Ladies and gentlemen, thank you for standing by. And welcome to the Q3 2022 EnerSys Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to turn the conference over to your speaker for today, David Shaffer, President and CEO. You may begin.

Thanks, Towanda. Good morning. And thank you for joining us for our third quarter fiscal 2022 earnings call. On the call with me this morning are Mike Schmidtlein, our Chief Financial Officer; and Andrea Funk, who will be succeeding Mike when he retires next month. Last evening, we posted 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 am 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’s Discussion and Analysis of Financial Condition Results of Operations set forth in our quarterly report on Form 10-Q for the fiscal quarter ended January 2, 2022, which was filed with the U.S. Securities and Exchange Commission. In addition, we will also be presenting certain non-GAAP financial measures, particularly concerning our adjusted consolidated operating earnings performance and our adjusted diluted earnings per share, which excludes certain highlighted items. 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 9, 2022, which is located on our website at www.enersys.com. And let me turn it back to you, Dave.

Thanks, Mike. Please turn to slide three. EnerSys delivered another quarter of strong year-over-year growth, with $844 million of revenue, the highest quarterly revenue in our company’s history, increasing 12% over the third quarter 2021, driven mostly by volume, as well as ongoing aggressive pricing actions. We saw record demand across all of our segments, with Q3 2022 orders increasing 30% from the prior year and 33% compared to the same period of pre-COVID fiscal year 2020. We also reported third quarter adjusted earnings of $1.01 per diluted share, which was in line with our guidance. Our Energy Systems business performed better than expected due to strong product demand, improving price recapture and excellent fulfillment execution. Motive Power successfully navigated the current environment to deliver impressive results, while strong demand in our Specialty business, particularly in EMEA, drove another quarter of segment growth that was limited by our ability to supply. By leveraging our core product and service capabilities and technologies, we continue to develop a pipeline of short- and long-term opportunities across the business. Helping to meet that demand, our global TPPL output pace increased 10% sequentially, with each TPPL factory improving over the prior quarter, while our Richmond, Kentucky Motive Power Facility continued to perform very well. Our quarter-end backlog increased an additional $160 million in Q3 to an all-time high of $1.2 billion, which is more than double historical levels. Based on positive customer feedback and ongoing industry analysis, we believe we are performing better than our competitors and continue to maintain and in some cases grow our market share. In addition, we utilized excess liquidity to buy back $116 million of stock since the beginning of the third quarter, bringing our full-year repurchases to $148 million, while maintaining leverage below 2.5 times EBITDA. I am proud of our employees for overcoming many of the headwinds we continue to face from mounting inflation, supply chain hurdles, and staffing issues brought on by the recent surge in COVID variants. We incurred in excess of $30 million or over $0.50 a share of sequential incremental cost in the third quarter, the highest quarterly cost increase yet. Despite these challenges, our teams aggressively offset most of these pressures with additional price increases, component resourcing, and engineering redesign work, which enabled us to achieve our guidance and set us up for margin expansion in the quarters to come. While the supply chain issues remain, I am very confident we will continue to adapt and make sequential progress in realizing the true profitability of our business and our financial results. Now, I will provide a little more color on some of our key markets. Please turn to slide four. Let’s start with our largest segment, Energy Systems, which continues to see robust demand with Q3 2022 order rates increasing over 54% compared to pre-COVID Q3 2020. We saw strong 5G-related demand from several of our largest customers, and we are especially pleased with positive results in EMEA. Progress also continues with the California Public Utilities Commission's grid shutdown extended network backup mandate, with the ramp-up starting in Q3 and accelerating into Q4. This momentum should continue well into fiscal year 2023 incorporating our lithium technology, and we are confident the solutions we developed for CPUC will be used for similar network resiliency programs. In addition, our strategic collaboration with Corning, which focuses on 5G deployments by simplifying the delivery of fiber and electrical power to small cell wireless sites, is gaining momentum with another large customer who communicated its intention to implement the system throughout its network of small cell sites by late fiscal year 2023. We also had a booth at the Inner Solar Energy Storage Conference in January, where we showcased our new Mojave Home Energy Storage System, including our lithium technology battery. It received strong customer interest, including our first tranche of orders that we expect to translate to revenue in fiscal year 2023. In addition, I am pleased with our fast-charging storage initiative. We have hired 20 engineers dedicated to this effort, and we have made substantial progress on our software development and customer specification design. We continue to anticipate our first revenues will be booked near the end of fiscal year 2023. Despite the positive product demand trends, the Energy Systems long and complicated supply chain continue to be hit hard by the macroeconomic environment of the third quarter, leading to further freight-related and other commodity inflation, as well as component and labor shortages. Although margins were again negatively impacted by mix, with more project services revenue offsetting higher margin power systems backlog that could not be delivered due to chip shortages. We did see a modest improvement in Energy Systems margins and are optimistic this trend will continue. We have worked with our customers to reach fair accommodations to defray the explosive cost increases we have incurred. We are seeing the pace of inflation growth decelerate and certain supply chain headwinds ease, and we expect the positive impacts of our mitigating actions, including pricing, engineering redesign, and contract manufacturing onshore to be more broadly realized in Q4 and beyond. This expected cost improvement, combined with the many growth opportunities I mentioned, reinforces our positive long-term outlook for Energy Systems. Please turn to slide five. Motive Power delivered another strong quarter with over $39 million of operating earnings, which is even more impressive when you consider the segment incurred $15 million of