Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter Fiscal Year 2023 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 call is being recorded. At this time, I would like to turn the conference over to Lisa Hartman, Vice President of Investor Relations.

Good morning, everyone. Welcome to EnerSys' Q3 fiscal year 2023 earnings conference call. On the call with me today are David Shaffer, EnerSys' President and Chief Executive Officer; and Andrea Funk, EnerSys' Executive Vice President and Chief Financial Officer. Last evening, we published our third 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 these forward-looking statements for a number of reasons. Our forward-looking statements are applicable only as of today, February 09, 2023. 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 differences between the GAAP and non-GAAP financial metrics, please see our company's Form 8-K, which includes our press release dated February 08, 2023. Now I'll turn the call over to President and CEO, Dave Shaffer.

Thanks, Lisa, and good morning, everyone. Please turn to Slide 4. We delivered strong Q3 results reporting $920 million of revenue and $85 million of adjusted operating earnings, our highest revenue and highest adjusted operating earnings in the company's history as all three lines of businesses performed well. We realized the second consecutive quarter of significant adjusted gross margin expansion, driven by impressive price/mix improvement and continued robust demand for our products in all of our end markets. Despite interest and FX rate headwinds, as well as ongoing supply chain and inflationary pressures, we reported third quarter adjusted earnings of $1.27 per diluted share, above the midpoint of our guidance and a 26% increase versus $1.01 per share in Q3 '22. As we've mentioned previously, the inflationary impact of these past two years has been truly unprecedented. For perspective, our Q3 '23 costs were $115 million higher than in Q3 '21 before inflation really began to rise. This annualizes to roughly $460 million of higher costs or approximately $9.00 per share of EPS pressure, which doesn't include the incremental impact on primary operating capital and interest expense. While we've experienced timing delays and price recapture, our focused efforts are now becoming visible in our results with opportunities for further mix improvement in EOS, or EnerSys Operating System, savings to expand profits in upcoming quarters. While some commodity and freight cost pressures have lessened, other supply chain shortages persist. Meanwhile, certain commodity prices remain elevated relative to and, in some cases, are even continuing to rise versus historical averages. We are mitigating our exposure to both through ongoing price recovery, increased stocking of critical raw materials, and alternative sourcing. We remain vigilant in monitoring the global supply chain environment evolution, including energy allocation in Europe and commodity prices as China reopens from COVID shutdowns. Please turn to Slide 5. Backlog was up 11% versus prior year, but declined modestly for the second consecutive quarter, particularly in Energy Systems to $1.3 billion. Additionally, it is worth noting a calendar year-end is often a seasonally lower quarter for new orders in Energy Systems. Our backlog remains healthy at near all-time highs and demand is robust across all our lines of business. Please turn to Slide 6. We are delivering on our innovation roadmap with proprietary technology solutions that are defining the future of energy transition. For example, we are excited to have received our first orders for Motive Power wireless chargers and look forward to showcasing our maintenance-free battery and wireless charger solutions at both ProMat and LogiMAT trade shows this spring. Demand for our TPPL and lithium maintenance-free batteries is growing as customers across all of our end markets notice the competitive advantage of our offerings, which help them achieve their operating efficiency and sustainability goals through higher energy density throughput, software management capabilities, and value-added services. We are advancing our fast charge and storage initiatives with our near-production-grade system now fully operational at our Tech Center, including new capabilities such as bi-directional grid connection. Combined with our recent certification for OpenADR, a software standard allowing automated demand response to the grid, our system offers further value for our customers. The team has also increased focus on our supply chain as we progress on our production roadmap. 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 7. Continuing its positive momentum, Energy Systems saw solid demand in the quarter, particularly in broadband and data centers, reporting revenue of $434 million, a 13% increase compared to the prior third quarter. Profitability was also much improved with adjusted operating earnings increasing nearly 170% year-on-year. We anticipate our top-line growth to continue flowing down to the bottom-line as we execute our price/cost recapture strategy and see a richer sales mix with supply chains improving. There is much to be excited about in Energy Systems with many of the major cable companies announcing CapEx increases for calendar year '23, the rollout of our new product pipeline, and incremental opportunities for EnerSys such as the Rural Digital Opportunity Fund, or RDOF. RDOF momentum is building, with one of our largest cable customers being the biggest winner of dollars to date. To help to mention this opportunity, approximately 2.5% of their spend applies to network powering, which we would expect to dominate participation in over the next several years. As a leading innovator of critical power solutions to telecom and cable companies, we continue to see 5G build-outs as favorable to our business over the next several years in addition to new growth opportunities and activities at MSOs. Cable customers are expected to grow their wireless businesses and invest in the next generation of DOCSIS network upgrades as they build out their own unique wireless networks. With the estimated deployment of tens of thousands of these bespoke small cells, we expect robust demand for our power and backhaul gateway products and new