EnerSys Aktie

Hello, everyone. Thank you for joining us, and welcome to the Q1 Financial Year '27 EnerSys Earnings Conference Call. [Operator Instructions]

I will now hand the conference over to Lisa Hartman Langell, Vice President, Investor Relations and Corporate Communications. Lisa, please go ahead.

Good morning, everyone. 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 Andi 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 12, 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 '27, 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 Network & Infrastructure Solutions and Precision Power Solutions 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 Industrial Mobility Solutions 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 energized 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 3 large growth bets, battery energy storage systems for warehouses, lithium batteries and 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 Mobility Solutions, we are pleased to share our Fortix 172-kilowatthour 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. This synergistic relationship and deep existing installed base uniquely positions us to bring the 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 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 '27. 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.

And 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 on the following 2 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 the 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 United States 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 9 chemistries of lithium batteries currently manufactured in our 6 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% to 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 derisking 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 for the unique requirements of defense applications. This level of energy production reflects a high quantity of small format cells and precision requirements for these applications. The production of these cells require 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, and 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 3 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 '27 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. For IMS, our collective end markets are showing areas of resilience that support a measured look at growth. Versus prior year, Q1 '27 transportation orders nearly doubled, while material handling orders were down high single digits. We maintain a high degree of confidence that material handling demand will improve later this fiscal year and pent-up demand will drive IMS to full year growth versus prior year. We also expect to recognize the first revenue from our next-gen lithium offering in the second half of the year, bolstering our optimism.

In NIS, Communications delivered strong demand and record shipments again as DOCSIS 4.0 upgrades are driving additional power needs and network powering refreshes, a trend we anticipate continuing as these upgrades are essential to support growing data traffic and connectivity needs. We also received very strong data center orders in the quarter, up over 80% versus prior year with deliveries extending into the future, increasing our visibility in this project-based business and reinforcing the multiyear demand opportunities for our lead-based offerings.

As market discussions are increasingly focused on resilience, energy efficiency, deployment speed and life cycle support rather than lowest acquisition cost, our TPPL solutions are well positioned to continue to deliver on these demands and will only be supplemented by the addition of our new DataSafe Noir lithium offering as we expand our share of wallet with our existing customers in this high-growth space.

In PPS, our aerospace and defense bookings are not as meaningful given the project award basis of this business. Our 24% year-on-year revenue growth was driven by increases across our A&D products particularly our counter-drone powering liquid reserve batteries and missile defense powering thermal batteries. Demand for these offerings is projected to continue to accelerate at least through 2030, driven by stockpile depletions and the evolution of battery-dependent drones and counter-drones and modern-day warfare.

In conclusion, we delivered a strong start to the year. We remain focused on executing against the priorities we outlined at the Investor Day with speed and discipline. We are already seeing the benefits of our more focused organization through progress in key areas of growth, stronger cost control and improved cash discipline. I want to thank the entire EnerSys team for their dedication, innovation and unwavering commitment to delivering to our customers every day.

Now I'll turn it over to Andi to discuss our financial results and outlook in greater detail. Andi?

Thanks, Shawn. Please turn to Slide 11. Net sales came in at $936 million, up 5% from prior year, driven by a 3% benefit from price/mix, a 1% benefit from volumes and a 1% benefit from foreign currency translation.

During the quarter, we realized $31 million or $0.63 per share of tariff refunds related to previously paid IEEPA tariffs, creating a onetime positive impact on our results. As a reminder, tariff refunds were not included in our Q1 '27 guidance and are not included in the operational results presented for our lines of business. We achieved gross profit of $313 million, up $60 million or 24% versus prior year period. Our Q1 '27 gross margin of 33.5% was up 510 basis points.

Excluding the tariff refunds I just mentioned, gross profit increased 12%, and gross margin was up 180 basis points over Q1 '26. We also enjoyed [ $9 million ] of expanded 45X benefits in the quarter, largely driven by the closure of our Monterrey, Mexico plant and transfer of production to our Richmond, Kentucky facility. Excluding the tariff refunds that our 45X benefits, we delivered gross margin of 25.2%, up 110 basis points versus the prior year.

Beginning this quarter, we made the decision to exclude noncash stock-based compensation expense from our adjusted operating earnings, adjusted EBITDA and adjusted diluted EPS metrics in order to better reflect the underlying performance of the business and align more closely with our technology peers. Prior year periods have been recast to reflect this change in this presentation. So all metrics I will provide to you today reflect the results excluding stock comp expense in both periods for an apples-to-apples comparison. These adjustments were $7.6 million for Q1 '27 and $7.2 million for Q1 '26 and provided a lift to our adjusted EPS of $0.16 and $0.15 per share in Q1 '27 and Q1 '26, respectively.

Our adjusted operating earnings were up 47% versus the prior year with adjusted operating margin improvement of 550 basis points. After normalizing for the onetime impact of the tariff refund, adjusted operating earnings were up 22% with 45X and up 21%, excluding 45X, with margin improvement of 220 basis points and 140 basis points, respectively. Adjusted EBITDA was up 50% versus prior year with adjusted EBITDA margin up 630 basis points. After excluding the tariff refunds, adjusted EBITDA was up 27% with 45X and 26%, excluding 45X, with margin improvement of 300 basis points and 230 basis points, respectively.

Adjusted diluted EPS increased 65% over prior year. After excluding the tariff refunds, adjusted EPS was up 36% of 45X and 42% excluding 45X. Our Q1 '27 effective tax rate was 13.7% on an as-reported basis and 21.8% on an as-adjusted basis before the benefit of 45X compared to 21.4% in Q1 '26 and 20.4% in the prior quarter. We expect our full year tax rate on an as-adjusted basis before the benefit of 45X for fiscal year 2027 to be in the range of 21.5% to 23.5%.

In summary, our core results, excluding tariff refunds, normalizing for stock-based compensation accounting changes and both with and without 45X benefits broke Q1 records across net sales, gross profit, adjusted operating earnings, adjusted EBITDA and adjusted EPS, further demonstrating how the underlying earnings power of our business continues to improve.

Please turn to Slide 12. As previously mentioned, our 45X benefits in the quarter increased as we realized the benefit of proactively transitioning production from Mexico to our existing facilities in the U.S. We received a $115 million U.S. federal tax refund in the quarter, which further bolstered our strong cash flow.

In Q1 '27, we also recognized $31 million in tariff refunds, of which we received approximately $16 million in cash with the remaining cash receipts expected in upcoming quarters. Our estimated annual tariff exposure remains materially unchanged despite the continuously evolving tariff policy environment, and we remain confident in our ability to manage that exposure through the pricing, sourcing and operational actions that we've already implemented and continue to monitor and proactively mitigate. These actions and the work of our tariff task force position us well to manage changes in the trade environment.

Let me now provide details by segment. Please turn to Slide 13. In the first quarter, Network & Infrastructure Solutions revenue increased 9% from prior year to $428 million, driven by strong volume growth and favorable price/mix. Adjusted operating earnings of $45 million increased 50% (sic) [ 51% ] from prior year, reflecting the benefits of favorable price/mix, higher volumes and disciplined expense management. Adjusted operating margin of 10.5% increased 280 basis points versus prior year, primarily driven by continued high demand for power electronics, robust data center demand and both volume and margin expansion in our service offerings.

Industrial Mobility Solutions revenue decreased 3% from prior year to $407 million, with lower volumes from material handling market activity, partially offset by transportation volume recovery as well as favorable price/mix and FX. IMS adjusted operating earnings were $38 million, down 11% from prior year, resulting in adjusted operating margins of 9.3%, down 70 basis points versus the prior year. Price/mix and cost improvements were temporarily offset by loss leverage on our lower volumes. Longer term, electrification, automation and demand for maintenance-free batteries and chargers support the IMS growth opportunity. We remain confident that these important industrial end markets will see notable improvement in demand trends in the coming quarters, and our confidence is corroborated by customer conversations and industry data.

Precision Power Solutions revenue increased 24% from prior year to $101 million, primarily driven by strong volume growth and favorable price/mix. PPS adjusted operating earnings were $18 million, up 48% versus prior year, driven by favorable price/mix and higher volumes. Adjusted operating margin of 18.2% increased 280 (sic) [ 300 ] basis points year-over-year on ongoing A&D strength, particularly counter-drone and missile defense. We continue to have confidence in robust top line growth and incremental margin expansion within this important and strategic segment.

Please turn to Slide 14. This was just an outstanding cash flow quarter. Operating cash flow of $230 million, offset by CapEx of only $12 million resulted in free cash flow of $218 million in the quarter versus negative $32 million in prior year Q1. Cash flow was strengthened by the receipt of our U.S. federal tax refund of $115 million as well as increased earnings, elevating free cash flow conversion in the quarter to 187%. Even excluding the benefit of 45x earnings in cash, free cash flow conversion was still an impressive 140%, largely attributable to the enhanced focus on working capital optimization by our centers of excellence.

Primary operating capital decreased to $858 million versus $993 million in the prior year on both the benefits of our expanded receivables purchasing agreement, which we executed in the third quarter of last year as well as the team's continued focus on working capital improvements. Our working capital efficiency measured internally by POC as a percentage of annualized sales improved an exceptional 490 basis points versus prior year. This is yet another example of energizing action and the enhanced approach to cost and cash discipline across the organization as we execute on optimizing our core.

As of July 5, 2026, we had $531 million of cash and cash equivalents on hand. Net debt of $522 million represents a decrease of over $160 million since the end of fiscal '26. Our leverage ratio remains well below our target range at 0.8x EBITDA, providing us more than ample dry powder for capital allocation flexibility.

Please turn to Slide 15. We remain committed to a disciplined capital allocation strategy that balances organic and inorganic investment in the business with consistent returns to shareholders, including a competitive dividend that grows with earnings, excluding 45X benefits and share repurchases under expanded Board authorization. Capital expenditures were $12 million in the quarter versus $33 million in Q1 '26.

As Shawn shared earlier, we anticipate construction on the lithium plant to begin in the first half of fiscal year 2028. As such, our expectation for $70 million in CapEx for fiscal year 2027 remains unchanged. During the first quarter, we purchased 219,000 shares for $50 million at an average price of approximately $229 per share and have nearly $900 million remaining in our buyback authorization. Additionally, the Board has increased our quarterly dividend by 10% to $0.2875 per share for the second quarter of fiscal 2027.

Our buybacks, in addition to our consistent and growing dividend, underscore our long-standing commitment to returning value to our shareholders. We continue to evaluate accretive bolt-on acquisition opportunities that align with our disciplined strategic and financial criteria and that would strengthen our customer intimacy, enhance technical capabilities, expand our share of wallet and accelerate our strategy in areas where we have a right to win.

Please turn to Slide 16. Our second quarter outlook reflects continued strength across data centers, communications and aerospace and defense as well as the recovery in transportation that is underway. Note that our prior year revenue had an unusually high proportion of sales phased in the second quarter, impacting year-over-year comparisons. We expect stronger year-on-year revenue growth in the second half of the fiscal year, supported by the start of a recovery in material handling on top of robust momentum across our other key end markets. In line with our previous communications, as we progress through fiscal 2027, we expect to see our earnings growth to be primarily driven from margin expansion in the first half with the shift to higher top line growth towards the end of fiscal year '27.

For the second quarter of fiscal 2027, we expect net sales in the range of $955 million to $995 million, with adjusted diluted EPS of $3.15 to $3.25 per share, growing 21% versus prior year at the midpoint, which includes $42 million to $47 million of 45X benefits to cost of sales. Excluding 45X, we expect adjusted diluted EPS of $1.95 to $2.05 per share, up in the 25% range versus prior year. We remain confident in our ability to generate strong cash flow, invest in growth and return capital to our shareholders.

With this, let's open it up for questions. Operator?

[Operator Instructions] Your first question from the line of Noah Kaye with Oppenheimer.

Maybe I'll start with a 2-parter on the data center business. You mentioned orders are up 80% year-over-year this quarter. I know orders in this business can be lumpy. Maybe can you put some context around that trailing 12-month orders growth or backlog growth? That's the first part.

And then, Shawn, I thought you sounded pretty firm on the newly launched lithium-ion products contributing to revenues next year. Should we take that to mean you already have orders in hand or visibility to orders materializing short term?

Yes, I'll start, Noah, and then I'll turn it over to Andi for order backlog history. But we knew going in, as we've socialized previously, that we had an open -- a wide open door to step through for just introducing this technology relatively through our same customers and sales channels because these are high-trust environments. So we were sort of just playing catch-up to get the product ready, and we've been going through the validations and approvals as we socialized. But yes, I think our quote activity and our market activity is robust. And as a result, we've already got the first 100 systems on the water, priming the pump in the supply chain. So we've spent a lot of time while we were doing the approvals, getting the supply chain set up, getting the service technicians trained, getting the sales channel ready. So we are fairly confident that the timeline we socialized is going to materialize in that way for us.

And I'll take the question on the data center orders. No, it's a good one. Obviously, we were really pleased, strong increase, 80% year-on-year. That said, a lot of these -- we continue to say that we expect our lead acid revenue on data centers to be up in the high single to low teens growth. A lot of these orders extend out 12 to 36 months. The real positive to me with that, Noah, is that lead has a long tail. It's got staying power. Our TPPL data center revenue will continue for some time. We've got a lot of visibility into it. We've made a lot of progress with our Noir. We have 100 orders or so in place with our supplier. We've had over 110,000 campaign impressions. We have over 500 units in active quotation.

