EnerSys Q1 FY2026 Earnings Call

Good morning, ladies and gentlemen, and thank you for standing by. My name is Kelvin, and I will be your conference operator today. At this time, I would like to welcome everyone to the EnerSys Q1 Fiscal Year 2026 Earnings Webcast and Conference Call. Thank you. I would now like to turn the call over to Lisa Hartman, Vice President of Investor Relations. Please go ahead.

Good morning, everyone. Thank you for joining us today to discuss EnerSys' first quarter results. On the call with me today are Shawn O'Connell, EnerSys' President and Chief Executive Officer; and Andrea Funk, EnerSys Executive Vice President and Chief Financial Officer. Last evening, we published our first quarter results with the SEC, which are available on our website. We also posted slides that we'll be referring to during this call. The slides are available on the Presentations page within the Investor Relations section of our website. As a reminder, we will be presenting certain forward-looking statements on this call that are subject to uncertainties and changes in circumstances. Our actual results may differ materially from these forward-looking statements for a number of reasons. These statements are made only as of today. For a list of forward-looking statements and factors which could affect our future results, please refer to our recent Form 8-K and 10-Q filed with the SEC. In addition, we will be presenting certain non-GAAP financial measures, particularly concerning our adjusted consolidated operating earnings performance, free cash flow, adjusted diluted earnings per share, and adjusted EBITDA, which excludes certain items. For an explanation of the difference between the GAAP and non-GAAP financial metrics, please see our company's Form 8-K, which includes our press release dated August 6, 2025. Now I'll turn the call over to EnerSys' CEO, Shawn O'Connell.

