Thank you for joining us for EnerSys' Second Quarter Fiscal Year 2023 Earnings Call. I will now turn the call over to Lisa Hartman, Vice President of Investor Relations. Please proceed.

Good morning, everybody. Welcome to the EnerSys Q2 Fiscal Year 2023 Earnings Conference Call. On the call with me today are David Shaffer, EnerSys's President and Chief Executive Officer; and Andrea Funk, EnerSys Executive Vice President and Chief Financial Officer. Last evening, we published our second quarter fiscal year 2023 results and filed our 10-Q with the SEC, which are available on our website. We also posted slides that will be referenced during this call. The slides are available on the Presentations page within the Investor Relations section of our website at www.enersys.com. 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 those forward-looking statements for a number of reasons. Our forward-looking statements are applicable only as of today, November 10, 2022. For a list of forward-looking statements and factors which could affect our future results, please refer to our recent 10-K filed with the SEC. In addition, we will also be presenting certain non-GAAP financial measures, particularly concerning our adjusted consolidated operating earnings performance, adjusted diluted earnings per share, and adjusted EBITDA, which excludes certain items. For an explanation of the difference between the GAAP and non-GAAP financial metrics, please see our company's Form 8-K, which includes our press release dated November 9, 2022. Now I'll turn the call over to our President and CEO, Dave Shaffer.