OSP, or Outside Plant Power, systems over the next several years. We look forward to sharing more details in this area with you at our Investor Day on June 15. Motive Power delivered another strong quarter with third quarter '23 revenue of $362 million increasing 7% compared to the third quarter of fiscal '22. Backlog and demand trends are strong with order rates in the Americas near record levels. And while EMEA order rates were somewhat soft in the quarter, we believe our order and backlog strength position us well for growth overall. We are monitoring this business very closely as it is our segment that is most vulnerable to economic slowdowns. Our positive Motive Power results reflect the strong customer demand for our proprietary NexSys TPPL and lithium-ion maintenance-free product offerings, which were up 140 basis points year-over-year as a percentage of Motive Power revenue mix. We expect these solutions to keep increasing as a percentage of revenue as the trend towards automation and electrification of material handling equipment requires technology-enabled power solutions. Our Specialty segment reported revenue of $124 million in the quarter, up 4% year-over-year, primarily driven by the continued pricing actions and improved mix. Though demand is still strong, this line of business is still challenged by our TPPL capacity constraints in our Missouri plants. With the team fully assembled and retention improving, we are laser-focused on driving operational efficiency improvements in these facilities and further realizing the financial benefits of strong product demand. Q3 started slowly for our Springfield factories with attendance and equipment issues, and as a result, we were unable to close the gap even with a strong push in December. However, positive momentum has carried over to a record Springfield January production. In Transportation, backlog was on par with the prior third quarter and Class 8 truck OEM demand signals are strong. We also remain very well positioned in our aerospace business and the recently announced 9% increase in the fiscal year '23 defense budget should provide an additional tailwind for our U.S. defense market, which is anchored by our premium TPPL and lithium technology. Moving on to some updates in our production capacity and operational efficiencies. The operations team continues to be confronted by a mix of headwinds, including ongoing inflation and productivity challenges. Utility inflation in EMEA and increased COVID cases in China have also presented some challenges, while we work with ongoing instability in our supply chain and elevated costs in the business. Putting the EMEA utility inflation into perspective, we anticipate our fiscal year '23 energy costs in EMEA will be 150% higher versus fiscal year '21, and for the first time in our history, is expected to exceed the annual cost of our direct labor force. On the positive front, we are seeing utility costs coming down from the peak in August, signs of cost stabilization, and freight rates coming down, chip allocations improving with certain suppliers and better availability of raw materials, all of which begin to generate benefits in future quarters. Collaboration across operations, sales, finance, and IT remained strong, with efficiency and capacity improvements in Missouri the top priority heading into the end of the fiscal year. Our two new lithium-ion module assembly lines are running as planned and the Ooltewah transition to Richmond is already paying dividends through greater operational efficiencies. We exited Q3 '23 stronger than last quarter, although there remain significant opportunities to reach our full potential. Please turn to Slide 8. As one of the world's largest energy storage companies, corporate responsibility is a key area of focus for EnerSys. We had several ESG announcements in the quarter, including the appointment of Ms. Tammi Morytko to our Board of Directors. Tammi is the President of the Pumps Division at Flowserve Corporation, where she has established a reputation in the industry as an enterprise operating leader and a supply chain subject matter expert. Tammi's decades of experience with global industrial manufacturing operations will provide excellent support for EnerSys' leadership team and our strategic objectives. Please turn to Slide 9. In closing, we are increasingly optimistic that our strong Q3 '23 results reflect the continued progression toward achieving our long-term financial and operational goals. While we are not out of the woods yet with inflation and supply chain unpredictability and there remains considerable uncertainty in global markets, demand remains strong with secular trends in our end markets that, along with a strong balance sheet and superior products and services, provide us a buffer from the impact of a potential economic pullback. We believe the steps we have taken over the past three years better position our business to benefit from global megatrends such as 5G, data center growth, material handling electrification and automation, grid stabilization, and electric vehicle fast charging, which provides us near- and long-term growth opportunities that are starting to materialize in our financial results and outlook. In addition to these trends, we are excited about our opportunities to benefit from U.S. Government mandates and funding that are driving markets to us, such as broadband expansion through the Rural Digital Opportunity Fund. We are still waiting for clarification on the Inflation Reduction Act, but we are cautiously optimistic that a substantial amount of our batteries could qualify for the Section 45X tax benefit, which would provide meaningful upside to our profitability. I look forward to ongoing progress during the remainder of this year and in fiscal 2024 as the true potential of our business continues to present itself. I want to thank our employees for their dedication and hard work, consistently capitalizing on opportunities and confronting a myriad of challenges head-on. We, as a unified team with a common goal, have positioned EnerSys for long-term success, and look forward to updating our shareholders on that success in the quarters and years ahead. With that, I'll now ask Andi to provide further information on our third quarter results and go-forward guidance.

