EnerSys Q2 FY2027 earnings call

• Strategic Acquisition: Announced the proposed acquisition of Ultralife for approximately $320 million in enterprise value. The deal is expected to close in Q1 Calendar 2027 and will integrate into the Precision Power Solutions segment, targeting $15-20 million in annual cost synergies and EPS accretion within 18 months.
• New Product Milestones: DataSafe Noir lithium offering received its first customer order for backup power at major events. Next-generation lithium batteries for material handling generated first revenue, aiming for higher margins. Synova chargers and Fortix BESS are ramping up.
• Defense Expansion: Secured $15 million in funding for munitions battery capacity expansion and a $50 million multi-year order for Soldier Power Solutions in Europe. Construction of a new defense-focused lithium cell facility in South Carolina is planned for H1 FY2028 pending NEPA process completion.
• Operational Efficiency: Appointed Navi Grewal as Chief Digital, AI, and Information Officer to lead digital transformation and operational efficiency efforts. Continued focus on domestic manufacturing to leverage IRC 45X tax benefits and mitigate tariff risks.

NIS (New Energy Solutions): Revenue was $449 million, up 3% year-over-year, contributing to total net sales. Adjusted operating earnings increased 38% to $50 million, with an adjusted operating margin of 11.2%, a 290 basis point improvement driven by higher volumes and favorable product mix. IMS (Industrial Mobility Solutions): Revenue decreased 8% to $397 million due to lower volumes and unfavorable price mix from market softness in material handling. Adjusted operating earnings fell 13% to $38 million, resulting in an adjusted operating margin of 9.5%, down 60 basis points. PPS (Precision Power Solutions): Revenue grew 21% to $104 million, driven by strong volume growth in defense batteries. Adjusted operating earnings surged 43% to $23 million, achieving an adjusted operating margin of 21.9%, up 340 basispoints year-over-year.

• Third Quarter Net Sales: Expected range of $935 million to $975 million.
• Third Quarter Adjusted Diluted EPS: Projected between $3.05 and $3.15 per share.
• Margin Outlook: Anticipates margin pressure in IMS due to transportation outpacing material handling growth; tough comps in PPS and NIS from prior year highs; potential step-up in freight and commodity inflation.
• Capital Expenditures: Full-year CapEx expectation remains unchanged at approximately $70 million.
• Tax Rate: Full-year adjusted effective tax rate expected to be between 21.5% and 23.5% before 45X benefits.

• Material Handling Market Softness: Ongoing delays in recovery for the material handling sector are pressuring top-line growth more than expected, particularly impacting IMS volumes and price mix.
• Political and Regulatory Uncertainty: While current bipartisan support for domestic supply chains is viewed positively, changes in policy or regulatory approvals could impact operations, though management sees low risk to core strategies.
• Execution Risks: Integration challenges associated with the Ultralife acquisition and the timeline for the South Carolina facility construction dependent on NEPA process completion.

Q: Analyst asked for details on IMS price/mix dynamics and the basis for confidence in a material handling recovery in Q4.

A: Management explained that the negative mix was primarily due to a shift in sales volume toward flooded lead-acid batteries rather than TPPL, reflecting customer timing. Confidence in recovery stems from leading indicators like truck orders up 45% and OEM bookings showing similar strength. Management anticipates the lagging battery sales will follow these trends, supported by new high-margin Gen2 lithium and charger introductions driving future margin normalization to mid-to-high teens.