Earnings Call Transcript - ENS Q2 2025

Operator, Operator

Good day and thank you for standing by. Welcome to the Quarter Two 2025 EnerSys Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there'll be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Lisa Hartman, VP of Investor Relations. Please go ahead.

Lisa Hartman, VP of Investor Relations

Good morning, everyone. Thank you for joining us today to discuss EnerSys' second quarter fiscal 2025 results. On the call with me today are David Shaffer, EnerSys' Chief Executive Officer; Shawn O'Connell, EnerSys' President and Chief Operating Officer; and Andrea Funk, EnerSys' Executive Vice President and Chief Financial Officer. Last evening, we published an announcement about a planned leadership succession, our second quarter 2025 results, and our 10-Q with the SEC, which are available on our website. We also posted slides that we will be referencing during this call. The slides are available on the presentations page within the Investor Relations section of our website. As a result, 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 10-K 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 November 6, 2024. Now I'll turn the call over to EnerSys' CEO, Dave Shaffer.

David Shaffer, Chief Executive Officer

Thank you, Lisa, and good morning. Please turn to slide 4. Before we dive into our quarterly results, I'd like to share some personal news. Last night, we announced that after much thought and reflection, I have made the decision to retire as President and CEO of EnerSys effective in May 2025. It's a decision I do not take lightly, but it feels like the right time for both me and EnerSys. We have a solid foundation, strong momentum and a clear path forward and I'm confident in the opportunities that lie ahead for this great company. I am pleased to announce that our Board of Directors has named Shawn O'Connell, our President of Energy Systems Global, as my successor. Shawn will assume the role of President and CEO and join the EnerSys Board of Directors upon my retirement in May. To ensure a seamless transition, Shawn has been promoted from President of Energy Systems Global to President and Chief Operating Officer effective immediately. Shawn will continue to serve as President, Energy Systems Global until his successor is named. A search for his successor is underway. Shawn has held key executive positions in each of our core businesses and international operating regions. As President, Energy Systems Global since November 2023, Shawn has led a significant business transformation including reshaping the go-to-market and operating strategies and reducing annual costs by nearly $50 million. Previously as President Motive Power, Shawn introduced several transformative initiatives that delivered 20% operating earnings growth and 210 basis points of margin expansion. But what gives me the steadfast confidence in Shawn's CEO candidacy is his ethics and character. Shawn's unwavering commitment to doing things the right way and natural leadership capabilities have supported our customer and supplier relationships and added to our culture. Over the past 11 years, he has successfully executed every challenge presented and his deep understanding of our business and strategic vision make him the ideal leader to build on our success. With Veterans Day soon upon us, I would be remiss not to mention that Shawn started his career serving the Armed Forces as a member of the US Army's 82nd Airborne Division and to thank Shawn and our other dedicated veterans for their brave service to our country. Over the next six months, I'll work closely with Shawn to ensure a smooth transition. Together, we remain fully focused on maintaining our operational excellence and strong customer relationships and supporting our ongoing initiatives with continuity and dedication. I'll now turn it over to Shawn, for a few comments.

Shawn O'Connell, President and Chief Operating Officer

Thanks, Dave and hello everyone. I'm honored to succeed Dave as EnerSys' CEO and thank our Board for their trust and confidence in me. Having been a part of this incredible company for 21 years, including the decade prior to joining EnerSys as an outside reseller of EnerSys' products within my own company, I've had the privilege of working with some of the most talented people in the industry and witnessed tremendous progress made under Dave's leadership, for which I am deeply grateful. Under Dave's leadership, EnerSys is transformed from the traditional lead-acid battery company with limited scale into a global leader in energy system solutions, growing revenue by some 35% through strategic acquisitions and groundbreaking product innovations. His efforts have built a unique portfolio of smart battery and energy management technologies, including both lithium-ion and lead chemistries, leaving an indelible mark on the company and our industry. I look forward to building on that strong foundation we've established, working with our team to continue our journey of innovation and growth as we pursue new opportunities that align with our long-term vision in delivering stakeholder value. As Dave mentioned, we will be working closely together to ensure a seamless transition. Over the next six months, I'll be conducting a listening tour across the organization and with other key stakeholders including customers, partners, our analysts and investors as I get up to speed on my expanded role and responsibilities. For now, it's business as usual. Our goals, initiatives, and day-to-day operations remain our focus with minimal changes. Now I'll turn it back over to Dave to discuss the results of our second quarter.

