EnerSys (ENS) Q3 2026 Earnings Call Transcript

Hello, and thank you for standing by. My name is Bella, and I will be your conference operator today. At this time, I would like to welcome everyone to NRCS Q3 Fiscal 26 Earnings webcast and conference call. All lines have been placed on mute to prevent any backward noise. After the speaker's remarks, there will be a question and answer session. We do request for today's session that you please limit to one question and one follow-up. If you would like to ask a question during this time? Simply press star, then the number one on your telephone keypad. To withdraw your question, press star one again. I would now like to turn the conference over to Lisa Langell, Vice President, Investor Relations and Corporate Communications. You may begin.

Good morning, everyone. Thank you for joining us today to discuss Enersys fiscal third quarter results. On the call with me are Sean O'Connell, Enersys President and Chief Executive Officer, and Andy Fonk, Enersys Executive Vice President and Chief Financial Officer. Last evening, we published our third 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 Invest 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 8a and 10q filed with the sec in addition we will be presenting certain non-GAAP financial metrics 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 8k which includes our press release David, February 4th, 2026. Now I'll turn the call over to our CEO, Sean O'Connell.

Thank you, Lisa, and good morning. Please turn to slide four. During the call today, we will provide an overview of our third quarter results, share progress on our energized strategic framework, update you on the latest demand trends we are seeing in our diverse end markets, and provide guidance for our fourth quarter. Please turn to slide five. We delivered strong earnings in the third quarter with adjusted diluted EPS X45X of $1.84, up 50% year-over-year and a company record for our third fiscal quarter. Net sales were up 1%, in line with the low end of our guidance range, a strong price mix and favorable FX offset lower volumes. Earnings growth outpaced revenue growth, driven by favorable product mix, pricing discipline, and our cost improvement efforts, resulted in adjusted operating earnings up 34 percent and adjusted EBITDA up 30 percent, both excluding 45X. We continue to be excited about mounting growth catalysts across all of our end markets, though near-term softness persists and motive power and transportation. A few highlights from our lines of business. Energy Systems delivered its first double-digit AOE margin on modest sales growth. Despite slightly lower year-on-year sales, motive power margins remain in line with prior year. And finally, Specialty delivered remarkable performance improvement with sales up high single digits and AOE more than twice that of prior year, resuming double-digit AOE margins for the first time in three years. Free cash flow in the quarter was also particularly strong and we are pleased to return 94 million dollars in capital to our shareholders this quarter through share repurchases and dividends please turn to slide six through our energized strategic framework we are continuing to further optimize our core invigorate our operating model and accelerate our growth we are capturing realignment savings as planned and our centers of excellence are continuing to improve execution speed and consistency we are also progressing on some of our key growth verticals the reduction in force actions we announced in july are now largely complete and we are committed to preserving these savings by discipline cost management going forward the closure of our monterey battery plant is substantially complete with all manufacturing transition to our richmond kentucky facility in november one month earlier than planned we expect to begin realizing the benefits mid fiscal 27 as the savings work their way through our inventory we've turned the corner on our services improvement having delivered revenue and margin expansion over the past two quarters in this important road vertical this is a direct result of improved execution enabled by deploying new project management tools to bring real-time visibility clear communication and tighter project control we are also seeing encouraging momentum and our new product development pipeline aided by our invigorated operating model in which we have enhanced alignment between our engineering teams centers of excellence and lines of business this renewed collaboration is helping us accelerate innovation focusing on expanding our share of wallet in our core markets where we have a right to win from battery energy storage systems to next-gen power electronics pppl and lithium solutions with embedded software We are developing products that solve our customers' most critical energy challenges. Although the progress on optimizing our core is already becoming evident in our financial results, I am most excited about the speed and focus we're making on our new product development initiatives. While this work won't material impact revenue in the next few quarters, the milestones achieved represent important building blocks for our future growth. We will have more to share in our long-term technology roadmap during our Investor Day on June 11th. We have also made notable progress aligning our planned lithium cell factory with current administration priorities, and we believe we are close to finalizing our updated plan with the Department of Energy. Progress has been slower than anticipated, but we believe the extra time will result in a very favorable outcome adapted to current market dynamics. We will provide updates when our plans are finalized. Please turn to slide 7. We continue to manage the impact of tariffs on our bottom line. In the third quarter, we fully offset the tariffs realized in our P&L through proactive supply chain actions and pricing strategies. While we anticipate continuing policy shifts, our total exposure remains stable at around 22% of U.S. sourcing, with our estimated direct tariff exposure unchanged from last quarter at around $70 million annualized for fiscal 26. Our task force and lines of business continue mitigating risk and enhancing supply chain optionality. Please turn to slide eight. Our diversified business model is proving its resilience as positive demand signals across most of our end markets help offset near-term softness in tariff-sensitive industries such as forklifts and class 8 trucking. Both Q3 orders and backlog grew up sequentially and year-over-year in all business segments except mode of power in transportation, illustrating the near-term dynamic conditions we are seeing market-to-market. In mode of power, industry data for forklift orders in December were up 40% versus prior year, a leading indicator for us which gives us optimism. However, we are not yet confident a firm recovery is underway as our battery orders were up only 1% sequentially, and thus we expect the slowness may continue into mid-Fiscal 27. In transportation, Class 8 trucking is still at the bottom of the cycle, but we are managing the impact through pricing, cost improvement, and aftermarket growth. Based on conversations with our customers in both trucking and logistics, we understand that fleets are aging and investment is being deferred through delayed ordering cycles, which translates into pent-up demand. This underinvestment is unsustainable, and when our customers need to ramp up swiftly in future quarters we will be prepared to address the demand associated with the technological deficit that has been created in communications our customers are updating their networks and planning upgrades we are continuing to see constructive momentum as they review the need to replace aging equipment across their installed base and improve capabilities to meet these expanding consumer and government demand for quicker and more reliable data delivery, and backup power. Our data center business remains strong, with Q3 sales up 28% over a prior year. Despite the acceleration we've seen to date, the data center market remains in the early stages of a multi-year growth cycle, driven by the rapid expansion of AI workloads and a rising need for energy resilience. Our customers rely upon our solutions to help safeguard essential energy infrastructure. While deployment timing can vary by affecting quarterly trends, we look forward to continuing to benefit from the critical role our products play in the AI development super cycle and compounding that impact with new product offerings in the future. The dynamic geopolitical environment continues to drive an increase in global defense budgets and demand for next-gen power technologies, both tactical and mobile soldier applications, as well as military drones. As such, A&E activity remained robust in the quarter. Overall, we're pleased with our earning strength and margin performance, reflecting our renewed discipline, execution, and operational rigor. As we look ahead, our teams are aligned around the actions that will drive long-term value, including organic innovation and strategic opportunities to expand our capabilities. We are highly confident in our focused growth strategy, supported by durable secular demand trends, including the growing need for energy security and high-performance energy storage solutions. Now I'll turn it over to Andy to discuss her financial results and outlook in greater detail. Andy?

