EnerSys

NYSE:ENS

Earnings Call Analysis

EnerSys reports modest revenue decline but strong margin growth and future optimism.

In the second quarter, EnerSys posted net sales of $884 million, down 2% from last year, primarily due to a decrease in organic volumes. Adjusted gross profit rose to $254 million, lifting adjusted gross margin by over 200 basis points to 28.7%. Adjusted EPS increased 15% to $2.12 per share. Although the company lowered its fiscal 2025 revenue guidance to $3.675-$3.765 billion, it anticipates a robust recovery, driven by improving order trends, especially in Energy Systems and Motive Power segments. Additionally, the upcoming lithium-ion Gigafactory, backed by a $200 million DOE award, positions EnerSys for strong long-term growth.

EnerSys: A Steady Performance Amidst Market Challenges

In the second quarter of fiscal 2025, EnerSys generated net sales of $884 million, reflecting a modest decline of 2% year-over-year. This drop was primarily attributed to a 3% decrease in organic volume spurred by headwinds in the communications and Class 8 OEM markets. Furthermore, price and mix pressures exerted additional strain, particularly regarding sales of higher-margin power electronics to communications clients. However, these challenges were partially offset by a 2% revenue contribution from the recent acquisition of Bren-Tronics.

Positive Indicators in Overall Profitability

Despite the dip in revenue, EnerSys's adjusted gross profit rose to $254 million—an increase of $14 million from the previous year—thanks to improved operating margins. The adjusted gross margin improved by 210 basis points to 28.7%, largely supported by higher-margin motive power revenue and operational efficiencies. Adjusted operating earnings also reflected a surge, reaching $115 million, up from the previous year. The adjusted operating margin held firm at 13%, suggesting that the company is effectively managing costs while navigating a transitional market.

Segment Performance: Mixed Results but Optimism Ahead

Looking closer at segment performance, Energy Systems saw a decline in revenue by 10%, totaling $382 million. However, this marked the first sequential revenue increase in six quarters, hinting at a rebound in the market. Meanwhile, the Motive Power segment reported a 3% uptick in revenue to $367 million, driven by strong volume growth, with adjusted operating earnings at an all-time high of $58 million and margins at 15.7%. Specialty revenue grew 9% to $135 million, bolstered by the Bren-Tronics acquisition. While organic volumes declined, ongoing demand in aerospace and defense remains promising.

Robust Cash Flow and Strategic Investments

EnerSys reported a positive operating cash flow of $34 million, leading to free cash flow of over $3 million despite significant capital expenditures of $30 million. The company plans to invest an additional $665 million into a new lithium-ion Gigafactory in Greenville, South Carolina. This facility, partially funded through a $199 million DOE award, aims to enhance domestic supply chains and generate new revenue opportunities while catering to stringent Department of Defense requirements, creating a strong value proposition.

Refined Outlook in Light of Market Conditions

For the third quarter of fiscal 2025, EnerSys issued guidance forecasting net sales between $920 million and $960 million, coupled with dilutive earnings per share (EPS) ranging from $2.20 to $2.30. However, the company has slightly lowered its full-year revenue guidance to a range of $3.675 billion to $3.765 billion, compared to the earlier guidance of $3.735 billion to $3.885 billion, reflecting the softening of demand in Class 8 OEM and delays in fast charging and storage deployments. Nevertheless, the expected adjusted diluted EPS has been tightened to a range of $8.75 to $9.05 from the previous range of $8.80 to $9.20.

Market Drivers and Future Potential

Amid fluctuating market conditions, EnerSys remains bullish about its position and prospects in energy storage solutions. Key drivers include recovery in communication orders and ongoing demand in aerospace and defense, as well as the anticipated increase in Class 8 truck procurement towards the fiscal year's end. The introduction of new higher-margin maintenance-free battery solutions, expected volume growth from manufacturing advancements, and strategic acquisitions all position EnerSys favorably for future growth despite current challenges.