sequential cost increases. Price and mix improvements primarily offset these costs, aided by continued growth in our Nexus lithium-ion and TPPL maintenance-free product offerings. We remain the only battery producer to offer both lithium and TPPL and maintenance-free along with our traditional flooded products. In addition to generating strong financial results in the face of supply chain headwinds, we are continuing to invest in the transformation of our Motive Power business. Initiatives include, one, flooded and legacy charge product consolidation as we transition to maintenance-free; two, robotic process automation for order entry; three, customer service self-help portals; and four, solution selling initiatives involving global collaboration on customer case studies supported by more user-friendly sales tools. Overall, we are seeing strong and steady growth in the Motive Power marketplace driven by several positive megatrends, including Toyota’s commitment to full electrification, as well as automation in material handling. Strong market dynamics combined with continued product differentiation in this segment are expected to drive additional growth opportunities going forward. In addition, as our OEM Motive Power customers have not fully recovered and continue to manufacture approximately 3% below their fiscal year 2019 build rates, we believe there is even further runway for our LOB’s volume growth to come. Please turn to slide six. Well, Energy Systems and Motive Power exceeded expectations during the quarter, our Specialty business results were mixed. Specialty revenue grew 18% sequentially to $119 million in Q3, despite being hindered by labor shortage pressures in our Missouri factories, along with component shortages impacting our ability to meet demand. In the face of these challenges, Specialty still contributed nearly $12 million of operating earnings, and as the high-speed line and other productivity and capacity enhancements are installed in our TPPL factories, both incremental cost and capacity improvements should be evident in future results. We are also seeing strong demand signals for calendar year 2022 as the U.S. economy recovers and the repressed Class A truck demand continues to be released. A&D performed well during the quarter, as we continue to work on many exciting projects. We discussed one of these projects in a recent press release about our ABSO lithium-ion batteries being a critical component of NASA’s James Webb Space Telescope that was launched into space on Christmas Day. It has been nearly 10 years since EnerSys was awarded the contract for our batteries to power this telescope, and we are extremely excited to be part of such a historical mission. Our TPPL production capacity continues to grow, and we are at our planned run rate of $1.2 billion per annum. We also expect significant reductions in manufacturing variances next fiscal year as the supply chain issues subside. Improving manufacturing efficiencies, record backlog, and strong demand signals in transportation in A&D all point to good things to come in our Specialty business. Please turn to slide seven. There is no doubt the recently passed infrastructure legislation holds many positives for EnerSys. I want to take a minute to highlight the various areas of the law from which we expect EnerSys to benefit. An overarching takeaway of the legislation is the opportunity to accelerate U.S. lithium-ion cell manufacturing to support commercial and defense battery applications. While the details are still being finalized, certain inferences can be made as to how our business may benefit or specifically major funding allocations available by segment include the following. For Energy Systems, the infrastructure law supports public and private broadband communications network build-outs and upgrades, critical power and backup for industrial and utility systems operations, monitoring and equipment control, and providing rural digital opportunity funds for broadband coverage in underserved regions. In Motive Power, more than $65 billion was allocated to improve the electrical grid, which should help our customers accelerate the electrification of Ford trucks and material handling equipment. In Specialty, the legislation should help drive advanced battery manufacturing, set up recycling grant programs, and support road infrastructure, which is expected to increase trucking profitability and investment in fleets. In addition, the U.S. Government has recognized the lack of lithium-ion cell production in the U.S. has created a national security weakness. The U.S. Government plans to establish new domestic cell production capacity and is strongly considering solicitations that require U.S.-made cells for key programs, of which EnerSys is actively working on. And lastly, we believe our fast-charging storage system will be buoyed by increased EV charging infrastructure, as well as an interconnected network to facilitate data collection, access, and reliability. We will participate in various RFQs across all three of our lines of business in the coming years, as part of the infrastructure legislation, as it is undeniable that the law aligns well with EnerSys’ core capabilities and technologies. Please turn to slide eight. Looking ahead, the global supply chain and its effect on rising commodity and labor costs, in addition to component shortages, will continue to be the major focus for the entire EnerSys team. Fortunately, we have gotten better at identifying and mitigating these headwinds through incremental price increases, alternative sourcing, engineering redesigns, and aggressive hiring actions. As a result, we are optimistic that Q3 2022 represents the beginning of the recovery across the entire company, with the pace of cost increases starting to decelerate and multiple pricing actions beginning to catch up. We will remain laser-focused on limiting the impact of these factors on our business. Even more importantly, we will work hard to keep our employees safe, as the Omicron variant remains pervasive in various parts of the world. Despite all of the external headwinds impacting our business, one incredibly positive fact remains unchanged. Market demand across all segments of our business has reached all-time highs. Our technology, products, and services consistently and reliably meet the needs of our customers, and they have rewarded us by remaining loyal to EnerSys. Our backlog has grown to unprecedented levels, and we are confident that we have maintained and in some cases grown our market share in this challenging environment. We continue to develop new products and technologies that are mission-critical and linked to mega market trends for which both our customers and shareholders will benefit. Our bottom line does not yet reflect all the hard work and progress we have made. I am confident that we are on the right track for EnerSys to realize our true potential in the quarters and years ahead. With that, I will now ask Andy to provide further information on our third quarter results and go-forward guidance.