Thanks, Dave. I will 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 third 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 11. Our third quarter fiscal '23 net sales increased 9% over the prior year to a record $920 million, even after absorbing roughly $35 million of foreign exchange offsets. This record was achieved through 5% organic volume growth and 8% price/mix improvement, partially offset by the 4% decrease from foreign currency translation just mentioned. Adjusted operating earnings were also a record for the company at $85 million in the third quarter, up 41% from Q3 '22 and 30% higher than Q2. Foreign exchange negatively impacted our year-on-year and sequential comparisons by approximately $6 million and $2 million respectively. In constant currency, Q3 '23 adjusted OE improved nearly 50% versus the third quarter of the prior year. Adjusted EBITDA for the third quarter was $98 million and 10.7% of net sales, compared to $79 million and 9.4% of net sales in the prior year third quarter. FX pressured the year-on-year comparison by approximately $7 million. Please recall that our margins are artificially deflated from the margin math impact of the unprecedented significant cost pass-through that Dave mentioned. A reconciliation of net earnings to adjusted EBITDA is presented in the appendix of our slides for your reference. Our adjusted EPS was $1.27 in the third quarter of fiscal '23, up 26% from $1.01 in Q3 '22 and up 14% from the $1.11 in the second quarter. It is worth highlighting the significant headwinds we are facing from foreign exchange and interest rates. Excluding the impact of FX and interest, our Q3 '23 adjusted EPS increased nearly 60% versus prior year. I will present a reconciliation of the third quarter sequential and year-on-year EPS shortly. Please turn to Slide 12. On a segment basis, compared to the prior year, all lines of business posted strong revenue growth, driven by substantial price/mix improvements, which were partially offset by foreign exchange headwinds. The favorable impact of price/mix improvements on adjusted operating earnings more than offset the higher costs and $6 million of unfavorable FX year-on-year. As Dave mentioned, Energy Systems delivered significant improvement to adjusted operating earnings as a result of impressive price/mix cost recapture taking hold for the second consecutive quarter, with nearly 170% adjusted OE improvement versus prior year and over 60% improvement sequentially. We are pleased with the recapture momentum in Energy Systems becoming increasingly evident on our bottom line as it had been slower to manifest versus our other segments due to the contractual nature and historically Asian-based supply chains inherent in this business. On another positive note, Motive Power adjusted operating earnings improved approximately 20% over both prior year and prior quarter, driven by mix improvements in maintenance-free sales, as well as positive price/cost recapture. And finally, AOE in our Specialty segment, while muted due to constraints in our Missouri plants, was still up over 20% sequentially and nearly in line with the prior year. Accomplishments across all of our lines of business coupled with healthy market dynamics resulted in solid improvement in our quarterly adjusted OE results and increasing momentum going forward. More detailed sequential and geographic results can be found in our press release and in the supplemental slides. Please turn to Slide 13. On a sequential basis, in the third quarter of fiscal '23, we realized $32 million or $0.65 per share of improvements in price/mix, adding onto an exceptional Q2 with nearly $30 million of sequential price/mix improvement as well. Q3 '23 sequential price/mix improvement more than offset the $12 million or $0.25 per share of volume-adjusted incremental costs incurred during the quarter. While we are still incurring significant cost increases, Q3's $0.40 per share of price/mix cost recapture is our second consecutive quarter of significant improvement, further closing the gap on the unprecedented cost increases we have endured over the past two years. Cost increases in the third quarter were driven by continued inflation, including commodity and energy rates, particularly in Europe, as well as productivity challenges in our Missouri plants. While we are beginning to see costs stabilize, it is important to remember that there is a delay in realizing product costs in our P&L until the related inventory is sold. Fortunately, this accounting treatment, coupled with lagging price/cost adjustments, should provide very nice margin tailwinds if and when inflation turns to deflation and costs normalize. We are cautiously optimistic that inflation is near an inflection point. After six consecutive quarters of gross margin erosion from steeply escalating costs, we have now seen two consecutive quarters of solid improvement. Our adjusted gross margin expanded 130 basis points in Q3 '23 after a similar increase the quarter before, posting a total of 250 basis points improvement over the first quarter of fiscal '23 despite the margin math impact from higher cost pass-through. Going forward, price/mix gains should continue to surpass cost increases due to ongoing price/cost pass-through, mix improvement from supply chain loosening, especially for our higher margin electronics products, and the margin benefit of maintenance-free conversions, as well as savings