Thanks, Lisa, and good morning, everyone. Please turn to Slide 4. We delivered solid Q2 results with our second highest quarterly revenue in what is typically a slow quarter, significant gross margin expansion as prices caught up with costs, and robust demand for our products across our diverse set of end markets. Second quarter net sales were $899 million, an increase of nearly 14% over Q2 '22 even after absorbing approximately $45 million of FX headwinds with strong volume growth in all lines of business. Despite ongoing supply chain and inflationary pressures, we reported second quarter adjusted earnings of $1.11 per diluted share, above the midpoint of our guidance and up $0.10 versus the prior year. We were encouraged by our adjusted gross margin expansion of 120 basis points from last quarter, a sign that we have begun to turn the corner on the long-anticipated catch-up on price/cost recapture. Margin improvement was driven by an impressive $30 million of favorable price/mix accomplished across all segments of our business, which was partially offset by an additional $11 million of volume-adjusted costs versus the first quarter. Let me put our price/cost recapture opportunity into perspective. Our Q2 '23 costs were in excess of $100 million higher than Q2 '21 before inflation began to rise. On an annualized basis, over $400 million of higher cost equates to nearly $8 per share of EPS pressure, even while ignoring the incremental impact on primary working capital and interest expense. Further closing of the gap between price and cost represents a significant earnings opportunity for EnerSys in the quarters ahead. Commodity prices remain elevated relative to historical averages and some supply chain shortages persist, both of which we are mitigating through alternative sourcing and increased stocking of critical raw materials. We are cautiously optimistic that we are approaching a supply chain inflection point with some notable easing. However, we continue to monitor how the supply chain environment is evolving, including energy allocation in Europe and uncertainties in China. Please turn to Slide 5. Backlog was up 38% versus the prior year and, for the first time in several quarters, declined slightly to $1.4 billion due to an easing supply chain that enabled more products to be shipped, primarily for Energy Systems and Specialty. Our backlog remains healthy and near all-time highs, with almost half attributable to program wins for Energy Systems projects and organic volume. Demand continues to be strong across all lines of our business. Please turn to Slide 6. Our strategy to invest in a diverse set of technology offerings and expand into Energy Systems end markets is paying off as secular trends and U.S. government mandates and funding are driving markets to us. While clarification from the U.S. government following the open comment period that closed last week is still needed, based on our initial assessment of the Inflation Reduction Act, EnerSys could benefit from substantial direct tax as well as market growth incentives for our transportation, Motive Power and EV charging businesses. Please turn to Slide 7. Our fast charge and storage initiative continues to build momentum. We are installing a significant upgrade to our current on-site demo with a near production-grade system, offering the highest energy density currently in its class with full artificial intelligence capabilities for optimized energy management and advanced cloud services. We are very pleased with our development on this project. However, as previously mentioned, the scope and scale of the project has increased throughout the design and development phase with our key customer. While this has led to a positive outcome, it has also added more time to the process than originally estimated. The proof-of-concept phase is also being impacted by extended supply chain lead times. As a result, we now expect our first revenue realization to be pushed out past this fiscal year. That said, we remain incredibly excited about our fast charge and storage initiative and the significant opportunity it poses for us. I'll now briefly walk through our business segment highlights. The slides contain additional details about each line of business that I won't cover in my comments. Please turn to Slide 8. Energy Systems saw continued strong demand and volumes in the quarter, particularly in broadband and data center, reporting revenue of $437 million or an 18% increase compared to the same prior year period. While we are realizing price and mix improvements across all end markets, resulting in sequential margin expansion and positive adjusted operating earnings growth trajectory, we anticipate this top line growth to flow down to profitability as we continue to execute our price/cost recapture strategy and continue to mitigate supply chain hurdles which will yield a richer mix of sales for Energy Systems. Demand continues for our mid-spectrum 5G architecture DC power systems, and we are still in the early innings for small cell builds. We expect this to be accretive to our business as we hold a large share of this market and will ship a richer mix of products to support these projects. Deployment of outdoor 5G small cells is forecast to reach $5 million in the U.S. and $13 million globally by 2027 according to ABI Research. Massive 5G small cell deployments are expected around 2025 when network capacity on the C-band should run out without additional spectrum or small cell densification. Sales related to the California Public Utility Commission, CPUC, Public Safety grid shutdown, extended network powering program are ramping as expected with a $40 million build in 1H F '23, including $20 million in the second quarter and $95 million remaining in backlog. Since this mandate was announced, we have booked over $170 million CPUC-related orders to date, significantly higher than our original expectations of a $50 million to $100 million revenue opportunity 1.5 years ago. Motive Power delivered another solid quarter considering the typical seasonal slowdown in EMEA, with 2Q '23 revenue of $338 million, increasing 5% compared to Q2 '22. We were pleased to realize significant sequential price recapture of $11 million in the quarter when offsetting the $1 million of volume-adjusted cost increases. Our overall results reflect the strong customer demand for our proprietary NexSys TPPL and lithium-ion maintenance-free product offerings. We expect the trend towards automation and electrification of material handling equipment, along with the value of our maintenance-free technologies and advanced wireless charging solutions to continue to drive Motive Power going forward. The strength of this business is evidenced by the successful launch of our recent NexSys customer day in our Arras, France plant, featuring TPPL and lithium-ion line tours with 300 key customer decision-makers across the globe, resulting in strong interest in orders for our proprietary maintenance-free solutions. Our Specialty segment delivered revenue of $124 million in the quarter, up 23% year-over-year, primarily driven by strong volumes. Demand remained robust throughout the business by several customer wins during the quarter, including over 1,000 store locations at a national retailer for our three new power sport batteries. Although this line of business is challenged by TPPL capacity constraints, Q2 price/mix improvements more than offset sequential volume adjusted cost increases. In transportation, backlog was steady from the prior quarter and the outlook is bright as Class 8 truck OEM supply chains show signs of improvement. September U.S. Class 8 truck orders hit an all-time high in excess of 56,000, more than 2x those of a year earlier and above the previous record high in August of 2018. We also remain very well positioned in our aerospace business and dominate the U.S. defense market with our premium TPPL and lithium technology. Moving on to some developments in our production capacity and operational efficiencies. The operations team experienced headwinds in Q2 due to unprecedented utility inflation, particularly in EMEA, along with a still unpredictable supply chain. These headwinds, coupled with a labor force in Missouri that has been difficult to build in a tight labor market, ongoing productivity challenges, and inventory increases in Q2. However, we are pleased that our hiring targets have now been met across our TPPL factories, and our focus for the second half of the fiscal year is to train and retain new hires, which we expect to translate into productivity gains. We exited the quarter better positioned in our Missouri plant than we were at the beginning of this calendar year. In addition, with signs of supply chain headwinds easing, we have shifted our inventory strategy and developed reduction goals by plant and line of business that our teams are now working on in lockstep to execute against. The Ooltewah transition to Richmond has been seamless to date, which is a testament to our comprehensive planning process and culture of teamwork, especially given the scope of this cross-functional project and the challenging global environment in which it was achieved. We will begin to realize a portion of the $8 million of annual cost savings benefit from this project in our Q4 '23 results. Please turn to Slide 9. Sustainability is a core element of our growth strategy, and we are working toward the many ESG goals we announced this year. Our team has already identified additional ways to reduce waste, energy consumption, and costs. As part of our initial planning phase, we've allocated an average of $4 million of annual capital spending over the next 5 years to execute these goals with expectations for accretive returns on these investments. We look forward to sharing key milestones as we progress on our ESG journey. Please turn to Slide 10. In closing, while we continue to monitor the supply chain environment in commodity markets, we are cautiously optimistic that our second quarter results represent a turning point with costs starting to plateau and signs of supply chain constraints easing. Customer demand for our products remains strong with secular trends in our diverse set of end markets providing support in a variety of economic environment scenarios. Our top near-term priorities are to increase productivity at our Missouri plants, execute our inventory reduction initiatives, and remain diligent in mitigating supply chain and inflationary pressures. As we affirmed last quarter, our long-term strategic initiatives remain unchanged, and we've made significant progress against them despite this highly disruptive period. We look forward to providing you details of our refreshed model and specific milestones, including our bottoms-up analysis, reflecting current market conditions at our next Investor Day, which will be held June 15, 2023. I want to thank our employees for their continued focus and hard work, adapting quickly to changing environments and positioning EnerSys for success, both in the near and long term. We are excited about the many opportunities ahead of us and look forward to updating our shareholders as we continue to execute. With that, I'll now ask Andi to provide further information on our second quarter results and go-forward guidance.