David Shaffer, Chief Executive Officer

Thanks Shawn. Before I go into an overview of the quarter, I would like to extend our sympathies to those impacted by the devastating hurricanes in the southeast. I would also like to thank and recognize our EnerSys service teams for working tirelessly to maintain power continuity for our customers affected by the storms. Please turn to slide 5, for a review of our second-quarter performance. In the second quarter, we delivered revenue and EPS in line with our guidance ranges and demonstrated our ability to generate strong and accelerating financial results in an uncertain market environment. Our balanced business portfolio has proven resilient allowing us to leverage exciting areas of profitable growth while weathering softer demand in other end markets. Adjusted gross margin of 28.7%, up 210 basis points over prior year, with adjusted operating earnings up 11% year-over-year and 8% sequentially. These results were attributable to impressive Motive Power performance on continued customer enthusiasm for our maintenance-free offerings; growth in our A&D business including the accretive addition of Bren-Tronics; solid cost discipline, particularly in our Energy Systems line of business; as well as increased IRA benefits, despite ongoing but easing headwinds in our communications and transportation markets and FX pressure. While we've adjusted our full-year revenue guidance modestly to account for the spending weakness in the Class 8 OEM truck market and deployment delays in fast charge and storage, we remain confident in our core strategy and the significant opportunities across our entire portfolio visible on the horizon. Our focus remains on delivering results. We're maintaining price and developing higher value products that lift our portfolio mix and create enhanced customer intimacy. We're optimizing our cost structure to adapt through cycles. We're improving productivity with investments in automation and flexibility, and perhaps what I'm most excited about, we're advancing our transformative strategic priorities. This quarter we achieved several key milestones in our transformative strategy. We were pleased to have been selected for a $200 million Department of Energy Award to partially fund our planned lithium gigafactory and have received formal Board approval to proceed with this important project. The integration work and results of the Bren-Tronics acquisition are exceeding our expectations and we've installed our first fast charge and storage system at our launch customer site. We are seeing promising demand indicators and positive momentum across our business, which gives us optimism heading into the second half of the fiscal year. Overall, orders were up year over year, with particular strength in Energy Systems Americas, in which we received a 30% increase in orders this quarter on 10% lower revenue, clearly indicating inflection points in both years and driving the second consecutive quarter of increases in Energy Systems backlog. Andy will give details on our second-quarter fiscal 2025 financial performance and outlook, but I will first provide a few more highlights and business drivers behind the results. Starting with Energy Systems, we saw a sequential increase in revenue for the first time in six quarters, driven by improvements in communications, and we were pleased to deliver higher adjusted operating earnings for the third consecutive quarter. Sales were down $40 million versus prior year but up $21 million sequentially driven by the softer but recovering spending by our communications customer as well as robust data center demand. Service revenue was notably challenged this quarter due to timing of projects, which we expect to come back in the second half of the year. We were particularly pleased to see the increase in communications orders in Q2. As we have previously mentioned, network resiliency can only be deferred so long. That spending resumption is what we are witnessing in our order book. We are not yet seeing significant investments in network expansion but with lower interest rates and increasing last-mile delivery volumes on higher traffic spurred by the surge in AI, we're confident it is imminent. Motive Power was once again a bright spot, with increasing volumes and margins versus the prior year. Our warehouse and logistics customers recognize the value of our higher margin proprietary maintenance-free offerings, seeing us not only as the power provider but as an energy solutions provider who helps them address their profit and labor challenges and achieve their sustainability goals. We are seeing more inbound customer interest in our lithium solutions and the announcement of our own lithium-ion cell factory to supply our products has gained customer attention and support. In Q2, sales of our maintenance-free product offerings grew 24% compared to the prior year, representing 26% of total Motive Power sales compared to 22% in the prior year. This growth underscores our competitive positioning and reinforces Motive Power's ongoing success. Industry data continues to support our expectations of mid- and long-term market growth opportunities. A leading industry association's research conveyed a 50% increase in current conditions' confidence levels compared to the last quarter. Industry experts are anticipating lift truck shipments to reach near double-digit growth for next calendar year. Although dealer truck inventory is currently elevated, we expect to enjoy heightened battery orders when our dealer sales pick up and the excess inventory is depleted. We believe that the uncertainty associated with the Presidential election has delayed decision-making and should now begin to resume momentum. In Specialty, revenue and adjusted operating earnings growth was driven by strong performance in aerospace and defense, bolstered by the accretive impact of our Bren-Tronics acquisition but offset by continued softness in Class 8 truck OEM demand, which reflects the broader truck market. A&D demand remained very healthy with a solid order book and several Department of Defense opportunities in the pipeline. Despite the year-over-year and sequential improvements