Thanks, Dave. For those of you following along on our webcast, we have provided the information on slide nine for reference. I am starting with slide 10. Our third quarter net sales increased 12% over the prior year to $844 million, due to a 10% increase from volume and over 3% from price net of mix, partially offset by a 1% decline from foreign exchange. On our line of business basis compared to prior year, our third quarter net sales in Energy Systems were up 14% to $385 million, Specialty was up 9% to $119 million, and Motive Power revenues were up 12% to $340 million. Motive Power’s improvement was mostly driven by 9% growth in organic volume and 5% in price and favorable mix, offset by 2% impact from FX. Our Motive Power volumes are now comparable to the pre-pandemic levels of two years ago, with 8% higher revenues from the favorable impact of pricing mix. Energy Systems had a 14% increase in revenues from volume, as well as a 1% improvement from price net of negative mix, partially offset by a 1% decrease from the impact of foreign exchange. Specialty’s revenues benefited from over 6% price mix improvement and 3% organic volume growth, with the volume growth tempered by delayed shipments. On a geographical basis, net sales for the Americas were up 16% year-over-year to $578 million, with 13% more volume and 3% higher price mix. EMEA’s revenues were up 5% to $203 million from a 5% increase in volume and a 5% improvement in price mix, offset by a 5% impact from foreign exchange. Asia was up 8% at $63 million on 7% more volume and small gains from both price mix, as well as currency. Please now refer to slide 11. On a sequential basis, third quarter net sales were up 7% from the second quarter due to 5% organic volume growth and 3% price mix improvement, partially offset by 1% foreign exchange translation. On a line of business basis, Specialty revenues increased 18% over Q2, with 2% higher price mix and 17% higher volume from seasonality, as well as a pickup of second quarter order fulfillments that were pushed into the third quarter. While we are pleased with our results in Specialty, it’s important to note that this quarter does not fully reflect the revenue potential of the business due to continued supply chain constraints. We expect our Specialty sales growth rates to increase as supply normalizes and our capacity increases. Sequential Motive Power revenues were up 6%, with 3% higher price and mix and over 4% volume growth, partially offset by nearly 1% currency translation. Motive Power volume growth benefited from a return from the European holiday season in the second quarter. Energy Systems sales were up 4%, with 3% sequential price mix improvements and 2% organic volume growth, partially offset by a 1% FX drag. On a geographical basis, Americas revenues were up 5% over the second quarter from a combination of both net price mix and volume. EMEA was up 13% on 14% volume, buoyed by the second quarter European holiday season rebound, as previously mentioned, as well as a 2% improvement in price mix, partially offset by a 4% drag from currency. APAC revenues were up 3% from a combination of both volume and price mix. Please now turn to slide 12. On a year-over-year basis, adjusted consolidated operating earnings in the third quarter decreased to $60 million. As you may recall, in the third quarter of fiscal 2021, we settled our insurance claim for the Richmond Fire, which resulted in a $6 million benefit to the quarter that skews the prior year comparison. On a sequential basis, our third quarter operating earnings were relatively flat as $30 million of higher costs from inflation and supply chain headwinds were offset by dramatic improvements in price mix and volume. Although gross margins eroded 80 basis points, our sequential gross margins would have been slightly higher if not for the cost recovery impact in the margin calculation. Mounting inflation and persistent supply chain headwinds negatively impacted mix and our ability to supply customer demand across all of our lines of businesses, as Dave has discussed. Operating expenses when excluding highlighted items were 14.7% of sales for the third quarter, compared to 14.8% in the prior year and 16.4% in Q3 2020, as we have maintained a more efficient operating leverage, with our revenue growth continuing to exceed our OpEx spending growth. Excluding the previously mentioned Richmond Fire recovery in the third quarter of 2021, prior year’s operating expenses would have been 15.3%, compared to this year’s 14.7%. On a sequential basis, our operating expenses were $6 million higher, as we have hired engineers and also incurred higher selling expenses to support the revenue growth and some resumption of travel, but we are still slightly lower as a percentage of revenue. Excluded from operating expenses recorded on a GAAP basis in Q3 were pre-tax charges of $9 million, primarily related to $6 million of Alpha and NorthStar amortization, and $3 million of restructuring charges for the previously announced closure of our flooded Motive Power manufacturing site in Hagen, Germany. Excluding these charges, our Motive Power business generated operating earnings of $39 million or 11.5% of sales, which was 180 basis points lower than the 13.3% of sales for the third quarter of last year, but slightly better after adjusting for the $6 million benefit from the Richmond Fire recovery received last year as previously mentioned. Motive Power continues to capitalize on strong demand, favorable mix from our maintenance-free products growth, and ongoing OpEx restraints. OE dollars for Motive Power increased over $5 million from the prior year, excluding the Richmond Fire recovery and up over $8 million from the same quarter two years ago. On a sequential basis, Motive Power’s third quarter operating earnings percent of sales decreased 130 basis points from the second quarter due to escalating inflation and the margin math pressure from cost recovery pricing pass-through. Energy Systems operating earnings percentage of 2.6% was down from last year, but an