Earnings Call Transcript 2025-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the Quarter 2 2025 EnerSys Earnings Conference Call. [Operator Instructions] 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, executive]

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, executive]

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 Sean O'Connell, our President of Energy Systems Global as my successor. Sean 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, Sean has been promoted from President of Energy Systems Global to President and Chief Operating Officer, effective immediately. Sean will continue to serve as President, Energy Systems Global until his successor is named. A search for his successor is underway. Sean has held key executive positions in each of our core businesses in international operating regions. As President, Energy Systems Global since November 2023, Sean 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, Sean 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 Sean's CEO candidacy is his ethics and character. Sean'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 Sean started his career serving the Armed Forces as a member of the U.S. Army's 82nd Airborne division and to thank Sean and our other dedicated veterans for their brave service to our country. Over the next 6 months, I'll work closely with Sean 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, executive]

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 has transformed from a 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 and delivering stakeholder value. As Dave mentioned, we will be working closely together to ensure a seamless transition. Over the next 6 months, I will 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, executive]

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 the 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 '25 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 6 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, and 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 are 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 were up 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 last quarter. And 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 is not specific to EnerSys and reflects the broader truck market. A&D demand remained very healthy with a solid order book and several aerospace and 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 '24, we were not able to fully offset the ongoing softness in Class 8 truck OEM revenue, which was down 37% first half of fiscal '25 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 1 quarter lag. Combined with the historical battery cycle data, we anticipate stronger transportation demand entering our next fiscal year. Additionally, much of our aftermarket volume comes from premium automotive sales with customers such as AutoZone and NAPA enthusiastic about the superior performance of our ODYSSEY batteries. We are 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 are excited to have delivered our first fast charge and 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 4 hours and 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 on Board NASA's Europa Clipper spacecraft. Our battery powers the spacecraft's flight and scientific instrumentation. The battery provides over 540 amp 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 the 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 2 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. The highlight of the quarter is the advancement on the new phase of construction plant 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 5 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 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 derisking 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 continue to progress on our sustainability journey and recently published our detailed climate action plan road map 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 are bullish about our strong position as a 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]

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 a 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. Q2 adjusted gross margin improved by over 200 basis points versus prior year to 28.7% of which nearly half was due to an 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 '25, 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 '24. 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 6 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 in communications resilient spending, and we expect to be able to hold OpEx restraint even as revenue further recovers. 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 '24. We remain optimistic coming out of a seasonally slow Q2 with good visibility from industry order data. As lithium product sales increase, 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 volumes. Q2 '25 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 volumes. 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 a transition tax payment of $11 million and over $40 million of investment in primary operating capital as sales accelerated during Q2 '25, leaning 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 credits 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 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 '24. 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 our planned lithium plant and a $58 million investment in primary operating capital to support the underlying business ramp as we anticipate in the second half of this fiscal year. Our credit agreement leverage ratio was 1.6x 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 2x to 3x 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 $200 million incremental authorization approved by our Board yesterday. We continue to screen for additional attractive bolt-on acquisition opportunities such as Bren-Tronic, 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 markets and positive early demand signals in Class 8 truck OEM markets, which we expect to improve steadily over the next several quarters. We are 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 billion to $3.765 billion of net sales versus prior guidance of $3.735 billion to $3.885 billion. As we enter the second half of the year, we expect the profitability of our business to deliver accelerating returns driven by improving volumes, 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 our lithium-ion gigafactory in Greenville and expect to incur modest related noncapitalizable 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 our planned domestic lithium plant. Although we expect that end markets may remain uncertain during the 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 Shanw's strong leadership in May. We remain focused on delivering long-term value to our stockholders. With this, let's open it up for questions. Operator?

[Operator]

[Operator Insructions] Our first question comes from Brian Drab of William Blair.

[Brian Drab, analyst]

Maybe we could just start with a 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 this still just the one customer landmark that we're talking about at this point?

[David Shaffer, executive]

Yes. Brian, we're still just talking about landmark to start. And I think the technical elements of the UL certification process, which we've completed. I think what we underestimated a little bit was the bureaucratic part of the certification process, getting all the documents on file and through the system. So that's the main source of some of the delays. And then there's been some site prep issues from the customer's perspective as well. So we've got one system in the ground. We've got a few more ready to go. And our goal continues to be to get 15. I have 15 ready to go this fiscal year. That's what we're continuing to drive on. And as you can imagine, a system, especially one as complicated as this, the early phases are are a little choppy and probably impact some of the modeling that I know Lisa and Andy are working with you guys on. But the key for me is the continued confidence by the end user about the business justifications or rationale for this investment, which is the energy management, mitigating demand charges. I don't even want to say excitement, but pressure from the end customer about this project. So we're going to push through these UL issues, and it's just been hard to get the timing right from a modeling perspective, but the momentum is still very much going forward. Andy, is there anything there?

