Ladies and gentlemen, thank you for standing by. And welcome to the Q3 2021 EnerSys Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers’ presentation, there will be a question and answer session. I would now like to hand the conference over to your speaker today, Mr. Dave Shaffer, President and CEO. Thank you and go ahead, sir.

Thanks, Don. Good morning, and thank you for joining us for our third quarter 2021 earnings call. On the call with me this morning is Mike Schmidtlein, our CFO. Last evening, we posted slides on our website 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 website at www.enersys.com. I'm going to ask Mike to cover information regarding forward-looking statements.

Thank you, Dave, and good morning to 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. Our actual results may differ materially from the 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 2 Management 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 January 3, 2021, 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 February 10, 2021, which is located on our website at www.enersys.com. Now let me turn it back to you, Dave.

Thanks, Mike. Our third quarter reflected strong demand for our products and services, with order trends accelerating during the period. The strength of our business was even more impressive considering the ongoing headwinds created by the COVID-19 pandemic, which continued to disrupt economic activity around the world. We have been able to maintain cohesion throughout the EnerSys workforce despite a number of positive, symptomatic, and close contact cases among our employee base. Those cases can lead to disruption in daily production schedules as workers are sent home in order to comply with COVID-19 protocols. EnerSys continues to emphasize social distancing, hygiene, the use of masks, and reminding our employees to follow the same guidelines in their personal activities which has helped to mitigate the impact compared to many companies, but we have not been immune. Despite the ongoing challenges caused by COVID-19, the demand for EnerSys products was clear during the period as we reported strong third quarter fiscal 2021 adjusted earnings of $1.27 per diluted share, which included a $0.10 benefit from the settlement of our claim related to the September 29th fire in our Richmond, Kentucky facility less $0.03 per share in foreign currency losses. Energy systems benefited from telecom-driven 5G growth in the Americas, and our motive power business saw marked revenue and earnings improvement over the second fiscal quarter. Our specialty segment continued its positive momentum in our third quarter, bolstered by our growing transportation backlog. Please turn to Slide 3. I'd now like to provide a little more color on some of our key markets. But before I begin, I would like to comment on how many of our customers across all of our lines of business have signaled increasing demand and alerted us to be ready. There seems to be pent-up demand which should accelerate near-term growth. Our largest segment, Energy Systems, has struggled in recent quarters from slow broadband orders. The MSOs had focused on increasing node capacity for their work-from-home demand. Those MSOs have now resumed strong orders for our products, which increased their networks’ power capacity. Even more encouraging, MSO participation in recent wireless spectrum auctions and their enunciation of their intention to carry their 5G and 4G traffic on their own networks validates the broadband growth assumptions of our Alpha acquisition strategy. Telecom 5G growth is also accelerating in the Americas, confirming their commitment to invest in their networks to increase capacity and reliability. Our 5G small cell powering project collaboration with Corning is progressing even better than we had hoped. In this quarter, we believe the network investment in 5G has, for the first time, surpassed the existing 4G network spend. It is also encouraging to see data center markets improving. In addition to our traditional businesses, renewable energy markets continue to expand with incredible opportunities for storage applications. The new administration has clearly focused on this emerging market. We plan to respond by updating our product offering using the same modular approach from our other lines of business. We will share more specifics with you on how we will participate in renewable energy storage and EV charging in coming calls. When you consider forklifts, we are currently the leader in charging electric vehicles globally, and this technology is easily transferred. Lastly, we are beginning to see the positive impact of the global alignment of the energy systems organization as we leverage regional expertise and key account development. Please turn to Slide 4. Our motive power business showed considerable improvement in the period compared to the second quarter, delivering higher sequential revenue and operating earnings. Our order rates have surpassed the pre-COVID levels of a year ago despite sporadic pandemic-related restrictions, particularly in EMEA. The Hagen Germany restructuring is ahead of schedule and forecasted to beat its budget. Although those restructuring benefits have not yet impacted our earnings, they will grow in magnitude throughout calendar year 2021, reaching nearly a $20 million annual run rate by the end of fiscal year 2022. Another exciting development is the launch of our NexSys iON lithium motive power batteries. Several OEMs continue to accelerate their adoption of this chemistry, and our sales team is focusing efforts for NexSys iON products on the portions of the market with the most demanding duty cycles.