Thank you, Lisa, and good morning. Please turn to Slide 4. Here's what we'll cover today. First, I would like to introduce EnerGize, our strategic framework to transform and grow our company. Second, we will provide an overview of our first quarter results. Third, we will provide an update on potential tariff impacts. Fourth, we will report out on our capital allocation actions. And finally, we will provide color on our Q2 guidance. Please turn to Slide 5. In the first quarter, we launched EnerGize, our strategic framework to shape the next era of growth for EnerSys. EnerGize builds on the hypothesis we have developed to unlock EnerSys' value. This framework focuses on 3 pillars: optimizing our core, invigorating our operating model and accelerating growth. Optimizing our core consists of restructuring our organization to enhance our operational efficiency and effectiveness with a focus on maximizing returns on capital. We recognize that we need to be faster and more efficient to lead the way in our markets. And so we recently announced a strategic organizational realignment. Through this program, we are reducing 11% of our non-production workforce, generating $80 million in annualized savings beginning in fiscal year 2026. With this effort well underway, we expect to realize $30 million to $35 million in savings in the second half of this fiscal year. More importantly, this isn't just about cost savings. This restructuring is about speed and focus. We've reduced layers of management to make our teams more agile and decision-making more direct. We are also shifting our manufacturing organization from a centralized model to 3 centers of excellence, or CoEs, aligned to our core technologies: lead acid, power electronics and lithium-ion, which require very different skill sets. These teams are designed to drive operational clarity and deepen functional competency that will be managed within the lines of business for stronger alignment of sales. By removing management layers and taking manufacturing supply chains out of the corporate silo, we are reducing complexities and sharpening skills to drive better and faster decisions to better serve our customers while lowering the cost of operations. The second pillar of our strategy is to invigorate our operating model. This includes enhancing our strategic planning processes and operational excellence metrics throughout the organization, enabling decisions to be made with greater urgency, accountability and coordination. We are confident these changes will enable us to bring new products to market faster, increase our productivity and be more focused with our capital allocation choices. These first 2 pillars are part of a transformation that will fuel our ability to accelerate growth. We believe we are uniquely positioned to leverage our leading market positions in diverse end markets to deliver new products and services that play a key role in solving 2 of our customers' biggest common challenges: energy security and labor scarcity. We will be focused on accelerating new product development that our customers are asking us for, such as battery energy storage systems, predictive analytics and services in markets that we know well and have a right to win. We will be rigorous with capital allocation choices tied to returns and future cash flow with a focus on accelerating our growth in current and adjacent end markets. To help lead this next chapter, we've officially named Mark Matthews our Chief Technology Officer. Mark joined EnerSys in 2016 and has over 30 years of experience in energy storage and battery technology, specializing in lithium-ion solutions. Mark co-developed breakthrough BESS technologies earlier in his career and has a proven customer-centered approach to new product development. Mark brings stronger alignment with sales and an outside-in perspective with his customer experiences. And he knows what it takes to bring high-performance solutions to market fast. As interim CTO, he has already realigned our engineering team to better focus on growth. We're excited about what's next under his leadership. Now I'd like to share a few more details on our Center of Excellence or CoEs. Please turn to Slide 6. Our CoEs will serve as a cornerstone for how we operate. There are unique needs and expertise required to win in each of these technologies, which, when operated centrally, left value on the table in terms of cost and speed we are now looking to unlock. Our lead acid CoE will drive global operational excellence and consistency across our lead acid and TPPL plants as well as strategic sourcing, supply chain and distribution activities to improve productivity and enhance delivery reliability to our customers. This team will implement standard work, benchmark performance and continuously balance production requirements to optimize our more stable, capital-intensive lead acid manufacturing team. Our power electronics CoE will manage contract manufacturing, assembly operations, strategic sourcing, and supply chain management of our power electronics offerings into one cohesive, highly skilled structure. This team will leverage strong external partnerships across our entire organization to accelerate speed to market and optimize the nimbleness and working capital requirements of this highly technical asset-light portion of our company. And the third, our lithium-ion CoE will enable us to leverage deep lithium expertise and customer relationships we have across the company to accelerate innovation and improve execution in this high-tech landscape. This team will be focused on developing and aligning the evolving sourcing, engineering and manufacturing skills required, especially as we prepare for future investments like our planned lithium cell facility. Their mission, deliver the next generation of products our customers are already asking for. Please turn to Slide 7. The value of this new organizational design is visible in the strategic bolt-on acquisition we completed in June, Rebel Systems. While new to the market, the team at Rebel has quickly become a trusted solutions provider to the U.S. military, specializing in cost-effective technology-driven lithium-ion-based hybrid power and energy storage systems and communication solutions for the defense industry. Combined with our 2024 acquisition of