[Andrea Funk, executive]

No, I think you hit it. Again, we've been focusing on this initial launch customer, and that's going to allow us really to develop our pipeline more when we have the systems installed. And it's exciting.

[David Shaffer, executive]

And the install Brian, the installation went extremely well. They prewire everything at the CM. And so they just hoisted it right down and they had that big old system installed in 4 hours. It was really impressive. Okay. And I guess you said it might change the modeling a little bit. I guess I'm looking at fiscal '27 doesn't seem that far away anymore. That's basically calendar '26.

[Brian Drab, analyst]

And I don't want to put words in your mouth, but I would imagine it looks a little bit tougher to get to like a $400 million to $700 million revenue run rate by with this product category by that time or no?

[David Shaffer, executive]

Brian, I think these are start-up issues. We will certainly update models and let you folks know if we think there's any sort of major departure. As far as I'm concerned, most of the issues we're talking about today are related to getting these first 15 systems in the ground and up and running.

[Andrea Funk, executive]

Yes. The other thing I'd comment, Brian, is there's growing enthusiasm across our other lines of businesses for things like a BESS system and warehousing and motive power. So there's plenty of opportunity. I think it's just early ramp of a very large complicated project that we're excited. The installations went very well for the first one. Just got to get the paperwork for the UN certification, even though the tests are all done. We've got 15 locations that we were ready to get the product installed in. And then the balance of those 50 systems, as we talked about, will follow after that.

[Brian Drab, analyst]

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

[David Shaffer, executive]

We're definitely seeing a recovery in orders. And Andy, what sequential number.

[Lisa Hartman, executive]

So revenue was down 10% year-on-year, but orders were up 30% year-on-year. If I look at comms in particular, Brian, you mentioned America comms, book-to-bill was 1.09 in Q2 of 2025. It was 0.57 in Q2 of '24 to give you an idea. 1.09 last quarter as well, but that's leaning into on a sequential basis going up 1.09 is a healthy increase. So we're mostly seeing it in network resilience. We're not yet seeing as much of the network expansion. So I think we're leaning into a return to normalcy on the base business. As we have talked about before, our target is to be at 8% to 10% during these down cycles when it's really just resilient spending and 12% to 15% when it's expansionary at the peak of these cycles and 10% to 12% overall. So as things continue to return to a normal baseline, we expect to be in that range, that 8% to 10% by the end of this fiscal year with upside opportunity as a lot of this expansion starts to kick in.

[David Shaffer, executive]

And there's certainly, Brian, with some pent-up demand as it relates to the network resilience. We've said all along, you can only defer that for so long. But in terms of the big new exciting projects, even though we've got several small cell area, and we've got the advantage of having Shawn on the call with us today. Shawn, is there any additional information you want to provide to Brian as it relates to some of the not the network resilience projects, but maybe some of the new network expansion projects.

[Shawn O'Connell, executive]