improvement from the prior quarter’s 2.3%, a $1 million investment in our fast-charging initiative, combined with higher freight, tariffs, and material costs, unfavorable mix from supply shortages and lagging price improvement realization caused the OE erosion versus the prior year. As Dave mentioned, the contract nature of this business caused these delays in matching price and costs that negatively impact us in inflationary periods, but will benefit us when costs stabilize and decline. We were encouraged by Energy Systems’ sequential price improvement in the third quarter and believe the price actions are beginning to catch up with the cost increases, and we will continue to see ongoing sequentially improving margins in the quarters to come. Specialty’s operating earnings 9.6 percent of sales was down from last quarter’s 11.8% and last year’s 11.9%. OE dollars were largely flat sequentially and down $1.6 million year-on-year, with margin erosion coming from inflation and input cost increases being only partially offset by price mix and higher volumes and supply headwinds delaying additional order fulfillment. Please move to slide 13. As reflected on slide 12, our third quarter adjusted consolidated operating earnings were $60 million. Our adjusted consolidated net earnings were $43 million. Our adjusted net earnings reflect the change in operating earnings previously discussed along with $2 million of currency gains in the third quarter of 2022 versus a $2 million currency loss in Q3 2021 and a lower share count, partially offset by a slightly higher adjusted tax rates. Our adjusted effective income tax rate of 17.5% for the third quarter of fiscal 2022 was higher than the prior year’s rate of 16.8% and also the prior quarter’s rate of 15.6%. Discrete tax items caused most of these variations. At a $1.1 per share, third quarter EPS was at the midpoint of our guidance range, despite dramatic and rapid cost increases, aggressive pricing actions, volatile supply chain conditions, and extremely robust demand throughout the period. Our EPS was flat sequentially and down $0.26 from the prior year after absorbing over $60 million or $1 per share of year-on-year cost increases, as delayed pricing realization and supply chain headwinds temporarily muted and offset our strong demand and the impact of the Richmond Fire Insurance recovery in Q3 2021 exaggerated the prior year comparison. As announced in our subsequent events footnote and last night’s press release, we acquired nearly $1.5 million EnerSys shares for $116 million since the beginning of the third quarter, bringing our year-to-date repurchases to almost 1.9 million shares for $148 million this fiscal year and leaving $42 million remaining on our Board of Directors share buyback authorization. As a result of our share buyback activity, we expect a lower weighted average share count for our fourth fiscal quarter of 2022 to be approximately 42 million shares versus 42.5 million shares in the third quarter. Our leverage at Q3 2022 remained below 2.5 times EBITDA, which has historically been the high end of our comfort range to enable untapped liquidity for both growth and investments. As demand for lithium technology mounts, we are intentionally preserving some capacity for lithium sourcing strategies to buffer against supply chain exposures. Last night, we also announced our quarterly dividend, which remained unchanged from prior levels. Slides 14 and 15 reflect the year-to-date results and are provided for your reference, but I don’t intend to cover them at this time. Please now turn to slide 16. Our balance sheet remained strong and positions us well to navigate the current economic environment. We have $397 million of cash on hand, and as previously mentioned, our credit agreement leverage ratio is now at 2.4 times EBITDA, which allows $385 million in additional borrowing capacity for growth and investments. We expect our leverage to remain below 2.5 times EBITDA for the fourth fiscal quarter of 2022. Our year-to-date cash flow from operations was negative $78 million. This was primarily due to our inventory expanding $164 million year-to-date to meet the requirements of rising revenues, as well as from higher input costs and transit times, along with intentional inventory builds to mitigate supply chain disruptions. Capital expenditures of $52 million were in line with our prior guidance. Our CapEx expectation for fiscal 2022 remains at or below $100 million and reflects major investment programs in lithium battery technology development and continued expansion of our TPPL capacity. Also included in our operating cash flows was $34 million in cash spending and highlighted items primarily related to the previously announced restructuring of our Hagen, Germany Motive Power plant, which delivered almost $5 million of savings in the third quarter, in line with the projected annual savings of $20 million, as previously communicated. We anticipate our gross margin to remain near 22% in the fourth quarter of fiscal 2022, with continued, but decelerating inflation being offset by accelerating aggressive price actions and mix improvements. In addition, as Dave has described, demand across all three of our lines of businesses was robust and continues to grow. While temporary supply chain challenges are suppressing our ability to fully capitalize on these opportunities, our mitigating actions, including onshoring of contract manufacturing, strategic inventory builds, and product redesign are beginning to take hold. We therefore anticipate ongoing sequential margin improvements in the upcoming quarters as the true underlying profitability of our business emerges. As a result, our guidance range of $1.11 per share to $1.21 per share in our fourth fiscal quarter of 2022 reflects our volume growth, combined with aggressive price actions and other mitigated activities more than offsetting the sequential impact of continued inflation and supply chain challenges as we make progress on a return to the true underlying profitability levels for our growing business.