Bren-Tronics and leveraging EnerSys' leading position in the defense sector, we now offer a fully integrated portfolio designed to meet the evolving demands of modern military operations. This strategic acquisition will not only provide an additional product stream in the A&D portion of our Specialty LOB, but is also an example of how we are leveraging disciplined M&A to enhance our talent and skills that will benefit us across the company in both our new lithium CoE and our battery energy storage systems product development. Overall, we are committed to ensuring our transformation initiatives and refresh strategy deliver stronger organic growth, higher margins and higher returns on invested capital. We will continue to provide updates on EnerGize over the next several quarters. Please turn to Slide 8. Net sales were up 5% year-over-year with a book-to-bill greater than 1. Adjusted operating earnings were up 8% and adjusted EBITDA was up 2%. Excluding 45X benefits, adjusted diluted EPS on our base business was down versus the prior year on FX and the anticipated impact of lower organic volumes, which are temporarily pressured by tariff uncertainty. Year-over-year revenue growth in the quarter was driven by strength from the Bren-Tronics acquisition, which once again outperformed and is increasing our wallet share of the defense market. We also saw early recovery in the U.S. communications end market and continued strong Data Center deployments. These increases were partially offset by softer macro conditions in EMEA across most of our businesses, additional pressure on already soft transportation market as well as lower volumes among forklift customers where tariff uncertainty disrupted customers' buying behavior. We view this variability as near-term and expect improving clarity in public policy to support more stable market dynamics beginning in the second quarter and improving further as the fiscal year progresses. As typical in our first quarter, free cash flow was lower due to timing of annual payments as well as an increase in inventory despite lower sales to support our expected ramp-up in revenue throughout the year. Yesterday, we announced the Board approval for a $1 billion increase in our share repurchase authorization to be executed over the next 5 years. This authorization provides us flexibility to repurchase our shares when undervalued as we did in Q1, while balancing our free cash flow generation with disciplined capital allocation to create shareholder value. During this period of macro uncertainty, we intend to keep our leverage below the low end of our target range, retaining a prudent level of dry powder for future capital allocation optionality. Please turn to Slide 9. First, a few comments on public policy items impacting our business. With the passage of the One Big Beautiful Act, we saw favorable outcomes for EnerSys as 45X remains largely intact, along with the enactment of other favorable tax policies. With regard to tariffs, approximately 22% of our U.S. sourcing is affected by direct tariff costs. Our tariff task force continues to proactively mitigate direct and tertiary exposure, enhance supply chain optionality, and assess our competitive positioning impact on demand. We remain confident we will be able to fully offset the impact of tariffs to our P&L. Please turn to Slide 10. I will now provide some additional detail on demand trends and the dynamics across markets we serve, while Andi will provide more detail on the performance of our business segments later in the call. In Q1, orders and book-to-bill were up year-over-year with strength beginning to accelerate across the business. Backlog has moderated since the peak levels we saw in fiscal '24, but has remained stable with a quarterly backlog coverage of 1.1, consistent with our historical trends. These order patterns are indicative of ongoing steady growth but with limited visibility beyond the next quarter. We are seeing communication orders picking up, and we expect customer spending behavior to continue growing at a measured pace. We see some network build-outs emerging, but we expect customer investments to be more disciplined than prior cycles and more closely tied to their specific growth plans. Data Centers, where we enjoy a large share of the U.S. market for lead acid-based uninterruptible power supplies, or UPS, is still in the early phases of a growth cycle. While orders can be uneven quarter-to-quarter, demand remains robust and we expect that to continue. The timing of our deployments tends to align with the later stages of build-outs, which are often faced by energy availability and infrastructure readiness. The dynamic geopolitical environment is driving an increase in global defense budgets and demand for next-generation power technologies for both tactical applications and mobile soldier power applications. A&D activity is accelerating, but in the quarter, our U.S. A&D revenue, excluding Bren-Tronics, was flat as actual spending was temporarily delayed by changes in U.S. personnel involved in procurement. We see this as a significant growth opportunity moving forward. Now a few comments on our operations. In our Missouri plants, our output is improving and our new assembly lines implementation and performance schedule is on track. As we shared last call, the first assembly line is now running and the second line is planned for the fall. However, realization of the financial benefits will be delayed due to suppressed transportation volumes. As part of our transformation efforts, our lead CoE team is refining our plant load balancing cadence to ensure that we maximize productivity and efficiency across our manufacturing facilities. Our plans for a new lithium factory remain on hold and upcoming discussions with the relevant government officials are scheduled later this month. We expect to have more to report on this important effort next quarter. In closing, we're taking clear, decisive steps to improve operations and position EnerSys for growth. While the full impact of our energized strategic framework will take time, we're moving fast and seeing early progress. We're confident in our team, our solutions and our ability to deliver for customers and shareholders. Now I'll turn it over to Andi to discuss our financial results and outlook in greater detail.