Thanks, Dave. I'll focus my discussion this morning on the key financial metrics and takeaways for the quarter. For more detailed information about our results, please refer to our second quarter 2023 10-Q, press release, and supplemental slides that were posted to our website last night. For those of you following along on our PowerPoint slides, I will begin on Slide 12. Our second quarter fiscal '23 net sales increased nearly 14% over the prior year to $899 million, driven by 10% organic volume growth and 9% price/mix improvement, partially offset by a 5% decrease from foreign currency translation. Adjusted operating earnings were $65 million in the second quarter, up 7% from the second quarter of fiscal '22 and in line with Q1. Foreign exchange negatively impacted our year-on-year and sequential comparisons by $5 million and $2 million, respectively. In constant currency, Q2 '23 adjusted operating earnings improved over 14% versus the second quarter of the prior year. Adjusted EBITDA for the second quarter was $86 million and 9.5% of net sales compared to $79 million and 9.9% of net sales in the prior year second quarter. FX pressured the year-on-year comparison by $6 million. It is worth noting again that our margins are artificially deflated from the margin math impact of cost pass-through. A reconciliation of net earnings to adjusted EBITDA is presented in the appendix of our slides for your reference. Our adjusted EPS was $1.11 in the second quarter of fiscal '23 compared to $1.01 in the prior year second quarter and $1.15 in the first quarter of fiscal '23. I will present a reconciliation of Q2 '23's sequential and year-on-year EPS shortly. Please turn to Slide 13. On a segment basis compared to the prior year, all lines of business posted significant revenue growth, driven by higher volumes and substantial price/mix improvements which were partially offset by $45 million of foreign exchange headwind. However, the favorable impact of volume and price/mix improvements on operating earnings was offset by higher costs and $5 million of unfavorable FX year-on-year. As a result, Motive Power and Specialty posted slight operating earnings declines. However, Energy Systems almost doubled their quarterly operating earnings versus the prior year, with significant price/mix catch-up combined with higher volumes driving strong bottom line momentum. More detailed sequential and geographic results can be found in our press release and in the supplemental slides. Please turn to Slide 14. On a sequential basis, we realized $0.60 per share of improvement in price/mix in one quarter. This easily dwarfed the $0.23 per share of volume adjusted incremental costs incurred during the quarter, which while still significant, was half of the sequential cost increases we incurred in the first quarter, illustrating the long-anticipated catch-up on price/cost recapture with our most substantial net quarterly price/cost recapture gain by far. Cost increases in the second quarter were driven by ongoing inflation and energy rates, particularly in Europe, as well as some productivity challenges in our Missouri plants while we train and develop our new team members. It is important to remember that there is a delay in realizing product cost in our P&L until the related inventory is sold. This accounting treatment, coupled with lagging price/cost adjustments, should provide margin tailwinds if and when inflation turns to deflation and costs stabilize. Expanding on Dave's comments about the extent of inflation we've endured over the past two years, we have incurred aggregate cost increases in Q2 '23 versus Q2 '21 of over $2 per share or $8 per share on an annualized basis. We have offset $1.85 per share of these costs with price/mix improvements, leaving approximately $0.15 per share of quarterly price/cost recapture opportunity. I would like to highlight that this understates our true margin expansion potential. Price/mix gains should not just catch up but rather should surpass cost increases over time due to the savings realization from our EOS accomplishments, including the Hagen and Ooltewah plant closures as well as mix improvements from supply chain loosening and the margin benefit of maintenance-free conversions, all of which should drop to our bottom line. As Dave mentioned, supply chains are starting to stabilize. Availability of key inputs such as chips, resins, and other raw materials is beginning to improve and become more reliable. And indices indicate that inflation is beginning to level off, giving us guarded optimism that our margins have reached an inflection point. Indeed, after six consecutive quarters of gross margin erosion from steeply escalating costs, our gross margin improved by 120 basis points in Q2 '23, as our aggressive price/mix improvements began to catch up with the unprecedented inflation we've endured over the past 1.5 years. However, we continue to keep a close eye on developments in global economies, particularly the energy situation in Europe and its ensuing impact on our business.