realization from our EOS accomplishments, such as cost reductions from footprint rationalization, all of which should drop to the bottom line. Please turn to Slide 14. Looking at our quarterly sequential adjusted EPS bridge, Q3 '23 adjusted EPS came in $0.02 higher than the midpoint of our guidance at $1.27 per diluted share. Our sequential results were driven by the impressive $0.40 per share of net price/mix/cost impact previously discussed, which was partially diluted by the substantial $0.25 per share of net pressure from foreign exchange and higher interest expense from rate increases. The FX headwinds were primarily a result of the weak euro throughout the quarter negatively impacting transactional FX and AOE, as well as the revaluation impact in other income and expense when the euro strengthened at the end of the quarter. Year-over-year, Q3 '23 adjusted EPS has approximately $0.35 per share of drag in the quarter from FX and interest expense headwinds. Please turn to Slide 15. Our balance sheet remains very healthy with improved liquidity, positioning us even better to navigate both the current economic environment and the potential downturn. In Q3, we had $188 million of positive free cash flow with our net bank leverage improving to 2.3 times EBITDA at the end of Q3 '23 from 2.9 times at Q2 '23. This was driven by strong earnings improvement and reductions in working capital investment due primarily to the initiation of a $150 million asset securitization program in December. In addition to reducing bank leverage by 0.4 times EBITDA, this program will reduce interest expense by approximately $1.4 million per year beginning in Q4 '23. In constant currency, our inventory was flat despite investments to support Q4 volumes and maintained strategic inventory levels to mitigate ongoing unpredictability in supply chains. At the end of Q3 '23, we had approximately $300 million of cash on hand. After a period of investing in working and increasing inventory to create targeted buffers and absorb the impact of longer lead times and higher costs, we are now focused on reducing inventory when prudent. Excluding the impact of our $150 million asset securitization program, we believe the leveling off of our primary operating capital levels in Q3 '23 represents an inflection point in which further efficiencies should positively impact cash by the end of fiscal '23, with significant cash generation opportunities when supply chain volatility and costs begin returning to pre-pandemic levels. That said, we are fortunate that we are able and will continue to prioritize minimizing risk to our business and customers with investments in strategic inventory when necessary. Capital expenditures were roughly $18 million in Q3 '23 and $58 million year-to-date. We remain confident in our multi-year plan TPPL capacity targets, building off our capacity expansion success in fiscal '22. Our prudent capital allocation strategy remains unchanged. Considering higher interest rates, the new 1% tax on buybacks already in effect, and global economic uncertainty, we have tightened our target to remain below the midpoint of our 2 times to 3 times EBITDA bank leverage for the remainder of fiscal year '23. In Q3 '23, we did not repurchase any shares and currently have $185 million authorized in our share buyback program. Please turn to Slide 16. Our business remains well positioned as demand for our products continues to be robust, supported by mega trends providing ongoing tailwinds for the business. Given prevailing economic predictions and some slowdown in other industries outside of ours, we remain vigilant and are making conservative capital allocation decisions. As a reminder, we have a strong balance sheet and a number of structural advantages that have mitigated the financial impact on us in past economic downturns and which position us even better at this time. The diversity of our revenue model includes large portions of our business that are cycle-independent, and we have enjoyed significant cash flow generation during past recessionary periods. While I don't intend to review it again on this call, our recession playbook remains intact and is included in the appendix of our slides. For the fourth quarter of fiscal '23, our adjusted diluted EPS guidance range is $1.33 to $1.43, which at the midpoint is up 9% from the $1.27 per share we just reported. Year-on-year, our midpoint adjusted EPS guide reflects a 15% improvement over the $1.20 per share we reported in Q4 '22. However, while our year-on-year improvement is commendable, it significantly understates the impressive operational improvement of our business, as our guidance reflects our expectation of continued sequential volume and net price/mix/cost gains, but our strong financial performance will again be muted by FX and interest rate headwinds similar to what we saw in Q3 '23. We expect our gross margin to be in the range of 22% to 24%, and we are refining our CapEx expectation for the full fiscal year '23 to approximately $90 million, reflecting investments in new products, including lithium production lines, continued expansion of our TPPL capacity and cost improvement in automation initiatives. We look forward to updating you on our continued progress and providing an overview of our refreshed strategic plan at our Investor Day on June 15 in New York City. This concludes our prepared remarks. Operator, you may now open the call for questions.