Thanks, Shawn. Please turn to Slide 12. First quarter net sales came in at $893 million, up 5% from the prior year, driven by a 4% positive impact from the Bren-Tronics acquisition, a 1% gain from positive price/mix and a 1% increase from FX tailwinds, partially offset by an expected 1% decrease in organic volume as continuing Data Center robustness and recovery in communications was more than offset by decreases in the forklift and Class 8 OEM markets. We achieved gross profit of $253 million, up $15 million year-on-year and up $9 million, excluding 45X benefits. Q1 '26 gross margin of 28.4% was up 40 basis points versus the prior year. Excluding 45X, gross margin was mostly flat. Our gross margins in the quarter were temporarily pressured by lower volumes and mix resulting from our customers' uncertainty regarding U.S. policy and hesitation to make significant investments, particularly in Motive Power, which I will discuss in more detail shortly. Our adjusted operating earnings were $114 million in the quarter, up $9 million from the prior year with an adjusted operating margin of 12.8%. We benefited from $38 million from 45X. And excluding these benefits, adjusted operating earnings increased $3 million or 4% with an adjusted operating margin of 8.5%, roughly in line with the prior year. Adjusted EBITDA was $123 million, an increase of $2 million versus the prior year, while adjusted EBITDA margin was 13.8%, down 40 basis points versus the prior year. Adjusted EPS for the first quarter was $2.08 per share, an increase of 5% over the prior year. Excluding 45X, adjusted EPS was $1.11 per share, down 6% versus the prior year, primarily due to the impact of FX, which added $0.15 of pressure below the line. For the first quarter of fiscal '26, our effective tax rate was 12.5% on an as-reported basis and 21.4% on an as-adjusted basis before the benefit of 45X compared to 20.8% in Q1 of '25 and 20.4% in the prior quarter. Let me now provide details by segment. Please turn to Slide 13. In the first quarter, Energy Systems revenue increased 8% from the prior year to $391 million, primarily driven by greater volumes, price/mix, and positive FX. Adjusted operating earnings increased 44% from the prior year to $27 million, reflecting the benefits of increased volume and favorable price/mix. Adjusted operating margin of 7% increased 170 basis points versus the prior year. As Shawn mentioned, we exited the quarter with encouraging order trends in this business. We expect year-over-year margin expansion as revenue increases driven by Data Center demand and ongoing communications recovery, though partially offset by continued softness in EMEA. Structural improvements should also continue to support performance. Motive Power revenue decreased 5% from the prior year to $349 million as lower volumes more than offset slightly favorable price/mix and FX tailwinds. Motive Power adjusted operating earnings were $47 million, down $9 million versus the prior year on the lower volumes and higher inflationary costs. Adjusted operating margins were 13.4%, down 190 basis points versus the prior year. Market-wide tariff disruptions disproportionately affected smaller, higher-margin customer sales and installations of new distribution centers, which typically include higher-margin charger sales. Along with the low-cost leverage and the volume pressure, these dynamics temporarily weighed on margins sequentially and versus the prior year. However, maintenance-free product sales increased 9% year-on-year and were 27.1% of Motive Power revenue mix compared to 23.8% in Q1 of '25, providing optimism that margins will recover in Motive Power once the macro uncertainty settles. We expect new lift truck demand to improve, though Q2 will remain impacted as customers continue to navigate this trade uncertainty. Longer-term, Motive Power is well positioned for growth, supported by electrification, automation, and strong demand for our maintenance-free and charger solutions. Specialty revenue increased 18% from the prior year to $149 million, driven by a 24% positive impact from the Bren-Tronics acquisition, as well as a 1% increase from FX, which more than offset a 7% decrease in organic volumes, primarily from transportation and flat price/mix. Q1 '26 adjusted operating earnings of $10 million were nearly double that of the prior year when we entered the transportation down cycle. Adjusted operating margin of 6.5% was up 260 basis points. We see the fastest opportunity for margin expansion in Specialty, driven by robust A&D demand and ongoing TPPL cost and delivery gains from automation under our lead CoE. Please turn to Slide 14. Positive operating cash flow of $1 million offset by CapEx of $33 million resulted in free cash flow of negative $32 million in the quarter. As our seasonally lowest cash flow quarter, Q1 was roughly in line with the prior year, though impacted by higher primary operating capital. As a reminder, even though the dynamics of our business caused quarterly and annual volatility in cash generation, EnerSys has generated an average free cash flow conversion rate, excluding 45X