Thanks, Dave. For those of you following along on our webcast, we have provided information on Slide 7 for your reference. I am starting with Slide 8. Our third quarter net sales decreased 2% over the prior year to $751 million due to a 3% decrease from volume, net of a 1% increase from currency. On a line of business basis, our third quarter net sales in motive power were down 4% to $304 million, while Energy Systems net sales were down 2% at $337 million, while specialty increased 7% in the third quarter to $109 million. Motive power suffered a 5% decline in volume due to the pandemic, net of the 1% increase in FX. Energy Systems had a 4% decrease from volume, net of a 2% improvement from currency. Specialty added 6% in volume improvements and a 1% increase from currency. There were no notable changes in pricing, and we had no impact from acquisitions. On a geographical basis, net sales for the Americas were down 1% year-over-year to $499 million, with a 1% decrease from currency. EMEA was down 4% to $194 million and 9% volume decline, net of 5% improvement in currency, while Asia was flat at $58 million. Please now refer to Slide 9. On a sequential basis, third quarter net sales were up 6% compared to the second quarter, driven by volume improvements. On a line of business basis, specialty increased 5% with NorthStar continuing to contribute its capacity for transportation sales. And motive power was up 15% as it rebounds from the pandemic, while Energy Systems was down 1%. On a geographical basis, Americas was up 4%, EMEA was up 13%, and Asia was up 4%. Now a few comments about our adjusted consolidated earnings performance. As you know, we utilize certain non-GAAP measures in analyzing our company's operating performance, specifically excluding the highlighted items. Accordingly, my following comments concerning operating earnings and my later comments concerning diluted earnings per share exclude all highlighted items. Please refer to our company's Form 8-K, which includes our press release dated February 10, 2021, for details concerning these highlighted items.

On a year-over-year basis, adjusted consolidated operating earnings in the third quarter increased approximately $15 million to $78 million, with the operating margin up 210 basis points. On a sequential basis, our third quarter operating earnings improved $12 million or 110 basis points to 10.4%. We settled our claim for the Richmond Fire, which resulted in a $6 million benefit in the quarter. $4 million was a gain on the replacement of equipment reflected in operating expenses from the property policy, while $2 million was a final recovery on the business interruption policy and is credited to cost of sales. Operating expenses when excluding highlighted items were at 14.8% of sales for the third quarter compared to 16.4 million in the prior year as we reduced our spending by $15 million year-over-year and by 100 basis points sequentially. Excluded from operating expenses recorded on a GAAP basis in Q3 are pretax charges of $22 million, primarily related to $6 million in Alpha and NorthStar amortization and $12 million in restructuring charges for the previously announced closure of our flooded motive power manufacturing site in Hagen, Germany. Excluding those charges, our motive power business achieved operating earnings of 13.3% or 330 basis points higher than the 10% in the third quarter of last year, due primarily to the insurance claim recovery of $6 million described earlier. On a sequential basis, motive power's third quarter OE also increased 420 basis points from the 9.2% posted in the second quarter due primarily to sequential increases of nearly $5 million in recovery of the business interruption and other proceeds from the Richmond Fire. OE dollars for motive power increased nearly $9 million from the prior year despite lower volume due to its lower operating expenses and $6 million in insurance recovery, while OE increased $16 million from the prior quarter on higher volume and $5 million for more in insurance recovery. The Richmond Fire damage which has since been repaired or replaced and now a more capable, safer facility is in operation. Please see our 10-Q for more specifics on cash received and the related accounting.