Please turn to Slide 15. Looking at our quarterly sequential adjusted EPS bridge. As mentioned, Q2 '23 adjusted EPS came in $0.01 higher than the midpoint of our guidance at $1.11 per diluted share. The net sequential price/cost recovery positively impacted earnings by $0.37 per share, demonstrating our earnings growth opportunity as price catches up to costs. This was offset by $0.09 per share of pressure from our seasonally lower volumes, $0.24 per share of incremental OpEx from higher personnel and travel costs, and $0.08 per share of net pressure from FX and interest rates. Similar to last quarter, we have been increasingly impacted by significant foreign exchange movements. In Q2 '23 versus the prior year, operating earnings were reduced by approximately $0.10 per share from the weak euro. This was partially offset by a $0.08 per share favorable other income and expense change, largely due to FX revaluation from the declining euro. We anticipate that we will continue to experience operating earnings pressure from the strong dollar, but the favorable FX revaluation in other income and expense will not repeat in future quarters if the euro-dollar exchange remains at current levels. Sequentially, FX created $0.03 of incremental drag on both operating earnings and EPS in the second quarter of fiscal '23 versus the first quarter. Please turn to Slide 16. Our balance sheet remains strong and positions us well to navigate both the current economic environment as well as a potential downturn. At the end of Q2 '23, we had almost $300 million of cash on hand. Our credit agreement leverage ratio was at 2.9x EBITDA, which was at the high end of our target range but slightly lower than the first quarter of fiscal '23. In Q2, we invested an additional $41 million in primary working capital to support our strong revenue growth. We had increased inventory over $170 million in the past fiscal year, $34 million of which came in the second quarter due to our higher revenue, but even more so as a result of our intentional decision to create targeted inventory buffers against potential supply chain disruptions, as well as the impact on inventory from longer lead times and higher raw material manufacturing and freight costs. That said, as Dave mentioned, we have now shifted our focus to reducing inventory where prudent with teams in place to execute on inventory reduction targets that we expect should begin to generate positive free cash flow by the end of fiscal '23, and minimize the potential risk of obsolescence if demand softens in more exposed areas of our business. We anticipate our leverage ratio will improve and trend towards the midpoint of our target range of 2 to 3x EBITDA in the second half of fiscal '23 from this shift in focus to more efficient working capital levels combined with the numerator and denominator benefit from improved earnings as our prices continue to catch up with cost and we realize a richer mix of sales from improving supply chains. Capital expenditures were roughly $17 million in fiscal Q2 '23. We remain confident in our multiyear planned TPPL capacity targets, building off our capacity expansion success in fiscal '22. Our capital allocation strategy is unchanged, with a focus on 3 key priorities in this order: investing in organic growth, strategic M&A, and returning excess cash to shareholders through consistent dividends and opportunistic share buybacks. In Q2 '23, we did not repurchase any shares in order to maintain our liquidity position in an uncertain macro environment. We are committed to our capital allocation strategy and expect to buy back shares once our leverage returns to the midpoint of our target range. We currently have $185 million authorized in our share buyback program.