Thanks, Sean. Please turn to slide 10. Net sales came in at $919 million, up 1% from prior year, driven by a 3% benefit from price mix, a 2% benefit from foreign currency translation, partially offset by a 4% decrease in organic volumes. We achieved adjusted gross profit of $278 million, down $22 million year-on-year, but up 19 million, or 8%, excluding 45X benefits. Note that 45X credits in the third quarter of last year were $75 million and included a one-time catch-up of $36 million compared to $35 million in the third quarter of this year. The prior year catch-up impacts the year-over-year comparison of adjusted gross margins and adjusted earnings, clouding the impressive year-on-year improvement excluding these benefits. Q326 adjusted gross margins of 30.2% was up 110 basis points sequentially and down 280 basis points versus the prior year. Excluding 45X, adjusted gross margin was up 150 basis points sequentially and up 170 basis points versus prior year. OpEx in the quarter improved as a result of our cost reduction initiatives. As expected, we realized approximately $15 billion in Q3 from these actions and anticipate similar savings in Q4. Our adjusted operating earnings were $142 million in the quarter, up $13 million versus the prior quarter, and down $13 million versus the prior year, with an adjusted operating margin of 15.5%. Excluding 45X benefits, adjusted operating earnings increased $28 million, or 34%, with a record adjusted operating margin of 11.7%, up 290 basis points versus prior year. • Adjusted EBITDA was $160 million, a decrease of $12 million versus prior year, while adjusted EBITDA margin was 17.4%, down 150 basis points versus prior year. Excluding 45X, adjusted EBITDA of $125 million, a company high, was up $29 million or 30% year-on-year, with a company record adjusted EBITDA margin of 13.6%, up 300 basis points versus the prior year. Adjusted diluted EPS was $2.77 per share, a decrease of 11% over prior year. excluding 45X, adjusted EPS was $1.84 per share, up 50% versus prior year, and also a third quarter record. Our Q326 effective tax rate was 14.9% on an as-reported basis, and 22.4% on an as-adjusted basis before the benefit of 45X, compared to 23.3% in Q325 and 23% in the prior quarter on geographical mix of earnings which can vary quarter to quarter. We continue to expect our full-year tax rate on an as-adjusted basis before the benefit of 45X for fiscal year 2026 to be in the range of 20 to 22%. Let me now provide details by segment. Please turn to slide 11. In the third quarter, energy systems revenue increased 3% from prior year to $400 million, primarily driven by strong price mix and a positive FX impact, partially offset by the anticipated softer volumes due to the customer pull-ins we noted last quarter and some deferred year-end CAPEX spend, both of which included lower margin product sales that propped up this segments third quarter margins adjusted operating earnings increased an impressive 67 percent from prior year to 42 million dollars reflecting the benefits of favorable price mix from a richer mix of products opex savings from our restructuring efforts and the service margin improvements sean noted earlier on the call adjusted operating margin of ten and a half percent increased 400 basis points versus prior year while we expect some variability in margins quarter to quarter due to the project nature of this business the overall trajectory of this segment remains very encouraging motive power revenue decreased two percent from prior year to 352 million dollars with lower volumes from ongoing market softness more than offsetting fx tailwinds and favorable price mix. Motive Power adjusted operating earnings were $53 million, roughly flat the prior year, resulting in adjusted operating margins of 14.9%, up 20 basis points versus prior year, with OPEC savings mostly offset, but they lost leverage from lower volumes. Maintenance-free product sales increased 5% year-on-year and were 29% of Motive Power revenue mix compared to 27 percent in Q3 of 25. As the pause in capital investments for many in the logistics market continues, we expect improving but still soft volumes in Q4, with this trend likely continuing into the first quarter of June of fiscal 27. Longer term, Motive Power remains well positioned for growth, supported by electrification, automation, and strong demand for our maintenance-free and charger solutions. Specialty revenue increased 8% from prior year to $168 million, driven by a 4% benefit from price mix, a 2% increase in organic volumes, a 1% FX tailwind, and a 1% contribution from the REBEL acquisition. As Shawn mentioned, Specialty's Q3 26 adjusted operating earnings of $20 million were more than double that of prior year. Adjusted operating margin of 11.8% was up 560 basis points, as this quarter reflected ongoing strength in A&D and transportation aftermarket