Energy Systems operating earnings percentage of 7.4% increased from last year's 6.3%, although it decreased from last quarter's 8.8%. Operating earnings dollars rose by $3 million compared to the previous year, mainly due to reduced operating expenses, but fell by $5 million from the last quarter because of lower volume and higher operating costs. The specialty operating earnings percentage was 11.9%, an increase from last year's 10.1% and last quarter's 11.4%. Operating earnings dollars went up by nearly $3 million from the previous year due to higher volume and lower operating expenses, and increased by $1 million from the last quarter because of higher volume. Our third quarter adjusted consolidated operating earnings reached $78 million, representing a $15 million or 23% increase from the previous year. Adjusted consolidated net earnings totaled $55 million, nearly $11 million higher than the prior year. The rise in adjusted net earnings reflects increases in operating earnings, offset by $3 million in foreign currency losses mainly related to unfavorable rate changes on inter-company loans. The adjusted effective tax rate for the third quarter was 17%, slightly above last year's rate of 16% but consistent with the previous quarter's rate. Variations were mainly due to discrete tax items. The full year rate for fiscal 2019 was 17%, while for fiscal 2020, it was 18%, aligning with our current expectations for fiscal 2021. Earnings per share grew by 22% to $1.27 due to higher net earnings. We anticipate a slight increase in outstanding shares in the final quarter of fiscal 2021 as higher share prices will increase dilution from employee stock programs. We have nearly $50 million in authorized share buybacks, though we have no immediate plans for repurchasing shares, except for modest annual repurchases aimed at offsetting employee stock plan dilution. Our recently announced dividend remains the same. Year-to-date results are included on Slides 12 and 13 for reference, but I will not go into these details now. Our balance sheet is strong, and we are well-equipped to manage the current economic conditions. We have almost $489 million in cash, and our credit agreement leverage ratio is below 2 times, which provides over $600 million in additional borrowing capacity. We expect our leverage ratio to stay under 2 times for the remainder of fiscal 2021. We generated more than $218 million in free cash flow during the first three quarters of fiscal 2021. Our free cash flow for Q3 was robust at $41 million, despite the strain of rising working capital from increased revenue. Year-to-date capital expenditures of $54 million met our expectations. Our fiscal 2021 capital expectation of $75 million has increased slightly due to an improving economic outlook. Major investment programs, including lithium battery development and the expansion of TPPL capacity with NorthStar integration, are on track. The high-speed line has completed commissioning and will add a second shift this month. Despite these investments, we have maintained the flexibility to adjust our manufacturing footprint as necessary. The closure of our facility in Hagen, Germany, announced last November, is progressing better than expected both in speed and cost. We anticipate beginning to realize about half of the projected $20 million in annual savings next fiscal year, with complete benefits following thereafter. Our gross profit rate is expected to stay around 25% in Q4 of fiscal 2021, although lower utilization in some factories during the holidays and enhanced COVID restrictions may affect our profit and loss statement in Q4. We have initiated price increases in Q4 to alleviate rising costs from various non-lead inputs, which should help maintain our margins. As noted, we believe the motive power markets are recovering, and our Energy Systems and specialty markets show promising prospects. With some of the uncertainty from the election and pandemic behind us, we feel confident enough to provide guidance for our fourth fiscal quarter in the range of $1.25 to $1.31.

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

So getting back to being capacity constrained here following this rapid recovery in demand. Can we dimension the impact of those constraints on revenue currently? What was the revenue shortfall in the quarter? What is kind of the shortfall that you envision in 4Q? And clearly, you've mentioned transportation as one area, but if you can help us understand where these constraints are really coming in.

We currently have a record backlog, and the fourth quarter should have been a record, but we haven't fully resumed operations. A significant part of the issue lies with the supply chain and also with hiring, training, and productivity. Previously, we mentioned that we feel we’re about a quarter behind in our HSL ramp, which has affected our performance. Mike, you can elaborate on what the shortfalls were for Noah, but to answer your question, it's mainly a TPPL issue. As previously noted, all three businesses are involved in selling TPPL, and I believe the largest share of the backlog is likely in the transportation sector, right Mike?

So Noah, we expect to have a sequential improvement in our top line contribute to the third quarter of about $60 million to $70 million, so that would be the step-up. Now that higher number for Q4 is still about that same amount as the amount by which we're missing our originally pre-COVID budgeted amount. So you can kind of see we're kind of making up half of the progress of where we wanted to be. In terms of the overall capacity on TPPL, we feel like we're somewhere in that $700 million to $750 million, with the high-speed line at its full, operating 24/7. That should add about $150 million to $200 million to our top line, so that would reset somewhere just $850 million to $900 million. And then to the $1.2 billion that we've spoken to in our analyst call, that's in CapEx expansions that would go on throughout our fleet of five factories that produce TPPL. So they will be all incremental bottleneck directed to try to expand each of those networks over the factories over the next three years.

And Noah, as a reminder, those CapEx requirements have been communicated as approximately $100 million per year going forward. This includes the further expansion of TPPL.