Thanks, Andy. Towanda, we can now open the line for questions.

Thank you. Our first question comes from the line of Noah Kaye with Oppenheimer. Your line is open.

Hi. Good morning and thanks for taking the questions. I appreciate all the color around the sequential improvement here. And I was just wondering if it would be possible to mention for us how much price benefit you are sequentially expecting in 4Q, and if possible, to give us some color on how much of that is really coming in Energy Systems just based off of the lag in these contracts starting to catch up? And if possible, what you are thinking about price runway in terms of further improvements as we get into 2023?

Noah, as Andy is looking at the numbers here real quick. I just want to tell you that the issue really in Energy Systems right now is the constraint we have on releasing backlog and also the mix impact because the products that we can’t shift are the ones that have the highest margin. So there still is a nagging mix constraint on that business, as well as unleashing some backlog. But there’s been a lot of good work done on the price. So, Andy, do you have those numbers for Noah?

Yeah. I do, Noah. It’s a good question. It’s obviously what we spend a lot of our time and focus on. As we mentioned, Q3 was in the highest cost increases, but it was also the first quarter where our price kept pace with the cost increases. So that gives us a lot of confidence. In Q4, we expect our cost increases to again be very high, in the range of $20 million, but we expect our pricing to keep pace with that again and actually be slightly higher. In Energy Systems, they have probably about a third of that cost increase, and we think the pricing is going to be almost twice what the cost increases are in the quarter. So that will be part of what contributes to the ongoing margin improvement in the business and with more to come once, as Dave mentioned, the mix begins to improve.

And Noah, remember that most of our costs are five-fold. So we do have a fairly good line of sight on the cost side and are optimistic, as Andy noted, that the pricing is starting to keep pace. So now the deceleration is welcome. But it’s by no means are we out of the woods in terms of these inflationary pressures. But we did see a $9 million drop sequentially in terms of the sequential rate of inflation increase. So fingers crossed it’s going to start to continue to slow down.

Yeah. That’s super helpful, guys. I guess to follow up on that, you mentioned that there’s some easing of bottlenecks, but then you just pointed to ongoing shortages still presenting some issues. So I guess, really where are kind of the primary bottlenecks? Is it really the chip and Energy Systems? And I guess, what are your expectations for when we start to see some easing there in your mix can really improve?

I believe we are narrowing down the issue to the chips. The redesigns the EnerSys team led by Devin is working on are beneficial. Unfortunately, we had to shift much of our focus to redesigning products for chips that are more readily available, and that is helping. While we haven't seen immediate benefits, we've made significant progress on our onshoring initiatives. Several products are no longer manufactured in China, which will have a positive future impact. We have achieved great strides in all the initiatives we discussed last quarter, and I am quite pleased with the team's efforts. However, the main constraints remain the chip shortages, and the second biggest challenge we've faced in the previous quarter was labor issues in Missouri. We are beginning to manage that situation better. Ted, who leads our HR team, is currently in Missouri and reached out to me last night. We are getting a handle on that, but the chip challenges continue to be widespread, and we will keep adapting. Initially, customers were resistant due to many contractual obligations, and we lacked protections against some of the rising costs. However, there has been a movement towards fairness, and positive cooperation has emerged among all parties to find mutually beneficial solutions. Therefore, it primarily comes down to chip concerns as we move into fiscal year 2023.

That’s super helpful. And I guess one more related question before I turn it over really on working capital and inventory management, it’s no surprise you are going to have working capital building when you got record broad-based demand and the supply constraints? But I guess when you think working capital starts to ease up a little bit, in particular, when the inventory levels start to plateau back down, because obviously, it’s a super-dynamic environment, you don’t want to carry too high inventory balances, particularly if that’s relatively high-cost inventory?