in this business, our transportation volumes were below our expectations for the quarter. Although we grew our U.S. transportation aftermarket revenue 31% in the first half of fiscal 2025 versus the first half of 2024, we were not able to fully offset the ongoing softness in Class 8 truck OEM revenue, which was down 37% in the first half of fiscal 2025 versus prior year. Class 8 truck demand is expected to remain suppressed through the end of our fiscal year due to high truck inventory and flat tonnage delaying OEM requirements. Encouragingly, U.S. Class 8 net truck orders picked up in September, and our fleet customers indicate plans to increase truck procurement toward the end of our fiscal year, which should boost battery demand with a one-quarter lag. Combined with the historical battery cycle data, we anticipate stronger transportation demand entering our next fiscal year. Additionally, much of our aftermarket value comes from premium automotive sales with customers such as AutoZone and NAPA enthusiastic about the superior performance of our EnerSys batteries. We're actively negotiating new retail contracts and anticipate increasing our spot buy activities until these contracts are in place later in the fiscal year, positioning us for both volume and margin expansion, as timing is well aligned with the completion of our Missouri Plant 1 investments. In our new ventures business, we're excited to have delivered our first fast-charging storage system at the end of the second quarter. This marks an important milestone, signaling the beginning of a new chapter in energy management solutions for EnerSys. The system installation was executed within four hours and performed as expected. Please turn to slide 6. Let me share some highlights from our progress on our strategic priorities during the second quarter, starting with Innovate. We continue to deliver cutting-edge new product introductions, including software-driven energy management systems, providing customers with flexible and efficient solutions that meet their evolving needs. In September, our EnVision CONNECT solution for wireless system monitoring and optimization of network batteries was recognized by Lightwave plus Broadband Technology Report as among the best in the industry for cable broadband innovation. With a small Bluetooth chip embedded into the battery, EnVision CONNECT enables our customers to proactively manage and monitor their battery assets with real-time data. In October the EnerSys ABSL lithium-ion space battery was successfully launched to onboard NASA's Europa Clipper spacecraft. Our battery powers the spacecraft's flight and scientific instrumentation. The battery provides over 540 ampere-hours of capacity through a 28-volt system, performing various charge and discharge cycles throughout the mission's duration. The lithium battery was specifically designed and minimizes magnetic interference within the spacecraft. This achievement underscores our lithium engineering excellence and decades of experience collaborating with NASA to develop custom, high-performance energy storage solutions for space exploration. We continue to focus on optimizing the business as well. Our investments in TPPL production flexibility across our Missouri plants are progressing according to plan, and will be complete by the end of the fiscal year. This initiative, including the installation of two new automated lines in Plant 1, will double production capacity while requiring only half the labor, enhancing our production flexibility and reducing operating costs. The increased volume and improved cost absorption will further drive earnings expansion, delivering meaningful benefits to our business and accelerating results. The highlight of the quarter is the advancement on the new phase of construction plans for our lithium-ion cell gigafactory for which I will now provide a brief overview. Please turn to slide 7. We discussed our gigafactory in detail during our recent Tech Talk and I will summarize a few key points today. Our new factory will be approximately 500,000 square feet in size with an initial capacity to produce five gigawatt hours of lithium-ion cells annually, located in Greenville, South Carolina. Our total investment is estimated at $665 million and will be partially funded by federal, state and local incentives including the $199 million DOE award. From a strategic perspective, this new factory provides a reliable, domestic supply of lithium-ion cells for EnerSys' lithium battery production, supporting our mix shift to higher performance lithium solutions. It has the scale and the flexibility to meet our customers' diverse needs and importantly will meet stringent DoD requirements, strengthening our relationship with this important customer. From a financial perspective, benefits include de-risking our long-term revenue and earnings growth, reducing our input costs and unlocking additional and incremental high-margin revenue opportunities, which collectively drive a strong financial return profile for our shareholders. We are forging ahead with our plans and we'll provide ongoing updates as we progress with this strategic investment. Please turn to slide 8. We also continued to progress on our sustainability journey and recently published our detailed climate action plan roadmap to achieve Scope 1 neutrality by 2040 and Scope 2 neutrality by 2050. We are unwavering in our dedication to collaborate with our customers and suppliers in decarbonizing our value chain and are excited to share our continued progress on this path. In closing, while we expect that market uncertainty will persist through the coming months, we are confident our second half of the fiscal year is on track for continued top-line and profit expansion. We're bullish about our strong position as the leading provider of energy storage solutions as we continue to deliver innovative products and services in growing end markets where the needs for access to reliable power is increasing exponentially. We remain focused on delivering profitable long-term growth to our shareholders. I will now turn it over to Andy to take you through our results and outlook in greater detail. Andy.