growth, helping offset the Class 8 OEM softness, as well as benefits from manufacturing cost improvements and restructuring efforts. As we've shared previously, this segment is capable of sustained double-digit margins, and our efforts to accomplish this are taking hold with additional opportunity in front of us. Please turn to slide 12. Operating cash flow of $185 million offset by CapEx of $13 million resulted in strong free cash flow of $171 million in the quarter, an increase of $114 million dollars versus the prior year same period. This increase was aided by the expansion of the company's receivable purchasing agreement during the quarter. Free cash flow conversion in the quarter was 190 percent. Excluding the benefit of 45x to earnings in cash, free cash flow conversion was 300 percent. And without the impact of the expanded receivable purchasing agreement, still over 120% free cash flow conversion. Primary operating capital decreased slightly to $934 million versus prior year on the benefits of our expanded receivables purchasing agreement with their working capital efficiency measured internally by primary operating capital as a percentage of annual sales, improving 70 basis points versus prior year after absorbing the impact of tariffs and our inventory and accounts receivable balances. as we continue to invigorate our operating model our coes are focused on further enhancing working capital discipline which we expect will unlock additional value for our shareholders over time as of december 28 2025 we had 450 million dollars of cash and cash equivalents on hand net debt of 743 million dollars represents a decrease of approximately 38 million dollars since the end of Fiscal 25. Our leverage ratio remains well below our target range at 1.2 times EBITDA. Our balance sheet is strong and well 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 two to three times target range providing us with ample dry powder for our capital allocation choices and to remain nimble to absorb any macroeconomic dynamics that may impact us please turn to slide 13. during the third quarter we repurchased 672 000 shares for 84 million dollars at an average price of approximately 128 dollars per share we also paid 9.6 million in dividends we have approximately 931 million dollars in our buyback authorization as of february 3rd we continue to be judicious in our share buyback activity our buybacks in addition to the dividend underscore our long-standing commitment to returning value to our shareholders our m a pipeline for small and mid-sized tuck-in acquisitions remains active supporting continued growth and innovation across the business. We are focused on ensuring alignment with our discipline, strategic, and financial criteria of any M&A. Please turn to slide 14. As we navigate the current environment of mixed end market demand trends, we remain optimistic but cautious about the near-term outlook. Year over year, our Q4 outlook reflects continuing positive price mix, The benefits of OPEX improvement from realization of our restructuring efforts, healthy demand in data center and A&D, steady improvement in communications, and continued volume softness in mode of power and transportation relative to the underlying market needs. For the fourth quarter of fiscal 2026, we expect net sales in the range of $960 million to $1 billion with adjusted diluted EPS of $2.95 to $3.05 per share, which includes $37 million to $42 million of 45x benefits to cost of sales. Excluding 45x, we expect adjusted diluted EPS of $1.91 to $2.01 per share, up 10% year-on-year at the midpoint of the range. Our CapEx expectation for the full-year fiscal 2026 remains approximately $80 million. While we are encouraged by the company's overall trajectory and momentum in several key growth areas, we continue to see the impact of a dynamic macro environment on customer buying patterns. Consistent with our fourth-quarter outlook and expectations we set at the beginning of the fiscal year, we expect full-year adjusted operating earnings growth, excluding 45X benefits, to outpace revenue growth, supported by ongoing OPEC savings, sustained price mix strength, and improving, though still soft, modus power volumes. Operational efficiencies aligned with our energized strategic framework are taking hold with continued progress in process optimization, capital allocation discipline, and manufacturing performance. These actions are positioning to business for long-term top-line growth and margin expansion. In closing, this quarter showcased the strength of our operating model and the discipline of our team, delivering record results, advancing our strategic priorities, and positioning us well for fiscal year 27. We have clear priorities, aligned leadership, and momentum in the areas that matter most to our long-term value creation. With this, Let's open it up for questions. Operator.

