EnerSys, Inc. 2027 Q1 Earnings Call

Thank you for joining us today to discuss EnerSys' first quarter fiscal 2027 results. On the call with me are Shawn O'Connell, EnerSys President and Chief Executive Officer, and Andrea Funk, EnerSys Executive Vice President and Chief Financial Officer. Last evening, we published our first quarter fiscal year 2027 results with the SEC, which are available on our website. We also posted slides that we will be referring to during this call. The slides are available on the presentations page within the investor relations section of our website. As a reminder, we will be presenting certain forward-looking statements on this call that are subject to uncertainties and changes in circumstances. Our actual results may differ materially from these forward-looking statements for a number of reasons. These statements are made only as of today.

For a list of forward-looking statements and factors which could affect our future results, please refer to our recent Form 8-K and 10-Q filed with the SEC. In addition, we will be presenting certain non-GAAP financial 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 8-K, which includes our press release dated August 12th, 2026. Now I'll turn the call over to EnerSys CEO, Shawn O'Connell.

Thank you, Lisa, and good morning. Please turn to slide 4. During today's call, we will review our strong first quarter results, share progress advancing our long-term growth initiatives, discuss our recently announced U.S. lithium manufacturing facility, and close with second quarter guidance. Please turn to slide 5. In the first quarter of fiscal 2027, we again delivered record financial results, which were driven by favorable price mix, higher volumes, ongoing OpEx discipline, and stock buybacks enabled by our exceptional free cash flow conversion. Our Energy Systems and Specialty businesses both performed very well during the quarter, supported by strength across our key growth markets, including data center, communications, and defense. At the same time, the Motive Power business saw initial recovery in the transportation market, while material handling demand is expected to improve in the back half of this fiscal year.

Our overall performance demonstrates the value of our end market diversification and the positive impact of our EnerGize strategic framework. Please turn to slide 6. At our Investor Day in June, we outlined how we are focusing on markets where we have the right to win while applying our differentiated technologies to address our customers' energy and labor challenges. As a reminder, we compete in a variety of diverse end markets that are collectively growing faster than GDP. We expect EnerSys' top line growth to outpace these end markets through targeted growth initiatives that will expand our share of wallet, leveraging our leading market positions and deep customer relationships. Our three large growth bets, battery energy storage systems for warehouses, lithium batteries in data centers, and aerospace and defense investments, build on our established capabilities and customer relationships.

I would like to share recent proof points of the progress we are making, which we expect will accelerate our growth beginning next fiscal year. In Industrial Motive Solutions, we are pleased to share our Fortix 172 kilowatt hour BESS received UL and NFPA 855 approval. This represents an important step in the permitting process required for commercial deployment. The Fortix system extends our material handling position from powering forklift trucks to optimizing energy across the warehouse. EnerSys forklift batteries, Synova chargers, and Fortix BESS will create an integrated energy ecosystem that delivers peak shaving and enhanced uptime. The synergistic relationship and deep existing installed base uniquely positions us to bring a BESS solution to the material handling space, while also strengthening the value proposition of our forklift batteries to our customers.

Within Network Infrastructure Solutions, momentum in our service offerings was a meaningful contributor to the division's top-line growth and margin improvement in this quarter. The capabilities and operating model we are building in NIS will support broader aftermarket service opportunities across EnerSys, including our BESS warehouse deployments. In data centers, we continue to enjoy solid growth, with Q1 top line expanding in the low teens year-over-year, in line with our expectations of high single digit to low teens growth for fiscal 2027. We look forward to expanding our share of wallet with these same customers in the faster-growing lithium portion of this market. We progressed the commercialization of our DataSafe Noir lithium offering, which has been met with strong customer enthusiasm since the official launch in June, particularly for its energy density and cost competitive advantages, and that it will be coupled with our established service performance.

This differentiated lithium solution will begin to have a meaningful impact on our revenue growth beginning in our next fiscal year, expanding our opportunities with customers who already know us, trust us, and rely on our global service network. Last, but certainly not least, we are very excited to announce the finalization of our Department of Energy grant, an important milestone in our aerospace and defense growth strategy. The planned facility will expand our ability to support mission-critical defense applications with a secure U.S.-based supply chain. I will discuss this opportunity in greater detail in the following two slides. Please turn to slide 7. Aerospace and defense represents one of our most compelling long-term growth and margin expansion opportunities, with our recent segment realignment providing enhanced visibility and focus on this strategic portion of our business.