And then on a related point, you mentioned in your prepared remarks, but just understanding the NorthStar integration progress. Can you update us on where you're at in terms of having product qualified with all the relevant customers? And how soon we can start to see really some of the logistics savings, the freight savings coming into the P&L as you kind of optimize your production to distribution footprint?

We recently had a productive global review with Patrice and his entire team, which provided us with a good update on all the factories. We received a major certification for the French factory, allowing us to shift some OEM volume from the NorthStar Springfield factories to France, which is significant. We have also qualified the Alpha sale, a high-volume block we were producing in France, on the high-speed line. The components we discussed regarding the deal logic and synergies are largely on track, although some delays were caused by COVID affecting the acquisition schedule and the high-speed line. Mike noted that we are hiring a second shift, but the team faced challenges hiring new staff. We're still addressing some COVID-related benefits, but the situation has improved as we have started to add new personnel. However, our finished goods inventory remains critically low, and we are working hard to recover. I am pleased with the progress on our SOx qualifications, and we have met nearly all our targets related to the NorthStar deal, apart from delays caused by COVID.

I would just like to add that the transition of the Daimler product from Springfield, Missouri, to Arras, France, could result in an annual benefit of $5 million to $10 million, depending on the volume we achieve with that customer. Additionally, the transfer of EnerSys products now being produced at the Springfield factories of NorthStar should help eliminate a $4 million to $5 million quarterly drag due to manufacturing variances from those factories. As we increase production to meet the demand for TPPL, we expect those variances to decrease as utilization improves. This is a significant factor and will be a major contributor to enhancing our margins over the next two fiscal years.

Maybe I could just sneak one last one in. Dave, again, you mentioned in the prepared remarks that you're going to be working on some product development for EV fast charging. We look at this as a significant market opportunity in the coming years, and we're looking at something close to $3 billion of EV hardware opportunity for DC fast charging in the US and Western EU. And so I think it would be helpful, I know you don't want to say too much about it now, but just can you give us the broad strokes of when we should think about the company having a product in the marketplace and maybe how you might go to market?

I believe the most exciting aspect is the similarity in the initial prototypes being developed this quarter at the tech center next door. I am pleased with the similarities in the bill of materials compared to a motive power system. While there are slight differences in the connectors and the pedestals for connecting to electric vehicles, generally, the 100 kilowatt-hour battery lithium pack we're implementing for motive is a natural fit for us. The market channels are intriguing, with substantial discussions happening with large real estate firms. The way new charging infrastructures will be implemented is fascinating. Part of this is what we refer to as application stacking, where one device serves multiple purposes. This is exciting because the same asset can facilitate fast EV charging, load leveling, demand shifting, and power a 5G base station. It’s truly remarkable, and a number of major real estate companies have really embraced this concept. As I mentioned, more updates will follow. The key takeaway for our shareholders is that over the past four to five years, we've developed significant competency and muscle memory in technology and supply chain. It’s time for us to leverage this and we plan to utilize our core competencies in supply chain and engineering to venture into new adjacent markets, which we are very enthusiastic about.

And our next question is from the line of Greg Lewis from BTIG.

Just realizing that it's early days and people like me on the finance side always want things to happen a lot quicker than they actually can happen in the real world, but you touched a little on the initial rollout of the lithium-ion battery in motive and just as we think about that, as you think about it gaining increasing in customer usage. And is there any way to kind of think about how that plays out over the next two, three, four years? And as we think about that, how should we be thinking how that maybe impacts margins on kind of like an annual basis? Any kind of color around that, I think, would be helpful.

Well, Greg, what we laid out at our Investor Day model included a lot of the product migration and product rotation, a lot of the margin improvement. So a lot of that was baked into our Investor Day model and the assumptions at the time. I don't know that the assumptions have dramatically changed in terms of the rate of conversions or the rate of impact on the margins post-COVID. I think if anything, just the kind of that whole of demand has sort of delayed things from a COVID perspective. But in general, what we have to do, like the big one was the Hagen factory that certainly was an expensive endeavor and it’s part of that product rotation that a strong balance sheet allows us to make those right kind of move. The adding of additional engineering talent with new skills, we’ve been doing this for years now. And I think we’re going to continue to see those lifts. We also should start to see additional lifts as we can continue to drive waste out of the organization. One thing I’ve really pressed my three key line of business leaders on is operating expense. I think COVID really showed these work-from-home initiatives that we can do things a lot cheaper than we’ve done historically in terms of travel, entertainment, things in those areas. So there’s certainly places to tighten up there. But in general, I would say most of the assumption that we say about margin improvement, product rotations, restructuring costs is all reflected in the model. And I think as we communicated the last cycle, Mike, we feel like we’re behind schedule as a results of COVID.