At this time, I would like to remind everyone in order to ask a question, press R, then the number one on your telephone keypad. We do request for today's session that you please limit to one question and one follow-up. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Noah Kay with Oppenheimer. Please go ahead. Your line is now open.

Good morning. Thanks for taking the questions. Uh, let's, uh, let's start with data center. Uh, you, you know, you commented on, you know, the growth in the quarter, but also what you said is sort of healthy demand. I think looking at the pretty eye popping CapEx expectations from the hypers, um, and some of the orders growth rates we're seeing, um, healthy feels like an understatement. So can you talk about your own data center pipeline and how you think about that scaling in the quarters ahead?

So, no, it's Sean. Good morning. Good to hear your voice. Listen, you know, we're very excited about this opportunity, obviously. And, you know, if we look at it from a lead-acid perspective, let me start there. You know, we have a commanding market share and data center. It's over 50% in the United States, as an example. And we serve those same hyperscalers around the world. And we're seeing growing demand for higher-density products. And so TPPL for us in this space is doing very well. What we're most excited about, though, for all of that strength and all of that growth, we have yet to release a lithium battery product into the marketplace. So for over 50 percent market share in the lead acid, for all the Greenfield data centers that are going lithium, today we have zero percent market share. So our product teams under Mark Matthews are doing a tremendous job to get that product over the finish line. We're not being very public about dates and that kind of thing because we'd rather have done it and told you about it than preshado something that we didn't deliver on. But that is a massive growth opportunity for us. And it's the exact same customers that we're serving with that great growth in lead acid. So it's just a tremendous amount of upside for us and a tremendous amount of willingness on the side of the customer because with Enersys you get – it's not just the product. You get the before and after sale services and care, the logistics support, the staging support. So our customers are very keen to get us involved in that, and it's probably our largest opportunity to date.