I think Andy did a good job explaining why the inventory numbers, as well as DSO and DPO, are largely under control. I don't see any issues there to discuss. The main concern lies with the inventory, which is largely attributed to the extended lead times from Asia and longer shipping durations. It's a mathematical situation. We are also stockpiling some critical components, which has impacted the numbers, and Andy has all the details on that. As for when things will stabilize, it depends on our confidence in the supply chain returning to a more normal state. I would anticipate that conditions should improve next year at some point, but for now, we will continue to make what we believe are the appropriate allocations. Andy, do you have any additional insights on inventory that you would like to share?

Yeah. Dave, I think you nailed it. Until supply chain issues subside, we are going to continue to use inventory as a buffer and we are very fortunate to have the borrowing capacity to do so. It will be a cash flow opportunity when the macro-environment normalizes. But as you mentioned, we had $153 million of increase in inventory year-to-date, with $30 million of that being in the third quarter, a lot of that is the cost increases. It’s intentional strategic build to mitigate against some of these supply chain headwinds. And then as our growth continues, I mean, you have seen our backlog numbers. But just to give you an idea, our Q3 2022 order rate is 40% higher than our sales rate. So we are seeing impressive growth last year that was about a one-to-one ratio. So, we need to make sure we have got ample working capital to satisfy our customer demand.

Yeah. Yeah. I should say if you put all these points together, it seems like you are setting up 2023 for a very strong free cash flow generating year. I will turn it over.

Thanks, Noah.

Thank you. Our next question comes from the line of John Franzreb with Sidoti. Your line is open.

Good morning, everybody, and thanks for taking my questions.

Hi, John.

I just want to go back to the previous point about the higher mix products and when you expect to realize shipping those products because if you are maintaining the gross margin profile is flat, it doesn’t sound like you expect to have made any headway into the fourth quarter. Is that a fair assessment or am I missing something?

I think, John, the onshoring and the mix issues are definitely going to get better and we are expecting just continued steady progress. But it’s just a question of the rate of progress. So, Andy, do you have any dimensions you want to ask?

We continue to anticipate significant price improvements. Additionally, it's important to highlight the substantial impact on margins. When we recover prices for the increased costs, it results in sales with zero margins. While this may not seem significant, it negatively affects our margins when percentages rise, although it benefits us when they decline. For instance, in Q3 2022, the gross margin impact from this margin scenario was 100 basis points. Typically, we would categorize ourselves as a business with a 25% gross margin and a 10% to 15% operating earnings margin, which isn’t where we currently stand. If we were to add $250 million in pricing at zero margin, it would lead to a 200-basis-point decrease in gross margin and a 100-basis-point drop in operating earnings. Hence, we are witnessing a lag in pricing adjustments, alongside mix impacts, and while we are beginning to see improvements from our mitigating actions, we have not yet reached the potential of the business. Part of this is simply a result of the cost increase calculations.

Do you have a sense of when you will be able to reach equilibrium as far as the pricing and the mix balancing out?

When we look ahead to next year, we anticipate that the second half will likely see a return to normalized levels. Although there are some factors beyond our control related to the supply chain, we are becoming more proactive and effective in our mitigating strategies, and our pricing is starting to align. We expect to see consistent improvement sequentially in the latter part of next year, reaching record levels.

Great. Can you discuss the total lithium sales across all three segments of the company and your projections for that in two years considering the opportunities you mentioned?

I would say that our lithium backlog is still under $100 million. However, we are working on several promising projects involving lithium across all three of our business lines. My focus is on the future, and there are many opportunities within reach, including the fast-charging storage project and the California Public Utility Commission's project, both of which have significant lithium components. We have substantial budget support for Lithium Motive Power, which was recently reviewed with the Board. Our team is dedicated and optimistic about these initiatives, which is why we mentioned the importance of our capital structure. We aim to keep some financial flexibility available to secure our supply chain. The pace at which lithium opportunities are emerging has surpassed my expectations from five years ago, and I believe things are accelerating quickly. Legislative support from the infrastructure law and positive customer feedback on our solutions have contributed to this momentum. Everything is gaining speed, and we must ensure that we maintain a robust supply chain, which is a key focus of our capital strategy.

Okay. And just one last question, just because I never heard this before, on the Motive side you talked about the electrical grid office opportunity for high forklift sales. Could you just talk to me about that comment or that slide and what I mean?

There is currently a significant push towards the electrification of material handling equipment, similar to the trend in the transportation sector with electric vehicles. This push relies on having sufficient power and grid capacity available. We are optimistic that as grid investments are implemented, they will not only support the electrification of transportation fleets but also cater to large customers who are dedicated to electrifying their material handling operations. In the U.S., we have been somewhat stagnant with around 60% of material handling equipment being electric compared to gas. However, we anticipate a breakthrough in this ratio, which will be facilitated by the availability of electricity to charge equipment like forklifts. Additionally, we are engaging in long-term projects that integrate our fast-charging storage solutions with solar energy, deploying these systems in warehouse environments. Overall, we feel very positive and optimistic about the alignment of our strategies with future investments as outlined in the bipartisan legislation.