Our first question or comment comes from the line of Noah Kaye from Oppenheimer Corporation. Mr. Kaye, your line is open.

Good morning. Thanks so much for taking the questions. I'd love to just start with order rates and lead times within Energy Systems. Can you comment on the characterization of the orders you're seeing coming in? Are we kind of passed double ordering or longer lead times? And just with the supply chain starting to loosen, how are product lead times trending now?

Yes, there is definitely a normalization of buying behavior. There seems to be a decrease in pre-ordering, and while I don’t think people were double ordering, they were ordering very early when they had visibility on a project. This situation affects the balance sheet due to inventory levels. Overall, we are moving back to normal. We are coming off challenging comparisons, though we had significant successes like the CPUC project. Even when compared to historical norms, I am quite satisfied with our order rates. Our book-to-bill ratio in January for Energy Systems was 1.2, indicating strong performance just this past January. In general, Drew is optimistic about the business. Looking at Europe, particularly in Motive Power, we observe that orders might be somewhat soft, although revenue remains stable. There are some price increases factored in, but from a volume perspective, it feels a bit soft. Overall, we have a positive outlook on demand across all business segments.

One other comment I think that's worth noting in our slide deck is our quarterly backlog coverage, which historically was a little under 1. In Q3 '21, it was 0.8. Our backlog coverage is now at 1.4. Motive Power was at 0.5 and is now 1.1. Energy Systems was at 0.7 and is now 1.6. We still have a lot of ground to cover.

Yes. But I think Noah's question is right. I think things are getting a little back to more normal in terms of lead times and expectations.

That's very helpful. Thanks. And then, you mentioned commodities a couple of times in the prepared remarks, and then we can see what's happening with lead prices. And I think we understand there's some lag on commodities because of FIFO accounting. But just high level, what are your expectations in terms of how commodities impact margin profile going forward? Maybe you could mention that in terms of what contemplated in the 4Q guide and then, as we look out maybe a quarter or two?

Commodities, particularly lead, steel, and copper, have decreased from their significant highs. Looking ahead, we expect this trend to assist us as we manage our higher-cost inventories. We are closely monitoring China's recovery from the COVID shutdown and the potential effects on commodities. Our strategy remains focused on adjusting prices to recover from the impacts of rising commodity and freight costs as well as inflation. While it's frustrating that these changes don't happen rapidly, we're beginning to see our capability to manage these impacts through our pricing strategies. Overall, the outlook is improving, and we are aiming for stability with commodities as China rebounds after its shutdowns, which we believe presents some positive momentum.

It seems like you're on a trajectory where you've positively impacted net recapture, and that's going to continue in the quarters ahead, is that a fair assumption?

Yes, we are very focused, and I am proud of my sales team. It took us some time to reach our goals, but there is a clear understanding that the inflationary challenges fall on the salespeople. They are responsible for managing these issues, whether it involves wage inflation or commodity inflation, and they need to counteract these with appropriate pricing strategies. We're aiming to maintain stability from a financial standpoint, and we have discussed this before. While this situation does negatively affect our margin calculations, we have fought hard to protect our margins, and I am very proud of the teams. We have implemented various pricing strategies tailored to different markets, which include energy surcharges in Europe, adjustments to list prices, and securing high-stakes deals with major OEM customers. We have employed a wide range of approaches over the past few quarters, and we are beginning to see the positive effects of those efforts.

Yes, very helpful. I'll take the rest of my questions offline.

Thank you. Our next question or comment comes from the line of Greg Wasikowski from Weber Research. Standby. Mr. Wesikoski, your line is now open.