So there's a lot of excitement and enthusiasm. We don't think that's going to be anything until fiscal '28 story from a revenue standpoint. But the lead will continue. We're getting visibility into a long-time demand signals and then the Noir lithium will be incremental on top of that. I hope that helps. It does.

It does. And then on the lithium plant, you shared that assumption of mid-20s ARR (sic) [ IRR ] for the plant economics. Possible to understand, at least at a high level, the assumptions driving that target IRR. And then how should we be modeling net CapEx related to the plant for fiscal '28 because that will certainly drive CapEx increase versus '27.

Yes. I think part of the challenge to think about with this now, we didn't get payback on it yet. There's some requirements that we have in the fact that we're getting the DOE grants, which we're very pleased with the trust that the Department of Energy and Department of [ Work ] placed with us. And your customers investing that amount of money for you to build capacity for them. It's very encouraging. But that said, there's some upfront requirements on things like environmental and that will pace the timing of when we're able to get started. We're saying that we think it's going to be mid next year that the CapEx starts -- the actual construction starts. And there is reimbursement that comes. It looks like it's going to be coming on a 1 quarter lag. Again, some of that is a little bit outside of our control.

That said, we have no doubt we're going to be able to handle the CapEx requirements of the plant with our ongoing cash flow. It's not going to have any impact on leverage other than leverage wouldn't continue to go down because of the plant. So we don't have more information at this time, but I hope that helps to explain some of the timing.

It does. And then just look at the first part of that, any color on the IRR rather, just because that would assume, I think, a nice amount of growth really coming from that plant and its ability to support the growth that you've talked about in PPS?

Yes. I mean there is a real value for FEOC compliant cells in the A&D space. This is of critical importance for national security. So I think there's a couple of things that says, we've got a long history of receiving grants from the A&D and receiving grants from the government for our A&D business. We've worked very closely with them. I think we mentioned we've got 6 plants in the U.S. currently manufacturing A&D plants, much of the growth of which has been funded through investments. And this will allow us to have very valuable products that have this FEOC compliance. So I think there is a pricing that comes along with that.

And this also allows us to continue to grow with and expand into new areas in A&D that were not as active like the large diameter drone batteries continuing with our drone counters. So there's both incremental revenue and margin expansion associated with this plan. And we've not built into the modeling, but we've received a lot of interest in expanding this even further and in discussions on that going forward. That would just further increase the return on this plan.

Your next question comes from the line of Trevor Sahr with William Blair.

This is Trevor on for Brian here. I was hoping to get a little bit more detail if we can, on implied margin expansion sequentially in the second quarter. It looks like the revenue growth at the midpoint, again, sequentially is about 2.5%, but EPS growth at the midpoint is about 12% sequentially. Can you just kind of shed some light on how we should think about margin and expansion into the second quarter?

Yes, I'll be happy to take that one as well, Trevor. As we talked about both on our last call as well as on Investor Day, we see that early in this fiscal year, a lot of our earnings growth is going to be driven more by margin expansion. And then as we get towards the end of this fiscal year, you'll start to see some of our growth kick in. It's going to begin with recovery in material handling. The transportation recovery is already beginning to be overweigh or a lot of our other markets continue to have growth like A&D and data centers. But the new product introductions aren't going to start to kick in mostly till fiscal '28.

And as you look through the balance of this fiscal year, you're going to see a lot of the items we talked about like the annualization of the adjustments we made with our RIF last year. You see the beginning of our 45x benefits from closing our plant in Monterrey. We might see a little bit of some of the benefits from closing our Tijuana plant. We also had announced 2 other facility rationalizations this quarter with our Bellingham facility, our Brazil closure. So those items and then just this company is being managed differently, a lot more cost discipline and strong operational initiatives as part of our energized strategy.

So you'll continue to see that growth as well as mix improvements. So we're going to be launching our Gen 2 lithium in our material handling business, which I'm very excited about. You see within our NIS business, an increase in the power electronics. Keith with Dan leading it, is doing a tremendous job with our service business that had been headwinds in the past. Now it's starting to turn into tailwinds. And it's also a real critical component to a lot of our strategy on what makes EnerSys unique, things like data center. It is our service network, our ability with [ BAS, ] having that service teams out there.

So that growth in both top line and margin of service is not just something that is impacting our current results, which we're excited about, but it's going to be an enabler of a lot of the growth initiatives that Shawn has kicked out. So I hope that helps to explain some of the things we're seeing. If you need more color or any more questions, happy to take those as well.

Trevor, it's Shawn. I would just add one thing. Andi explained it very well. On the 2% top line growth, we always have some summer seasonality during this period in spite of the material handling pressure that we've seen over the last couple of cycles. So that's fairly typical for us in a normal year.

Makes sense. That's helpful. If I could ask one more actually, just on that service business. Could you give us a little more detail on the size, growth and margin contribution in that? And maybe what you've done and the work you've done in the background to turn that from what you just said Andi into a headwind into a big contributor?

Yes. Trevor, I'll start, and then I'll turn it over to Andi. So I'll start on what we've done and the importance of the business. If you look at our strategic framework that we talked about at Investor Day, the 2 things we're trying to solve for customers are energy security and labor scarcity. And it's along that adage of we're going to run out of electricians before electrons. So we've been building the plumbing over the past year of putting in very disciplined project management and upskilling our labor force. So if you look at what we do, you can kind of -- we call it service, which kind of invokes ideas of attach rates and repetitive aftermarket and that kind of thing. There's a big component of our business that is actually on the implementation side, electrical, very specialized electrical construction.

And as you might imagine, you can get that very right or very wrong in the details. So what they've done, and Keith and Andi mentioned Dan Cohee in that business, is put all of that plumbing in place that high level of discipline. We've invested in new project management software, and the teams are just doing a remarkable job upskilling that entire segment for us. With that, I'll turn it over to Andi for some of the numbers.

Yes. When I look, Trevor, at services, what we're referring to primarily here is our Network Information Systems services. You can see our total services revenue and margin in our Q, and you can see the improvement there. But really, the turnaround that we're looking at is in the NIS business where we had some headwinds and it's such a key aspect to the growth and the value proposition that we have to customers and is a differentiating factor. If you look in our Network Information Systems, and I'll always give specifics down to this level, but you're talking revenue up around 20% in the quarter year-on-year. So really nice improvement in revenue as well as total EnerSys margins in -- with our services area being up about 100 bps. I would say, even more in the NIS division.

And a lot of that is just, again, really disciplined management. Keith is an extraordinary operator, and he's putting that kind of discipline into the NIS business under Shawn's leadership. We're managing it tighter and making sure that we're ready for a lot of the opportunities in our headlights, things like that NIS services department division helping our BAS installation. So it's an exciting and very strategic area for us going forward.

[Operator Instructions] Your next question comes from the line of Jeff Osborne with TD Cowen.

Just a couple of quick ones on my side. Maybe just starting with Motive Power. It's been weak for a while. I know you've seen cycles in the past. How do you ascertain sort of where we are in the cycle? You felt comfortable that things were rebounding. Are you looking at substitution effects? We're just getting a lot more questions from investors on sort of the sustained weakness in that core segment.

Yes, Jeff, I'll start. We have a lot of leading indicators that we look at. We get the truck order data from the forklift market, both internationally and domestically in the Americas market. We have that. Then we have -- we typically lag our forklift customers between half a quarter to a quarter when they start seeing the truck orders and when we see the battery orders. And so we look at that. We, of course, have conversations with those same customers. Most of them don't split out and report publicly the individual results of the forklift division. So if you're looking at one of the larger OEMs that are embedded in a bigger company, they don't give you that color. But we do have some public ones like HY that just released their results.

And you can see that they -- in spite of being down, I think, 16% year-on-year, they had a 2% increase, but their truck orders are way up, and they're seeing those green shoots now. And we're -- that's kind of consistent with what we're hearing across the board in the industry. And obviously, between the 3 classes of forklifts, people are positioned differently depending upon the OEM they are. So the markets haven't been totally even. But we look to those things and all of those indications for us and those customer conversations are positive.

And so we -- it gives us a high degree of confidence. We always -- also, we have data going back to the '90s, very solid data about what happens after an economic recession period, material handling. There's only been 3 of them. And this one is a little goofy because of coming out of COVID, supply chain shocks and buildups and normalizing. But typically, those recoveries for us, when we see these indicators, they are -- they follow fairly quickly. So that's giving us some confidence there.

Yes. I'll give a little bit of more data behind that as well. And Shawn mentioned the Hyster-Yale report. They also did note that first half calendar year '26 would mark the financial low point for them. They had the strongest booking quarter in 3 years this last quarter. So all really good signals. Our customers also continue to give us great signals. That said it's choppy. Industry data showed positive order trends for our Q4 '26 and then dropped to negative 8% with shipments this past quarter.

So there's a lot of volatility. If you recall in the last quarter, we had called out that we thought Q1 could look very similar to Q4, which is unusual. And of course, that didn't materialize. We -- so the lag is frustrating for us. We do build a risk factor into our guidance because we knew that market recovery is outside of our control. We track our performance versus market. We are in line with market. But I think it's a positive sign that we have this record quarter despite that continuing to feel the pressure. We are seeing signals that it's coming back. When it's going to come back, that's the question, whether it's going to be our Q2 or we're thinking it's more a Q3 story.

Another aspect to it, which I think is an exciting element to this as well, we have some great new products on the horizon, both with chargers and Gen 2 lithium. So as we are depleting our stock of our old offerings and our customers are waiting for those products to come out, which will be a second half story. That might be impacting a little bit for us as well. Nice thing is our Gen 2 lithium, which is an LFP solution versus the NMC we had in our previous version has a much more attractive price point for our customers, which we feel will allow us to get -- pick up a lot more volume there and is at significantly higher margins.

So I think there's a lot of good news in front of us. I'd be lying if I didn't say we weren't a little frustrated that it's taken as long as it has. But overall, I'm not concerned at all the outlook here. Our products are necessary to move goods around the world, and it can't stay down longer.

Perfect. Just one -- I appreciate the detail there, Andi. One follow-up on Motive and then I have one on data center. On the material handling side, are you seeing since you brought up lithium, any acceleration in the shift from lead to lithium?

I would tell you that we're seeing the same conversion rate we've seen. And I would just reiterate that this is pent-up demand on the forklift side. They can't -- these are typically leases, they can extend the lease. But what it starts to happen is you start to see a lot of breakdown of maintenance items. So it can't go on forever. But our typical maintenance-free conversion, which fortunately for us, we're uniquely positioned. We have our TPPL offering and lithium offering. That's been fairly steady for us. So there's no big movements there. We're just seeing really market effects at the moment.

One other thing worth mentioning, too, Shawn, I know we've talked about this. We believe there's a correlation, which is why we did the re-segmentation between the transportation and the forklifts. These are large capital purchases. They both experienced this downturn coming out of a lot of the macro volatility. And transportation is starting to come back really strong. We were 20% revenue growth in the quarter. Orders that we had year-on-year in transportation were up 91%. Now of course, it's off a low point with orders as it was declining last year. And there's great momentum there. So that's just another signal that gives us confidence that the capital markets for forklift trucks are going to start to turn as well.

Good stuff. And just very quickly, on the data center side, a lot has been answered there, but just 2 clarifications. One, are we still shooting for UL certification either late this year or early next calendar year? Is part one of the question. And then part two, now that you've socialized with customers, you have the units coming in for training and whatnot and testing, do you have any further comments that you can share about expectations for margins, just given you have a third-party manufacturing it for you folks?

Yes. I would tell you that we are right on track with our plans for UL and our validations. We feel very good about that. And we -- if you look at how our product delivery has been going, and it's a close parallel with the -- how quickly we were able to get UL and NFPA certification on our BESS system, which is a more complex system. It just speaks to how we're operating differently. So we have a high degree of confidence in our UL journey on the data center and war side. And on the second part of the question?

Yes, on the margins. So go ahead, Shawn.

Yes. We expect margins in line with our -- sort of our TPPL and higher-margin offerings than lead. And early indications from customers, we think we're going to have a high degree of confidence achieving that. The other issue and the other real benefit that we have is not comparing lithium to lead, but lithium to lithium, we're releasing a system that can do in 2 cabinets, what the competitor's lithium battery now does in 5. So we have a real value conversion opportunity from that 5 to 2 that is a big differentiator in the market and as well as saving a premium on that data center space.

Not to mention our service network, can turn it back around.

Your next question comes from the line of Greg Lewis with BTIG.

Shawn, I was hoping you could talk a little bit more about the A&D opportunity. You mentioned the factory, the facility being built and just the relationship EnerSys has with the U.S. government. I'm kind of curious how also just given a lot of headlines about drone is accelerating drone warfare, drone -- anti-drones. Beyond the U.S. and realizing that's a big opportunity, how should we be thinking about that over the next couple of years, even maybe as we think about NATO and the broader opportunity?

Yes. So Greg, thanks for joining us. Look, it's -- we have an extraordinary opportunity in front of us. And if I had one big takeaway from Investor Day, I got a lot of comments that we haven't talked enough about our position there. But our position with the defense apparatus is strong. And one of the reasons is if you look at what we've done with TPPL that powers nuclear submarines and how we've taken the developments out of one technology and expanded that into a commercial basis. So we don't tend to rely totally on the government apparatus, and we've been successful in doing that across end markets, including leveraging defense markets to sell back into commercial areas.