Got it. Thanks for taking my questions. I will get back in the queue.

Thank you.

Thank you. Our next question comes from the line of Greg Wasikowski with Webber Research. Your line is open.

Hey. Good morning, everyone. How are you doing?

Good.

Good morning.

First question is on the backlog, and Andy, those are really interesting data points that you brought up on that, plus 40% of the order rate. So just curious, how long do you think the backlog continues to build here? And then, as supply chain starts to ease do you think that eventually the backlog returns to more normalized levels or do you kind of see that coinciding with this rising demand that you are seeing and maybe the backlog kind of stays at this historically elevated level?

Yeah. Thanks, Greg. Well, as long as our order-to-sell ratio is 30%, 40% above 130%, obviously our backlog will continue to grow because we are getting more orders than we are shipping. So we do see the demand continuing. But if you look at what makes up some of the backlog growth, I’d say about $70 million or so of that is supply chain delaying deliveries. So that should normalize as supply chains begin to get back to stabilized levels and we are able to ship that product out. We probably have about $50 million, which is price. So as we have higher priced orders, our backlog will be reflective of that. And then we do have some advance ordering where it’s the order book is increasing at longer than normal phasing because of truck lead times and electronic lead times that might be in the range of $150 million to $200 million, and again, as supply chains normalize, that should start to be realized into revenue and not on a backlog book.

Yeah. Mike, do you had anything to add.

Greg, it's important to consider that for Motive Power and Specialty, the batteries are unlikely to be ordered with a lead time longer than the truck itself. However, when it comes to Energy Systems and the complexity of some projects, like those for 5G or the CPUC mandate, orders may still be taken that could extend 18 to 24 months out. Therefore, in this sector, we could see ongoing growth in the order book well beyond the revenue figures mentioned by Andy.

I believe it's crucial for us and all the lines of business to have a clear understanding of what's driving our backlog, particularly in Energy Systems, which, as Mike mentioned, is linked to specific network construction projects. In our transportation segment, our success comes from penetrating the market with our thin plate pure lead batteries for the large transportation sector. We've seen significant achievements in the Class 8 over-the-road market by reaching end users and demonstrating the benefits of total cost of ownership. I feel there is a strong strategic alignment between our backlog and the initiatives we outlined during our recent Analyst Day. We believe we are well-positioned. In Motive Power, as Mike pointed out, most customers place orders for batteries just eight to twelve weeks before their trucks arrive at the dealers. Therefore, the majority of our backlog in Motive is under 90 days old. Overall, we are very optimistic about the quality of our backlog. Regarding the release of more backlog, it will depend on contract manufacturing, and I don’t have specific details on that right now. Some of the backlog will come from our battery factories and some from contract manufacturing, where we likely have more flexibility to increase output once chips are available. That's a significant constraint for our electronics and contract manufacturing operations. For the battery side, we're somewhat limited by the capacities of our large fixed asset businesses. Nevertheless, we remain very optimistic about the situation and, like you, we're looking forward to a more stable environment. We are prepared to adapt to any new lead times or pricing structures that arise. These are indeed challenging times with unprecedented cost pressures that have impacted us significantly sequentially, but we believe this situation will improve.

Thank you for the helpful information. I have a few follow-up questions about the EV charging product. Andy, can you provide any specific details or updates regarding your initial expected orders or the first two customers involved in that $100 million order that is still pending? Also, as you continue to develop and commercialize this product, is your focus still on reaching commercial markets like office parks, shopping centers, and apartment buildings? Have you considered other applications, such as highway corridors or fleet uses, particularly in relation to material handling? Your insights on how you plan to move forward with this would be appreciated.

It's a fantastic question. Our sales funnel has significantly expanded in the last 90 days in terms of opportunities. It's not as narrow as I initially thought, especially with fleet and corridor charging, and the ability to charge quickly. We had a Class 8 fleet customer considering electric trucks that required charging to be completed in 45 minutes, with an electrical load exceeding 700 kilowatts. To put that in perspective, that's equivalent to adding 100 homes to the grid whenever one of these trucks is plugged in for charging. This really highlights the scale of the situation. People are starting to realize how limiting grid connectivity can be in these high-charge scenarios. They understand that they will likely need to buffer that energy demand to reduce the immediate impact on the grid. We're seeing significant interest in distribution centers, corridors, and fleet charging. Personally, I am focusing on keeping our specifications narrow during rollout to avoid becoming too scattered. I've been encouraging our team to be precise in our approach. Our target remains these commercial lead-type customers, and I'm pleased to say our specifications have been finalized after a lot of discussions over the last 90 days regarding container size and energy storage. I truly hope we will start generating revenue by the end of fiscal year 2023. Additionally, I want to emphasize that the technology we're utilizing aligns well with our Motive Power and Energy Systems business modules. The principles enforced by our CTO are starting to yield positive results. It's impressive how quickly we've been able to develop this system, thanks to all the groundwork we have laid over the past five years with our lithium infrastructure and software systems. This is an exciting project, and we've accomplished a significant amount in just the last 90 days.