Please turn to Slide 17. While we have not seen signs of a slowdown in our business, factors such as the Fed tightening and the ongoing war in Ukraine are raising increased concerns of a global recession. As a reminder, we have a strong balance sheet, conservative capital structure, and a number of structural advantages that have mitigated the financial impact to us in past economic downturns and position us even better at this time. These include: over 60% of our business follows GDP independent cycles that are fueled by large mega trends, including 5G that are expected to continue regardless of the macro environment; we have a near record backlog and strong orders in all of our lines of business; stable costs should drive further price recovery catch-up improvements with potentially lower costs creating tailwinds from lagging price/cost dynamics; the continued easing of supply chain disruptions should help drive profits through volume and mix benefits; and finally, because primary working capital historically has been a significant cash generator in slowdowns, it should serve as a very effective natural hedge on our balance sheet and even more so now, due to our current elevated levels.

Please turn to Slide 18. Our fiscal third quarter 2023 guidance range is $1.20 to $1.30 adjusted EPS, a significant increase to the $1.01 share we reported in Q3 '22. Our guidance reflects our expectation of continued sequential volume and price/mix improvements, partially offset by ongoing FX headwinds and higher interest rates. We expect our gross margin to be in the range of 21% to 23%. Our CapEx expectation for the full fiscal '23 remains at approximately $100 million, reflecting investments in new products including lithium production lines, continued expansion of our TPPL capacity, and cost improvement and automation initiatives. We are cautiously optimistic that the true profitability of our business and the advancements we have made against our strategic plan are beginning to be visible in the trajectory of our earnings even in the face of ongoing macroeconomic challenges. We look forward to providing you an overview of our refreshed 5-year model at our Investor Day in June. This concludes our prepared remarks. Operator, you may now open the call for questions.

Our first question comes from the line of Noah Kaye of Oppenheimer.

And nice to see a number of items inflecting positively here. I'd like to start with supply chain. You obviously mentioned a number of considerations during the prepared remarks. But can you talk about your visibility into supplier allocations and how we should think about the cadence of the backlog conversion this quarter and possibly in the fourth quarter as well?

Yes, Noah, the main change from quarter to quarter has been in the semiconductor market, which has loosened significantly. We’re seeing better forecasts for certain product segments, particularly in electronics, which tend to have higher margins and improve our mix. For example, one product that was previously at 8,000 units per quarter is now forecasted to increase to 25,000 units per quarter. This indicates a notable loosening in the market, which will help reduce our backlog and enhance margins. That's been the most significant recent change. As for other supply chain issues, they have been somewhat quieter. While I don't want to imply that we are completely past all challenges, we have seen improvements, though some surprises still occur. The biggest opportunities ahead excite me: commodity prices have decreased. While they haven't fully returned to pre-inflation levels, especially for copper and steel, they are moving in that direction. Freight costs have also dropped significantly, which is beneficial. Overall, semiconductors and these other factors represent the major supply chain improvements from the second half of the year compared to the first half. However, I want to clarify that we are not entirely out of difficulties yet.

And do you think some of that improving allocation in any way is related to the consumer electronics demand getting softer? Or are these really industrial chips, right, the analog and RF and mixed signal, and you're just seeing improving flow on that side?

Well, I think the teams have done a lot of work on redesign. So a big part of this is we probably pulled 20% of our engineering and reassigned them from new products onto redesigning products around readily available chips. So that's been a huge part of it. I would say most of the chipsets that we use, especially on the microprocessor side, are the ones more automotive. So I think that those are the types of chips that we use, these lower-cost micros. And it’s just gotten better.

Okay. Very helpful. And then you mentioned capturing some margin with that backlog conversion. I guess, can you help us think about quantitatively the margin uplift or the margin profile of what's in backlog? You talked earlier about that kind of price recapture opportunity. How much of that is just in the backlog conversion already?