Andrea Funk, Executive Vice President and Chief Financial Officer

Thanks Dave. Please turn to slide 10. Second quarter net sales of $884 million were down 2% from prior year, driven by a 3% decrease in organic volume from the headwinds in communications and Class 8 OEM markets Dave mentioned, as well as 1% price mix pressure from lower proportionate sales of higher margin power electronics to our communications customers, which were partially offset by 2% positive impact from the Bren-Tronics acquisition. We achieved adjusted gross profit of $254 million, up $14 million year-on-year including IRA benefits booked as a reduction to cost of goods sold in the quarter. Adjusted gross margin improved by over 200 basis points versus prior year to 28.7%, of which nearly half was due to the increase in higher margin Motive Power revenue and the accretive impact of Bren-Tronics, with the balance being attributable to higher IRA benefits. Our adjusted operating earnings were $115 million in the quarter, up over $10 million versus prior year with an adjusted operating margin of 13%. Excluding the IRA benefits, adjusted operating margin increased approximately 20 basis points year-on-year. Adjusted operating earnings benefited from the realization of our cost improvement actions in Energy Systems. Adjusted EBITDA was $129 million, an increase of approximately $13 million versus prior year, while adjusted EBITDA margin was 14.6%, up 170 basis points versus the prior year. Adjusted EPS for the second quarter came in above the midpoint of our guidance range at $2.12 per share, an increase of 15% over prior year. In the second quarter of fiscal 2025, our effective tax rate was 2.3% on an as reported basis and 19.4% on an as adjusted basis before the benefit of the IRA compared to 18.3% in Q2 of 2024. Let me now provide details by segment. Please turn to slide 11. In the second quarter, Energy Systems revenue declined 10% from prior year to $382 million, primarily driven by the lower volumes and price mix pressures previously mentioned. Revenue was up over $20 million sequentially, the first increase in six quarters as we began to see improvement in these challenged end markets. Adjusted operating earnings of $24 million improved for the third consecutive quarter, reflecting the increased revenue on top of the optimized cost structure and were in line with prior year despite the softer market conditions and lower revenue. Adjusted operating margin of 6.4% was up over 100 basis points sequentially and increased 30 basis points versus prior year. We exited the quarter with very encouraging order trends and communications resilient spending and we expect to be able to hold OpEx restraint even as revenue further recovered. Please turn to slide 12. Versus prior year, Motive Power revenue increased 3% to $367 million, largely driven by volume growth. Motive Power again reported strong adjusted operating earnings this quarter, contributing $58 million, up 8% over prior year representing our highest Q2 ever. Adjusted operating margins were at record highs of 15.7%, up 70 basis points over Q2 2024. We remain optimistic coming out of a seasonally slow Q2 with good visibility from industry order data. As lithium product sales increased, we expect healthy margins but in the near term the growth will be reflected as higher volume increases with suppressed price mix due to the elevated ramp-up cost pass-through impact of these batteries. Please turn to slide 13. Specialty revenue increased 9% from prior year to $135 million driven by a 12% positive impact from the Bren-Tronics acquisition and a 1% increase in price mix partially offset by a 4% decline in organic volume. Q2 2025 adjusted operating earnings of $8 million were up approximately $2 million versus prior year with an adjusted operating margin of 5.4% up 90 basis points. Margins remain below our target range of low double-digits due to pressure from lower Class 8 OEM transportation volumes and the impact of under-absorption in our Missouri plants. However, we are seeing the early benefits from the Bren-Tronics acquisition and beginning to grow our higher margin transportation aftermarket volume. Given the incremental transportation aftermarket opportunities and the broad strength of A&D end markets combined with the enhanced high-speed flexible capacity expansion and the full contributions from Bren-Tronics, we remain optimistic about our opportunities in Specialty and expect to see ongoing improvements over the next several quarters. Please turn to slide 14. Positive operating cash flow of $34 million offset by CapEx of $30 million resulted in free cash flow of over $3 million in the quarter. Operating cash flow absorbed the transition tax payment of $11 million and over $40 million of investment in primary operating capital as sales accelerated during Q2 2025 leading into a more robust second half of the year versus softening demand in the prior year. In addition, we increased capital spending by $11 million year-on-year primarily from the incremental Missouri investments previously mentioned. Note that the benefit of our IRA credit will not have the full positive impact on our cash flow until our fiscal year 2024 tax filings are finalized and we receive our first section 45X tax refund of over $100 million which we expect to get near the end of this fiscal year. During the quarter final section 45X regulations were issued by the U.S. Treasury Department and made public on October 24. We believe these align with and support our current interpretation and application of the law. As of September 29, 2024 we had $408 million of cash and cash equivalents on hand and net debt of $840 million representing an increase of approximately $329 million since the end of fiscal 2024. This increase is primarily attributable to the $206 million acquisition of Bren-Tronics, $75 million of stock buybacks, $19 million of dividends, $66 million of CapEx including the Missouri production investments and the purchase of land for a planned lithium plant, and a $58 million investment in primary operating capital to support the underlying business ramp as sales picked up during Q2. Our credit agreement leverage ratio is 1.6 times EBITDA. Our balance sheet remains strong and positions us to invest in growth and navigate the current economic environment. Although our leverage increased modestly during the quarter 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 decisions. Please turn to slide 15. During the quarter, we paid $10 million in dividends and repurchased $64 million in shares. We currently have approximately $258 million remaining on our buyback authorization including a $200 million incremental authorization approved by our Board yesterday. We continue to screen for additional attractive bolt-on acquisition opportunities such as Bren-Tronics which meet our disciplined strategic and financial criteria. Please turn to slide 16. We are seeing encouraging demand trends in the majority of our end markets including healthy trends in our Motive Power, data center and aerospace and defense businesses and while still challenged nicely improving orders in our communications market and positive early demand signals in Class 8 truck OEM markets, which we expect to improve steadily over the next several quarters. We're excited about our progress in new ventures delivering our first fast charge and storage system at the end of the second quarter, although deployments have taken longer than originally expected. Our fiscal third quarter 2025 guidance range is $920 million to $960 million of net sales with adjusted diluted EPS of $2.20 to $2.30 per share. Our guidance anticipates a modest sequential improvement in both communication spending and transportation aftermarket volume, incremental revenue and earnings from Bren-Tronics and ongoing revenue growth in Motive Power. In consideration of the current market conditions and delays in fast charge and storage, we are modestly lowering our fiscal 2025 revenue guidance range now set at $3,675 million to $3,765 million of net sales versus prior guidance of $3,735 million to $3,885 million. As we enter the second half of the year, we expect the profitability of our business to deliver accelerating returns driven by improving volume, favorable product mix, the accretive contribution of Bren-Tronics, continued cost improvements and benefits from operational efficiencies, flowing through to our bottom line. With recent Board approval, we are excited to advance the next phase of construction plans for a lithium-ion gigafactory in Greenville, and expect to incur modest related non-capitalizable expenses in the second half of the year as we move forward with this strategic project. As a result, we are tightening our fiscal 2025 EPS guidance range on increased confidence in previous earnings expectations, but slightly lowering the midpoint by $0.10 per share to account for these increased expenditures. Our expected adjusted diluted EPS range is now $8.75 to $9.05 per share versus our prior guidance of $8.80 to $9.20 per share with a pre-IRA tax rate of 20% to 21%. Our CapEx expectation for the full fiscal year 2025 remains in the range of $100 million to $120 million, after absorbing incremental spending on our planned domestic lithium plant. Although we expect that end markets may remain uncertain near term given the dynamic macro environment, we are excited to be standing on the threshold of our future. During Dave's impactful tenure as our CEO, he has established EnerSys as a leading provider of energy systems and storage solutions. We are confident in our positioning and strategy and we are extremely optimistic about the tremendous growth opportunities ahead of us. I'm grateful for Dave's leadership and mentoring and look forward to beginning the next leg of our journey under Shawn's strong leadership in May. With this, let's open it up for questions. Operator?