benefits of 105% over the past 5 years, and we expect to continue delivering at these levels over time. Primary operating capital increased to $993 million during the quarter due to higher strategic inventory investments in anticipation of recovering volumes in the upcoming quarters. Improving primary operating capital over time is one of the positive outcomes we expect to realize with our new CoEs. As of June 29, 2025, we had $347 million of cash and cash equivalents on hand. Net debt of $964 million represents an increase of approximately $183 million since the end of fiscal '25 as we've returned $159 million to shareholders through share repurchases and dividends, and continue to invest in our business. Our leverage ratio remains comfortably below our target range at 1.6x. While we still have not received our fiscal year '24 U.S. tax refund of $137 million, we are accruing interest that mostly offsets our incremental borrowing costs. Recent updates from the IRS tax technician assigned to our return indicated our return is officially processed and posted into the IRS system with the submission for payment to be released in early September, which will further reduce our net leverage. Our balance sheet remains strong and positions us to invest in growth and navigate the current economic environment. During this period of heightened geopolitical uncertainty, we anticipate maintaining our net leverage at or below the low end of our 2 to 3x target range, providing us with ample dry powder for our capital allocation decisions and to absorb any macroeconomic dynamics that may impact us. Please turn to Slide 15. During the first quarter, we repurchased 1.7 million shares for $150 million at an average price of $86.20 per share. We also paid $9.1 million in dividends. As Shawn mentioned, our Board of Directors approved a $1 billion increase to our buyback authorization to be executed over the next 5 years, bringing our total remaining authorization to nearly $1.1 billion. This increased authorization allows us to be more aggressive in our opportunistic share buyback activity, particularly during these volatile market conditions while still targeting leverage below the low end of our 2 to 3x target range. Additionally, the Board has increased our quarterly dividend by 9% to $0.2625 per share. All of these actions represent our confidence in the growth and strategy of our business as well as our continued commitment to returning shareholder value. We continue to evaluate accretive bolt-on acquisition opportunities like Bren-Tronics and Rebel that align with our disciplined strategic and financial criteria and are focused on strengthening customer intimacy, expanding share of wallet with our leading positions in exciting end markets and advancing our transformation progress. Please turn to Slide 16. As anticipated, our seasonally lower first quarter was further burdened by the impact of tariff uncertainty on volumes and mix. We continue to expect this will mark the low point of earnings for the fiscal year with increasing clarity to dissipate these pressures over the course of the year. For the second quarter of fiscal 2026, we expect net sales in the range of $870 million to $910 million, with adjusted diluted EPS of $2.33 to $2.43 per share, which includes $35 million to $40 million of 45X benefits to cost of sales. Excluding 45X, we expect adjusted diluted EPS of $1.34 to $1.44 per share, up 8% at the midpoint of the range. Before I close, I would like to provide some additional details on the impact of our recently announced cost reduction program. The actions underway represent $80 million in total annualized savings, a 10% reduction in fiscal year '25 OpEx of $70 million and a $10 million reduction to cost of goods sold. We expect to incur one-time charges of $15 million to $20 million, primarily in Q2 and Q3, and to see material net benefits beginning in the third fiscal quarter with $30 million to $35 million of net savings in fiscal year 2026. We remain confident in the earnings power of our business and our ability to navigate through evolving policy and macroeconomic conditions. Our diversified business model is helping offset the near-term softness in tariff-sensitive segments such as forklift trucks and Class 8 transportation. In defense, future demand for both our organic and acquired technologies is strengthened by global customer needs. We are seeing continued signs of recovery in communications, and sustained strength in Data Centers and industrials. While we are encouraged by momentum in these key growth areas, we believe it is prudent to keep our full year quantitative guidance paused until there's greater clarity around public policy, macro trends and more importantly, the downstream effects on our customers' behaviors. We continue to expect full year adjusted operating earnings growth, excluding 45X, to outpace revenue growth. We are excited about the impact EnerGize will have on our accelerating achievement of our long-term top-line growth opportunities and margin expansion through streamlined operations. With this, let's open it up for questions.