And Greg, I would say to your question on what it’s going to do to overall margin. So we would expect we ought to in this upcoming fiscal year sell $50 million to $100 million in our motive power products lithium base. And most of the product with current costs is you're using soft tooling, and you have some fairly small purchase quantities. Your assembly teams are going through a learning curve. So as we expand, we would expect the first year, those margins to be fairly modest, actually be a little dilutive to our overall margin profile. But as you cost out in that first year the product, we would expect, obviously, that these are going to be among our higher margin models. But don't expect that in the upcoming year.

Yes, I think Greg sort of asked in the long run. But certainly, I agree with Mike's point. In the near term, there's going to be some growth pains in terms of margin impact, and that's reflected in our model.

You briefly mentioned it in your prepared remarks, and it seems like Energy Storage is gaining momentum. You outlined potential opportunities in residential, telecom, and energy sectors. I have two questions regarding this. Can we consider stacking these opportunities? Do you see telecom as the initial focus with energy as a longer-term opportunity? How do you envision the performance of each sector over the next few years? Additionally, considering your acquisition in 2019 and the efforts to reduce debt, you seem to be at a point where you can pursue additional opportunities to solidify your presence in these areas. I'm interested in your thoughts on the energy storage opportunity.

Right now, it's really a question of going after the right targets because it’s such a target-rich environment. As Mike mentioned, we think the change in administration is only going to improve the prospects for these opportunities. We think that the key, as I mentioned earlier to Noah, is the ability to application stack these devices so there are multiple value streams that are created. And I feel very confident that the technology piece is well within our core competency. Now as you expand into like resi and you push into some of these kind of utility interconnects, there are some software elements where a tuck-in or something might make some sense. And we're working on those issues every day. So the software component of the business is increasing as part of the needs here. On the hardware side, I think we're really well positioned. We do need to add some expertise on software, but I really like this space. I think during the Obama administration, this same team in a lot of ways, wanted to do some of these things. It just was too early. The technology wasn't ready. But all these years later, I think now we're in a much better position to do things as the costs have come way down on battery energy storage in general.

And so when you mentioned earlier about the hiring of engineers. I guess it's safe to assume that a lot of those positions are potentially or probably for software?

Yes. The software piece, the firmware piece, for sure, that's a big part of it. And as we push deeper into these areas, that will be more and more of the mix of people we're hiring is on the software side.

And our next question is from the line of Brian Drab from William Blair.

Just a first question, there's a lot of moving parts here in terms of the capacity constraints and the need to push through some prices, you're taking out costs, closing facilities. If I remember correctly, we were at the Analyst Day about a year and a half ago talking about marching toward 28% to 30% gross margin and we're at around 25% now. As you look to fiscal '22 and you move past the capacity constraints, put through some of the price, you get the costs out. What is a reasonable expectation can you get? 200 basis points of gross margin in the next fiscal year, and also you have volume coming back, I guess, as well, or is it 100? Where do you think gross margin could be in fiscal '22?

We continue to believe that margin expansion will occur. The pandemic and its associated restrictions are unpredictable factors, but regarding the capacity improvements you've mentioned, the NorthStar factories have been a limiting factor for us. The overall capacity will improve across various areas, with expected benefits of $20 million, though not all will be recognized in the next year. We estimate around $10 million in benefits from Hagen next year and $20 million thereafter. These improvements, along with necessary adjustments to our pricing in response to changes in freight or commodity costs, should contribute to this expansion. Given the uncertainties in the current environment, we anticipate that margin expansion should result in an increase of 100 to 200 basis points by the end of the next fiscal year. Therefore, we expect to finish 2022 with a margin that is 100 to 200 basis points higher than where we are today.