Good morning, Dave and Andi. Thank you for addressing my questions. I'd like to discuss the backlog. Can you share your perspective on managing it? Typically, an increasing backlog is a positive sign, but eventually, converting it to sales and seeing a reduction in backlog can also be beneficial. I'm interested in how you plan to navigate this throughout the year. Specifically, what would be an ideal level for the backlog? How do you feel when the backlog decreases due to conversions versus when it increases because of new orders? What are your thoughts on this for the year?

It's an important question. I'm usually pleased when our customers are satisfied, but I don't believe they’ve been very pleased with us due to our supply chain delays, which have been challenging. We definitely want to achieve some stability. I often refer back to pre-COVID to understand typical order rates, long-term trends, and our growth rates in our five-year model so that I can gauge current order rates and account for the buying behaviors we've discussed, such as hoarding and advanced ordering. To your point, I truly hope our contract manufacturing partners and chip suppliers can increase their output. We experienced significant reshoring and are currently behind our timelines for moving manufacturing out of the impacted areas due to tariffs. It's frustrating, but we've seen improvement. We’ve had to redesign many aspects, and we're still working to transition our customers away from one particular chipset that remains difficult to procure. There are many factors at play in your question. I don’t have a precise number for you, but the situation with electronics and chip allocations is getting better. As we move into fiscal '24, we anticipate improved performance regarding tariffs due to increased onshore activities, which should lead to shorter lead times that could reduce our backlog. Many customers are placing orders earlier due to the ongoing lead time issues. I believe that as we ensure consistent delivery within an eight to ten-week timeframe, they won't need to order as frequently. I aim for us to maintain the long-term growth rates outlined in our five-year model and stay above the expected order rates. We still have a considerable amount of electronics trapped in the backlog, which can positively influence our product mix. I know this is a lengthy response to a vital question. However, January orders were strong, and I’m eager to see how they progress throughout the quarter, considering the seasonal factors that we must also take into account. With the RDOF projects wrapping up, the completion of the CPUC project, and ongoing 5G small cell opportunities, we have plenty of ways to grow within this business.

Yes, got it. Thanks, Dave. That's helpful color. Next one, two-parter here on capital deployment. So, first part, just on the CapEx guidance going down a bit, I mean, nothing major, but can you maybe speak to that? And what you're expecting for the year forward just in terms of investing in growth versus being disciplined on the CapEx side, and how you're thinking about that? And then, the second part is that kind of leading into M&A. Obviously, focus is on reducing that net leverage number, but it's been a while since we've seen some M&A. So, just gauging your appetite there, what kinds of things you guys could be looking at or focusing on in terms of application or geography, etc.?

I'll begin with the CapEx and then Andi can address the rest of the capital structure. We're somewhat disappointed with the slow pace of spending on our major projects, particularly those aimed at productivity improvement and expansion, primarily due to extremely long lead times for equipment. Items that were expected to be built and shipped within six months are now taking up to two years. It's frustrating for us, but we recognize that it's not the suppliers' fault as they struggle with obtaining components like PLCs. Thankfully, this situation is beginning to improve, which should help accelerate our CapEx. We've been quite strict with our spending, and generally, for us, the challenge is how much we can effectively manage rather than how much capital we have available. Regarding other uses of cash, we're always on the lookout for M&A opportunities. We have bankers regularly presenting ideas. While our appetite for acquisitions is a bit tempered when leverage is close to 3, we anticipate improvements moving forward. Additionally, reducing high debt levels carries its own benefits. There are many factors for Andi to consider. So, Andi, what are your thoughts on this?

Yes, I think the CapEx issue you mentioned is just a matter of timing. As Dave noted, it is not due to any strategic pullback. Regarding capital allocation, we are fortunate to have a cash-generating business. However, considering the current market conditions, including higher interest rates and uncertainty, we are adopting a more conservative approach and targeting leverage on the lower end of our 2 to 3 times EBITDA range, which will help reduce interest expenses. Our stock buyback program is already impacted by a 1% tax, and we want to maintain some liquidity. Nevertheless, our business continues to generate significant cash, so we have no changes in our internal investment strategy. If there is an economic slowdown, we still expect to generate a lot of cash. We are intentionally ensuring we have adequate buffers for our customers, but if the situation changes towards deflation, that could also increase our cash flow. As for acquisitions, we remain opportunistic and do not have any changes in strategy to announce at this time. Does that address your question?

Yes, it's perfect.