So they like that. They like our stability. They like our balance sheet. We have a lot of permanence that they can rely on and trust. And then because of the fact that we've stayed very active in places like liquid reserve and thermal batteries, I mean that's a very narrow field, and it really well positions us. The Bren-Tronics acquisition added to that and of course, what we're doing in our space business. So if you look across what's happening in the world with the drone powering ecosystem, the Ukraine conflict showed everybody that the future of the battlefield is going to be much different. You had a very small army hold off a 3 million person army because of these cheap drones in the supply chain. And so that has woken up all of the governments around the world.

And I think that extends into the second part of your question. Some of our most compelling growth in A&D this year has come from our European business. And we've had segments of our allied countries in Europe, NATO allies outpace for the first time in our evolution, our Americas business. And it just speaks to our reach and what we're able to do. So we're actually expanding capabilities in places like Northern France in our Arras facility to support what Bren-Tronics is doing there, for example, with the French government and the French Ministry of Defense. So we see a lot of runway internationally with not just the U.S. but with allied countries as well.

Yes. Just to give some data behind Shawn's answer, our growth rate in Europe in '26 versus '25 was 2x. It's probably going to be pretty close, it's off a smaller base. We mentioned our 6 plants in the U.S. in our prepared remarks. But as Shawn mentioned, we also produce A&D batteries for our allied nations in both the U.K. and in France as well. And there's opportunities around the world.

Okay. Great. And then realizing -- I guess I want to have a question around data center, but I guess a little different. As the architecture evolves, I guess they've started rolling out or converting some data centers to [ 800 volt. ] And if that changes, I guess, the legacy way a UPS system was kind of -- I guess, it was big and now they're going to be, I guess, more smaller focused on rack. How does that change or I should say, does that change the revenue opportunity however you guys spend per megawatt or per location? Is that an opportunity to actually drive more revenue out of a data center as this switch happens for kind of the same product?

Unequivocally. Just one point of clarification. We are seeing a lot of movement towards very large systems, centralized systems. And it's just without getting too technical on this call, maybe we do a tech talk later or something, but it depends on what type of data center it is, whether it's large language training model, whether it's inference, whether it's storage. So it depends on what they're trying to achieve will influence the architecture. As I said before, 800 volts, we love that because for us, it doesn't change much. It may give us the opportunity in a centralized system to just sell more cells as we put more cells in parallel. We have a long history in managing these voltage ranges. And so we're quite used to that.

And then to your point about distributed rack systems and what we think of -- we use the term BBU business. We've historically not played there because of -- it's typically been these packs that involve small cells that are put into those packs in our rack system. We see that there could be some potential future opportunity for us out of the Greenville plant when we're manufacturing our own cells to have a compelling offering in the BBU space, which gets back to our -- my answer to your last question about the Defense Department loves us because we tend to commercialize what we develop -- co-develop or develop with them or for them. And we see data centers as a big opportunity for offtake in Greenville downstream.

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

Thank you, Ben, and thank you all for joining us today. We look forward to speaking with you again soon, and want you to have a great day.

This concludes today's call. Thank you for attending. You may now disconnect.

Good morning, everyone, and welcome to EnerSys 2026 Investor Day. We appreciate you taking the time to be here with us today, whether you're here in person or joining us virtually. I'm Charlotte Murnan, Senior Analyst of Investor Relations, and I'm pleased to welcome you to today's event. We're excited to spend the morning with you and provide a more detailed view into our company, our strategic priorities and the opportunities ahead of us.

Before I get to the agenda, I want to remind everybody that we'll be making some forward-looking statements. There are risks and uncertainties related to these statements. Please refer to the details in our safe harbor slide as well as our 10-K, which has a full list of those risks and uncertainties.

With that covered, let's go to the agenda. We have a full event planned this morning. We're going to begin with Shawn O'Connell, our President and Chief Executive Officer, who will discuss our focused strategy and how EnerSys is positioned to win as leaders in the diverse and growing end markets that we serve. Following Shawn, Mark Matthews, our Chief Technology Officer and President of our Precision Power Solutions, will dive deep into our customer-centric approach to innovation and new product development. From there, Keith Fisher will discuss Network & Infrastructure Solutions, followed by Chad Uplinger, who will discuss Industrial Mobility Solutions.

At the conclusion of Chad's presentation, we'll take a short break and then return for John Benetti to cover Precision Power Solutions. Andi Funk, our Chief Financial Officer, will then tie everything together and discuss how we are driving financial focus and discipline to deliver our long-term value creation framework and shareholder returns. Shawn will share some closing remarks, and we'll jump into 45 minutes of Q&A. For those in person today, we'll conclude with a lunch and a product showcase, which will give you the opportunity to see the elements of our unique customer-centric solutions.

Before I turn it over to Shawn, we want to share a quick video with you that will preview the exciting things you're set to hear about today.

[Presentation]

Thank you, Charlotte. Good morning. For those that don't know me or I have not met, I'm Shawn O'Connell, President and CEO of EnerSys. I'm happy to say I see a lot of faces in the audience I do recognize. And certainly, thank you to those joining us virtually today. I've been around the industry about 30 years. I've been in the EnerSys universe since 2003. I actually started as an outside representative of the company, at a power integration business on the West Coast, largely doing what you're going to hear in Keith Fisher's business today, power integration.

So I actually got to see this great company from the outside in as a customer, if you will. And then I joined in 2011 as an employee. And since that time, I've held leadership positions throughout our business, I've been privileged to work in every area of our company. And so I have a deep fundamental understanding of what we do and our customers. Today for us is about one thing. It's describing to you and explaining to you how EnerSys is positioned to win in a changing energy landscape. For our part, we've sharpened our strategy. We've aligned an amazing leadership team. You're going to hear from some of them today, and we are together focused on what we need to do to drive profitable growth. And what we plan to do today is walk you through how we're going to leverage all of our strengths to deliver to you long-term shareholder value.

As we go through the morning, I want you to contemplate 4 key points. We're going to start this way and end this way when you think of our value proposition. First and probably the most common question I've gotten in my -- I've now just finished my first full year tenure as CEO of the business. And the most common question I get is Shawn, what's going to be different? And I'll tell you, and I want to be very clear here, it's focus. It's focus on our core markets, focus where we have meaningful share, where we have a lot of mass customer understanding and a clear right to win.

Secondarily, our customers are all grappling with two main themes at the moment: energy security and labor scarcity. Let me bifurcate for you in your minds so you understand it, this energy security issue. For most of our careers in the Western world, power was just something you could depend on. Now that's not true. There's an aging grid infrastructure. It's not ready for the loads that are hitting it now or tomorrow. So just the access to reliable power for operational continuity is no longer assured and the cost of what you and all of our customers are going to pay for energy can only go up as that infrastructure gets invested in. EnerSys can solve these two main challenges, not for the whole market, for our space, that specialized space.

The third thing I want you to take away from today is EnerSys really stands alone when you finally -- when we walk you through what our markets are and how they are differentiated in that space, we stand alone being able to provide these end-to-end solutions from products, software and services, to walk this journey with our customers and deliver value in these very attractive but very specialized growth markets.

And then the final thing you should take away from today, and I hope it comes through in the presentations is that this team that we have here today, it's not a collection of individuals working together. It's a team. It's working together. It's hitting its stride. And it's actually totally aligned on our energized strategic framework and how we're going to continue to transform our company and deliver value and growth.

I'm going to talk a lot about where we're headed today, but let me just tell you where we're at. EnerSys today is about $3.8 billion top line revenue company. We have excellent earnings generation, excellent cash generation, well above the average. We serve over 10,000 customers around the world through 3 primary segments: Network & Infrastructure Solutions, Industrial Mobility Solutions and Precision Power Solutions, and I'll describe these to you in a moment in more detail. But these are different businesses. These are different lanes for us. But from a technology stack perspective, we can very elegantly deploy our technology stack across them. And when we do, we get a great deal of resilience to that diversity because these markets tend to operate in slightly different cycles. And then on top of that, we get multiple growth levers.

So I told you I'm going to describe the segments. And if you've been in the stock, I'll tell you what it was before the current name. But only last month, we announced resegmentation and renaming our businesses. And what this is about is that word I started with, focus. We want to deliver absolute clarity to our own teams, to our customers, to our suppliers and to you, what the mission of these businesses are and where we're going to spend our time, money and energy.

So Network & Infrastructure Solutions is the business that is -- used to be known as Energy Systems, that's providing critical power systems into communications networks, data centers and powering industrial utilities. Our next segment is now Industrial Mobility Solutions. It would have -- it now has in it what would have been Motive Power and the Transportation portion that was in our Specialty business. So they are now combined, and this is powering warehousing and logistics and over-the-road Class 8 trucking for the material handling network. If you think about it, it makes perfect sense. Some of our largest forklift fleet customers operate some of the largest Class 8 truck customers. So now we're getting all that customer synergy and benefit, and being able to put that mass together in those accounts.

Finally, Precision Power Solutions. This is the aerospace and defense component of what was in the Specialty business, along with some of the other critical applications that they do. And the name is exactly -- is a perfect fit for what these guys do. They offer the most demanding or support the most demanding critical power applications on and off planet earth. Mark and John will tell you later, we were on the Artemis program that everybody just watched on TV. We were powering several platforms on that program and programs like that. So Precision Power Solutions. Again, our technology stack can be very easily and elegantly deployed for us across these 3 segments to offer that great resilience and great growth lever.

We are not trying to be all things to all people. We purport to solve those two major challenges I told you about, energy security and labor scarcity, this aging grid that isn't ready for what's happening and being accelerated by AI. And I don't want you to just think about AI in terms of, well, it's just giving the data centers a lot of power consumption. Those big large training model data centers, they consume massive amounts of power, and they have a dirty little secret. They can go from 100% load to no load in milliseconds. When you're managing a power grid, having too much capacity is just as bad as not enough capacity from a stability standpoint. And the grid operator only has one choice, just turn it off, right, close breakers.

So this is a big problem for our customers. The grid is becoming unstable. And a time when they most need labor to solve it, they can't get it, certainly not qualified labor. So EnerSys is going to stay in our lane, not solve these problems for the market at large, but in these specialized high-growth markets that we serve and where we have a right to win, we'll deploy our technology stack to solve these issues.

I've been talking about our technology stack. Let me just go into it in a little bit of detail here, so you understand what we're talking about. EnerSys, there's really 4 elements: battery energy storage, power electronics, software and services. At our core, we have always been a battery energy storage company. I've hand signed drawings from Thomas Edison in my office in Reading, because we trace our evolution all the way back to Edison. But we are a chemistry-agnostic battery company at our core.

It might surprise you to know, I often get asked, how is EnerSys going to handle the lithium transition? We make 9 chemistries of lithium batteries at EnerSys today. In fact, we have for decades. We're going to talk about some of the things we're powering with the most demanding lithium battery applications on the planet that we already make. We have a full suite of lead-acid technology solutions. We have our advanced Thin Plate Pure Lead technology that's growing at a double-digit CAGR in many of our markets. But the point is this, there's no one battery that just fits every application, right? No one battery does that. But there's a good battery depending upon the application, and that's how we deploy the technology.

Power electronics, what do they do? Their job is to keep that battery that we selected in a healthy state of charge and ready to do its job and disperse power to the end application. The software that we deploy manages those power systems to the extent that they can without human intervention to help with that labor issue. They also aggregate power across multiple systems. Why? Because it gives our users optionality in additional revenue streams, additional power or energy arbitrage, additional cost offsets with their utility.

And then when human intervention is necessary, we have a team of highly trained associates around the world that are EnerSys employees that can do everything from the design phase, installation, implementation, system maintenance and certainly end-of-life services to wrap the customer in that entire experience. I mentioned at the beginning, a big differentiator for us. In our space, we really stand alone in being able to offer all of these organically at EnerSys.

This is a very important slide. If you remember one today, remember this one. Now that I've showed you our technology stack, I need to go a little bit deeper on our differentiation. EnerSys and Mark Matthews, our CTO, will talk about today how we make a decision whether we would make a cell or buy a cell because there's a different value proposition based on the market and who we're selling to.

But most of our value add after that begins after the cell. And the reason I tell you this, I've been at investor conferences and somebody says, boy, I open the Wall Street Journal and the relative cost of an automotive battery pack is so low. How is EnerSys ever going to compete? You got big companies in Asia doing 40-gigawatt hour. We don't really care. All things being equal in the open market, everybody is going to buy the cell at that price. And those aren't the cells where we're adding value anyway. Everything we do starts after that. For example, there's not a pack we deploy today in the world that looks anything like an automotive battery pack. So our value add begins immediately as we put batteries into a form factor that works for the application.

We then have to take that battery, whichever one we selected and make sure that there's a battery management system that manages that one. Again, a level of customization and a level of departure from that EV battery pack. We then have to figure out what power electronics are going to go with it, how that battery communicates with the end application. And believe me, it's different in every one of our markets. And then we put all of that into an end packaging. Maybe in telecommunications, it's the enclosure that you see at the bottom of a macro site.

When we do that, they all have their own safety requirements, whether it's UL or CE, they all have their own regulatory requirements, IEEE requirements, telecommunications standards. So it's a lot of work, and a lot of knowledge and a lot of EnerSys history is tied up in making sure we know how to do that for the customer and in the end, those deployment and services piece. And when we do this, we are no longer a vendor or supplier for our users. We've actually been in co-development with them. At this point, we're actually just more like a member of their operational team solving these issues. Big differentiator for here for us. And so I really need to make sure this is clear in your mind when you leave here today.

This gets us into our sustainable competitive advantages. These are very high-trust environments. I'll pick on data center for a second. You might think with all trillions of dollars of investment, there's a lot of people managing the environmentals inside data centers. In fact, it might surprise you to know this is a very small cadre of people that actually manage data center environmentals, very small. Very small.