Yes. Again, it will come down to execution in terms of how many of these units we get out the door. And what you should see as we go forward is a steady improvement in the performance, and this is principally going to be viewed in our Energy Systems business. So you should start to see a better mix coming out of that group. I am a little hesitant to dimension too much, but I would tell you that the electronics mix tends to be very accretive. So it is a nice opportunity for us. And if you do look at the magnitude of the ES backlogs relative to historic norms, it came down a little bit. Backlog is still very, very high. And a lot of what's in that backlog is electronics. So we're optimistic as the allocations improve from our chip suppliers, things should steadily get better.

Our next question comes from the line of John Franzreb of Sidoti.

I'm curious about your thoughts on the e-commerce market after a number of the larger players, Amazon and Walmart, decided to cancel the construction of some warehousing facilities. Have you seen any impact of that? Or do you expect to see that maybe in the Motive side of the business? Can you talk about what you're hearing there?

Yes, I would say that Motive is where we're closely observing the effects of any recession or slowdown. Many of the large distribution centers have been using fuel cells, so we haven't directly felt the impact yet. Our order rates are generally solid. I recently spoke with Chad, who oversees the Motive Power sales in North America, and he emphasizes that our main challenge in Motive continues to be the long lead times for forklift trucks. Customers are now ordering batteries much earlier than before, which has necessitated some adjustment, but he doesn't seem overly worried about a slowdown. That concern appears to be more relevant for Vincent, who manages our European operations and is a bit more apprehensive about the macroeconomic landscape, particularly regarding energy issues and their potential effects on the European economy. However, we're not currently noticing any immediate effects from the major e-commerce announcements, although we are keeping a close watch. I'm advising the teams to focus on recognizing the fluctuations in volume during this period marked by COVID shutdowns, subsequent recoveries, inflation, and foreign exchange noise impacting revenue. The goal is to isolate volume and compare it against pre-COVID normalized trajectories to see how we are performing relative to historical standards. As of now, it looks like volumes are beginning to return to where they would normally be, with a significant drop followed by a considerable increase, and now things appear to be stabilizing in the Motive Power segment. We are monitoring the situation closely, but I have not yet observed any direct effects from the e-commerce side.

That's helpful. And just on the backlog, historically, it wasn't something we ever talked about, but it's gotten so large that we can't ignore it. I'm just kind of curious how firm is the backlog? What's the cancellation risks? Is it different between each segment? Just give me some context about what you're thinking.

The significant increase in our backlog is primarily due to major program successes in our Energy Systems division. A lot of this growth stems from the mid-spectrum DC power cabinets we've been selling for 5G. Additionally, a substantial portion of our backlog growth is attributed to the CPUC project we previously mentioned, although we have shipped less than half of the $170 million in orders we received so far. In our defense sector, we've also seen some notable program wins that contribute to our positive outlook. While no business is entirely recession-proof, the Energy Systems and defense sectors tend to follow their own patterns. Regarding Motive, the current backlog growth is mainly influenced by the lead times for trucks, encouraging earlier orders. We are still experiencing a robust demand for new trucks in the Motive Power sector. I would encourage the teams to regularly assess cancellation rates. Andrea, have you noticed anything in your testing?

No. And I can give a little bit of dimension to the data, if it would be helpful for you, John. Energy Systems, our backlog is up $600 million versus two years ago. Very healthy. There's no COVID-related risk of cancellations. A lot of it is, as Dave has mentioned, program-related, 5G, CPUC, strong market. And to give you an idea, at $600 million at higher margins with a lot more electronics, less service. If you assumed a 25% drop-through, you have over $100 million of operating earnings trapped in that backlog. So big numbers and minimal risk there. Transportation is up $30 million versus two years ago. There's a lot of pent-up demand from the trucks, minimal risk of cancellations. I think you've seen we just had a record Class 8 order. So very strong there. EAS is down slightly, but that's really choppy because of projects. U.S. government replacement spend for Ukraine support isn't flowing through yet, but we expect that's going to start coming in strong, which leaves us with Motive Power, probably the area you're focused on the most, with a $200 million backlog versus two years ago and $100 million from a year ago. We would look at that as most exposed. So as Dave mentioned, we're constantly getting at it, but we aren’t seeing any cracks yet. If you look at the data, our backlog there, $380 million. Our quarterly backlog coverage is over $1 million, at $1.1 million. In Q2 of '21, to give you an idea, that was $0.6 million. Our book-to-ship ratio was just around 100%. While we have seen a softening of orders, we look at a five-year trajectory rate, and we're right in line with where we were pre-COVID. So we're seeing a softening because we don't have this huge catch-up from when we had the COVID decline. But we're keeping our eye on it, but it still looks pretty healthy. We’re not concerned yet, but I assure you we’re not taking our eye off that.