One thing I think is worth mentioning is the significant impact of foreign exchange and interest rates. Year-over-year, this impact could be as much as close to a dollar per share. It has been substantial. I’m really proud of our team because, despite many factors being out of our control, we're actively working to mitigate the effects. We entered into a $300 million foreign exchange swap, which saved us $4 million in annual interest expense. After terminating that, we received proceeds which we used to pay down a revolver, saving another $2 million in interest. Then we re-entered into another $150 million swap, resulting in savings of about $3 million. Additionally, we repatriated $175 million from EMEA to pay down more of our revolver, saving approximately $9 million in interest. We also managed to get cash out of China, taking nearly half of the $100 million we had there while working closely with tax to minimize the impact of that repatriation. We discussed a change in our capital allocation strategy as well, where we're exiting a pension plan and taking advantage of current FX and interest rates to reduce it from $20 million to $4 million. We have implemented several foreign exchange hedges. While there are significant headwinds, our team is actively doing a lot to address these challenges where possible. The asset securitizations we mentioned will also save us a considerable amount of interest, even as they adjust our pricing structure and provide us with more resources. So, there are definitely significant challenges ahead, but we are working hard to mitigate them.

Yes, great, and very helpful. I'll turn it over. Thanks, guys.

Thank you very much. Our next question or comment comes from the line of Brian Drab from William Blair. Mr. Drab, your line is now open.

Hi, good morning. Thanks for taking my question.

Hi, Brian.

Hi, Brian.

I would like to focus on the fork truck market for a moment. Could you provide an update on what percentage of the overall business or what percentage of Motive is related to fork trucks? This area of the business seems to have some concerns regarding the outlook due to macroeconomic factors. While we don’t have the fourth quarter reports from some of the fork truck companies yet, the latest data indicates declining orders. I'm curious if you could share any insights from your conversations with fork truck manufacturers. Additionally, it would be interesting to know the latest trends in electric fork trucks if you have the WITS data available.

I don’t have the WITS data, and I apologize for that. However, based on our conversations with customers, there continues to be significant supply chain constraints in Europe. This remains the primary concern for them. The key point is the extent of their forecasting. Outside of the Russia-Ukraine markets, we haven't heard much else. The WITS data is delayed by six months, so what we have isn't very current, but I do have some information. The main feedback from customers points to their frustration with obtaining adequate parts, and this varies for each customer. In the U.S., similar supply chain concerns exist, but the atmosphere appears slightly more positive. They lack the high energy costs that we're seeing in Europe. We recently went through the budgeting process, and Shawn offered a cautiously optimistic view going forward. Those familiar with Shawn know he's not one to get ahead of himself. Overall, we're in a better position with the Ooltewah and Hagen moves regarding fixed cost absorption than we were in past slowdowns. Still, the ongoing supply chain issues are central to the discussion.

Okay.

And in terms of WITS statistic, so I don't read the wrong column or anything, I'm going to have Lisa just send you whatever information you want.

Thanks. Dave, within Motive, how much does fork truck account for that?

That's dominant, the dominant. I mean, there's floor scrubbers and a little bit of rail and stuff. But you could say 80% plus is related to fork lifts.

Yes. That percentage hasn't changed significantly. I'll just ask one more question for now. We've been discussing the opportunity for 5G and small cells for EnerSys for nearly five years. I know that the evolution of 5G hasn't been as favorable as expected. However, during today's call, you mentioned tens of thousands of 5G cells. Are you still optimistic about the opportunity reaching over 1 million, or has that outlook changed? Also, how are you assessing the timing of when this will impact EnerSys?

All right. The tens of thousands mentioned refer specifically to some of the DOCSIS modem-enabled strand-mounted products in our portfolio. Cable companies like to use the strand for backhaul and power when building their networks, and that aspect has been progressing well and has accelerated. Additionally, the larger players in the market, such as T-Mobile, Verizon, and AT&T, have their own strategies that are interesting to observe. We recently had a guest speaker at our Board meeting who is a leading expert in the small cell area. We conducted a deep dive during the meeting, focusing on the timing and why developments have deviated from our initial predictions, particularly after the Alpha acquisition, where small cell powering was a key consideration. Increased spending on 5G is beneficial for EnerSys, as we have products throughout the network in central offices and large cell towers. We are particularly enthusiastic about small cells, as we believe we can gain significant market share in that area. It’s important to note that it typically requires over 1 million small cells to achieve adequate coverage and speed. Currently, many are not yet satisfied with the performance of 5G compared to LTE, and the real advancements will come when small cell densification initiatives are implemented using higher frequencies. We discussed various challenges, many of which were COVID-related. With Caroline Chan from Intel on our Board, we have access to thought leaders in this domain, and it’s clear that no one in our Board or management is pleased with the delays. Nonetheless, we are continuing to develop our product portfolio and are nearing critical UL approvals required in this industry. An industry consultant projects significant upside in 5G spending, showing us a chart indicating that these small cell build timelines have shifted by three years, but improvements are on the horizon.