Operator, Operator

Thank you. Our first question comes from Brian Drab of William Blair. Your line is now open.

Brian Drab, Analyst

Good morning. Thanks for taking my questions. And Dave it's been great working with you. Congrats on your decision. And Shawn, looking forward to getting to know you better.

Shawn O'Connell, President and Chief Operating Officer

Thanks, Brian.

Lisa Hartman, VP of Investor Relations

Good morning, Brian.

Brian Drab, Analyst

Yeah, maybe we could just start with the question on the fast charging and storage. Can you give a little more detail around what is causing some delay there? And how many units have shipped from that initial order of 50? And is it still just the one customer Landmark that we're talking about at this point?

David Shaffer, Chief Executive Officer

Yes. Brian, we're still just talking about Landmark to start. I think the technical elements of the UL certification process, which we've completed, required more bureaucratic steps than we initially estimated to get all the documents on file and through the system. So that's the main source of some of the delays. There have also been some site prep issues from the customer's perspective. We have one system in the ground, a few more ready to go, and our goal remains to have 15 ready to go this fiscal year. The system, especially when it's complicated as this, has early phases that are a little choppy and can impact some of the modeling that Lisa and Andy are working with you on. But the key is the continued confidence by the end user in the business justification for this investment, which is energy management and mitigating demand charges. There is continued pressure from the end customer about this project. We're going to push through these UL issues. It's been hard to get the timing right from a modeling perspective but the momentum is still very much going forward. Andy, is there anything to add?

Andrea Funk, Executive Vice President and Chief Financial Officer

I think you hit it. Again, we've been focusing on this initial launch customer, and that's going to allow us to develop our pipeline more when we have the systems installed. It's exciting.

David Shaffer, Chief Executive Officer

Yes. And the installation went extremely well. They pre-wired everything at the CM, hoisted it down, and had the large system installed in four hours. It was really impressive.

Brian Drab, Analyst

Okay. Thanks. And I guess you said it might change the modeling a little bit. If I'm looking at fiscal 2027, that isn't far away anymore — that's basically calendar 2026. I don't want to put words in your mouth, but would you expect it to be tougher to get to a $400 million to $700 million revenue run rate for this product category by that time or not?

David Shaffer, Chief Executive Officer

Brian, I think it's primarily start-up issues. We will certainly update models and let you know if we think there's any major departure. Most of the issues we're discussing today relate to getting these first 15 systems in the ground and up and running.

Andrea Funk, Executive Vice President and Chief Financial Officer

The other point is there's growing enthusiasm across our other lines of business for BESS systems, warehousing and Motive Power. There's plenty of opportunity. It's early ramp for a very large, complicated project that we're excited about. Installations went very well for the first one. We just need to complete the paperwork for the UL certification even though the tests are done. We have 15 locations that we're ready to install in, and then the balance of that initial order will follow.

Brian Drab, Analyst

Okay, thanks. And then, can you put a little bit of a finer point on what you're seeing in the communications market in telecom? Sounds like orders are picking up and I might have missed the growth rate in orders, maybe sequentially. If you could give us an idea how much orders improved sequentially or year-over-year?

David Shaffer, Chief Executive Officer

We're definitely seeing a recovery in orders. Andy?