I'd say battery is a small incestuous industry. They're even smaller than us. There's not a lot of people doing this. They can't make a bad bet on a supplier. There's too much at stake. They have the investment. They have the revenue goals. So a shiny new widget to them with somebody that they don't know can walk the walk and be there for them when there's an issue, doesn't mean a lot. EnerSys has these deep relationships and a seat at the table in these accounts.

Then we have our domain expertise, which has been informed over decades of engineering investment, co-development with our customers, service experience and the customer locations. We've walked the walk with them. So we understand exactly how they function, what the challenge is now and what they're trying to achieve. Then we have our modular technology stack. I talked about this being a huge differentiator that we can deploy.

And Mark likes to say all of our customer issues are the same problem, disguised in slightly different packaging. And for us, that's true. For us, it doesn't matter if you go up to an 800-volt data center battery down to a 24-volt telecommunications battery. It's power electronics, it's a voltage, it's a battery component. For us, it looks very similar. But we can very elegantly better than most deploy our technology stack at scale across these end markets. And of course, those end markets to reiterate, give us a great deal of resilience. We couple that with a phenomenal balance sheet. We're in a great position, phenomenal cash generation, so we can continue to invest in those markets for our customers.

Finally, as a going concern, we have a large operational footprint. And that operational footprint is going to provide additional -- you've seen some of them this year. It's going to provide additional opportunities for us to squeeze value out of that apparatus and deliver that long-term growth and value. One last thing on this slide that I thought was kind of interesting. I had our team put it on here. Battery energy storage, late markets to battery energy storage. There are some players out there now. It seems that their battle cry is how many gigawatts of power are under management for them. I guess it's a way to tell the Street that they're being successful.

And there's one now that's very popular. It gets a lot of press. I'm not going to name them. And I think they have 22 gigawatts of power under management. And I thought, well, let's do our math. So I said, okay, let's just take a look at our annual production. Let's take a look at the average life of our systems deployed in the field. And we did that math, and very conservatively, we're probably powering about 85 gigawatts of power every day in the world and some of the most demanding critical applications out there. I'm not sure how many people could say that.

In any event, our markets -- and for as much as I told you in the beginning, we have a compelling market share. We have leading market share. We're focused on places that we lead. But even at $3.8 billion, you can see with our service addressable market that we have a lot of runway to produce value and a lot of room to grow. And we are exposed to two of the main megatrends of our time. This issue of energy security is affecting all of our customers. We happen to be one of the largest battery suppliers to data center in the world today, but it isn't just the data centers, it's everybody else that needs help with energy security.

At the same time, we're the #1 supplier to the U.S. Department of War for battery and many of our NATO allies. And what are they doing? The U.S. is going for $1.5 trillion budget with battlefield electrification at the top of their list. NATO allies are having their budgets increase. So we're right in the middle of one of the most compelling conversations that have ever existed in this space.

I want to double-click just very quickly on this growing energy demand issue. I was talking to a gentleman in the room earlier. I happened to live in North Texas during the pandemic in Dallas. And at that time, the grid regulator of Dallas or the grid operator of Texas, ERCOT, had a situation where they had exceeded their safety margin and the demand on the grid exceeded their capacity to deploy power. And it was weird to watch whole sections of Dallas, Texas go offline and go dark.

The reality was there were ample generation resources in the Gulf of Mexico with renewables. The problem was they didn't have the transmission lines to get the power from where it was generated to where it was needed. And this is sort of illustrative of what's going to happen to the power grid. There's now a multiyear, multibillion-dollar project to get that extra distribution in those transmission lines. It's going to take time. It's going to take money. There's going to be right-of-way lawsuits, all that kind of stuff before they can get that fully implemented.

This is what's going to happen to the entire grid, and it's only going to get worse and that intermittency issue of those AI data centers destabilizing the grid. And the only thing that can ameliorate these problems, the only thing that can ameliorate these problems in the near term and even the midterm are going to be battery energy storage systems. EnerSys isn't going to solve that for the whole grid. We're just going to solve it for our customers that want us to do this.

The defense investment, a little bit different story. And this is a very important point here. The Ukraine conflict showed the entire world that the future of the battlefield is electrified. The future of the battlefield is drones, it's autonomous, and there's no way to do that without a battery. Here's the sticky wicket. Most battery constituent battery elements and cells either originate in or in controlled by China. If you're the U.S. Department of War and your method of mounting and defense in the future is controlled -- battery is controlled by your #1 peer threat in the world, you have a major problem. And that's exactly their energy security issue. It's exactly the conversation that EnerSys is right in the middle of and being asked to help solve.

Okay. I've been talking about what we're going to do. I'm going to still talk about what we're going to do in a minute. Let me tell you about how we're doing it. We announced last year our EnerGize strategic framework. Very simply, once again, this is about focus. This is about being very clear to ourselves, our customers, our suppliers, our shareholders, what our focus is and what we're going to do. So optimizing our core wasn't just about the $80 million in cost saves we took. It was about cutting away anything that wasn't adding value and that was distracting us from our core mission. And the team has done a very nice job doing that.

The next thing was reorganizing our business in a way and putting in the metrics, the operational metrics and rigor that enabled us to move faster and know with data on those metrics, whether we were being successful or not. And all of that was to enable us to move quicker, accelerate our growth with new product introduction and strategic M&A. For those of you in the room, when you go out into the foyer and when you spend time with our people, I want you to know there are products out there that were not conceived of a year ago, not just that we hadn't developed them yet. They weren't even conceived of their products out there on the floor. They're not plastic mockups. And every product you see out there is already in customer trials already. So we went from nothing to customer trials in a year. It has never happened in my time with EnerSys since 2003. I have never seen it in my industry and talking to some of my colleagues, that's fast for any industry. And that's exactly what's coming from the alignment and clarity that we're developing here at EnerSys.

It was all enabled by our Centers of Excellence model sort of underpinned all of this. I'll just touch on this very briefly so you understand what this means. We have 3 Centers of Excellence. But if you think about from a supply chain, procurement, engineering perspective, just intellectually, even though you don't come from the business or may not come from the business, those lifts or those activities involved with lead-acid, lead and separator paper and the heavy capital-intensive legacy lead-acid battery manufacturing environment, much different than the folks that are dealing with the microprocessor supply chain, software, a lot of asset-light contract manufacturing.

And those two things are much different than new technologies, lithium, those constituent supply chains, much different engineering lift. So we just made it official. We came up with 3 Centers of Excellence, and we tucked each one under a P&L leader. So there are no longer any participation trophies at EnerSys. You got to get something done and you're responsible for the P&L leader when you spend money. So Chad Uplinger has the lead-acid CoE. Keith Fisher has the power electronics CoE, and Mark Matthews and his team of engineers that do those 9 chemistries of lithium batteries, they have the lithium-ion CoE, and it's working very well for us.

Okay. For all the talk about discipline and cost and all that, I don't want you to think we're not placing bets. We're placing 3 very big bets, but we think they're very safe bets and they're back in our core or either that or a near-term adjacency. We have a clear right to win. And in every case, we don't have a customer acquisition issue. In every case, customer is asking us to do it. Don't got to go out and find a customer. And in each case, this is in our technology wheelhouse.

Let me start with battery energy storage. A lot of talk about battery energy storage in the world today. What are we doing that's different? Well, we're going back into our IMS segment, where we already in North America, as an example, have 55% market share powering the electric forklifts in these warehouses. So think of it this way. EnerSys is already the partner that manages the battery energy storage component they utilize today. We then -- these warehouses are going to their utility and saying, I want to add another bake of chargers. I want to extend my forklift fleet. And the utility, because of that power famine issue or that energy security issue is saying, I don't have the capacity to give you or I have a 3-year wait to set a new transformer at your location.

So what do they do, just stop operating? They need help. Our battery energy storage system can solve this, but here's what we're doing different. Not only we already know the warehouse to manage the battery power in the forklifts, we can marry the two together with our technology and with our charger. You're going to hear more about that today. And we can offer a solution that's leveraging all of the energy storage assets in the facility to mitigate their power famine issue, to allow them to island if they want to, if they get no power, allow them to sell power back when forklifts are idle. So we can have a lot more optionality there. Again, those other players in energy storage don't have that material handling knowledge. It's a differentiator for us.

The next big bet we're making is lithium data center. Now we have North America, about a similar market -- over 50% market share position in lead-acid. Our TPPL batteries are growing in data center at double-digit CAGR. We have a seat at the table with every UPS OEM out there for centralized UPS. We have a seat at the table with all the hyperscalers. We have contracts with many of them that we already maintain and service their equipment and deploy our battery. If we know how lithium -- if we know how the battery is acting in the application, we already know lithium batteries. This isn't an adjacency for us. It's right in our core. We've just been slow to deploy this product until this year. There's one outside. You're going to walk out and see it.

And that battery has a competitive advantage. It will take -- and they're going to get into this later and where another lithium supplier in the market today needs 5 cabinets, we can do in two cabinets. So it's going to give a big real estate benefit back. It's going to give a big cost benefit back. It's a really sharp system. But again, we have a right to win in this space. Customers are asking us to do it. We're already maintaining some of their lithium batteries in their network. There's no technical lift for us. It's just about getting and executing over the line. So we're very, very happy about that bet, but I think it's a safe bet.

Finally, aerospace and defense. We are the #1 supplier to the U.S. Defense apparatus for battery. Their whole goal now is electrification of the battlefield. With our Bren-Tronics acquisition, Rebel acquisition, we've consolidated our mass with the Department of War, and they are asking us to solve this problem of domestication of lithium batteries. And not just for drones, but for drone charging out at the forward edge of battle and also counter-drone activity that I'll tell you a little bit more about in a second.

So we've -- in the past, more than a year ago, we announced we were going to do a lithium plant. We've spent the last year changing what that looks like. So there was an administration change. The old premise of the plant was we were going to do something in the electric vehicle supply chain, charging electric vehicles. And we didn't have -- at that time, there was an uncertain view of could we attract customers. We've totally changed that. We've totally derisked it. We've taken some time because we're moving at the pace of government.

But now what we purport to do is solve their issue with the domestic FEOC compliant supply chain. It's going to be a different cell form factor. We can't tell you all about it today, but I'll tell you a little bit about it. But think of it this way. When you go out in the foyer, you're going to see the Rebel Hyper power system. It provides hybridized power to the battlefield to the forward edge of battle. The center of that system is a Bren-Tronics lithium 6T NATO battery. The center of that battery is a cell that we buy today.

When we build this factory, we will then make that cell. When we do that, we will close the loop on the entire ecosystem for drone powering. And I can safely say that we believe when we build this plant and do that, we will be the #1 supplier in the drone powering ecosystem on the planet for NATO and Western allies in the U.S. Defense apparatus.

One last thing on what we do, kind of cool. There was a Wall Street Journal article maybe a week before last, and they had -- it was all about counter-drones, if you search counter-drones in the journal. And there's a munition in there called Lightweight 30. It's a proximity round. And you can fire it into the air, gets anywhere near the drone, takes it out. That munition, and you'll see it in John Benetti's presentation. It's got a little thermal -- or I'm sorry, liquid reserve lithium battery in there. It is made exclusively by EnerSys. So the #1 counter-drone round in the world is powered by EnerSys. We make it in Horsham, Pennsylvania. So very excited about this. Incidentally, we're not going this investment alone. We're being co-invested by the U.S. government and the State of South Carolina. So a bet for us, but again, I think a very safe one.

Okay. I can see on the confidence monitor, I've already exceeded my time. So I'm going to be coming to the end of my comments. We've done some amazing stuff this year. And all of the good growth things that we're working on are ahead of us. None of it's possible without a phenomenal team. You're going to hear from some of them today, but we have assembled a group of, frankly, rock stars. And we know we're not perfect. We know we've got a lot of work to do, but this team is totally aligned and working together to deliver on profitable growth and deliver long-term value. I'm so excited for you to hear from them today and see what I get to see every day.

So with that, I'll turn it over to Mark Matthews, our CTO and President of PPS.

All right. Thank you, guys. I know I've been told I talk fast, but I feel like we're in the right city to talk fast today, so I'm not going to slow down. So again, Mark Matthews, I'm our CTO. I've been at EnerSys now going on 10 years. I've been in the battery industry for 30 years now, which is scary. So I've been in the aerospace and defense lithium business for a long time. You hear John Benetti and I have worked together. He hasn't aged as well as I have, but I'll just leave that with him.

But it's the most exciting time I've ever seen in the business. And I think, Shawn, when you talked about EnerGize, we'll talk about what that means to us. What that really means to us is understanding that our markets, we happen to be in the right markets across the board. So when we talk about IMS and Chad -- we'll talk about the products we're developing for that division, they are energy starved, and we can solve that problem. They're going to need our solutions.

Data centers, you can't turn on the news without seeing data center. And then the Noir product you see out there, the team has done a great job of recognizing what our customer needs are and how we move that forward. And in aerospace and defense, as Shawn mentioned, we can't get enough manufacturing, electrification. It's -- we're in every conversation going forward. From my perspective, I have the coolest job in EnerSys because I'm responsible to deliver to Keith, Chad and John, the products that are going to make this business grow. So -- and that's what I love to do and what our team loves to do.