Yes. I would say that the biggest challenge is related to the volume absorption and the COVID-related volume reductions. The primary issue that the finance team has been highlighting as we head into fiscal '22 is the tariffs and freight costs. Freight rates continue to be a significant pressure point. Some tariffs have increased from 10% to 25%. This has made it very challenging for our procurement team as they work to adapt and change suppliers. It's a difficult situation, but we are managing as best as we can. Overall, that’s the main concern. However, we are trying to stay ahead by adjusting prices to address commodity pressures, so I believe Mike's forecast is quite reasonable.

One topic I've been frequently asked about for quite a while regarding EnerSys is lithium and the potential competition from new entrants producing lithium batteries for forklifts. I wanted to touch base with you publicly today about how you perceive the competitive landscape. As I understand, currently, less than 5% of forklifts are being shipped with lithium batteries; this percentage might be slightly higher in Europe compared to North America, but globally it remains around that 5% or less. You now have a lithium product available. Who are the primary competitors you are encountering in the market? Are you feeling increased pressure to develop a lithium product due to partnerships forming between OEMs and emerging lithium battery suppliers?

Well, it's a great question. I think that Asia, especially the China market, is the furthest ahead on lithium. I think part of that is because BYD is both a battery company and a forklift company, and they use lithium-ion phosphate technology. So I would say the percentages have moved higher than where you're at. Our NexSys iON product is well positioned to participate. I think one of the things you have to think about is this whole make versus buy in terms of how easy it is for these forklift companies to get into the battery business. That's a real serious question. And the objective for me and my team is to make that decision really easy that our products are going to be better, safer, cheaper, and readily available to try and protect our share, grow our share, grow our margins, and we're having success. And the other piece to it is the maintenance-free is what a lot of these customers want. And our NexSys Pure, which is our TPPL variant, also fills a lot of those or checks a lot of those boxes as well. So we feel like between our new NexSys Pure and our NexSys iON products, we have a very compelling option as people want to push into more of these maintenance-free solutions. The percentage of lithium in the marketplace, I don't have a clean number like I do with lead because of industry associations and so forth, but it's pushed past that 5% number globally for sure. And we're going to participate. We're going to be there. And we're going to be the only supplier out there that carries traditional flooded lead, NexSys iON, and NexSys Pure maintenance-free products. Mike, do you want to add anything?

I just think, Brian, when you think about market penetration, you have to think of the size of the vehicles, and they have a much higher penetration in Class III vehicles where those vehicles, the operator walks alongside, so the counterbalance weight is a little bit different. They don't need to be heavy. So even though those are Class III trucks are the most numerous, that's not in terms of battery sales, it's not necessarily where the money is. So I would say you're higher in penetration Class III less so in I and II.

Yes, the market is moving to maintenance-free. We're moving with the market. And in terms of the competitive landscape you mentioned, there's really two sets. Principally, there's been a lot of small start-up companies that have tried to compete, and that's not always easy in terms of costs and balance sheets. And then there are some of the big OEMs like Heidrick that have tried to do their own organic programs. And again, it's incumbent on us to offer a better mousetrap and to do it more effectively. So it's easier for the OEMs to use our products integrated into their trucks, and that's what we're trying to do every day.

I'm just processing that and thinking, you started, Dave, by talking about Asia. I mean your share in Asia, if my memory is correct, is more around the mid-teen range. And in the Americas and motive, it's over 50%, I think. And Europe is in the 40% range, I believe, or maybe mid-30s. And then the large trucks is where the money is, as you just said. So overall, if you just look at Americas and Europe, can you even ballpark what percentage of the market that's important to EnerSys is now shipping with lithium versus lead acid?

I can speak to the lead piece. So the lead markets and the demand are still robust and healthy in the US market and in the European market. I would also say, lithium is coming off of a very small base, so their growth potential or their growth rates are obviously super, double, triple, but coming off a small base. And so, in terms of the loading, the margins, we feel like a lot of that as best as we could do, we baked into our Investor Day model. And that's the best answer I can give you. And I really don't have good statistics like we do with lead for how many lithium batteries are out there. But in terms of our lead battery business and the demand for our lead batteries, it's still very normal. And I would think, based on a lot of the information we're seeing from our customers, that there's some pent-up demand from earlier in, let's say, the spring of 2020 when all the factories got shut down.