Andrea Funk, Executive Vice President and Chief Financial Officer

Revenue was down 10% year-on-year but orders were up 30% year-on-year. If I look at Communications in particular, Americas Communications book-to-bill was 1.09 in Q2 of 2025. It was 0.57 in Q2 of 2024. That indicates a healthy sequential increase. We're mostly seeing it in network resilience; we're not yet seeing as much network expansion. We expect to return to a normal baseline, and our target is for resilient spending to be 8% to 10% during down cycles, 12% to 15% when expansionary, and 10% to 12% overall. As things return to baseline, we expect to be in the 8% to 10% range by the end of this fiscal year with upside as expansion starts to kick in.

David Shaffer, Chief Executive Officer

There is certainly some pent-up demand related to network resilience. We have several small cell opportunities, and we have Shawn on the call who can provide further details on network expansion projects.

Shawn O'Connell, President and Chief Operating Officer

Sure, Dave, and good morning, Brian. We have several sales in the wind for network expansion. These are in early stages but promising. First, our Hyperboost area: we've been shipping a large number of Hyperboost modules beginning in January of this year. These allow greater traffic to be handled by antennas without climbing the tower and support power upgrades in base stations. We have about 4,000 Hyperboost modules in our pipeline and growing. Second, our DPX area, formerly called TouchSafe: we've completed our first public right-of-way trial for a major carrier's small cells in Dallas, Texas using the direct cable-bury method and it went extremely well. We have two more trials in process, one on the East Coast and one on the West Coast with about 15 nodes with different carriers, which is encouraging. We're seeing excitement for the DPX use case. We have a stocking program for our OEM partner, supplying about 100 nodes so they can deploy as interest builds. Third, our ADOM gateways, OEM module and gateway programs with Charter and Comcast continue to support 5G, CBRS and Wi-Fi segments, and demand is building over the next year. Finally, rural broadband is picking back up again after a pause last year; we're seeing several thousand new broadband powering systems being provisioned, largely to build in the next calendar year. Across the board, these are good signs for network builds forthcoming.

Brian Drab, Analyst

Yes. There's a lot going on. Thanks for sharing all that detail.

Shawn O'Connell, President and Chief Operating Officer

You're welcome.

Operator, Operator

Thank you. Our next question comes from Chip Moore of ROTH Capital Partners. Your line is now open.

David Shaffer, Chief Executive Officer

Hey, Chip.

Chip Moore, Analyst

Good morning. Thanks for taking the question. Echo my congratulations Shawn. Maybe just a follow up there on Energy Systems. Can you expand a bit more on what you're seeing in the data center market?

Andrea Funk, Executive Vice President and Chief Financial Officer

Yes, sure. Data centers are a strong spot for us. Q2 was up high single digits year-on-year and we expect fiscal 2025 to be up double digits. Orders are healthy with strong year-on-year gains particularly in Americas — America's orders are up about 50% year-on-year, though these projects have long lead times. New construction lead times are much longer than replacements. DC buildouts face extended lead times due to power issues; critical components like transformers, utility buildouts and switchgear can have lead times more than a year and in some cases two to three years, which impacts battery sales. We're planning builds going through calendar 2029. These projects are much larger than previous installs — for example, a recent large order was for 224 UPS systems versus historical orders of 10 to 15 UPS systems. That is driving a longer-term order book. Our mix of replacements (more book-and-ship) and project-based larger installs helps balance choppiness. We expect robust DC demand to continue as a multiyear trend.

David Shaffer, Chief Executive Officer

Longer term, Chip, Shawn has a lot of background here and we've added talent with depth in data centers. Over the next few months, we're looking at bolt-on acquisition opportunities in this space and working with Jern, our CTO, on new product opportunities. It's an exciting space. Shawn often highlights the demand outlook for electricity associated with artificial intelligence and how much availability of electricity will drive this market. That will create some choppiness in timing, since we're often one of the last things installed in a data center.

Shawn O'Connell, President and Chief Operating Officer

Yes. We tend to be fairly down the line in the procurement cycle, long after transformers and other major items are procured and installed.

Chip Moore, Analyst

Good. All right. That's very helpful. Any insight on chemistry mix in that market or how you see chemistry mix shifting over time?

David Shaffer, Chief Executive Officer

Chip, TPPL is where we're seeing the most interest and opportunity. On our new product introductions, it's mostly lithium. We see TPPL demand in data centers providing many of the benefits of lithium without some of the risks. It varies by customer and we haven't seen the same momentum for lithium in data centers as in other markets, so it's mixed.

Shawn O'Connell, President and Chief Operating Officer

I agree. TPPL is an important piece and is delivering good price/mix benefits analogous to Motive Power. TPPL addresses some industry safety concerns and delivers better performance characteristics, which supports our CAGR in that space.

Chip Moore, Analyst

Great. That's very helpful. If I could sneak one more in on Motive Power: it sounds resilient. Any more color on dealer inventory dynamics and how you see order trends near term?