So when we talk about expanding from the core, it's exciting because we already own these markets, and we're able to make products and align with those road maps to go forward. So I'm going to walk you through today, really how we've evolved over the last year in terms of taking the EnerGize process and then turning that into new products, and some of the shifts we've made to be more chemistry agnostics and those type of things going forward. So we'll walk through that. And obviously, we're very proud of the tech showcase we have here. Go out and take a look at that, and we can walk you through and the people that made those products a reality like Dave and Kerry and Kyle back there, they're the voices that turned it into a reality for us.

So Shawn talked about it, so I'm not going to beat this up too much. The key drivers for us is about creating this customer-centric approach. I got the opportunity, I guess, two weeks ago, we were at our sales meeting in Phoenix, and you realize one of our key strengths is our contact with our customers. We have a huge depth of knowledge into our customer base, and we have a long history of being trusted with there. So our job became how do we take that knowledge and turn that into products. So that's been this customer-centric LOB-aligned approach to innovation is something that we've really been driving hard with our teams, and that's why I've been one of the big reasons we've been able to move faster.

That market expertise we have is significant. We have people that have lived in those markets, become part of EnerSys and that culture around our alignment and trust that we've developed with those customers over the 100 years of EnerSys is why we are different. We recognize -- I was told one time -- I'm a chemical engineer, so I was told, like, one of our senior leaders said what do you think is the most important thing about EnerSys? I'm like, we're a chemistry company. He's like, no, no, no. We're a sales company that makes chemistry. And he's right. We have such strong application expertise. How do we use that and weaponize that to get products out. And that's been our alignment to make that a reality.

And the other thing we do, critical applications. So how do we get value out of that? The fact that we do things that cannot fail, the fact that Keith will talk about five 9s reliability, and Benetti is going to talk about 11 billion hours in space without a failure. That is what our customers value. We are not just a battery. We're a system that allows them to do things and allows them to provide products and services that aren't allowed to fail. And we take a great deal of pride from an engineering standpoint that we can do that.

So as we go through, just keep that in mind, that's the fundamental changes. It's around taking our market expertise and turning into products, and that's really what my focus is. We look at what we've done. So I think you'll see this in Chad's presentation. I was taken aback by some of the numbers he put up as we put this together the last few weeks. But we talk about where we start. We are a great chemistry company and always have been. We do, as Shawn mentioned, 15 different chemistries that solve all different applications. I'm of the belief when we talk chemistry agnostic that any chemistry, there's no thing a bad chemistry, there's just a bad application of a chemistry.

So we look and say, what is the right fit and how do we align the chemistry that we have with that solution, you'll see that chemistry-agnostic approach that we take. But we do that well. We've always manufactured and make chemistry well. The next thing we've done is power electronics, as Shawn mentioned. But what's key about our power electronics? What's key is we embed intelligence. And so what we've done over the last several years, and this started with the guys in IMS and you're seeing it in Keith's business as well, and we're now seeing it with the products we're making in PPS, let's get that intelligence out there.

So we're putting all these smart batteries, these smart systems, how do we then capture that data and evolve our systems going forward. So when we look at this, that is kind of the next step for us. So you'll see that we have tons of data points we're getting in all of our markets. Now how do we use that to create a solution product. And that's the evolution of our solutions is the power, the management of that power and then how we integrate that going forward. And that's where you see the EnVision, the Fortix and the DataSafe Noir really taking its shape. It's taking all that intelligence and power, and power electronics and energy, and then utilizing that to solve customers' problems. So it's a very simple concept.

As Shawn mentioned, we're not going to try to make it sound complicated. We take stored energy and we release it when the customer needs it to solve their problem. That is it. And we do that better than anybody else, and we have the service teams to support that. So when you'll see these products, we have -- we can go fast because there's similarity in all these products that we're building, even though they're very different end applications. So this is the biggest difference in our development process is around the strategic acquisition and disciplined approach or strategic approach to product development.

So what I like to tell people and our teams is that when Keith and Chad and John go talk to their customers and their teams go talk to their customers, we want those customers to look at us as the power electronics battery energy arm of their business. They want them to be comfortable. And with that, we align with their road maps. So what this cyclical approach is around the innovation cycle is not only solving the problem next year, but how do we know what Keith's problems are going to be in 5 years, and how we develop our core technologies that are going to differentiate and add value to us in that time frame.

So as we created this process, we are much taking advantage of that leverage we have with our customers to share our road maps where we want to go, align that with them and then we can create products around that. The key to that, that creates, one, stickiness because we're engaged in next-generation solutions. The other thing it really does is it helps our ROIC. We're working on the right things. So we've put a lot of discipline coming out of the aerospace and defense business for John and I, project management is core to us. And we want to put discipline into our product development process that not only are we developing faster, we're developing the right things, and we're developing at the right cost.

So this whole process helps to really narrow that down and align strategically, are we building the right things? Is this going to solve these customers' problems? Is today's data center in a war going to fix today? What does it look like in 3 years? What does it look like in 5 years? And do we have those products now to hit the market? We're never going to be in a position where we're not ahead of our customers' needs going forward. That is critical to us because if that means we're not taking advantage of what our core strength is of EnerSys.

So this innovation cycle has started to take off. We're getting better at it. We'll get even better and better and faster as we go forward. And the other thing we wanted to make sure that we get across to this team and to our teams at the sales meeting was the products we're releasing now is Generation 1. We're going to have -- we're going to continue with this cycle to release products and improve on our products. So we're not chasing one product that's going to be great for the next 10 years. We're going to solve the problem tomorrow, innovate that -- take the data that we're getting back, continue that innovation cycle and continue to align with our customers' needs as they evolve.

You look at a data center, it's 100 kilowatts now for an NVIDIA stack. That's a megawatt hour per stack. So just imagine 10x the amount of backup power required for that and what that means in terms of space and data center planning. So as great as Noir is today, 3 years from now, it's got to have twice the capability it does today to be able to solve the problem and stay ahead of our team. Look at John's business in PPS. We know that the amount of power that was just used in the Ukraine was more than the entire U.S. Army uses in any of its previous conflicts or any of its previous planning. So that world is changing so quickly, and we have to be on top of that to solve the FEOC-compliant problem and everything that goes with that. So this cycle is really critical to us. It seems very simple and intuitive, but it creates the focus that we need to get the products out quickly.

The other thing we've done to go faster is take advantage of the CoEs to Shawn's point, in our partner network. We have gone to a make-and-buy decision framework on our products. We are not looking at it as we need to develop every piece of our products from the ground up. We understand where our products are differentiated, why our customers see the value in us. We do invest in that. That's our core technology. A great example of the make and buy is chemistry agnostic. So John and his team, the U.S. Department of Defense or U.S. Department of War says, I have to have an FEOC compliant cell. I am willing to pay a premium for you to make it in the U.S.

Chad's Motive Power customers are like, I really like your data. I love your power conversion. I'll be happy with an LFP cell as long as you tell me it's the best-in-class LFP cell, we'll put it in place. So we are making those decisions at the beginning of every new product cycle to say, which of this do we have to own? We got to own cybersecurity. We got to own software. Is power electronics something we need to own in Keith's business, maybe not in Chad's business. So we make those decisions upfront, and that helps us to go quicker.

So instead of being in these multiyear cycles of developing everything we need to develop, now we're able to create a data that's Noir product from conception to release, last, I guess, Tuesday, last week, it seems fast -- Tuesday, in under a year. So we did not conceive what this product was until we exit the EnerGize strategy, which was in the, probably, August time frame, where we were sitting in a room saying, we need to have this by the end of the year. Kerry thought Keith and I were crazy. And the teams worked incredibly well together to make that a reality. And I think that's a really exciting product for us.

Same thing with the next-generation lithium batteries for Chad. We had a cost issue on our lithium-ion batteries. We weren't as competitive as we need to be. We rescoped the whole lithium-ion strategy around LFP cell that allowed us to choose a cell and move quickly. And now we're able to release those products to Chad, which are then a really part of the entire network we talk Fortix, as Shawn mentioned, the battery, the charger and now the Fortix system all work together. So this change of, kind of, mindset is one of the reasons we're moving a lot faster, and we can continue to get better here as we go forward.

The last piece of the EnerGize strategy that really stuck out to us is when we did the customer interviews, and we've always been very much a product company. Like in my mind, I'm a product guy. I love products. And we've always known that we do, as Shawn mentioned, storage, power electronics and software. The service piece was one where we were underutilizing from a design standpoint and understanding our customers. Our customers really value our service capability and the ability to keep that uptime and critical. And so what we intuitively thought out of that is, if that's the case, we need to be designing our products with services in mind.

So you'll see these new products, Fortix, our Hyper system and certainly the Noir product are designed with service in mind, meaning that the software, the hooks that we're putting in there allows us to integrate that into a NOC we're going to talk about, so we can proactively decide when these products are going to go, how these products are going to work, when we need the replacement cycle. And you're going to hear Keith talk a lot about what he's done with the service team, which is almost its own CoE at this point. We don't say that, but it's really servicing the entire company around what that looks like. That whole process now has gotten better, and it's going to be something that allows us to drive margin for our business because it is a huge differentiator in the field.

So now we get to talk about some specific products. I don't want to steal all the thunder from these guys, but I steal some of it because I get to go first. So as we talk about Chad's business or our IMS business with the logistics electrification, what's happening there around energy, security and starvation, and that's what the Fortix battery is going to talk to. The energy resilience in data center with the AI, the amount of power they need in the UPS for our NIS business and certainly electrification.

As we mentioned, as you look through these products, just see the commonality in what we're doing because they are very similar in terms of the overall architecture of those products. They may have a little different cyber overlay from a defense versus an NIS application. It might be a different power profile, different voltage. But fundamentally, the core pieces of where we're good at and where we differentiate are similar, and we can take advantage of that as we go forward.

So the first one, I'm so excited about this product. We talked about this coming out of EnerGize and we started to see our customers talk about it. And at the sales meeting, I was ready to talk about power -- peak shaving and demand response and all these things, how are we going to get value of this. And our sales guys kind of stop me and they're like, that's all great. It's fine that they can do all these things. Our customers want control of their build back. They're having 5% energy increases a year. They can't convert and run their business so they don't run it because they can't get power to their systems. They can't continue to convert to electrification of trucks because they just can't get the power. That's what they want.

The return on investment and the value that, that creates, yes, that makes sense so they can get someone like Andi to sign off on it. But at the end of the day, if somebody wants to say I want to control my own business. So what this product does -- and you'll see this in Chad's presentation, it takes all that data we talked about. But now you have a new charger releasing that he's going to talk to, the new batteries releasing and then you have this energy storage that acts as a full platform that allows you to control the customers' bill and energy supply within a warehouse. Very unique solution, very specific to our logistics customers.

And we're -- we developed this product. We focused on how do we get this out as quickly as possible and also accomplish what we need to from a TCO. It enables services long term and enables up to 17 chargers for Fortix system. Additionally we need capas (sic) [ capacity ]. So we're going to sell -- as these become reality, it allows us to, one, help electrify a customer. We sell more chargers, we sell more batteries and we manage the bill. That's what this does. And Chad will walk you through it. But we're really excited about this product. And you see out there, we didn't want to bring a full big system in here. I don't think they would let us, we would like to, but it's a really amazing product. We're out with our first trials that Chad is going to mention, and it's -- I think this is a great example of how EnerGize worked to develop something quickly that really focuses on solving our customers' needs.

We move on to data center. This is -- obviously, this is -- we talk about this all the time. This is such an exciting market for us. But we look at it in two ways. So we talk about the technology road map. We know and knew we needed a lithium product today. And how do we design something, a product that's going to give you the high-power data center, hyperscale data center, large data center UPS system. This is high power. So this is 10 minutes of backup to get the spinning reserve going so you can bring the generators online, a real need for our customer with the increasing power demands.

We also know and we hear from our customers that in 3 to 5 years, you're going to start to see more distributed data center networks, inference nodes that are going to be looking a little different. They're going to want high energy, meaning they want to run 10 hours. They want to get rid of that generator. So we've kind of looked at this in two ways. We're tackling the first product first, which is the Noir product will cover all these. We got the high-power product first, which is focused on that short duration backup. The team and the CoEs did a great job of pushing this through quickly.

We have a very unique solution here in that we have a cell that is purpose designed to solve this power problem. So it is not a cell that we would ever use to power a fork truck, but it is perfect to give you 10 minutes of UPS backup. So we've designed with our -- this is where being chemistry agnostic really enables us because we could go to find the right solution, the right cell to solve this power moving forward. We know as inference nodes and edge data networks become a reality, you're going to see that high energy piece start to be needed. And we have -- that's where the product we have in Fortix right now will be able to be expanded and expanded that portfolio to a 2, 3, 4-megawatt hour solution to solve those inference nodes and in a very different type application. So we see this as such an evolving market, and Keith will talk about it. But from a product perspective, our new strategy enables to really focus in on where our customers need us to be, and we're going to continue to deliver on that with those cells.

All right. So then all this brings up kind of our next issue -- not even issue, our next focal point is probably the right way to say it, is that we are going to be successful in selling a lot of Fortix systems and data center systems. I'm sure of that. And now it becomes how do we get good at managing that and aggregating that for the future. So we started to look at, and we have been looking at, as we design these, the ability not only to do the product and do the installation service and maintenance, but how do we start to look at monetizing this in the future? How do we look at this to start to say, yes, we want to be able to get out in front of proactive and predictive maintenance. We want to get larger hooks into our customers in terms of the service element of this.