Your first question comes from the line of Chip Moore of ROTH Capital.

I wanted to ask on Energy Systems, encouraging to hear communications seeing some comeback. Just maybe expand on that, what you're seeing and how you're thinking about the rest of the year and cadence of that recovery?

It's Shawn. I'll start and then hand it over to Andi. We're seeing strong activity across the board in telecom and broadband. Early-stage build-outs that we tracked over the past year are beginning to take shape. Broadband is just starting their DOCSIS 4.0 tech upgrades, which require more power, leading to incremental power additions. Operators are also assessing their energy footprint and the utility networks they operate within. Additionally, with all the robust data activity, telecom operators are focusing on managing and being distribution networks for that data. We're observing very promising macro upgrades that we can leverage, and we anticipate this trend will continue throughout this year and into subsequent years.

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

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

Sure, Chip. I missed a bit of the first part of your question. I’m not sure if you were referring to the full year or the second quarter.

Yes. No, just in general, and more so on next year when you get the full benefit, just margin trajectory with those savings ramp.

The savings that we have, sure. So I'll go through a little bit of color maybe on our full year projections and give you just some general momentum of what we're seeing. And I think in Q1, obviously, the bottom line results were not as exciting as we'd like, but were in line with what we expected. And I think we managed the uncertainty well coming in with the sales above the guidance and adjusted EPS in line with our expectations. Obviously, that implies some margin uncertainty in Q1, some margin erosion. In Q1, we had a little more volume than we thought with a little bit of price mix hit, particularly in Motive Power, which we can talk about further. We absolutely believe Q1 is going to be the low point, and Q2 and beyond will be tracking back towards the record Q4 levels that we had with upside, albeit tempered by the macro. Underlying businesses remain really good. We look at full year AOE growth, excluding 45X, to outpace the revenue growth. The cost reduction program is $70 million of net full-year OpEx savings and $10 million of manufacturing savings. I think we'll see about $30 million to $35 million of that in fiscal year, largely underway, but it will start to materially impact in the second half of the year. And we'll have about $15 million to $20 million of one-time charges from that. I can go through some trends in each one of the lines of businesses, if you're looking for that as well.

Yes. No, that was helpful. And maybe just on the savings in the second half of the year, Andi, that $30 million to $35 million, is that relatively equally spread or more so in Q4? Any thoughts there?

You will notice some of it in Q3, and then a bit more as we progress into Q4.

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

Yes. We haven't provided full-year guidance or guidance for next year, but $80 million in cost savings translates to $1.60 per share. If applied to our fiscal '25 actuals, that would increase our AOE margin, excluding 45X, from around 9.5% to 11.7%. This will have a significant impact. It's important to note that these actions were not taken in response to any short-term macro conditions. The pressures we experienced in Q1 are seen as temporary and will start to ease in Q2 and beyond. The timing of this was carefully considered, and we made tough choices, as people are affected. This was planned before the macro downturn. A lot of it focuses on improving speed, being more customer-oriented, and eliminating layers of management. Our revenue has been stagnant, and our customers expect more. We are committed to strengthening our core business where we excel and increasing our customer focus in both engineering and operations. We will be updating all of our long-term targets, including the impact of savings as well as additional growth we anticipate. We believe this approach is much more than just a cost reduction plan.

Yes, that's a perfect transition to what I really want to discuss, which is how we should approach this new strategic growth framework. I want to break it down into two parts. First, I’d like to focus on the strategic cost reduction announcement and identify where the early wins might be in terms of margins. Are there opportunities for improvement in areas like sourcing, procurement, or factory throughput? Are there significant cost of goods sold opportunities that you see? Secondly, regarding organic growth, you mentioned that customers are seeking more from EnerSys and want the company to expedite its efforts. Could you provide insights on how you plan to accelerate growth with this emphasis?

Yes, Noah, it's Shawn. It's great to hear from you. I'll begin and then hand it over to Andi for a more in-depth discussion on margins. To reiterate a point I made earlier, we believe we have significantly mitigated and will continue to mitigate any tariff exposure impacting our profit and loss statement. This is a strong assertion, and we have regular meetings to address it. In relation to your question, we've made considerable progress. When considering our supply chain efforts and the protocols involved in sourcing lead and plastics compared to the fluctuating global electronics supply chain, particularly with microprocessors, it's apparent that a high level of specialization is crucial to manage it effectively. We're still in the initial phases, but our Center of Excellence is enabling our supply chain team to gain the necessary expertise and comprehensive visibility to manage these purchases and supply chains effectively. This is how we can confidently state we're managing tariff exposure, and these are some early successes. We believe this will continue to create value and enhance our competitiveness in terms of costs and profit margins. Regarding the second part of your question about growth and customer engagement, for example, our maintenance-free solution for a major U.S. retailer has already shown a significant reduction in labor costs and advancements in sustainability. They are also requesting us to create additional revenue streams by implementing real-time monitoring of their sites. Additionally, when we launch our battery energy storage systems for warehouses and logistics, they want to integrate that into their on-site power management along with forklift batteries. This represents a deeper engagement with our existing customers in areas where we have a competitive advantage, as they are actively seeking our involvement. Notably, earlier this year, we started delivering IoT-enabled features with every battery in our Motive Power division, laying the groundwork to support this approach. This exemplifies our strategy for fostering growth within our core business.