Sure, Dave. There are several sales in the win that we have for network expansion. And as Dave mentioned earlier, these are in their early stages, but there are good signs nonetheless. And just to give you a little color, the first would be in our HyperBoost area. and we've socialized that previously. But we've been shipping beginning in January of this year, a great deal of our HyperBoost modules. And this is allowing greater traffic to be handled by the antennas without climbing the tower, so doing power upgrades in the base stations. And we have about 4,000 HyperBoost modules and growing in our pipeline. So that's the first. And as Dave mentioned, it's not the next G level build, if you will, but it's a good building sign that some of this is coming back. If you look at our DPX area, formerly called Touchsafe, we've completed our first right-of-way public right-of-way trial for one of the major carriers, small cells. That trial was in Dallas, Texas using the direct cable barry method. and went extremely well. We have 2 more trials in process at the moment, a small cell trial of a node on the East Coast and then another one on the West Coast with about 15 nodes, both with different carriers, so which is very encouraging for us. And we're continuing to see excitement building around the specific use case of DPX in those applications. So we've got a stocking program we're working on for our OEM partner. We're getting them about 100 nodes now so they can have a rolling stock and begin to deploy more of these as the interest builds. And then the final one I'll talk about and really mention are our Atom gateways, so our Alpha DOCSIS OEM module and gateway programs. So Charter and Comcast continue to deploy gateway connected devices to support both the 5G CBRS and WiFi segments. And we're seeing consistently building demand for the next year, and we're continuing those deployments. And then as a subsegment of that, we're seeing rural broadband beginning to really pick back up again. This was sort of shut off during the last part of last year when we saw the general order book decline. But we're seeing several thousand new broadband powering systems being provisioned, which is largely going to build in the next calendar year. So again, across the board, some good indications that some of these network builds are forthcoming.

[Operator]

Our next question comes from Chip Moore of ROTH Capital Partners.

[Alfred Moore, analyst]

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?

[Lisa Hartman, executive]

Yes, sure. Happy to go. Data centers is a bright spot for us. Q2 was up high single digits year-on-year, and we do expect fiscal '25 to be up double digits. The orders are healthy. We've had strong year-on-year gains, particularly in the Americas. Americas orders are up, I almost hate to say it's 50% year-on-year, although these have long lead times. So the project nature tends to be these longer lead times with new construction being much longer than the replacement. The DC build-outs facing extended lead times due to the power issues. Some of the critical components like transformers for the new utility build-outs and switch gear to bring the power to the DC can have lead times more than a year and some components even as much as 2 to 3 years, which impacts the battery sales. We're doing builds for going through calendar '29 being planned. They're much larger than the previous new installs, like a recent large order that we had was for 224 UPS systems versus historically a huge order with 10 to 15 UPS systems. So that's what's driving really this order book that's going to be longer term in nature. this is one of the reasons why our mix of both doing replacements, which is more book and ship as well as the project aspect of these new larger installs helps to balance some of the choppiness that you can have with this project activity. But we expect robust DC demand to continue as a multiyear trend.

[David Shaffer, executive]

And I think longer term, Chip, it's nice that we've got Sean leaning in here because he has a lot of background in this particular area. And we've actually added some talent to the team recently with a lot of depth in data centers. And really, my focus with Shawn over the next few months is we're really looking at bolt-on acquisition opportunities in this space and certainly working with Jon, our CTO, on some new product opportunities in this area as well. So it's an exciting space, and Sean shares with me often some of the demand outlooks for electricity, mostly associated with artificial intelligence, and it's staggering how much the availability of electricity is going to drive this market. And to Andy's point, will create some choppiness in terms of when we see the orders, which come we're the very last. Shawn, you'd say we're the last thing that gets installed in a data center.

[Shawn O'Connell, executive]

Yes. We tend to be fairly down the line in that procurement cycle long after transformers and those other high tentpole items are made their way through.

[Alfred Moore, analyst]

Can you give us any insight on, I guess, chemistry mix in that market or how you see chemistry mix shifting over time?

[David Shaffer, executive]

Chip, really holding on. And I think TPPL is where we're seeing the most interest and opportunity. Of course, on our NPI side, it's mostly lithium. We're looking at to fill in some of the gaps. It depends on every customer, but we haven't seen the same maybe momentum across all elements of the data center space with lithium as we see in other markets. So it's really mixed. Shawn, did I miss anything there?

[Shawn O'Connell, executive]

No, Dave, I think you captured it well. And I think that TPPL portion is an important piece. If you look at it analogous to Motive Power and what TPPL has done for price/mix in Motive Power. We're enjoying some of the same type of lift in TPPL and data center. And Chip, if you think about it, it gets you a lot of the way of lithium, TPPL, we've said in the past, without some of the risk. And we're still seeing some of the uglier stuff globally in data centers where we've had some fires and other things, not we as EnerSys, but the industry. And TPPL is really laying that risk with much better performance characteristics. So our CAGR is really quite nice in that space.