So we're now looking at expanding our NOC capabilities, our Network Operating Center capabilities to be able to manage large fleets of batteries in the future. So if we have thousands of these out there, Shawn talked about 85 gigawatts a day. How do we have a NOC in that manages that? And then how do we utilize that to drive value to our customers with demand response and utility initiatives. We need to figure out how to aggregate that better and move forward.

So as we move forward, we're not saying we're moving to Energy-as-a-Service today. I know that's a different model, but we, as an engineering team and as a technology group, need to be putting the ability to now for our LOBs to say, at some point, I want to continue to monetize those assets we have in the field. How do we look at that? So we're putting the NOC in place now. We're working to develop that network and that control center to be able to manage these products going forward. That's a big deal for us. It's part of our evolution. We're -- we've come a long way in the last year. We've got a long way to go to be really, really good at this. But this is on our road maps, the ability to manage not only the service side, but the value of those assets we have field. It's going to become more and more critical, and we're thinking about that now, and you'll hear more about our Network Operating Center over the next year, okay?

All right. Now I could really go a long time, Benetti, I don't want to steal all your thunder here, but I love the PPS business. It's the most exciting time we've ever had in aerospace and defense for sure. And one of the reasons why Shawn hit on it is the world has changed that -- for 30 years of my career, 25 years of my career, it was about providing the most accurate, high-technology performance. It was fewer systems. It was lower volume, but we could do things really well that no one else could do, and we powered that.

Now what's happening is we still do all that, but you got to make a lot of them. Like the volume in aerospace and defense for power is increasing at such a rapid rate because drones have just changed the entire landscape of what's important. And so what's happened is we see the government looking to us. We'll be at the Pentagon, they're coming to us saying, it's important that we partner with people that know what scale is, right? So when we talk about the lithium plant, they wanted a partner that's going to want to be able to make those investments, but also know what it is to get to an 85-gigawatt hour a day management.

So our value has always been very much appreciated by the Department of War and our NATO and allied countries you're going to hear about, but now they're looking at us and saying, we want you to be even more to us. We want somebody that can scale it the right way. And so that's one reason PPS is its own -- we were talking about it beforehand, one of the reasons its own division now is we see this growth coming. We're leaning into that growth and making sure we take advantage of it. For example, if you look at that, the tactical vehicle here on the bottom left-hand corner, we traditionally would have just had two Hawker batteries that started that engine, right? That was a great business for us. Now there's 4 or 5 more, not only the two Hawker batteries that are TPPL lead-acid batteries. We now have lithium-ion batteries there because of the amount of power that's being drawn.

We also have a Hyper system that's going to be screwed to the back of that vehicle to help power the drones. And then John is going to tell you, we're also making the chargers to power the drones. So as you start to look at this, we are now touching so many electrification points in the battlefield, and that's really what the lithium plan is up to support that going forward. So what does it do for us? It creates that secure supply chain of lithium cells for the U.S. And allows us from a defense to be really specific about the power solutions. They are different than you can just buy commercial cells. There's unique things we need to do, and John will talk about some of that. And it really deepens us as a provider of batteries to the Defense Department. We're going to have fully vertically integrated supply.

Not only do we make the cells, but we'll also make the batteries, the chargers and then the systems, and then we want to get into software and service going forward for the Defense Department. So this becomes a whole power infrastructure with the DOD and DOW and our allied countries, and we can leverage not only the U.S. piece, but also the European piece as we go forward. You hear that from John. So exciting times. It's a new world where manufacturing scale matters, and we're well positioned to take advantage of that. Okay.

All right. So I'm wrapping up here in my last couple of minutes. Just wanted to kind of touch base. You're going to hear a lot of what we're doing across the board for our LOBs. I just want -- as I said, we are a service organization in technology to service our customers and to service our LOBs to get them the products they need. We are focused on doing it faster. We're focused on very customer-centric and aligned conversations around what is right, what is wrong. And when we see we're making the wrong bet, let's get out of it and make another bet. I mean those are all part of our strategy.

We're really leveraging the great expertise we have in our markets and the knowledge we have with our customer bases to create these technology road maps and develop the core products that are going to differentiate us going forward. And then ultimately, it's about that we do something that no one else can do. We can do the battery, the power, the software and the service. And that is what differentiated EnerSys from everybody else. We want to keep that always in our gun sights. This is why we're good, don't lose sight of what we're valued at and then how do we develop products and services to be able to support that.

So with that, I'm wrapping up. I get the pleasure to introduce. So Keith Fisher's a great person, but we've got to know each other, and he -- we have the same musical taste. So it's as eclectic as it is, it's good, so we get along there. But Keith's been -- joined the team a couple of years ago. He's been a great addition to the team. Brought a lot of experience and knowledge that I think we're all learning from. So it's my honor to bring Keith Fisher up to the stage and introduce him. Thanks, Keith.

Well, I'll give Shawn a little bit of credit for putting a CTO in place that not only speaks passionately about chemistry, and he's a great business guy, but he also talks about design for service. Not a lot of CTOs think about service when they're doing product design, and it's really fortunate for me as a business leader. He clicked a little bit on the customer-centric design model. And I can tell you, as one of the lines of business leaders, we really feel that change happening in the business. So other than his musical taste, I'll give him some credit for that, too.

Like he said, my name is Keith Fisher. I've been with EnerSys for about 18 months now. Look forward to what's in front of us with Network & Infrastructure Solutions. If you don't know my background, I spent 28 years, almost 28 years with an industrial company, Honeywell. I started my career in operations and supply chain. And then I had the privilege of running multiple business units, whether it was across aerospace businesses, building solution businesses and more recently, inside warehouse automation.

And I can really say I picked a great time to join EnerSys. What really attracted me to this was the markets in which we competed in and the positions that we hold in these industries. So it's absolutely a core business for us. Today, I want to walk you through how we're leveraging our market leadership, expanding into high-growth areas like data centers while also keeping our eye on the ball on operational discipline and long-term value creation.

So the 3 key messages, you see a little bit of a recurring theme around customer centricity. As the integrator in the business, we really want to think customer back and develop these solution-led innovation that takes advantage of the vast network that's out there in the supply chain through partnerships to help us do that. It's more of an asset-light model for the NIS business. There's a lot of competent people out there, especially as we're dealing with solution-led, more chemistry-agnostic battery solutions. So it's a really good opportunity for us to improve our margins at the same time, deliver the innovation that our customers look forward to.

And being service-led is really key. And we've already started to see some signs of just the virtuous cycle of doing a great job for our customers every day, leading to new business and leading with service first is a core part of our business strategy. We are going to continue to optimize fixed costs, whether it's the more recent Tijuana announcement that allows us to continually operate our TPPL franchise profitably as lead continues to be an important part of our business.

We've flattened our organizational construct because we want to be designed. We want to have a leadership team designed to work with speed. And then, of course, the CoE model that we've put in place that really takes the markets, the engineering intelligence, the supplier capacity brings us the ability to leverage that and scale in obviously, some really exciting and fast-growing spaces.

And then it's awesome to be able to announce the DataSafe Noir product this week. We're placing that bet in our business. We have lithium across the business, as Mark talked about, as Shawn introduced, but this is our launch into the data center space with a lithium offering. And I'll talk more about how we think the growth rates in that space look going forward, but it's a really exciting time to be here in the business.

So if I boil down kind of who we are, what we do, we spend a lot of time on the statement there that says powering the connected world with trusted reserve and critical infrastructure solutions. When I got here, I heard us being talked a lot about as reserve power. But I think what both Shawn and Mark did very well in their introduction is the networks are evolving to the point where our products are not just sitting there waiting for something to happen. They're a very important part of the ecosystem to ensure that, that stability or that -- those energy challenges are being dealt with. So we really like that and critical infrastructure solutions part of the business. It's been a really good rallying cry for the team.

Our customer base is vast. If you look at the communications space, we deal with all the largest network operators in North America and globally. From a data center standpoint, we actually operate a little bit more across the customer stack. We have rich relationships with the hyperscalers and the end users. We have deep partnerships with the OEMs. And then, of course, we have a large channel network that helps bring the EnerSys brand to market with us every single day. So operate across the whole stack in data center, and I think that's an important part of our differentiation going forward.

And then whether it's the industrial power and utility space, this is another great opportunity for growth for us as the infrastructure evolves to support the growing power needs, we're there to grow with them. So we operate there across all the local, regional utility providers, and it's actually a nice growing business for us. Globally, we're dominant in North America, but we actually have a strong foundation, and we've seen some green shoots of growth happening in Europe. We've recently recaptured some share with some of the largest telecom operators over in Europe. And then, of course, we operate in the rest of Asia as well. So good global business, service capability and breadth across the board.

So if I click a little bit deeper, our focus really is where uptime is nonnegotiable. And if you think of these critical infrastructure networks, whether I start with communications on the left, the statistic you see on the page is 750,000 broadband and power supplies. And I knew I arrived at EnerSys when I was hooking my Internet up and I talked to somebody pretty high up at my Internet provider and he said, well, the box is right outside your front driveway. You can look at that alpha box every day, you drive in and drive home from work. And we have 750,000 of those out there in the marketplace and about 40% of those are approaching an upgrade cycle. And that's probably being a little bit conservative given some of the power constraints that the industry is facing.

So when you hear me talk about XM Edge later and you get to talk to John or Grant in the organization here about XM Edge, that's a solution we have to continue to meet future needs for our customers. The data center space, we're not new to data centers. We have over 10 million batteries that we've sold just in the last 5 years. Depending on the usage case, about 20% of those recycle annually. And then that's on top of the existing installed base that's growing through new data center builds. So we continue to see lead-acid sales in both spaces, but this lithium launch that we're introducing here this week is a really good catalyst for growth for us.

And then similarly, across industrial power and utilities, over 2 million batteries, maybe a little bit of a less usage cycle on that depending on how they're used, but still, more floor for continued stability within the business as 10% of those are replaced across the board. Shawn talked a lot about the products. The point you see there across the enclosures. You'll see enclosures in everything we do. They're a key integration point for our technology. So it's a core part of our portfolio.

But I think I really want to point out the point on the bottom here. So we're looking to be there from the beginning of the engineering design solution for our customers all the way through monitoring and software. So as we look forward in the NIS business, that stack that we're creating and that capability we're creating to really truly be service-led, service at the start of the process, service at the end of the process, that will be the virtuous cycle that continues to feed innovation for us. But the takeaway here is that as power and labor become more integral to sustaining our customers' operation, we can clearly provide solutions across the board.

There's a lot of common needs across our industries. Across CDI, customers need connectivity. They need operational resilience. And they also need increasing reliable power in an age where AI acceleration is continuing to stress the networks. So while the actual specific recipe might look a little different depending on the market that we create, the needs are actually very common, and that gives us competitive advantage as we deliver more efficient new products to the market.

We're actually in talks today with a lot of large customers about refreshing their networks. So if you look across the telecom network space, they've grown through acquisition. They've had various focus on new builds and 5G cycles, and that has put some stress on some of their older product lines. So as they continue to deal with these power-hungry environments, the network needs to be refreshed. So it's a good opportunity for us.

The data center story is also clearly unfolding right in front of us. Large hyperscale enterprise data centers, they continue to need more power, and this is where our innovation is really focused. These trends that we see really create those common needs around resiliency, uptime, energy availability and is going to be core to our value propositions as we go forward.

So I characterize the SAM here in this business at about $15 billion of the total that Shawn showed earlier. To break that down a little bit more, still see about $9 billion of that in sort of the communications and broadband space. We see about $1.8 billion, $1.9 billion in the data center space, another $1.5 billion in the industrial power and utility. And then depending on that industry and the service tail associated with that, we kind of have somewhere between a 15% and 30% attach per product sale for the rest of it makes up in service.

The key that I want to point out here is though is that the data center piece, while like $1.8 billion for us today, not the biggest chunk, it's the one that's clearly growing the fastest. I mean we're going to see somewhere between 15%, 20% over a 3- to 5-year period growth within that data center SAM. And the other thing I'm excited about is I haven't even really captured Fortix into these models yet. So as we're launching in Chad's business around warehouse solutions, but that offering that Mark described and Chad is going to go more deeply, also is applicable clearly in our space. And as we continue to evolve our focus, I only see that SAM growing.

So our competitive advantage, why do people pick NIS? Well, I think Shawn did a really great job of honing in on these, but I'll click just a little bit deeper. First and foremost, we have reliable integrated solutions. A point Shawn made, I'll reemphasize. You don't just pick a new person off the street and plug their solution into a data center. They want someone who's been there, they've been through the cycles. They've been able to deploy them, and they really want to know that the product's going to work. They can't take a bad bet on a supplier.

Second -- and again, I'd point out, Shawn -- Mark mentioned the five 9s. For those statistic majors, where people have taken a lot of statistics or Six Sigma stuff. Five 9s basically means you get about 5 minutes of downtime a year in a data center. So for an AI edge or AI inference data center, the people, the process, the technology, they all have to be humming in order for that to work. That's some value that we believe we bring to the table. Three 9s, you get a full day to deal with downtime events for what it's worth.

We do have trusted long-term partnerships. We've got customers today that rely on us exclusively for their power solutions providers as their power solution provider. We have a lab in Bellingham, Washington that can actually simulate a broadband network so that as customers introduce new product or they're dealing with troubleshooting challenges, we're literally on the phone call with them, helping them introduce those new products or working on those systems.

Third, our application experience. Whether it's regulatory, whether it's interoperability challenges. These are fast-growing markets, and we can't be slow. We have to understand what it takes to not only develop the product, but get it certified for use in a safe manner. As lithium becomes more and more popular, they're relying on the supply chain and the network to really understand what the safety constraints are there, and that's something that we bring to the table.