The only other comment that I would just add because, as Dave mentioned, we have some really great proprietary products that solve customers' problems, high electronics content. These are our higher margin products for the business as well.

Yes. The mix here is favorable. And then, the other thing, as we noted, is we think we've got some unique value propositions, and that should help as well. But again, I share everybody's frustration with this, but it's not us. And it's nothing that the team has done wrong. It's just really the focus of the big telcos has been on building those macro cell sites up. And that's helped us. Don't get me wrong. We've got a lot of those orders as well.

Yes. Okay. Thanks for going through that. That's very helpful. Thanks.

Thank you. Our next question or comment comes from the line of Tyler DiMatteo from BTIG. Mr. DiMatteo, your line is open.

Hi, everyone. Thanks for taking my question. Dave, could we revisit the TPPL capacity constraints? I would like to understand more about the Missouri plan and your thoughts on it. Any additional insights would be greatly appreciated.

Sure, Tyler. Thanks for the question. I would say at the highest level, we are hanging in with our demand and TPPL growth. But it has been painfully expensive to do it so far. So, we have generated a tremendous amount of manufacturing variances on the way there. And some of that is not in our control per se. Like for example, the wage pressures. And I think the sales guys, like I mentioned earlier, have owned that portion of the manufacturing variances. But the other part of the manufacturing variances, equipment delays from suppliers has been a huge issue, absenteeism, training, just the tenure. We're trying to hire a lot of people in a job market that's really tight in an area of the country with especially low unemployment. So, we've just done every trick in the book that we can think of to get the folks to come to the factory. We had a little bit of COVID scare that hurt us a little bit on some of the tenants issues. So, as I noted, the quarter started off really rough. And then, I would say, Andi, for Mark's group, the Specialty group, we probably left about $15 million of revenue on the dock in a sense. That's about the right number, right Andi?

Yes, that's correct, Dave.

That's about the right number. December was pretty good, and January is really good. We just need to keep these efforts going, but we found ourselves in a challenging situation. A lot of this is due to the new team we have in place, and we just need to stabilize things. Every day, we need to make some improvements. Between the capital investments, the demand, and bringing on new customers, we're still very confident that we can achieve what we've historically outlined as part of our long-term growth initiatives. What I need the team to do is to reach those goals with less difficulty. The issues related to inflation are still costing us tens of millions of dollars due to productivity losses that we encountered while ramping up the factory.

Yes. If we look at the comment that we've made in the past, Tyler, that might be helpful, and this is just pure data. If we compare our Arras plant, which is our most highly-performing thin plate pure lead plant to our Missouri plant, we've called out we probably have $40 million of delta between performance, scrap, productivity, efficiency. Now, that takes a longer time. You've got some of it as CapEx investment. You have to train people. So, it's a multiyear project. But I would say we run the Arras plant and we know how to do it. So, it's not an engineered number.

It's the same managers, the same engineers, and the same equipment. One significant difference is that the Arras factory is further along in automation. We have faced challenges with our equipment suppliers, having ordered machinery years ago that is just now being commissioned. We have not been immune to the pressures of COVID, hiring, and labor, and I would say that our Missouri factories are at the center of those difficulties. However, things are improving daily. One metric we monitor in HR reports is the average tenure of our employees, and 90 days appears to be a key timeframe. We now have a lot more employees with at least 90 days of tenure at the factory. While we have a lot of work ahead, I believe that in terms of our capital expenditure and generating sufficient demand to sustain growth in TPPL, we are moving forward steadily in that area.

Okay, great. Thank you. I know we're out of time here. I'll take the rest of my questions offline. Thanks for the time.

Great. Thanks.

Thank you.

Thank you. I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to Mr. Shaffer for any closing remarks.

Well, I just want to thank everyone for joining us today, and we look forward to providing further updates on our progress on our fourth quarter fiscal year-end call 2023, that's in May. So, have a good day everyone.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.