And just on this topic, you said there's some concerns in Europe. Has the order trajectory changed at all in Europe? Or you just monitoring it closely because of conditions?

I would say we're doing more monitoring. Yes, we're just feeling a bit nervous like everyone else; we're all watching CNN and there's a lot of risk.

Yes. I believe we are taking proactive steps to manage any potential issues. In the event of any external curtailment, each of our plants has prepared letters for authorities, emphasizing the importance of our operations during such situations. We have categorized our EMEA countries into three risk levels, from low to high. Our large TPPL plant in Arras, France, is the least at risk due to the abundant nuclear energy available in the country. Each plant has prepared scenarios for restrictions, prioritizing single-sourced products, adhering to customer contracts, exploring ways to manage capacity, reducing supply-side consumption, and identifying alternative suppliers in high-risk areas. We are addressing not only our own exposure but also our suppliers' risks. Furthermore, we have created a long-term strategy to cut energy consumption by approximately 15% per kilowatt hour over the next year by optimizing processes, minimizing usage and waste, and aligning these efforts with our sustainability objectives. As Dave mentioned, we are allocating about $4 million annually for the next five years to support these sustainability initiatives, prioritizing this region due to its exposure.

I want to focus on Motive in response to your initial question. We've experienced some downturns together over the years. Looking ahead, if we do face a downturn, I anticipate it will be different from those in the past. We currently have two fewer large factories compared to before, specifically Ooltewah and Hagen, which will benefit Motive. I have a leadership team that is completely dedicated to operational productivity, automation, and maximizing efficiency. I'm very proud of their efforts. We have significantly expanded our product range with higher-margin items, including our NexSys Pure TPPL, NexSys iON, lithium, and our newly launched wireless charging. There are many reasons to feel hopeful. Additionally, as Andrea often points out, in times of economic downturn, commodity prices typically decrease, alleviating some pressure on our profit and loss statement, which allows us to generate substantial free cash flow. Our working capital requirements also diminish. Compared to previous downturns, we are in a stronger position with our new product mix, reduced factory size, and enhanced productivity at our remaining factories. We are preparing as best we can.

Our next question comes from Greg Wasikowski of Webber Research.

First one, just on the IRA in Slide 6. I know everybody needs some more further details before really figuring out your full strategy. But does the potential there kind of change how you think about your strategy for some of your products and end markets? I'm just thinking Outback for an example, like maybe making that less of a niche product and trying to make it more mainstream in residential or commercial, solar or any of the other products that are listed on that slide?

Yes. Regarding the IRA, there's an interesting aspect related to taxes. The main issues revolved around defining the target, specifically a battery that meets the 100-watt hours per liter requirement. We are seeking clarification on how to determine the watt hours and which dimensions to use for the liters—whether to consider the interior cell dimensions or the exterior module dimensions. From my product engineering perspective, I can assure you that all our lithium products will meet the 100-watt hour per liter target. Depending on the outcomes of the comment period and these definitions, a significant portion of our TPPL business aligns with this since we prioritize volumetric energy density rather than just weight metrics. Many of our products should qualify under the 100-watt hours per liter guideline, which could lead to considerable material savings; however, we’ll need to see how the definitions finalize. I won't specify dimensions now, but it could be quite interesting. On the market demand side, we feel optimistic. The NEVI and related legislation present numerous positive opportunities that align perfectly with our goals. Specifically regarding Outback, I previously mentioned that we've redirected about 20% of our engineers from new products to focus on redesigns, ensuring we can ship our chargers, rectifiers, and UPS systems. The most significant impact on engineering resources has come from our residential energy initiatives and some Outback projects, which is unfortunate. I appreciate your point, and as we navigate the supply chain redesign challenges, we must leverage the opportunities from these new laws to guide our engineering priorities. Thank you for the suggestion.