David Shaffer, Chief Executive Officer

Feedback mirrors what we hear from transportation. Economic activity over the past two quarters has been muted, which exacerbated inventory positions. Some uncertainty related to the election likely delayed decisions, and with that clearing we expect improvement. We're focused on mix and operational excellence. Our factories have done a fantastic job on on-time deliveries. We have encouraging indicators from trade association data. We're pushing maintenance-free and technology solutions into the market and the team is doing a great job.

Andrea Funk, Executive Vice President and Chief Financial Officer

I'll add data: this is a record second quarter adjusted operating earnings for Motive Power and record operating margin percent for the LOB, impressive given Q2 is seasonally slow. One OEM projected modest declines mostly in EMEA, but remember we sell replacement and OEM products and profit is improving despite a stagnant market. ITA July-September lift truck orders were up 12% over prior year. Our backlog is about 50% higher than pre-pandemic levels: we exited Q2 2025 with $286 million of Motive Power backlog versus $196 million in Q2 2020. Backlog coverage is 0.8 versus about 0.6 pre-pandemic. Book-to-bill was 0.9 in both Q1 and Q2. October orders had our strongest book-to-ship rate in 18 months at around 35%. There's return to normalcy and we expect continued improvement.

David Shaffer, Chief Executive Officer

One of our reach truck customers still has abnormally long lead times, but another major customer is back to normal. We believe we're nearly through the disrupted phase and order rates are beginning to feel like pre-COVID.

Andrea Funk, Executive Vice President and Chief Financial Officer

Exactly.

Chip Moore, Analyst

Yes, appreciate all the color. I’ll hop back in queue. Thanks very much.

Andrea Funk, Executive Vice President and Chief Financial Officer

Thanks.

Operator, Operator

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

Greg Lewis, Analyst

Hey, thank you and good morning, everybody. And hey, Dave, I reiterate everybody else — thanks for all that you've helped me learn over the last couple of years. It's really been great. I was hoping to talk a little bit more around the Class 8 market and Specialty. On the prepared remarks, it sounds like we're kind of bottoming and it seems like it's picking up. As we think about Specialty margins, which are up sequentially and margins across the board are improving, how can we think about margin progression from mid-single digits back toward the high single-digit to low double digits we saw a couple of years ago? How contingent is that on the Class 8 recovery versus other drivers that could push margins back to the 10% range?

David Shaffer, Chief Executive Officer

Great question. The Class 8 situation was largely driven by customer inventory levels, which led to an abrupt reduction in order activity. Inventory is improving. In the post-election environment we expect overall tonnage to improve, and our customers indicate plans to increase procurement toward year-end. Transportation elements will improve as volume returns and as new lines ramp up in Springfield Plant 1. Another key piece to Specialty is aerospace and defense, where we see continued strength. Bren-Tronics is performing well. Those are the main drivers for margin progression. Andy, do you have more detail?

Andrea Funk, Executive Vice President and Chief Financial Officer

I'll add more color. We're confident we can move back toward double-digit margins. Specialty includes aerospace and defense, which has a healthy order book, and Bren-Tronics which was only partially in this past quarter. We'll see fuller contributions going forward. Transportation is comprised of OEM and aftermarket; aftermarket spot buys are growing (plus 31% on a smaller base) but couldn't fully offset the 37% decline in OEM business. Year-to-date we built about $20 million of inventory to accept aftermarket business. We have three Missouri plants — Warrensburg and two Springfield plants acquired from North Star. Plant 2 performance has turned the corner and is performing well. To capture the financial benefits from reduced under-absorption, we need more loading; normalized loading could be about $10 million or roughly $0.20 per share of opportunity. We invested in two new automated lines at Plant 1 that cost about $25 million and account for part of our CapEx increase this year. Most of that spending is behind us. These new lines will provide flexibility, incremental capacity and lower cost: they will allow us to produce 2x the volume with half the people. That incremental capacity is about $150 million of revenue and roughly $30 million of lower cost, or about $0.60 a share. It will likely take two to three years to fully realize as OEE improves and capacity is filled. This capacity will also help meet data center demand. The installation should largely be complete by the end of this fiscal year. That aligns with DC growth and coming aftermarket opportunities and, into fiscal 2026, resumption of Class 8 OEM demand. It's not overnight, but we expect ongoing incremental improvement in revenue and earnings, and eventually mid-to-high single digit to double-digit margins in Specialty.

Greg Lewis, Analyst

No, that's great to hear. Thank you both for the thoughts. Have a great day.

Andrea Funk, Executive Vice President and Chief Financial Officer

You too. See you, Greg.

Operator, Operator

Thank you. Our next question comes from Noah Kaye of Oppenheimer and Co. Your line is now open.

Noah Kaye, Analyst

Dave, I wish you well in retirement. Thanks for all the dialogue over the years. Shawn, a big congratulations to you and wish you luck.

David Shaffer, Chief Executive Officer

Thanks, Noah.

Shawn O'Connell, President and Chief Operating Officer

Thank you, Noah.

Noah Kaye, Analyst

Let me start with the gigafactory. There was a bit of political news recently. Strategically the gigafactory makes a lot of sense given tariffs and the importance of a domestic manufacturing base. On the funding side and development, can you help us understand the schedule? How could a transition in administration impact finalization and timing of funding for the DOE award?