That's helpful. You know, a hat tip to the team on the energy system's margins getting above 10%. Yeah, I think the slide deck talks about a sort of normalized margin improvement in 4Q. Maybe we can sort of put a little bit more context around what that normalized means. I know you don't quantitatively guide to segment margins, but just help us think about some of the puts and takes and what normalized could look like, given some of the comments around product makeshift and the like.

Sure. Good morning, Noah. This is Andy. Nice to hear from you. So, consistent with what we've said in the past, as you know, our energy systems business is very project-oriented, which also has some mixed opportunities that can cause it not to be a pure linear progression. And as we talked about in Q3, we both had some pull-ins into Q2 that we had talked about on our last call. And then we had a couple customers that pushed out, one customer in particular, in order at the end of the calendar year into our Q4. So that put a little bit of pressure on our volumes in Q3 in energy systems, but also aided the margins a little bit. So what I would look at is if we normalized for that, we would continue with the improvement trajectory, but probably a little bit of that 10.5% OE margin in ES. Some of that probably should have propped up Q2 a little more and propped up Q4. So if you normalized for that, you would continue to see an improvement. And we might be sub-10%, but not much. It'll still be in that trending in that direction. But I would expect probably a little bit of a step back in Q4, but a continuation of the improvement that we've seen so far to date. Does that make sense?

It does. It's very helpful. And maybe for the last one, just to touch on motive power, we have seen some really strong demand trends in e-commerce and warehouse automation, trends that seems like it should play into your wheelhouse. So when do you think kind of this de-stocking ends, and when do you think you start to see some inflection in mode of order rates?

You know, I'll take that again. No, it's, Sean, this is why we've been so reticent for full-year guidance, because it's just all the leading indicators have been tough for our forklift manufacturer OEMs, let alone us, on how to gauge this market. And, of course, there was tariff exposure, particularly in heavy steel, and then there were the interest rates and just all sorts of things that affect these heavy capital purchases. With that being said, as we said in the prepared remarks, we know for sure this is pent-up demand, that as these trucks age, if there was zero growth in logistics, which there won't be, that just to keep the fleet moving today that exists, they have to order trucks. We saw evidence of this in December. We mentioned a 40% increase in December in the Americas in the trucking orders. To put that in perspective, about 22,000 units. That's a record December. We've never seen that kind of number. And it's not that the market just decided to grow that much. That's that pent-up demand. So where we're being careful, though, is we saw, you know, earlier this year, we talked about some strength coming back in. And historically, when motive turns, it's basically a linear climb out. This has been a little more choppy for us. But that 40 percent new truck order number is a big one for us. And, you know, typically, and the reason we're saying, hey, you know, it may take a couple of quarters of fiscal 27 to iron out. So that's usually the lag time between trucks being ordered and our batteries being ordered. But it's a very positive sign.

And I'm just adding a little bit onto what Sean said as well, Noah, if it's okay. One thing, while we're not thrilled with, obviously, the volume being down, what I do feel good about is we know that we are outperforming the market. It's not lost share. Our industry data that we received showed that, you know, while our volume was down, you know, high single digits, that the industry indicators were down low double digits in the quarter. So, you know, I think we're doing better than the market. Motive power is not a segment I really worry about.

Chad does a tremendous job managing it.

We know over time, as long as materials are moving, our products are needed. And, you know, there's, as Sean mentioned, it will come back as a question of when. And I think the team does a great job managing through it.

Great. Thank you very much.

Your next question comes from the line of Chip Moore with Ross Capital. Please go ahead.

Hey, good morning. Thanks for taking the question. Morning, Chip. Maybe I could ask – hey, Sean, maybe I could ask about lithium factory. You know, expecting, I think it was a favorable outcome. Just anything you can share there and how we might think about how the strategy has evolved and when we might see a final decision?

