 6.5% was up two sixty basis points.

Andrea Funk
Andrea Funk
EVP & CFO at EnerSys

We see the fastest opportunity for margin expansion at Specialty, driven by robust A and D demand and ongoing TPPL cost and delivery gains from automation under our lead COE. Please turn to Slide 14. Positive operating cash flow of $1,000,000 offset by CapEx of $33,000,000 resulted in free cash flow of negative $32,000,000 in the quarter. As our seasonally lowest cash flow quarter, Q1 was roughly in line with prior year, though impacted by higher primary operating capital. As a reminder, even though the dynamics of our business caused quarterly and annual volatility in cash generation, EnerSys has generated an average free cash flow conversion rate, excluding 45 FX benefits, of 105% over the past five years, and we expect to continue delivering at these levels over time.

Andrea Funk
Andrea Funk
EVP & CFO at EnerSys

Primary operating capital increased to $993,000,000 during the quarter due to higher strategic inventory investments in anticipation of recovering volumes in the upcoming quarter. Improving primary operating capital over time is one of the positive outcomes we expect to realize with our new COEs. As of 06/29/2025, we had $347,000,000 of cash and cash equivalents on hand. Net debt of $964,000,000 represents an increase of approximately $183,000,000 since the 2025 as we returned $159,000,000 to shareholders through share repurchases and dividends and continue to invest in our business. Our leverage ratio remains comfortably below our target range at 1.6 times.

Andrea Funk
Andrea Funk
EVP & CFO at EnerSys

While we still have not received our fiscal year twenty four U. S. Tax refund of $137,000,000 we are accruing interest that mostly offsets our incremental borrowing costs. Recent updates from the IRS tax technician assigned to our return indicated our return is officially processed and posted into the IRS system with a submission for payment to be released in early September, which will further reduce our net leverage. Our balance sheet remains strong and positions us to invest in growth and navigate the current economic environment.

Andrea Funk
Andrea Funk
EVP & CFO at EnerSys

During this period of heightened geopolitical uncertainty, we anticipate maintaining our net leverage at or below the low end of our two to three times target range, providing us with ample dry powder for our capital allocation decisions and to absorb any macroeconomic dynamics that may impact us. Please turn to Slide 15. During the first quarter, we repurchased 1,700,000.0 shares for $150,000,000 at an average price of $86.2 per share. We also paid $9,100,000 in dividends. As Sean mentioned, our Board of Directors approved a $1,000,000,000 increase to our buyback authorization to be executed over the next five years, bringing our total remaining authorization to nearly $1,100,000,000 This increased authorization allows us to be more aggressive in our opportunistic share buyback activity, particularly during these volatile market conditions, while still targeting leverage below the end low end of our two to three times target range. Additionally, the Board has increased our quarterly dividend by 9% to $26.25 per share. Both of these actions represent our confidence in the growth and strategy of our business as well as our continued commitment to returning shareholder value. We continue to evaluate accretive bolt on acquisition opportunities like Burntronics and Revel that align with their disciplined, strategic and financial criteria and are focused on strengthening customer intimacy, expanding share of wallet with our leading positions in exciting end markets and advancing our transformation progress.

Andrea Funk
Andrea Funk
EVP & CFO at EnerSys

Please turn to slide 16. As anticipated, our seasonally lower first quarter was further burdened by the impact of tariff uncertainty on volumes and mix. We continue to expect this will mark the low point of earnings for the fiscal year with increasing clarity to dissipate these pressures over the course of the year. For the 2026, we expect net sales in the range of $870,000,000 to $910,000,000 with adjusted diluted EPS of $2.33 to $2.43 per share, which includes $35,000,000 to $40,000,000 of 45X benefits to cost of sales. Excluding 45X, we expect adjusted diluted EPS of $1.34 to $1.44 per share, up 8% at the midpoint of the range.

Andrea Funk
Andrea Funk
EVP & CFO at EnerSys

Before I close, I would like to provide some additional details on the impact of our recently announced cost reduction program. The actions underway represent $80,000,000 in total annualized savings, a 10% reduction in fiscal year 'twenty five OpEx of $70,000,000 and a $10,000,000 reduction to cost of goods sold. We expect to incur onetime charges of $15,000,000 to $20,000,000 primarily in Q2 and Q3 and to see material net benefits beginning in the third fiscal quarter with 30,000,000 to $35,000,000 of net savings in fiscal year twenty twenty six. We remain confident in the earnings power of our business and our ability to navigate through evolving policy and macroeconomic conditions. Our diversified business model is helping offset the near term softness in tariff sensitive segments such as forklift trucks and Class eight transportation.