And then just a last question, probably for Mike. I just want to be clear on this. I think I heard you say that sequentially, revenue should improve in the fourth quarter. I think you said by $60 million to $70 million. And then I'm wondering, as you go to the first quarter of fiscal '22, given that you have this dynamic of maybe capacity constraints lessening, would you expect typical seasonality in the fiscal first quarter where revenue steps down materially, or could it be a situation where actually revenue holds flat or is even up as you move sequentially from the fourth quarter to first?

Yes. I think it's going to be a flatter look than most years. But on the top line, I would expect Q1 won't look tremendously different from Q4.

I just wanted to revisit the comments on renewable storage. Is that explicitly talking about getting into the residential storage business, or is it something else, maybe like utility scale or something more unique?

Resi is part of it. And then the other one is commercial, industrial. So C&I behind the meter. We've said previously, we're looking at systems probably in the zip code of 500 kilowatt hours, plus or minus, and not utility scale. That's a piece that we have not identified in our product roadmap.

And then just kind of thinking about the EV charging and then the resi storage market, you kind of touched on this earlier. But can you compare and contrast the competitive dynamics in those two markets, and maybe just give like the biggest hurdle for entering each one?

I think it's not a well-defined market yet. I think the Biden administration is certainly recognizing the criticality of charging and charging infrastructure as part of reaching more carbon reduction targets and getting more vehicles electric; you have to be able to charge them. And we're looking at the portion of the market where folks that are interested in charging very quickly, that's really the portion of the market we're most focused on. And we have forklift customers who want the same thing. They want to get the electricity back into the battery pack as fast as possible. So we want to leverage what we've done in the forklift area and pursue it into the electric car market as well. So in terms of what the capabilities are, you have to have expertise in energy conversion. You have to have packaging, software, balance sheet, and it's all the things that we feel like we already bring. In terms of the channels to market, you've seen some MOUs we've done before with Blink. And then we certainly we've spoken to other people in this area. But it's still a very, I would say, it's still fairly early days. And I don't know that there's a clear roadmap yet as to how this market is going to develop. I think what I said earlier, I think it was Noah, is it's very interesting how the real estate companies are thinking about taking a leadership role in a lot of this EV charging area.

And then one more quick one, if I could. Jumping back to Energy Systems and 5G. Last quarter, you said you kind of expect like an accelerated ordering activity in the spring, late spring and into the summer. Just given how quickly things can change nowadays, it seems like that's still the case, but I'd thought I check, is that still a timeline that you're thinking?

Yes, orders are strong, and the Corning project is very exciting. They mentioned our collaboration on their call a couple of weeks ago, and we're part of their eVolve program, which is designed to simplify fiber deployment for customers using prefabricated connectors. Our role involves integrating our systems with their large cable, which includes some power conductors, allowing energy transmission to base stations or power supplies located about a mile away. It's an impressive project, and Corning highlighted Verizon in their press release. Verizon is indeed involved, particularly in relation to the small cell site ultrawide band rollouts, although the timing for that is still pending. Currently, the orders we are receiving primarily come from customers focusing on the lower spectrum, and there is strong activity in the 5G radio buildout at a broader, macro level. However, the ultrawide band and small cell sites will likely come a bit later. We have achieved significant milestones in development, and we are quite enthusiastic about it. Additionally, as I mentioned earlier, some large cable companies are moving towards a quad play, aiming to provide their own wireless services over their existing networks rather than acting as mobile virtual network operators. They plan to manage data traffic, radios, and power directly over their current HFC networks, which aligns well with our capabilities. The Alpha acquisition was particularly appealing because their gateway product family offers a DOCSIS-compliant, high-speed modem for backhauling 5G traffic while also supplying 48-volt power. It's important to note that securing licenses for electrical connections is a substantial part of the 5G rollout, and many projects we are involved in aim to streamline the deployment of small cell sites, making the process quicker and more cost-effective.

And we have our last question from the line of John Franzreb from Sidoti & Company.

My questions have been addressed.

Well, again, we just want to thank everybody for attending the call today. We look forward to providing further updates on our progress on our fourth quarter and year-end 2021 call in May. Have a good day, everyone. Bye bye.

And this concludes today's conference. Thank you for participating. You may now disconnect.