Defense platforms increasingly require greater mobility, mission duration, and power density, driven by demand for advanced batteries in drones, counter-drone munitions, missile defense, and soldier power. The origin of these advanced batteries is of crucial importance as the U.S. and allied nations look to reduce reliance on components sourced from foreign entities of concern, or FEOC. EnerSys has been the leading provider of integrated systems, application engineering, reliability, and life cycle support to these demanding applications over nine chemistries of lithium batteries currently manufactured in our six U.S. CMMC and ITAR-compliant production facilities today. We expect this steep demand growth to be more durable as geopolitical priorities evolve. The economics of warfare have transformed, and higher volume, lower cost battery-reliant technologies such as drones and counter-drone systems are driving mounting demand for incremental energy storage capacity that doesn't exist today.

We conservatively expect annual market growth in the range of 9%-11%, with above-market opportunity in front of us as we expand our offerings in this space. Aerospace and defense contributes to the unique value that the diversification of our business model provides to our investors and is a key area of strategic growth for us, including our planned DOE-supported Lithium and Advanced Technologies campus, which I'll discuss next. Please turn to slide 8. In July, we reached an important milestone with the U.S. Department of Energy, securing financial support for our refined, defense-focused lithium cell manufacturing plant in Greenville, South Carolina, which will also serve as a campus for our Lithium and Advanced Technologies Center of Excellence. This investment will strengthen our domestic lithium strategy, while helping support customers that increasingly require U.S.-based and FEOC-compliant supply chains for critical applications.

Rather than investing in lithium battery capacity for broad commercial consumption, we chose to focus this facility on the applications where domestic production creates the greatest customer value and where we believe EnerSys has the strongest competitive position. In addition to dramatically de-risking the offtake of our planned incremental capacity, this focused direction enables us to preserve flexibility to the most efficiently sourced technologies that best meet our customers' needs in markets where FEOC compliance is not a priority. Our new lithium plant will produce high energy density cells to support manned platforms, soldier power, space and autonomous systems, further supporting the electrification of the battlefield. Importantly, it will also enable a closed-loop ecosystem for drone powering and recharging.

Consider a system with Bren-Tronics drone battery packs and chargers powered by Rebel hybridized power systems, which in turn are powered by Bren-Tronics batteries, with the cells of all those batteries produced in our new plant. We expect our new lithium plant to have an initial annual production capacity of approximately 1 gigawatt hour, purpose-built to the unique requirements of defense applications. This level of energy production reflects the high quantity of small format cells and precision requirements for these applications. The production of these cells requires specialized equipment and security protocols that meet national defense requirement, which is a very different scope than a commercial or other specialized lithium cell manufacturing facility. While measured in gigawatts, the plant appears considerably smaller than our initial plans. We will actually be producing a higher quantity of these smaller batteries than the quantity of larger batteries contemplated in our original scope.

In addition, the campus will provide us expansion opportunities for future growth, footprint optimization, and the specialized requirements of lithium and other advanced chemistries across all our end markets where we manufacture or source the cells. We have not yet included the value of these incremental opportunities in our financial modeling. The revised DOE grant provides approximately $150 million towards the facility's estimated $650 million cost. We expect EnerSys net investment of approximately $500 million to be funded entirely through operating cash flow. In addition, as previously announced, EnerSys has been awarded a comprehensive incentive package through South Carolina and Greenville County valued at approximately $200 million, which includes a combination of short-term and long-term incentives that will help support ongoing operations of the plant. We believe this disciplined investment will meet critical customer needs and generate compelling long-term returns.

Construction is planned to begin in the first half of fiscal 2028, with full production expected approximately three years after construction begins. We expect to generate an internal return in the mid-20s for this investment. With DOE support now secured, we are moving into the next phase of the project. Our near-term priorities include advancing local grant process, completing NEPA and permitting requirements, refining capital timing, and establishing the appropriate execution governance. We look forward to providing additional updates as key milestones are achieved. Please turn to slide 9. Across our markets, demand for our solutions is building, and our teams are focused on delivering for our customers. Q1 2027 orders were up 7% versus prior year, with our book-to-bill at 1.06, and backlog relatively flat versus prior year, and up 2% sequentially.