Yeah, I'd be happy to do that. Thank you and good to hear from you. We are very encouraged, I'll just say that, of where we're at in our discussions with the Department of Energy and the overall administration you know if you recall and we go back to you know the beginning of this administration uh uh what we saw were grants being canceled uh projects being canceled and um you know we didn't know at the time that the batteries would survive the one one big beautiful bill act and all that is sort of sort of ironed out now the the you know the government priorities being clarified and then putting the people in place that they wanted to put in place on their side you know to to get these initiatives across is what's taken all the time but i'll tell you that our our grant has remained intact was never canceled um and uh you know we we had a really strong audience with the government to talk about their new priorities and what is that it's secure domestic supply chains, free from foreign entity of concern content, particularly for the U.S. military and the Department of War. And of course, grid resiliency and electrification is still there, U.S. manufacturing and job creation. But the really interesting thing for us is this has been a bipartisan supported issue. And, you know, I've said previously that if we could, you know, in terms of what the plant does and what its purpose is, if we could point the whole thing at a secure supply chain for the military, we would. I'm not saying that that's where we're going to end up. And I don't want to get in front of the administration and determining yet what that looks like. What I can tell you right now is it's very positive. We believe we're in the final stages. We were hoping to have some information by, you know, a little more concrete by this call, but we can only go as fast as the customer on the other side, which in this case is the government, but we remain very optimistic about where this is trending.

Understood. I appreciate all that color. Thank you. And just maybe for my follow-up, just maybe more of a follow-up on Noah's question for motive and some of the pent-up demand. I mean, maybe a similar dynamics for Class 8, I think that you called out, just maybe talk about, you know, your ability, both those markets, you know, how do you think about the back half of next fiscal year, if some of that demand starts to come back? Thanks.

Yeah, well, we are well positioned, you know, the actions we've taken in our factories to be more efficient, to, you know, increase the effectiveness of our supply chains, the work we've done through tariff mitigation, we're ready. I mean, there's no question about it. And just to give you, you mentioned transportation, I didn't really give that color. We have a fleet operator, which is one of the largest in the U.S., and they operate over 400,000 tractors. And they told us today, they have 50, they told us if they had to order today, they have some 50,000 tractors to order just to maintain the fleet as it is without any additional growth. Think about that. So they've just delayed and nobody wants to go first because they don't know when this is going to turn back on. But they told us all of their conversations now with the OEM tractor providers and Class 8 OEMs is how fast can you restart? What does that look like? What does that pipeline look like? Because they know and they represent just a bit of color. That 412,000 tractors or 450,000, whatever that number is, they represent a number approaching 20% of their portion of the market. So it just gives you an idea of the dimensionality of the number of tractors that need to be ordered now just to sustain the fleets out there due to the aging issue, let alone growth. So we're ready. We have ample capacity. We've got Missouri up and running. We've hit all of our milestones there that we committed to. We've got scrap coming down, productivity increasing. OEE looks good at our bottleneck points. So when those drivers turn back on for us, we can execute pretty quickly.

I'll just add a little bit more onto that one one thing that's interesting chip and good to hear from you is you you mentioned transportation right after modus power with with invigorating our operating model one of the things that we've been looking at is having chad who does a great job leaving our leading our modus power business um also begin to look at synergies that we have with our transportation business and there's immense synergies there uh because as you can imagine you've got um warehousing and distribution you have both forklifts and trucking in there. We actually had a really nice quarter for transportation with the market still being soft. And I think that's aided by some of the benefits from this invigorated operating model, as well as the improvements the COE are having in our manufacturing cost, both absorption with a little bit of the volume pickup we had and Sean's monthly trips that he's taking out to Missouri. I think you're really seeing improvements across the board. And only other thing I've mentioned, since we're talking about transportation, as you get into the whole specialty line of business, we couldn't be more pleased with our A&D business. That's an area where, you know, we mentioned our A&D backlog, I think up 27% year on year. Munitions in particular has had a 230% growth in their backlog year to date, really a 29% CAGR since we acquired the business in fiscal 19. So lots of opportunity in front of us with the geopolitical environment continue to drive this increase in defense budgets as well. So, bright spot there for us.

Appreciate all the callers. Thank you both. Thanks, Chip.

Your next question comes from the line of Brian Drabb with William Blair. Please go ahead.