Andrea Funk
Andrea Funk
EVP & CFO at EnerSys

In defense, future demand for both our organic and acquired technologies is strengthened by global customer needs. We are seeing continued signs of recovery in communications and sustained strength in data centers and industrials. While we're encouraged by momentum in these key growth areas, we believe it is prudent to keep our full year quantitative guidance paused until there's greater clarity around public policy, macro trends, and more importantly, the downstream effects on our customers' behaviors. We continue to expect full year adjusted operating earnings growth, excluding 45x, to outpace revenue growth. We are excited about the impact Energize will have on our accelerating achievement of our long term top line growth opportunities and margin expansion through streamlined operations. With this, let's open it up for questions. Operator?

Operator

Your first question comes from the line of Chip Maher of ROTH Capital. Please go ahead.

Chip Moore
Managing Director & Senior Research Analyst at Roth Capital Partners, LLC

Good morning. Thanks for taking the question. I wanted to ask

Andrea Funk
Andrea Funk
EVP & CFO at EnerSys

Good morning, Chip.

Chip Moore
Managing Director & Senior Research Analyst at Roth Capital Partners, LLC

Good morning, Andy. On Energy Systems, encouraging to hear communications seeing some come back. Just maybe expand on that, what you're seeing and how you're thinking about rest of the year and cadence of that recovery.

Shawn O'Connell
Shawn O'Connell
President & CEO at EnerSys

Hi, good morning. It's Sean. I'll start and then turn it over to Andy. We're definitely seeing good activity across the board in telecom and broadband. We're seeing some early stage build outs that we were tracking over the course of the last year beginning to materialize.

Shawn O'Connell
Shawn O'Connell
President & CEO at EnerSys

Certainly, is early in their DOCSIS four point zero tech upgrades, and those require more power. And so they're incremental power adds. And certainly, those operators are also looking at their energy footprint and the utility networks that they exist in. So we're seeing activity there. We're also seeing if you think about the telecommunications folks, with all the robust data activity going on, the telecom operators are also looking at their point in managing and being distribution networks for that data.

Shawn O'Connell
Shawn O'Connell
President & CEO at EnerSys

So we're seeing some very encouraging macro upgrades occurring that we're able to leverage and take advantage of, and we expect that to be a continuing trend throughout this year and subsequent years.

Andrea Funk
Andrea Funk
EVP & CFO at EnerSys

Yes. I can add maybe a little bit to that as well, Chip. Yes, I think we had a little bit more of some pre tariff buy ins in Q4 anticipated that pressured Q1 a little bit. So if you look at Q4 and Q1 together, I think you see a little bit more of that steady ongoing progression versus year on year volumes up 5%, 2% price mix. As Sean mentioned, data center is very robust, up 14% year on year in the first quarter.

Andrea Funk
Andrea Funk
EVP & CFO at EnerSys

And, you know, we we continue to see that ongoing steady improvement to to continue going forward throughout the course of the year.

Chip Moore
Managing Director & Senior Research Analyst at Roth Capital Partners, LLC

Great. Very helpful. If I could ask one more just on the cost optimization underway, pretty substantial. Any way to help us, frame potential margin trajectory across the business? And then maybe energy systems in particular, just how do we think about future up cycles and down cycles, what you can do there? Thanks.

Andrea Funk
Andrea Funk
EVP & CFO at EnerSys

Sure, Chip. And I missed a little bit the first part of your question. I don't know if you I think you maybe were talking talking about full year or second quarter?

Chip Moore
Managing Director & Senior Research Analyst at Roth Capital Partners, LLC

Yeah. No. Just in general, and more so on, next year when you get the full benefit, just the margin trajectory with with those savings ramped?

Andrea Funk
Andrea Funk
EVP & CFO at EnerSys

The savings that we have. Sure. So so I'll go through a little bit of color maybe on, our our full year projections, give you just some general momentum of what we're seeing. And I think in Q1, obviously, the bottom line results were not as exciting as we'd like, but we're in line with what we expected. And I think we managed the uncertainty well coming in with the sales above the guidance and adjusted EPS in line with our expectations.