[Alfred Moore, analyst]

If I could sneak one more in, just on Motive Power, staying very resilient, it sounds like. Just any more color. I think you called out, I missed it, some dealer inventory dynamics. Just what's going on there? And then how do you see order trends playing out near term?

[David Shaffer, executive]

I think most of the feedback we're getting is not dissimilar from what we hear from the transportation group. I would say, the economic activity over the past 2 quarters has been somewhat muted. I think that's exacerbated some of these inventory positions. Most of the feedback I received, and I was just with a bunch of these folks not too long ago, is that I think some of the uncertainty related to the election, we're going to clear that pretty quickly now because it feels like things are going to improve. And so I think a lot of the same dynamics. But what we're leaning into mostly with some of the choppiness in the volume, it's just been mix and just operating excellence. The factories have been doing a fantastic job a on-time deliveries. So I'm just impressed as heck with that team. And we look forward to a bit smoothing out orders. As I noted in my prepared remarks, we've got some great indicators from some trade association data reports that we look at. And really, for us, it's just pushing maintenance-free and technology and higher-margin solutions into this market. And the team has been doing a fantastic job.

[Andrea Funk, executive]

Chip, I can follow up with some data as well. I want to stress again, this was a record second quarter AOE for Motive Power and record AOE percent for the LOB. They just continue to knock it out of the park. And that's on Q2, which tends to be our seasonally slow quarter with EMEA holidays, so all the more impressive. One of our OEMs has projected some modest declines, mostly in EMEA. But I think it's important to remember that we sell both replacement and to the OEMs and that our profit is improving despite the market being somewhat stagnant, and I think having a lot of opportunity for growth in front of it. On a positive note, ITA July, September lift truck orders were up 12% over prior year. And getting to some of this volatility that's largely behind us, but I would say not 100% back to normal. So again, I think there's a lot more growth in front of us. Our backlog is still about 50% higher than pre-pandemic levels. We exited Q2 '25 with $286 million of motive power backlog versus $196 million in Q2 of '20. Our backlog coverage right now is 0.8 versus about 0.6 pre-pandemic. Book-to-bill was 0.9 in both Q1 and Q2. So you always wonder when it's below 1, what's causing that. That's because of a lot of this return to more of a book and ship type of an environment. Our orders in October we had our strongest book-to-ship rate in 18 months at around I think it was around 35% or so. So there's a little bit of that return to normalcy until we get a steady line, and I think the slope is going to continue to improve.

[David Shaffer, executive]

One of our customers, Andy, on the reach trucks has still got really, I would say, abnormally long lead times, but the other major customer in that area has gotten back to normal. So I think we're almost through this disrupted phase and order rates is really starting to feel like it did in the old days, pre-COVID.

[Operator]

Our next question comes from Greg Lewis of BTIG

[Gregory Lewis, analyst]

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 bottoming. It seems like it's picking up. Just as we think about specialty margins, which are up sequentially and margins across the board are improving. Looking back and trying to see how can we think about margin progression from this mid-single digits to that high single-digit, low double digits that we saw a couple of years ago? How contingent on that is really that Class 8 recovery that we're talking to versus maybe some other drivers that could see that those margins start getting back to that 10% range?

[David Shaffer, executive]

As we said, the Class 8 situation was really a slowdown overall, but what really caught maybe our customers off guard was their level of inventory. So we saw a very abrupt reduction in order activity as we saw. And I would say the inventory situation is improving. And again, similar to our comments earlier on Motive, I think in this post-election environment, we think the overall tonnage and at least our customers are telling us that they expect that things are going to improve as we get through the uncertainties around this period. And so the transportation elements are going to improve largely as that volume returns and also as the new lines come up, ramp up in Springfield Plant 1. I think those are going to be the major drivers as we've modeled into our own forecast for the Board. And then, of course, just as a reminder, the other piece to specialty beyond transportation is the aerospace and defense. And we just see continued buoyancy in terms of that piece of the business. The macros are all favorable. Bren-Tronics has gone extremely well to date. And so those are going to be the key drivers of that margin progression. Andy, any more detail?