Hi. Good morning, and thanks for taking my questions. I just wanted to talk about the energy systems segment first. and the outstanding growth that you've seen in the data center, I think you said up 28%. If I look at that segment and think about, you know, I think data center revenue for you is over $400 million on an annual run right now. I think, Sean, that you had said it was around $425. You know, if data center is up 28 percent, I guess that implies or tells us that the balance of the energy system segment was down, you know, maybe low single digits to mid single digits. And I'm just wondering, you know, that's being driven, I guess, mainly by dynamics and telecom and broadband. But I don't know if I missed it, but I didn't hear a lot of comments today yet on the call around telecom and broadband. So I'm just curious what is happening in those end markets and what's the outlook in those end markets?

Yeah, good morning and good to hear from you, Brian. We, you know, I think Andy went into a bit on timing and margin normalization. What I would tell you is that we see only positive signals in the rest of the segments there. Q3 to Q4 for us, because we are on this April to March fiscal, is always a little weird in the telecom space for us because you either have the communications folks trying to increase their year-end spend before the calendar year flip, or they're deferring CapEx based on what their CFO is wanting them to do to restart it again in our fourth quarter, their first quarter. Andy mentioned earlier, too, we had the pull-in issue from Q2 into Q2. If you normalize Q2 and Q3, it would look a little better. But all of the demand signals are good. We don't talk about it because it's a small segment for us, but we have over 50% market share in power utility. That specific application for us is electric substation switchgear and control. That business is up 15 percent uh and and just doing very very well so we we see very positive demand signals i'll tell you the engineering team particularly under the center of excellence realignment is doing a fantastic job with the next xm product uh you know the the broadband people are under the same pressure everybody else is under you know they're trying to plan for more expensive energy more frequent outages. And so that product achieves a lot of that for them. So we've been in trials and co-developing that with a key customer partner. So I would tell you that there's all positive demand signals for us there. You're probably just picking up on a little of that year-end choppiness and project staging.

Yeah. And just to echo that, Brian, and good to hear from you. As we mentioned, this business is project-driven. There's some large customers. So when you look at growth rates quarter by quarter, both with volatility in last year as well as volatility in this year, quarter to quarter, you see some spikes up and spikes down. But I would expect our comms business overall in 26 will be up mid-single digits. Our data centers We'll probably be up high teams year on year. So, you know, quarter to quarter because of some of these, you know, you have a customer year-end, you've got budgets, you've got a project that completes early or you're behind. You can have some shifts quarter to quarter. But the trajectory is really in good shape. And I would say while we're not in kind of this robust build-out like we've seen maybe in some of the past communications expansion, it's more slow and steady, continues to improve. This fiscal year, we probably won't be back at the fiscal 24 level, but we'll be trending towards it with opportunity in 27th to get above.

Okay. And the guidance for energy systems, or I guess the guidance for the revenue overall, does that imply for the fourth quarter, like, would I be correct in thinking that energy systems revenues up a little year over year and motives down a little year over year, or any detail there you can help with?

You know, we don't guide specifically line of business by line of business, but I can give you a little bit of color on each if that would be helpful, Brian.

Whatever you want to give would be great.

Sure, sure. I'll give you a little, and hopefully this will help. Energy systems, we'll continue to see some growth from data centers, although, again, as we mentioned, the choppiness prior year is probably a little bit of a tough comp. The comms network refresh will continue with the build-out to enable the AI data delivery necessary, but at this measured pace. And, again, some of those push-outs that we had will be materialized, so that will benefit us. Just as the Q3 volume with pressure to margins were aided, that is quarterly phasing, that'll be normalized. So you'll get a little bit more of the pickup from the volumes, as we talked about, but probably a little bit of pressure from the margins quarter on quarter. Our cost actions are holding and, again, normalizing towards double-digit margins. So very pleased with the progress. And as you know, we've talked about several quarters service having been a headwind for it's now, we believe we've turned the corner and going to start to become a tailwind, an important part of our strategy going forward. In most mode of power, again, I would use hesitant as probably the best word to describe the market. We see that continuing into fiscal 27. We had a 0.9 book to bill in mode of power, but we're really returning our backlog more to pre-COVID levels, so there's more book and ship business. And, you know, again, as Sean mentioned, we definitely see pent-up demand there that it's just a question of when that's going to be unloaded. There's going to be the Q4 seasonal volume lift that always happens, so we'll benefit from that. We continue to see customer enthusiasm in our maintenance-free solutions. And we will also see some higher cost pass through from Keras as our cost optimization opportunities and volume grows. Our Monterey closure, as we mentioned, is a head of plan. We substantially close that one month early. You'll probably begin to see that benefit in starting around the middle, maybe second quarter or third quarter of next year as we work through the inventory that we had. But that, along with the BESS opportunities. You know, there's a great article we just read about how 15% of warehouse operators' costs or their operating expenses are energy, and they're asking us for these solutions. So that's on the horizon for next year. And specialty, I think not unreasonable to expect double-digit AOE Q3 that we saw and beyond as our A&D business continues strength. Aftermarket transportation picks up And the lead-acid COE is driving cost improvements in both trends through automation and the growing benefits of the restructuring. So hopefully that was a little color that could help.