Okay. That’s great. Thanks, David and Andy, and congrats again, Mike. Best luck to you.

Thank you. Our next question comes from the line of Greg Lewis with BTIG. Your line is open.

Yeah. Thank you and good morning. And yeah, Mike, thanks for the help over the last couple of years and good luck. Dave, I guess, I wanted to talk a little bit about your comments around the ability to kind of aggressively push price, but at the same time gain market share. Any kind of color around the business lines where that’s happening and/or is that being driven by any or what should I say, are there any differences by region of where that is happening?

I don’t think it’s a regional issue. The most challenging aspect of price recapture was in our Energy Systems, particularly with our large contracts involving significant wireless and broadband carriers. This situation arose due to the terms of our agreements, which resulted in longer timelines. This was evident in our Motive business and Specialty area. On the Specialty side, we face similar challenges with some of our large OEM customers in the Class 8 sector. Generally, this is not a major concern anymore, but there was indeed a delay in our ES business stemming from customer-centric issues. We have significantly fewer but larger customers in ES compared to other sectors, which is simply the nature of the business. However, we have seen improvements in pricing and fair accommodations. We will keep enhancing this, but I remain cautious about the impact of the electronics drag and its effect on margins. As Andy highlighted, we are not generating margin from the cost price recapture, which negatively affects our upward trajectory. Nonetheless, as Andy noted, it will likely provide more benefits when prices decrease.

Okay. I realize we are on the hour. So, yeah, thank you very much.

Thank you.

Good morning. This is Blake Keating on for Brian.

Hi, Blake.

Hi, Blake.

So I just looking to get an update on the Alpha business, how that’s been growing, kind of how you expect it to grow over the next year or two? And then also within that business, how you are seeing the opportunities in 5G and if there are upgrade opportunities in the cable network?

I find it increasingly challenging to discuss the Alpha business separately since it is now so integrated with our entire Energy Systems business. However, I can share that Alpha has had significant market share within North American cable television companies like Comcast and Charter, where it has always performed exceptionally well. The business is thriving. The California Public Utilities Commission projects are being delivered through our established channels, and the products we are developing for CPUC blend the strengths of both Alpha and EnerSys. This includes TPPL batteries, lithium batteries, enclosures from our legacy Purcell factory, and XM3 UPS systems from Alpha. Overall, the business remains robust and is performing admirably. Our customers continue to invest heavily in their hybrid fiber coaxial networks, and there is considerable potential in rural broadband. We have begun to generate revenue from the RDOF funding and have significant growth opportunities ahead. However, the electronics segment has faced challenges, particularly due to tariffs that have added considerable strain. When discussing Alpha, it's important to note that many of the pressures we experience come from the electronics aspect of our business. We have made substantial progress in onshoring to alleviate tariff impacts, and we are addressing chip supply issues through redesign efforts and other measures.

All right. So just to confirm, do you still anticipate that revenue will increase by about $50 million sequentially in the fourth quarter? Additionally, any guidance for 2023 revenue would be appreciated. Thanks.

Well, Blake, we typically do not provide guidance for the upcoming year's revenue at this time. I can say that historically, our fourth quarter is our strongest quarter. We had a solid third quarter in terms of topline as well. While the sequential volume growth may not be as significant, we anticipate that pricing will have a positive impact as more of our pricing strategies are implemented. Therefore, the expectation of a $50 million increase is likely reasonable, but it will not solely come from volume growth.

Yeah. It’s different. Yeah. It’s a little different right now with all the constraints we have on delivery.

Thank you. I am showing no further questions in the queue. I would now like to turn the call back over to David Shaffer for closing remarks.

All right. Well, Mike, I went back and counted, you have participated in 50 of these. This is your 50th analyst call. You have done three Investor Days for us. You were on the stage twice to ring the bell for the New York Stock Exchange. 18 acquisitions, $1 billion of debt offerings and I don’t know how many calls with investors. That’s got to be a countless number. Let me speak on behalf of all EnerSys’ stakeholders and thanking you for 26 years of invaluable service to the company. Thanking you for recruiting and preparing Andy. And from me personally, thank you for your wisdom and loyalty to the company. I will miss you and always consider you a friend.

Thank you very much. It’s been a wonderful experience. I will continue to work through the 31st, but Andy will be handling most of the daily operations. I have some personal goals and strategic initiatives I want to focus on. I will still be around and will miss all of you, but I am available to talk in the next 75 days if anyone needs to reach me.

Great. Thanks, Mike. So thank you everyone and we look forward to providing further updates on our progress on our fourth quarter and year-end 2022 call in May. Have a good day everyone.

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.