We extend beyond the contract from a dependability standpoint. So our service network is across the globe, frankly. And when there's a problem, we get out there. We don't ask why we get out there. We fix the problem. We do it in critical situations. We do it in floods and hurricanes. We don't ask why. We get out there and we support our customers. And that's something that builds a lot of credibility over time. And then I think global scale. They don't want somebody who's not going to be continuing to reinvest in the business. Andi is going to talk about our balance sheet position. We have the ability to continue to reinvest in this business and differentiate for customers.

So what does EnerGize mean to me? EnerGize means a few key point and things to me. One, we are going to focus on targeted end markets, but we're not just going to treat every market the same. There are actually places within each market where we can segment and be even more specific about how we compete and why we win. Second, we're going to make sure that we've got our footprint really optimized to deliver on these, whether it's our footprint or whether it's through our partners' footprints. We're going to make sure that we've got the right value stream in place to be responsive and differentiate from a service standpoint.

When I look at invigorating our operating model, Mark did a great job of talking about new product innovation, bringing new products to market is a core part of our growth strategy. But our service piece is another piece where we can really look across not just product innovation, but business model innovation. I'll show you in a minute that within NIS, we have a projects business, we have a products business, we have a service business, and we have software revenue streams. We can operate across all those to have a compounding effect on growth as we bring more installed base to light, we then monetize it through the life cycle.

Accelerating growth, I'm just going to focus on the data center for today. There's a lot we're doing within the business to try to grow. But the data center space is clearly an opportunity for us. It's staring us right now. It's a fast growth market, and we're going to have the right products and solutions to deliver there.

So I want to click through a couple of case studies to just give some representative examples of how we're doing this. First, this is really to illustrate how we're changing the way commercially we go to market. Not that what we ever did was wrong, but in a solution-based environment, we actually had a customer, a large network operator come to us with a challenge they were facing with tariffs, and they needed a domestic partner to help them get through that and manage their cost.

Well, our commercial team in that discussion, led by John Hewitt in the room, was able to take that opportunity and say, okay, but how do we look larger across your whole network and what do we do? And not only did we solve their tariff problem, but we actually were able to provide them a 48-volt lithium battery with a retrofit kit, remote monitoring and installation services that gave them a more energy-efficient solution that they were going after. So the commercial team solved problem, expanded the problem. And then the result of that is we grew our market share or our share of wallet with that customer by over 5x. That's not -- that's a very scalable process for us. If we do that consistently across our customer base and our markets and we operate with a commercial-first mindset consistently, we've got that opportunity in all of our businesses.

You're going to see XM Edge when you go out there. I alluded to it a little earlier in my presentation. I talked about how we're a core partner within the broadband space. That didn't happen overnight. And what we see now is whether there are customers looking for efficiency from a cost standpoint where they're just looking to keep up with the demands of all the traffic and the massive growth in data traffic, they need more efficient solutions.

And so we have a solution. We're -- it's still in development right now, but we're in customer trials. It's going to be certified within the next 12 months. We have the opportunity to go take those 750,000 power supplies and continue to extend the brand and franchise that the XM product line has given to us for a long time. Super excited about the innovation processes here. This is right in our core, it's what we're good at. We're introducing new features. We're going to give the customer more access to be able to see what's going on across their network. So bringing connected power-efficient solutions should afford us the ability to expand our value creation for the customer in this case.

Third, I'm going to go back to service a little bit more. If you look at sort of the left side of the page, I want to just emphasize a couple of pieces. First, we do have the business models. All the capability, even though we've been largely a product-first company within NIS for a period of time, we've built some really, really talented people and pieces of capability around service, managing service contracts, retrofits and upgrade installations and doing more general contractor-like projects. This is a good split that we can scale. We can continue to create installed base for our customers, and then we can figure out how to monetize that over the life cycle of the program.

You can also see, just frankly and transparently, we're a little concentrated with our largest customers. That's a great opportunity for us and a focus area of how we bring these services and solutions to more customers when we know labor scarcity is going to be a continued challenge that they face. So I think there's a lot of runway in here for us as we get better and better at scaling our service model.

There's some cool stats on this page. The strong foundation that we have today, 750 service techs across my and Chad's business -- service professionals across my and Chad's business, 43 gigawatts of power that we support. We actually have a continuity monitoring platform that's looking at over 500,000 sites regularly to see how it's operating and where we might see problems. We have opportunities to be more predictive and preventative as we get better at software over time, but we have that infrastructure in place.

And then from a lithium-ion standpoint, we talk about that being a launch in the data center space, but the reality is we're already installing data center lithium on the competitors' products today. So there's no real technical hurdle for us to overcome as we continue to bring our own products to market. So super excited.

I think that where we're going, I've hit on a lot of these points, but the graphic at the bottom, Mark kind of joked about a service Center of Excellence. Well, we don't need to create this capability across 3 different business units. We need to create really good capability and then deploy it across 3 different business units. So whether it's Noir, whether it's Fortix, this is a great opportunity for us to build and scale once right and then tailor that application through back office, and great techs in order to solve service challenges for our customer.

So I will finish my last case study with one of the more exciting launches that I've had in my career. That box out there, there's a lot of hard work in that from a lot of people in this room. But it is really exciting. A point I want to emphasize on this page and back to segmentation, data centers aren't all data centers, aren't all data centers. I'm sure you all know that, right? The needs actually vary within the data center.

So if you look at something that has a short run through time, our lead-acid solution could still very well be very well positioned to win in that space from a total cost standpoint. But we know that the growth is really coming from lithium and new installs going forward. And whether it's edge and inference or hyperscale or training models, the DataSafe Noir product line that you're going to see out there is purpose-built for those applications.

Talked about the competitive advantage. Well, here's a picture of it. If you look at the blue-topped batteries on the left part, that's a traditional VRLA, TPPL-like solution. That's how much space it takes up to deliver a power requirement. If you look at the far right, that's what our competitor offering is right now, if you look at the DataSafe Noir product line, we can do that in a lot less space. That's more space for the end users to do what they need to do to get the compute power to everybody who needs a data center output. So this is really exciting. And I think you're going to see some really good -- we are early days in the commercialization process. We have to absolutely get through the OEM certification part of it, but the runway here is really exciting.

So I'm going to close with the same 3 points that I started with, customer-centric, solution-led. That is becoming the rallying cry. We use a process of strategy deployment and the thing we put closest to our hearts was being customer-centric and solution-led. We can design cool stuff, but we need to design cool stuff that people really want to buy. And that only comes from talking to our customers. And that's become a real do different within the NIS business and something that I'm excited to continue to build upon.

We certainly aren't going to take our eyes off the ball from a fixed cost standpoint. We have the opportunity to continue to expand our margins in our business, and we're going to do that. And then lithium, lithium, lithium. This is a really cool time to be running this business and there's a lot of runway ahead. So I want to thank you all for your time and attention today. I appreciate you listening to the NIS story.

And I'm going to turn it over to Chad Uplinger, who leads our Industrial Mobility Solutions business. Chad?

So good morning. My name is Chad Uplinger, and I'm the person that's standing between you and a cup of coffee in a minute. So I'm the President of Industrial Mobility Solutions, which formerly was Motive Power. And as Shawn mentioned, we merged with Transportation. So a quick background on myself. I've been with the company for 27 years, all within the Motive Power unit. So if I call it Motive Power today, it's like changing your spouse's name after 27 years, it's hard to do. So you might catch me.

But what excites me the most about our business is in 27 years, I've seen most of the products that we sell in Motive Power get introduced and get launched. I think there's a handful of a few legacy products from the '80s that we still sell. But when I look at today and I look at fiscal '27 and beyond, our product road map is the most exciting thing for us. And we just had, as Mark mentioned, the sales meeting, we sat down with our sellers, and we see more products coming out, more next-generation products coming out this year than any year I've seen in my tenure with the business.

So it allows us to advance as customers transition and electrify fleets, but it also allows a great opportunity for energy management. And that's key for us because that's a great growth opportunity for us, and that's something we've not been able to do before. And I think that's going to provide some real value to our customers and to our shareholders.

So I'm going to touch on 3 key items. One, advancing our next generation of maintenance-free solutions. We've been doing that for a long time, right? That's been part of our heritage for the last 6 or 7 years. We continue to see that. I'm going to talk about the road map advances that we're doing, but we're going to continue to invest in TPPL and lithium-ion, and we can see that continuing for the future.

The next is the organizational alignment. I'm going to talk a little bit about why material handling and transportation, why they fit together. Shawn mentioned it briefly in his introduction. Owners and operators of lift trucks, they use a lift truck. And unless you're in a manufacturing facility, if you're in a distribution or logistics hub, you're using that lift truck to do what, load a trailer, right? And so most of those operators own their own fleets or they work through fleet leasing companies. But we have an extremely intimate knowledge of material handling, being the market leader in North America and a predominant leader in Europe. So this gives us a great opportunity to pivot slightly from what we've been selling and to be able to target the Class 8 trucks.

And then finally, energy management because this is what gives us above-market growth, right? We can take a Fortix battery system, and we can just not be a battery and charger supplier, but we can take a Fortix system and we can go into a customer and provide them a full complete energy management system within their warehouse. So that's the exciting thing for us and where we see the big growth opportunities.

So just quickly, again, on what we do. So we power goods and services, essential goods and services, whether it be in the warehouse or in the lift truck. We serve two primary markets, warehousing and logistics, and transportation and transportation is mainly focused on that Class 8 trucking market. As Shawn mentioned, in North America, we are the #1 market share position holder. And in Europe, we're one of the top providers for material handling. So we have a long lineage history going back 70, 80 years until the advent of the lift truck. So we've had a long history in material handling. We know that space extremely well.

And then in Transportation, we have a growing footprint globally, both in EMEA and here in the U.S. in Class 8 trucks in both OEM installed Class 8 trucks and also the replacement business. And that is a key aspect of our business is the replacement cycle. So they're both replacement-driven businesses. We sell into new trucks, but we also sell into replacement trucks. And given our large market share and wallet size, we're able to leverage our leading positions and transition customers into our newer technologies from our older technologies. And we do that all the time in the marketplace.

So as we restructure IMS, again, we think we get a lot of greater alignment across shared customers. And a big target for us is our large material handling key accounts. These are large accounts, again, that operate their own fleet of Class 8 trucks. And so at a very, very high level, our goal is to just better serve a common customer. If it's a large common food distribution company, we're also going to service their Class 8 trucks. We want to capture more wallet share within our existing customers.

And then there's obviously, we're going to drive some operational synergies just naturally between the businesses. So there are areas like customer service or marketing or other OpEx types expenses that we can do. But it's not just a structural change. We -- it's a focused go-to-market change for us and a transformation within the Transportation business.

So I'm going to talk a little bit about our product set. And in warehousing and logistics, if you look at the slide, we have over 700,000 chargers in the system globally that charge lift trucks each and every day. We power over 1.9 million lift trucks around the planet, every day somebody is plugging them in. What's key to that is on these, we have almost 350,000, I'd probably call it 350,000 now because we probably have installed 5,000 in the last month. So we have about 350,000 Wi-iQ devices. These are devices, battery collection devices that are gathering data on the battery, on the lift truck, on the application it's used in. Is it used in a freezer? Is it used in a warehouse? So it's gathering all of this information. So these are little small nodes that we have out throughout the industry.

And we gather this data. We've -- as a seller in our business, we use this data, it feeds into our software systems and our application modeling systems. So we help customers when it's time for them to change their batteries, we can pull that data off and we can say, hey, you have 20 trucks, but maybe you only need 18 trucks to do that work. Or we can change you to this chemistry or change you to this charging solution and save you money. And this data collection that we have and the software program insight that we use allows us to do that type of thing.

In the future, this same software system will also tie to Fortix. So not only will I say, okay, here's how I operate the lift truck and here's how often I plug it in and here's the power draw, but we're building the front end of the system to be able to say, what's your electric bill? What's your peak demand charge? How do you use -- at what time of the day is your utility rate? And the system will go through and say, okay, based on that customer, you need a 344-kilowatt Fortix system. I can operate reducing the draw on the building during peak times or peak shave and save you money, and here's how much I can save. That's the beauty of the system. And we're trying to make it that simple that every one of our sellers can go back into our existing customer base and offer that type of solution.

In Transportation, let's just review a little bit about Transportation. So we power about 900,000 Class 8 trucks today. Now remember, a Class 8 truck could have 4 batteries, it could have 8 batteries. It depends on the configuration, if there's a sleeper cab, an air conditioner or lift gate. But that gives you a scope of how many trucks we have out in the field today. And over half of those have an ACE-embedded chip in them. Now what that chip does is it monitors over voltage, it monitors heat. It gives recommendations if the battery is reaching end of life.

And so if I'm a maintenance mechanic in a fleet, I don't need to go in and open up all the battery compartments and check all the batteries, say the fleet maintenance intervals every 90 days. All I do is pull out my phone, I stand next to the truck and I tap on it, and the system goes out and touches all the batteries and gathers that data. And people use that a lot. 4,000 -- we have 4,000 active users every month that do that exact same thing. But the best part about us is all of this data comes back into our system.

So we have a vast database of how our customers use our equipment. And this allows us to do some unique things. So we can monetize assets. We can develop predictive maintenance programs for our customers or we can optimize fleet sizes for customers. But the most important thing it does is create a stickiness relationship with our customers. They value our service as a long-term solution provider because we are so embedded within their products.