Yeah, thanks, Andy. Thank you both. Thank you, Brian.

Your last question comes from the line of Greg Lewis with BTIG. Please go ahead.

Yeah, I thank you, and good morning. A lot's been covered. So I guess, Sean, I'll ask a little bit about, you know, the rollout of the UPS system in lithium. I mean, you mentioned that, you know, you're 50 percent in TPPL. You know, I guess around the rollout, I mean, I imagine it's I know it's something I know it's something you've been looking at since last year. As we think about the go to market strategy, I guess a couple of things is clearly there's demand. How should we think about Enersys entering this market as a new entrant? is is this going to be like how competitive is that landscape um clearly there's a lot of growth to be had um and and then and then just also around that you know i'm kind of curious how we can think about that ramping i.e hey we start having a solution maybe this spring are we selling out that quickly and then we ramp or like just if you could kind of talk about how we should be thinking about the rollout of that, the lithium UPS solution later this year?

Hi, Greg. Good morning, and thank you for calling in and joining us. It's a great question and the right question. Lithium as a technology does some very interesting things for the user, but it also carries risks that blood acid does not carry. And as such, it's the adoption rate for it, to your point, I think to your question, is that you get trials in the field and these centers are so large that the amount of power that you're generating or the amount of power that are going through the systems is substantial. So what you would expect to see for us is, you know, trials, which have already pretty much been pre-agreed by our customer base. Again, I mentioned earlier, there's a lot of pull-through from our customers, and it's more than just the product. It's how we handle them. It's how we service them. It's our global presence. So there's a high desire for our customers. This isn't something we're going out and trying to pitch. But with that being said, we have to get through these trials. They have to get comfortable with the technology. We have to be sure that we're making the little tweaks because our battery doesn't go in isolation. It's communicating with the OEM's UPS systems, and you know the big names and who they are. So that all takes a little bit of time. so what we what we suspect is that when the trials come in uh that that'll be you know probably a let's call it a six month period for that that fine tuning and that customer comfort and then we begin to get into the project queue and then of course the other issue there for us that we that we have to mitigate is that these data centers are planned uh you know a long time in advance and late times are long so when we get into that queue you shouldn't expect a hockey stick ramp in the first year but a steady growth for us uh climbing out and just to give you some context there are really only one to two other credible lithium providers in the space today

and so it's not a crowded or mature field and again we have a lot of pull through from customers but i don't i don't want to mention it that there will be this astronomic ramp for ups it will take bit of time okay great and then and then andy real quick on motive in terms of you know the the upward price and you know i i know you called out in the slide deck about the maintenance free solution um you know growing um just kind of curious what drove that price mix and and and and i'm curious was any of that kind of just tariff pass through um well tariff pass through would be at a lower margin, and we are starting to begin to see more of the tariff impact coming

through. We had a nice margin in Q326, again, at 14.9 up year-on-year and up sequentially. A lot of the volume softness that we saw was in our flooded business, and so that mix really helped us. We think those are the smaller manufacturers, smaller warehouses that are We're feeling some of the pressure, and those are the ones we think that are kind of holding back and driving some of the mixed benefit we're seeing. Plus, of course, our restructuring efforts are holding.

Sure. Absolutely. Thank you very much. Thank you, Greg.

There are no further questions at this time. I will now turn the call back over to Sean O'Connell, President and CEO, for closing remarks.

Thank you, Bella. I'd like to thank you all for joining us today. We look forward to updating you again next quarter. Hope you have a great day. Thanks again.

That concludes our conference call today. Thank you all for joining. You may now disconnect. Everyone, have a great day.