David Shaffer, Chief Executive Officer

We don't anticipate any change regarding timing or likelihood of the DOE award. Andy, you have the timeline in front of you.

Andrea Funk, Executive Vice President and Chief Financial Officer

Yes. To give background on the schedule: we bought the Greenville land in Q1 for about $10 million which is included in our CapEx numbers. The DOE negotiations are expected to be complete before January 2025. The team is progressing well. This is largely administrative — it's not about whether we get the award; it has been approved and authorized. It's about some specific logistics such as environmental details for land prep and making sure everything aligns with DOE expectations. We don't see this being at risk. We've already rented local space and begun hiring staff. We had our Board meeting in Greenville last week and economic development officials were very supportive.

David Shaffer, Chief Executive Officer

If you haven't been down there in a while, you should visit; it's a dynamic city. The Board was very happy and impressed with Greenville.

Andrea Funk, Executive Vice President and Chief Financial Officer

We expect to break ground in late calendar Q2 2025 and probably begin construction in third quarter 2025. We expect the building to be commissioned by the end of calendar 2027 and to start production in Q2–Q3 of calendar 2028. We're conducting environmental site assessments and material testing. There's a lot of activity and we couldn't be more excited. We don't expect any changes to the progress; if anything, the administration's priorities underscore the importance of domestic supply chains and support these efforts.

David Shaffer, Chief Executive Officer

There are few issues that unite DC, and one is the importance of a domestic supply chain, especially for defense-related products. This is a high priority for the current administration and we anticipate that continuing through any transition.

Noah Kaye, Analyst

On funding timing: as you spend CapEx on the plant, would DOE and local cost-share funds be reimbursed concurrently? How will this work for reporting CapEx — do you net the reimbursement against CapEx or report gross and then offset when reimbursement occurs?

Andrea Funk, Executive Vice President and Chief Financial Officer

These details are being finalized in negotiations, but our expectation, consistent with our modeling and discussions, is that DOE funding would likely be a reimbursement with about a one-quarter delay. We would have the outlay and then receive reimbursement the following quarter as we continue investments. We also expect the bulk of it to be booked as a reduction to the basis of the assets, so capital spending would be net of the reimbursement in many cases since it reduces the capitalizable basis. This is our current understanding pending final negotiation details.

Noah Kaye, Analyst

Okay. Very helpful. Last one: I walked past an Odyssey battery this morning and got asked about Specialty. You provided color on organic trends and Bren-Tronics outperformance. It looks like Bren-Tronics contributed about $16 million to Q2 sales in the partial quarter. If you annualize that, it's around $100 million. Can you comment on seasonality in that business and what you expect for sales this fiscal year?

Andrea Funk, Executive Vice President and Chief Financial Officer

We haven't provided specific guidance on Bren-Tronics beyond what we included in our results. We are conservative in modeling; Bren-Tronics' orders have been fantastic and we're optimistic, but we are building forecasts conservatively around their historical run rate at acquisition. We do see upside potential. We'll report Bren-Tronics revenue in our quarterly filings, so you'll have ongoing visibility, but we are pleased with the team's performance, the cultural fit and the synergies, which have been greater than we expected. We didn't bake many synergies into the initial plan, so it's been a positive surprise.

Noah Kaye, Analyst

Great. Very good. Thanks for all the color.

David Shaffer, Chief Executive Officer

Thank you.

Andrea Funk, Executive Vice President and Chief Financial Officer

Thank you.

Operator, Operator

Our next question comes from Greg Wasikowski of Webber Research & Advisory LLC. Your line is now open.

Greg Wasikowski, Analyst

Hey, good morning, everyone. I know we're over on time already, so I'll keep it brief. Could you just follow up on the UL certification process for clarification? Is that a once-and-done issue or does it vary by customer, geography or product?

David Shaffer, Chief Executive Officer

It's essentially a once-and-done issue for this product. We must reach the point where the contract manufacturer can mark the product with the UL certification, and part of our contractual requirements with customers is to have that UL Certification marked on the unit. That's been one of the steps we've been working through for these initial units. Once we get this done, it's done for everything. The systems we've been quoting to other customers besides Landmark are the same unit essentially as the one we sold to Landmark. As Andy mentioned, there's excitement building because the economics that drive payback for our customer in Canada — demand charge mitigation and energy management, energy arbitrage — appeal to distribution center customers in California and elsewhere. There's a lot of momentum in this new line of business.

Greg Wasikowski, Analyst

Okay, great. That's what I thought, but good to confirm. That's it for me. Thanks and one last echo of congratulations to Dave and Shawn.

David Shaffer, Chief Executive Officer

Thank you.

Shawn O'Connell, President and Chief Operating Officer

Thank you, Greg.

Operator, Operator

Thank you. This concludes the question and answer session. I would now like to turn it back to Dave Shaffer for closing remarks.

David Shaffer, Chief Executive Officer

Thank you everybody for joining us today. We look forward to speaking again in about 90 days. Take care.

Operator, Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.