Andrea Funk
Andrea Funk
EVP & CFO at EnerSys

Obviously, that implies some margin uncertainty in the Q1, some margin erosion. In Q1, we had a little more volume than we thought with some with a little bit of price mix hit, particularly in Motive Power, which we can talk about further. We we absolutely believe Q1 is gonna be the low point, and q two and beyond will be tracking back towards the record q four levels that we had with upside, albeit temp you know, tempered by the macro. Underlying businesses remains really good. We look at full year excluding 45x, to outpace the revenue growth.

Andrea Funk
Andrea Funk
EVP & CFO at EnerSys

The cost reduction program, dollars 70,000,000 of net full year OpEx savings and $10,000,000 of manufacturing savings, I think we'll see about 30,000,000 to $35,000,000 of that in fiscal year. It's largely underway, but it'll start to materially impact in the second half of the year. And we'll have about 15,000,000 to $20,000,000 of onetime charges from that. I can go through some trends in each one of the lines of businesses if you're looking for that as well.

Chip Moore
Managing Director & Senior Research Analyst at Roth Capital Partners, LLC

Yeah. No. No. That was helpful. And and maybe just on the Okay.

Chip Moore
Managing Director & Senior Research Analyst at Roth Capital Partners, LLC

The savings in the second half of the year, Andy, that 30 to 35, is that relatively, equally spread or more so in q four? Any any

Andrea Funk
Andrea Funk
EVP & CFO at EnerSys

Little more little more in q four than q three. So it'll start to you'll you'll see it some of it in q three and then a little bit more going into q four.

Chip Moore
Managing Director & Senior Research Analyst at Roth Capital Partners, LLC

Got it. Okay. Appreciate it. I'll hop back in queue. Thanks.

Andrea Funk
Andrea Funk
EVP & CFO at EnerSys

Sure. Thanks, Chip.

Operator

Your next question comes from the line of Noah Kaye of Oppenheimer and Co. Inc. Please go ahead.

Noah Kaye
Senior Research Analyst at Oppenheimer & Co. Inc.

Yes. I think just to follow-up on Chip's question, affecting the full $80,000,000 savings on a run rate basis, that's a couple of 100 bps of structural margin expansion right there. And I would assume that your mix uplift from comms and some of the other business elements returning will help support some underlying margin expansion as well. So I mean, guess if you can just sort of first confirm that, that perhaps heading into next year tracking towards mid teens EBIT margins, all in basis, that seems a reasonable starting point. So we love your feedback.

Andrea Funk
Andrea Funk
EVP & CFO at EnerSys

Yeah. I mean, we don't have obviously, we haven't provided full year guidance, let alone next year, Noah. But but for sure, I mean, $80,000,000 of cost savings equates to a buck 60 a share. If you apply that on our fiscal twenty five actuals, that alone would take our AOE margin excluding 45 x from, about nine and a half to eleven seven. So, it should have a significant impact, but I I think the important part to mention is that these actions were not taken in response to any short term macro conditions.

Andrea Funk
Andrea Funk
EVP & CFO at EnerSys

I mean, we see the pressures that we saw in q one as being very temporary, and we'll start to abate in q two and throughout the rest of the year. It's just the timing. This was some, you know, choices that that hard choices because people are affected, but that we weighed heavily before any of this macro downturn occurred. And a lot of it is really about, you know, quicker speed, more customer focused, removing layers of management. Our revenue has been stagnant, and our customers are asking more for us.

Andrea Funk
Andrea Funk
EVP & CFO at EnerSys

So doubling down on our core business where we have the right to win, being more customer focused in both engineering and operations. And we'll be refreshing all of our long term targets, including both the the savings impact as well as additional growth that we expect. But we think this is much larger than a cost reduction plan.

Noah Kaye
Senior Research Analyst at Oppenheimer & Co. Inc.

Yes. Yes. And that's a perfect, I think, transition to what I really wanted to get after, which is know, how we should think about this new strategic growth, you know, framework. And and I wanna take it in two parts. One is really around where, apart from me, what have you done lately, strategic cost reduction announcement, Where the early wins can be on the margin side?

Noah Kaye
Senior Research Analyst at Oppenheimer & Co. Inc.

You know, where you see opportunities maybe around, I don't know, better sourcing, procurement, you know, throughput at that factory? And, you know, are there there material COGS opportunities you really see the opportunity to go after? But then to pick up on your point on the organic growth side, I think you just mentioned the customers are looking for more from EnerSys and looking for the company to grow faster. Can you maybe give us some insights there on where you think you can help accelerate the growth through this focus?