My first question is just on the buyback, which is really interesting and pretty exciting or bold announcement. I'm just wondering, does that mean that we should have any takeaways about your capital allocation philosophy? And what I mean is, I don't know if I'm supposed to be thinking that this might be laying the foundation for a plan B regarding the funds coming from 45X in the event that the lithium plan ends up not making sense to move forward on. It's just $1 billion is a really big figure, and it kind of lines up with the tax credit over the decade.

Yes, Brian, it's Shawn. I'll start and then Andi will discuss the financial aspect. Regarding 45X, we have always maintained, and will continue to maintain, that we will use those proceeds as intended by law. These investments are aimed at enhancing our ability to produce batteries domestically at the right cost and with the right technologies for our customers. For example, expanding in Kentucky and closing Monterrey to accelerate our benefits is one example, along with our expansions in TPPL and that capability. We are still confident about our lithium plant based on our discussions with the government, although the final size or the exact approach may shift slightly with this administration, but nothing we've heard is negative. Part of our overall strategy is to be disciplined and opportunistic with capital allocation. We asked our Board for that reload as a strong statement to indicate that we believe in our future and opportunities. If we see the market undervaluing our stock and presenting a buying opportunity, we will act. Additionally, we want to emphasize that we are actively seeking acquisition opportunities. The Rebel acquisition is an example of a small tuck-in that we executed quickly and effectively, which aligns with our strategy. Rebel relies on the lithium battery supplied by Bren-Tronics, allowing us to provide more to the Department of Defense. We will continue pursuing similar opportunities. Our overarching strategy is to be opportunistic with our capital deployment, including purchasing our own shares, and we will not mix this with 45X proceeds. Furthermore, we have never returned 45X benefits to our lines of business, nor have we allowed them to factor that into their pricing strategies.

I think you nailed it, Shawn. The only other thing that I would add is we are being very clear that we intend to stay below the low end of our 2 to 3x target leverage ratio just with the uncertainties in the market right now so that we have ample dry powder whether it's strategic tuck-in acquisitions like Rebel, which was a tremendous add to our whole A&D platform or to have available capability to do things like our lithium plant.

Okay, that's helpful to hear your thoughts on that. I have one more quick question. The gross margin we are using for the model in the second quarter seems to be a significant increase from the first quarter. Could you comment on the short-term gross margin for the second quarter?

Sure. I'm not providing specific numbers, but I see improvements across all our business lines compared to the previous year. Motive Power is also closing the gap, despite some ongoing tariff uncertainties that may still exert pressure. To elaborate on Motive Power, we observed a decline in volume, with EMEA down 15% and the Americas down 1.8%. This trend reflects broader industry data, and our smaller accounts have been particularly cautious. In contrast, our national accounts grew from 17% to 29% of sales in the first quarter, indicating some hesitancy among smaller customers. Industry data aligns with trends reported by Hyster-Yale, which noted a 19% decline in truck lift sales attributed to economic uncertainty affecting customer order patterns and overall weaker book rates in the industry. However, there are also positive industry projections for Motive Power. For example, forklift demand is expected to be flat in 2024 and 2025, but Global Newswire anticipates a 6.8% CAGR from 2024 to 2030, while Research Insights forecasts a 13% CAGR in forklifts from 2025 to 2030, even without considering our maintenance-free conversion. This indicates a lot of optimism in Motive Power. Looking at the quarter compared to the previous year according to our guidance, revenue aligns closely with the Bren-Tronics impact and favorable price/mix. Volumes are expected to remain mostly flat, providing some cushion against uncertainties, and the improvement in earnings per share will primarily come from a favorable price mix that offsets some of the higher costs we are experiencing.

Ladies and gentlemen, there are no further questions at this time. I will now hand the call back to Shawn O'Connell for closing remarks. Please proceed.

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

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