[Andrea Funk, executive]

Sure. I'll add a little bit more to that, too, Greg. And I'll tell you, I'm sure you're disappointed, but we're even more disappointed on Mark especially who does just a great job running this business at the OE percent because we know just how much potential there is here. And we're very confident that we're going to be getting back at or near that double digit by the end of this year. And I'll give you a little bit of feedback. As Dave mentioned, remember that it's specialty is made up of both the aerospace and defense, which we have a very healthy order book and now adding Bren-Tronics which we only keep in mind this past quarter was only a partial impact. So we'll have, in addition to an accelerating business, full impact going forward as well as the transportation. And remember that transportation is made up of both OEM and the aftermarket. So as we mentioned, Afterbuy spot buys are growing. It's plus 31%. But on a smaller base, it has trouble offsetting that 37% decline that we had in the OEM business. Year-to-date, we built about $20 million of inventory to be able to accept that aftermarket business. As a reminder, we have 3 Missouri plants, Warrensburg, Springfield 1, which was Springfield 2, both the Springfield plants we bought from the North Star acquisition. Plant 2 performance has turned the corner and is performing well, but to really see that financial impact that both ES and Specialty are absorbing from that under-absorption, we need more loading. That loading, when it's back at normalized levels, is probably about $10 million or $0.20 per share of opportunity, and we've talked about some of the growth in ES as well as the more aftermarket and then eventually the Class 8 coming back. But these 2 new lines, just to give you some perspective, it cost about $25 million as part of the increase in our CapEx that we had this year. Most of that spending is behind us. These new lines will provide flexibility, incremental capacity and lower cost. So as Dave mentioned, we'll be able to produce 2x the volume with half the people. To give you some dimensions on that, that revenue is about an incremental $150 million of revenue capacity. And the less cost is about $30 million less cost of $0.60 a share. Now that probably will take us 2 to 3 years max, until those lines are installed until we get the OEE at the level that we need and then we fill that capacity, but significant opportunities for improvement that will fall through to both ES and transportation over time. And that, I think, is really consistent with the story Patrice shared at our Investor Day. Some of that capacity also is going to be used to meet the surge in data center demand that we talked about before. So the timing of that installation is very well aligned. Again, we said it should largely be complete by the end of this fiscal year, and that will be lined well with DC growth, comms coming up, the incremental aftermarket and then going into fiscal '26, the resumption of the Class 8 OEM demand. So it's not going to happen overnight, but we do expect ongoing incremental improvement in revenue, earnings and OE percent in Specialty as a result of this, and it's really a great business.

[Operator]

Our next question comes from Noah Kaye of Oppenheimer & Co.

[Noah Kaye, analyst]

Maybe just start with the Gigafactory. We had a little bit of political news in the last couple of days. At this point, I just want to understand because I think with the outlook for tariffs and the implications for developing a strong domestic manufacturing base, the Gigafactory probably makes more sense than ever before from a strategic standpoint. But on the funding side and the development, just help us understand a little bit finer point what the schedule should look like here. How could this transition administration impact both the finalization and the timing on funding of the contract?

[David Shaffer, executive]

We don't anticipate any change with regards to timing or likelihood of the DOE award. And then in terms of the schedule, Andy, do you've got the time line in front of you?

[Andrea Funk, executive]

Yes. Just to give you a little background on the schedule, Noah, as you know, we bought the Greenville land in Q1. That was about $10 million again included in our CapEx numbers. The DOE negotiations are expected to be complete before January '25. The team is doing an excellent job progressing there. This is largely administrative to say I don't want to give the impression that we're negotiating whether we get it. It's been approved. It's been authorized. It's just a question of some of the specific logistics behind it, some things like the environmental details for the land prep, making sure we've got everything in line with what their expectations are. So we don't see that being at risk. We've already rented local space, beginning to hire staff. We had our Board meeting in Greenville just last week, and everyone was thrilled with the economic development folks.

[David Shaffer, executive]

No, if you haven't been down there in a while, you need to. It's a dynamic city. I think the Board was very happy and impressed with Greenville.