Got it. Next, I want to discuss the EV charging product. It appears from an external perspective that this product has been ready for commercial use for a while. I understand you have made some upgrades, but they might be more like standard annual updates. It also seems that there is good collaboration between you and your primary customer, which is encouraging. However, speed to market is crucial in the EV charging sector right now. Have you considered expanding into the market with other customers or launching additional pilot programs? Does your agreement potentially restrict you from doing that? I'm trying to gauge the urgency and competitive pressures in the industry against the pace at which this product is being developed. I would like to hear your thoughts on this.

Yes. I would say that the engineers have made significant progress, possibly for the first time outpacing the sales team. The installation of the new production system is currently underway next door, and while a few adjustments are needed, we are optimistic about its capabilities. In addition to our initial target customer with an interesting use case, we have decided to pursue NEVI charging station projects, as requests for quotations are starting to emerge. We anticipate the first RFQs around December or possibly January. There are about seven states working on developing fast EV charging stations along major routes, which is backed by approximately $5 billion from the Infrastructure Law, with states funding 20% of the costs. We aim to participate in these RFQs, targeting an initial range of $50 million to $100 million, with $50 million representing 1% of the NEVI Program. Based on our assessment of the specifications, we feel confident that there is a strong alignment between what the states require and what we have prepared. While we aren't fully commercial ready yet, we're honing the design with a focus on higher efficiency in DC-to-DC conversion. The engineers are doing excellent work, and we will keep you updated on our progress. By the next time we speak, we hope to have more insights into the RFQs and provide a clearer picture of our cost targets and specifications, along with a sense of optimism regarding our prospects.

Our next question comes from Greg Lewis of BTIG.

And Dave, I wanted to discuss the comments you made regarding inventory runoff. I understand we may not get too detailed on that, but can you give us an overview of the different business lines, like Energy Systems, Motive, and Specialty, and your thoughts on how inventory is being managed? Additionally, was the inventory situation due to overbuilding or just a stock buildup related to supply chain challenges that the industry has faced over the past 18 months? Or is it also connected to discussions with some customers?

A significant portion of our inventory build is due to stockpiling lithium to address the tight conditions in the lithium cell market. Additionally, we felt uncertain about our Asian supply chain because of disruptions with freight, longer lead times, and COVID shutdowns, leading us to overstock relative to historical levels. Many of the power systems we're assembling have components that we have stocked more heavily, especially chargers, compared to past practices due to challenges in the electronic supply chain. On the Specialty side, we have focused on ensuring we have sufficient raw materials like lead to provide us with greater assurance. Things are getting better, and our operations teams, under considerable pressure from Andrea, are working hard to return to more typical levels after this difficult time of supply chain disruptions. Andrea, did I overlook anything in this discussion?

Yes, I can provide some additional insights, Greg, and share some data. While Dave covered all the key points, since the second quarter of 2022, our inventory has grown by approximately $170 million. Breaking that down, around $65 million comes from strategic investments, $35 million from increased volume, $55 million due to inflation, and $15 million related to supply chain issues. Typically, at this point in the second quarter, my inventory levels would be more balanced. Even after accounting for strategic investments and challenges, there’s room for improved efficiency. Given the current interest rates and potential downturn risks, we aim to enhance our performance beyond previous levels, factoring in our strategic investments and supply chain challenges. We have established a weekly meeting involving all business lines and manufacturing leads, and they have pinpointed $150 million in potential cost-cutting opportunities, which are monitored weekly. While I haven’t fully accounted for these in my assessments of working capital due to ongoing challenges, I acknowledge that until supply chain issues are resolved, we will rely on inventory as a buffer. We’re cautious in our decisions, ensuring they serve our shareholders' best interests. We anticipate that cash flow will improve when macroeconomic conditions stabilize. In our weekly review meetings, the focus has evolved from just price to include inventory as well. There’s definitely an increased emphasis on accountability, and we believe there are opportunities for improvement in this area.

At this time, I'd like to turn the call back over to David Shaffer for any closing remarks. Sir?

Thanks, Latif, and thank you, everyone, for joining us today, and we look forward to providing further updates on our progress on our third-quarter fiscal 2023 call in February. Have a good day, everyone.

This concludes today's conference call. Thank you for participating. You may now disconnect.