Shawn O'Connell
Shawn O'Connell
President & CEO at EnerSys

Yes. So Noah, it's Sean. Good morning. Nice to hear your voice. I think that I'll start and then turn it over to Andy if we want to get deeper into margin discussions.

Shawn O'Connell
Shawn O'Connell
President & CEO at EnerSys

As you look at and I'll just remind you of a call or a comment that I made in the earlier remarks, we believe that we have substantially will substantially mitigate all tariff exposure to the P and L. That's a pretty bold statement. And we do meet weekly on that, but how it pertains to your question, we've done some great work there, if you think about just the supply chain efforts and the rules of the road that may go into buying lead and plastics and dealing with that supply chain versus a shifting global electronics supply chain with microprocessors and how dynamic that is and the level of specialization required to get that right. And early stages here, the COE focus are allowing our supply chain folks that specialization and that broad and deep visibility into how they could administer those purchases and those supply chains. And that is how we're able to tell you that we're mitigating that tariff exposure.

Shawn O'Connell
Shawn O'Connell
President & CEO at EnerSys

So that's some real early wins. And we expect again, we're ten weeks in. We expect that to continue to unlock value for us and continue to help us be extremely competitive on costs and expand margin, to your point. The second part of your question, I think, is about growth and where customers how we see that manifesting. And I'll just give you a for instance, our maintenance free journey for a very large retailer in The United States has already demonstrated, one, that they could have substantial labor reductions two, that they could make substantial investments or I'm sorry, advancements in sustainability.

Shawn O'Connell
Shawn O'Connell
President & CEO at EnerSys

Moreover, they're asking us for additional to essentially embed additional revenue streams for us and doing real time monitoring of their sites. And also, once we get our battery energy storage systems launched for warehousing logistics, they want to add that into that power management at the site in addition to the forklift battery. So it's really effectively deeper wallet share, deeper mining of existing customer relationships right in our core, right where we have a right to win, where customers are asking us to do this. And incidentally, we began in the first quarter shipping IoT enabled capability on every battery and motive power. So we already building the plumbing to be able to do that, but that's a very emblematic example of how we're going to find growth in our core business.

Noah Kaye
Senior Research Analyst at Oppenheimer & Co. Inc.

Great examples. Thank you very much. I'll turn it over.

Andrea Funk
Andrea Funk
EVP & CFO at EnerSys

Thanks, Noah.

Operator

Your next question comes from the line of Brian Drab of William Blair. Please go ahead.

Brian Drab
Brian Drab
Co-Group Head - Industrials at William Blair

Hi. Good morning. My first question is just on buyback, which is really interesting and pretty exciting or bold announcement. I'm just wondering, does that mean that, we should have any takeaways about your capital allocation philosophy? And what I mean is that, you know, I don't know if I'm supposed to be thinking that this might be laying the foundation for a plan b regarding the funds coming from 45X in the event that the lithium plan ends up not making sense to move forward on?

Brian Drab
Brian Drab
Co-Group Head - Industrials at William Blair

It's just $1,000,000,000 is a really big figure, and it kind of lines up with the tax credit over the decade.

Shawn O'Connell
Shawn O'Connell
President & CEO at EnerSys

Morning, Brian. It's Sean. I'll start, and then I'll turn it over to Andy for more of the financial piece. On 45X, first of all, we have maintained always and will maintain that we're going to use those proceeds as the law intends. And so those investments are into our ability to produce batteries that are needed domestically at the right cost and the right technologies for our customers.

Shawn O'Connell
Shawn O'Connell
President & CEO at EnerSys

So for example, expanding Kentucky and closing Monterey and accelerating that to gain those benefits is one such example, our expansions in TPPL and that capability. And certainly, we still feel very confident based on our discussions with the government about our lithium plant. While the end size or how exactly we achieved that could shift a little with this administration, Nothing we're hearing is negative on that. Part of our strategy, just overall, is we're going to be very disciplined and very opportunistic with capital allocation. And so we asked our Board for that reload and that pretty strong statement to say, if we see we believe in our future, and we believe in our opportunities.

Shawn O'Connell
Shawn O'Connell
President & CEO at EnerSys

And if if we see the street undervaluing our stock and and it being a buy opportunity, we're opportunistically gonna buy. The other thing we didn't wanna signal here, and I hope that we did not, is that we're not going to stay we are going to stay on the acquisition hunt. And the Rebel acquisition is an example of a very small tuck in. We did quickly and effectively makes a lot of sense for us. Rebel is built on the lithium battery that's provided by Brentronics. So we've taken more of that supply to the Department of Defense, and we're going to continue to do those as well. So that's our overarching strategy, is that we just want to be opportunistic with our deployment of capital.