[Andrea Funk, executive]

Yes. I want to move there. We expect to break ground in late calendar Q2 '25, probably begin construction in third quarter '25. We expect the building to be commissioned at the end of calendar '27. Obviously, there's still a lot being ongoing here and expect to start production Q2, Q3 of calendar '28. We're undergoing environmental site assessments. We're doing material testing. So a lot of activity there, and we couldn't be more excited and don't expect any changes on the progress. In fact, if anything, you mentioned a lot of the the priorities of the administration, I think, just underscore the importance and couldn't be thrilled that Dave started with this.

[David Shaffer, executive]

I think you've alluded to when you started, Noah, that there's probably very few things that are agreed upon in D.C. these days, but one of those seems to be the importance of a domestic supply chain, especially for defense-related products. So it's a huge priority for the current administration, and we anticipate that to continue as we transition.

[Noah Kaye, analyst]

Just a timing question as well. I guess as you go through and spend the CapEx on the plant, would the expectation be that the DOE, I guess, in local cost share funds get disbursed to you more or less concurrently? Do you net that out in terms of how you're reporting CapEx? Do you have to take the gross CapEx number and net that back? Just how will that all work in terms of both timing of funding and then the accounting?

[Andrea Funk, executive]

The fine touches are being made during the negotiation. As I'm sure you know, Noah, you've got such a long history with us. Mark has a long experience in doing projects like this, not this large, but with the government. And our expectation that we've modeled and that is consistent in the discussions we've been having with them is that it would likely be a reimbursement probably on about a one quarter delay. So we'd have outlay and then we get reimbursement in the second quarter when we'd be making additional investments going forward. And also what we've been able to confirm is the bulk of it would be booked as a reduction to the basis of the assets. So the capital spending would be net of that since a lot of it is based on, again, reimbursing of spending that has occurred. So that's our current understanding. Again, all of that is being finalized in the negotiation.

[Noah Kaye, analyst]

And I guess just last one since I walked past an ODYSSEY battery lying out on my street this morning. I guess I got to ask about Specialty. You provided a lot of color here on the organic trends. You also mentioned Ben-Tronics outperformance. It looks like on a partial quarter basis, about $16 million contribution to 2Q sales. You quarterized that and then annualize that, that's around $100 million, which you did last year. So just comment on any seasonality in that business and what you expect the business to do in sales this fiscal year.

[Andrea Funk, executive]

We haven't provided specifics on that. As you know, I think I mentioned one of my roles is to be conservative. So obviously, this is a new business. Their orders have been fantastic. We're very optimistic. But we're sticking with what we know already. So we're building into the forecast conservatively about the run rate of where they were when we bought them, but we do see there's upside potential from there. I don't know if that helps. Hopefully, that's close enough. Obviously, we'll be reporting Bren-Tronics revenue in our Q. So you'll get exposure to on an ongoing basis. But without a doubt, the team is phenomenal. Dave and I were there for their annual picknick. It was just a great culture, great environment. About half of the workers were wearing EnerSys T-shirts, which is really fun. The orders have been great. The synergies with EnerSys have been greater than we expected. We didn't bake much synergies into the plan at all. It's just been a great going well if I could I do more of these types of acquisitions all day, if I could. The team has been fantastic, and they've been beating both their financial results so far, and we have high expectations.

[Operator]

Our next question comes from Greg Waskowski of Webber Research & Advisory LLC.

[Gregory Wasikowski, analyst]

Just a follow-up to the UL certification process just for clarification. Is that a once-and-done kind of issue or does it vary by customer, geography or product, what have you?

[David Shaffer, executive]

It's a once-and-done kind of issue. So we have to get to the point where the contract manufacturer can mark the product with the UL cert. And part of our contractual requirements with our customers is to have that UL certification marked on the unit. So that's been just some of the steps we've been wrestling with on these initial units. But once we get this done, it's done for everything. And the systems that we've been quoting to other customers besides Landmark are the same unit essentially that we're selling to Landmark. And as Andy mentioned, there is excitement building because the same fee structures that are driving the payback for our customer in Canada demand charge mitigation and energy management, energy arbitrage, those same factors appeal to our distribution center customers in California and other parts. So there's a lot of momentum building in this new line of business.

[Operator]

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

[David Shaffer, executive]

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

[Operator]

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