Shawn O'Connell
Shawn O'Connell
President & CEO at EnerSys

Our own shares are one way to do that, and we're not going to blend or blur it with 45X proceeds. And on top of that, just we've mentioned in the past, I'll just remind you that we've never returned 45X benefits to our lines of business, and we've never allowed them to incorporate that into their pricing strategies. Andy, do you have anything you'd add to Brian on that?

Andrea Funk
Andrea Funk
EVP & CFO at EnerSys

I think you nailed it, Sean. The only other thing that I would add is we are being very clear that we intend to stay below the low end of our two to three times target leverage ratio Mhmm. Just with the uncertainties in the market right now so that we have ample dry powder, whether it's, you know, strategic tuck in acquisitions like Rebel, which was a a tremendous add to the our whole a and b platform or, you know, and also to have available cap capability to do things like our our lithium plant.

Brian Drab
Brian Drab
Co-Group Head - Industrials at William Blair

Okay. Yeah. No. That's really helpful to hear how you're thinking about all of that. Thank you.

Brian Drab
Brian Drab
Co-Group Head - Industrials at William Blair

One more quick question. The gross margin that we're having to put into the model for the second quarter is, seems to be like a, you know, pretty material step up from the first quarter. So if you could just comment on the near term gross margin for second quarter.

Andrea Funk
Andrea Funk
EVP & CFO at EnerSys

Sure. So not giving specific numbers, Brian, but I see all of our lines of businesses beginning to close the gap, versus prior year. All of our lines of business will see improvement with, Motive Power power closing the gap gap to prior year as these uncertainties begin to dissipate, although we still think we'll see a little bit of pressure from this tariff uncertainty. And and maybe just to give a little bit of color on that. A couple of things with Motive Power, you know, volume being down, EMEA was down 15% and Americas down 1.8.

Andrea Funk
Andrea Funk
EVP & CFO at EnerSys

I think this is really consistent with a lot of what you're seeing in industry data. We I think our our smaller accounts were especially cautious. Our national accounts increased from 17% to 29% of sales in the first quarter. And I think those smaller customers were the ones that were a little more uncertain. And there's, industry data that is just really aligned with it.

Andrea Funk
Andrea Funk
EVP & CFO at EnerSys

The Hyster Yale call yesterday, they had truck lifts down 19% on economic uncertainty of the customers' end market order patterns overall weaker industry, book rates. But there's also some industry projections that really show some positive data in Motive Power. You know, the industry data said forklift 0.3% in 2024 and and being really flat in calendar twenty five. But both, Global Newswire said they're expecting a 6.8% CAGR from '24 to '30, and research insights is projecting a 13% CAGR in forklifts from '25 to 30. And that that's not that's even without our maintenance free conversion.

Andrea Funk
Andrea Funk
EVP & CFO at EnerSys

So, you know, I think there's lot of optimism in Motive Power. But just looking at the quarter, you know, I think, versus prior year at our guide, you know, revenue is largely in line with the Brentronics impact and some favorable pricemix. Think volumes will be mostly flat with a little bit of a cushion for uncertainty. And EPS improvement will be driven by the favorable pricemix more than offsetting some of the higher costs that we're seeing.

Brian Drab
Brian Drab
Co-Group Head - Industrials at William Blair

Perfect. Yeah. Thank you very much.

Andrea Funk
Andrea Funk
EVP & CFO at EnerSys

Sure, Brian.

Operator

Ladies and gentlemen, there are no further questions at this time. And with that, I will turn the call back over to Sean O'Connell for closing remarks. Please go ahead.

Shawn O'Connell
Shawn O'Connell
President & CEO at EnerSys

Thank you. We'd like to thank you all for joining us today. We are confident in our strategy, excited for our future. We look forward to updating you again next quarter, and we wish you all a great day.

Operator

Ladies and gentlemen, this concludes today's conference call. We thank you for participating. You may now disconnect.

Executives
Analysts
    • Lisa Hartman
      VP - IR & Corporate Communications at EnerSys
    • Chip Moore
      Managing Director & Senior Research Analyst at Roth Capital Partners, LLC
    • Noah Kaye
      Senior Research Analyst at Oppenheimer & Co. Inc.
    • Brian Drab
      Co-Group Head - Industrials at William Blair
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