So let's talk a little bit about the market. I know Shawn showed the overall picture of the market. Our market is just over $8 billion. It continues to grow. There's a lot of good market tailwinds that will continue to grow. There's conversions from internal combustion to electric lift trucks. That trend continues to happen. A lot of customers are pushed that way because of regulations in the states in which they operate. Also, some companies, maybe they have a sustainability goal to reduce Scope 1 and 2 emissions, just like what we do as a business. So they may look to convert their internal combustion trucks to electric. So that -- so we see the market potential continuing to grow.

Electric trucks do have a lower cost of ownership, and there are a lot of advantages to go that way. And then on the transportation side, fleet operators, their requirements have changed. There's more electrical components on a Class 8 truck that puts demand on the battery. And then also, there's anti-idling laws, no longer in a lot of like large public spaces, can you just leave your tractor trailer run while you're unloading your goods on the street corners in New York, but you have to shut that off. That turning on, turning off, turning on, turning off is a cyclability issue, and it's a lot of strain on the battery. And then as Shawn mentioned, just the overall increase in electrification and the drive for energy security, it really gives us that we're an expert to solve a lot of these common challenges for our customers.

So if I look at just a few points about why we win. So we are a recognized leader in forklift power systems. We know that. We produce lead-acid, which we have for 100 years. We produce TPPL, and we also produce lithium-ion. So we sell all chemistries. We're chemistry agnostic when we go into customers. We sell up to 5 different type of charging systems. Chargers, when I started, we had one charger. That's it. You had a charger, you plugged it in. Now we have fast chargers, opportunity chargers, wireless chargers, outdoor chargers. We have all different types of charger solutions. So we continue to invest in that type of product development.

We're a customer-centric solution. You've heard that several times. Keith mentioned it, Mark mentioned it. Our knowledge of our customers, we can help our customers with operational challenges they face because we've seen other customers in the same industries. And we have that knowledge base from all the data devices and all of that. Many times, we can go into a customer who's operating in a cold storage application, and we can bring to them solutions that we've seen work in other cold storage applications. So it allows us to tailor our solutions for our customers, which is a really unique differentiator for us.

And then we have an industry-leading team. Keith talked about it, our service organization. Wherever you are in the world, if we have customers in Germany and they ship products to Phoenix, Arizona, they typically look to EnerSys as the company that's going to provide them turnkey coverage anywhere in the world. So we are extremely unique in that. So again, this is just a few of the items. Again, our deep installed base and our leading market positions and then some of these are really why we have a right to win.

So if I talk about EnerGize and how it affects IMS, optimizing our core, the first and foremost, we're going to continue to drive next-generation TPPL and lithium-ion, right? So that is a key for us. We also have a new charger line. You can see it out here in the display area. That's going to be a game changer for us. So we're going to continue to invest in our core business which is material handling and Class 8 trucking. So we have all a new array of products just in our core base that we're launching.

Invigorating our operating model. So I'm responsible for the lead CoE. That is within the IMS business. IMS is probably the biggest consumer and seller of lead. So it sits within our business. But we operate the lead CoE, and we make the engineering development decisions. We do the manufacturing, the distribution, all of that. As Shawn mentioned, the procurement, it makes logical sense. We've seen a lot of synergies between our European factories and our American factories, all operating under that same umbrella.

I mean it's allowed us to do things like the closure of the Tijuana plant. What does that do? It allows us to ramp up the investments we've made in Missouri in our TPPL factories to maximize those and to drive costs out of those operations. Same thing in Monterrey, Mexico. We closed that factory. It ramped up our factory in Kentucky, and it's going to offload some of our volume in Poland. It's going to make us a much more leaner, more profitable manufacturing business.

And then Shawn mentioned, when he talked about accelerating our growth, the biggest growth acceleration I see in our business, I mean, it's going to come from conversions of maintenance-free and things like that. But we follow GDP and forklift sales, we track forklift sales. The biggest revenue generator for me is the Fortix opportunity because now I can go back into the exact same customer I'm talking to today. I don't have to meet a new customer. I can just talk to the exact same person and solve another problem for them that they have. So we really see that as the driver for above-market growth, and that's where we really want to see -- we're excited about that in the future.

A few of the additions, and you'll see these in the back, we could talk after the venue. But TPPL, so we've extended the range. If you think about Thin Plate Pure Lead, it was a product that fit about 65% of the applications. If you got into a really heavy-duty application, we would tell you, Thin Plate Pure Lead is not for you, you probably have to stick for flooded. But we've done a redesign of the product, so now we can cover almost the entire product portfolio. So why are we confident in growth in TPPL? Because now I can sell it everywhere, right? I can sell it in a lot more applications. I'm giving people a lot more power than the old system.

The ODYSSEY battery, I talked about the no idling laws, the actual more times to cycle. We've developed the ODYSSEY Evolution. It's up to 2,000 cycles. That's about 33% more than the industry is in terms of trucking batteries. So that gives us a great opportunity to provide customers the ability to turn their truck on an awful lot and still get the long life they expect.

Mark talked a little bit about our lithium-ion chemistry. We're moving to a Generation 2 and LFP chemistry type. So that is -- that's providing us a lower cost per kilowatt, but we also have done a refresh on the power electronics to improve performance and safety. And then overall, the design is really designed for manufacturability and scale so we can drive margin expansion and support our volume growth with our Gen 2 products.

All of these are tied together with our Synova charger. This is the first time we've changed the charger design in about 9 years. I'm really excited about it. It's going to give us an extremely high-efficient charger, one of the most high-efficient chargers in the market. It has very strong data capabilities. The charger, we can connect to it no matter where it sits. I can pull data from the charger. If a customer has an application that maybe they're not charging at the exact time, I can remotely go in and change their charge profile or how they're using their charger. I don't even have to send a technician to it.

And in the future, what the really cool thing is it will work bidirectionally back with Fortix. So I can take power from the Fortix system, put it in the lift truck but I can also take battery power energy out of the lift truck and put it back into the Fortix system. So we'll be able to use the lift truck battery as a distributed energy storage asset that can generate revenue from the grid, like vehicle to grid or just back into the warehouse. So that's a game changer for us. And this charger really is -- it's the foundation for our integrated energy ecosystem. The Fortix system does it, but the Synova charger allow -- it's the mechanism to allow us to do that. So that's very exciting.

Quick -- I just want to do one quick case study. And this is on a large grocery retailer, right? This is what we do. This is bread and butter for us every day. We go into customers. They're operating traditional lead-acid batteries. We convert them over to -- in this case, we converted this customer over to lithium-ion and TPPL. We put lithium-ion in their reach trucks. We put TPPL in their walkie riders. And so you'd say, okay, well, Chad how's this any different than what you've been doing for the last 3 or 4 years. It isn't. We've saved this customer 40% on their battery purchasing and operating costs. So this is what we've been -- this is how we convert customers over to maintenance-free today.

But the beauty of this now moving forward, what our sales team would do is go in and say, oh, by the way, can you give me a copy of your electric bill? Let me look at your peak demand charges. Let me look at what your utility rates are. Hey, on top of the 40% I'm going to save you, I can save you another 40% to 50% on your energy cost by deploying a Fortix. And that's what we're going to be able to do as we launch the system.

Leveraging our operating -- so invigorating our operating model. So particularly, this is around transportation. We really are trying to -- we've done a significant work with -- we've identified 60 key target accounts within the material handling space. And we've said, okay, these 60 accounts, 40 of them are fleet operators. I need my Motive Power sales specialist to connect up with my Transportation specialist and let's get in and meet with these customers. And we're starting to see some really early seeds of opportunity doing that. We have teams that meet weekly. We're out talking with customers about ODYSSEY. We've launched about 8 different application studies in these customers, and we expect to start to see that pull-through selling happening.

But what we also did is we took -- we said, hey, we needed a tool. We looked back to Kerry Phillips and the team that developed EnSite. And we said, hey, how do you take the power of EnSite and the application modeling and the data we collect from the ODYSSEY ACE chip and put that together? Help us build a tool to shorten our sales cycle. So what we did is we created a power fleet program (sic) [ FleetPower program ]. I can put batteries in a tractor-trailer. I can send it out to be used for 90 days. Our salespeople can go back and download the data. They can do a quick customer assessment. They can do a recommendation on what the long-term effects will be, how long they can expect the battery life to last. And really, what it does is it enables a faster selling cycle for us in Transportation. So it's just one example of how we've been able to leverage both teams to be able to enhance the selling experience.

So the last thing I want to talk about is our Fortix system. I know it's been covered a couple of times here today, but it's our key area for accelerated growth. And as Mark mentioned, it's our next step in our evolution in energy management as a company. So within warehouses, we know we have a deep installed base. Over 50% of warehouses have our products in them. These are customers that we know. We know they have energy challenges. We're actually -- as we talk to customers, they're actually surprised at what they do pay on electric bills. We've met with one in Chicago and they're like, oh my god, I can't believe I pay, like, a 50% premium on my utility cost. So we're actually opening their eyes in some cases by asking the question.

But for example, we can cut -- demand charges could be 30% to 50%. That 15-minute window when you're running at that high demand, that's your utility rate for the entire month. If we can cut that down, we can save a significant amount of savings to our customers. And then as Shawn mentioned, on the flip side, people just can't get power. If I'm operating a facility and I cannot get more electrical infrastructure into my building, Fortix allows you to deploy a system and charge up to, well, it's 6 to 12, depending on size of the charger, let's just call it 15 chargers, you could charge up to 15 chargers on the same charging port, right? That is huge because if I'm moving into a light industrial warehouse, and I'm going to operate 10 lift trucks and the last person there only operated 4 lift trucks, odds are, there's not enough power in that building, that all they'd have to do is buy a Fortix system, and now I can level load the draw on that line and operate more lift trucks. So that's a huge opportunity.

Or for 3PLs. If I'm the 3PL and I'm moving into a building for a 3-year contract, I don't want to go pay for electrical infrastructure that has no value that I have to then try to recover my cost, if I could deploy a Fortix system and take it with me when I leave. So there's a lot of opportunities for us in this business. But now that you've seen the benefits of the Fortix, I just want to spend just a few minutes talking about the early traction and what we're seeing. We don't have a product yet that's fully approved. Mark's team's working on the UL approvals.

But we have gone out with customers. We have 5 active sites that we have running today. We've had 15 pipeline discussions with customers that are excited about it, that we actually said, hey, we're going to do our 5 pilot sites. These 15 other people would do pilots with us tomorrow, but we kind of stopped and said, we need to get through the approval process and get all of our UL before we launch any further. But if you looked at just those customers, there's over 475 targeted locations that we could go after with these customers. These are trucking customers. These are logistics customers, cold storage customers. And these are all people that we know, that know us, that have known us for 20 years, right?

So that's the beauty of this product is I don't have to go find a new customer. I don't have to establish a relationship. I can walk into all of our customers today, find ones that benefit from Fortix because there'll be certain regions of the country that do and certain regions don't depending on utility cost. So that's really the excitement. And that's why we see a huge opportunity for this. Again, strong relationships.

As Keith discussed, we're going to be using his service network to service this. This is not anything new. He's installed over 5,000 lithium sites. We're confident we have the support system for this. And we -- for our customers, we're the proven expert in high cyclability, high reliable energy applications, and that's why customers look to us. And that's why we're confident that this product will give us above-market growth.

So just to summarize, item one, I said, next-generation solutions. 3 years ago on this stage, Shawn O'Connell was the President of Motive Power at the time. Our maintenance-free overall sales mix of our global sales was about 19%. This past year, it was 29%. So it grew at a 50% rate. I'm confident that in 3 years from now, we would easily be at 50%. I mean we've seen it grow with the products we have coming. We know that trajectory is going to continue. I'm highly confident of that. And these are high-margin products, higher margin than our traditional flooded products.

Secondly, we're leveraging the organizational alignment between Transportation and Motive Power. I've explained to you today about it. It's the same customer base. So there's a lot of commonality, and we see a lot of opportunities in the short term that we're going to get from that. And then thirdly, the most exciting one is the energy management system. It's totally new for our business. Our sales team loves selling new stuff. We try to hold them back a little bit because they'll just keep selling and selling. So especially, they love to sell the new stuff.

But I'm highly confident that as we fully launch the product and we get into the end of fiscal '27 into fiscal '28, you'll see more and more Fortix becoming a larger portion of our business. So thank you very much. I would say that during the break, again, check out all the products back in the hall.

And at this time, I'd like to pass it back over to Charlotte. Thank you.

All right. Well, great. We're just going to take a quick break here. So let's see, it's 10:21 now. Let's take a 10-minute break, and we'll turn back at 10:31, and we'll see you then both online and in person.

[Break]

The next time we do this, we'll have to find a different place to let you guys take a break instead of out with all of our great products. But yes, thank you for -- welcome back, everybody. Thanks for coming back in room. Thanks to those that were on the webcast having a break there. Just now we're excited to get started again. So I'll just give a couple of more seconds here to get some final seated places. And I would love to welcome John Benetti on stage to talk to you about Precision Power Solutions.

So good morning. My name is John Benetti. I'm the Vice President of Precision Power Solutions. Before we get started, just a little bit about myself. So prior to taking this role, I served as the Senior Director of our operations for our A&D business for the past 8 years. I've got over 25 years of experience in aerospace and defense industry with a strong focus on battery technologies and operational leadership. The majority of this time is, as Mark said, the last 25 years, I've been partnered with him as we've brought new technologies to market and ramping and scaling of that. A lot of that is me trying to cash the checks that he writes, right?

The reason I bring up my background is two. The first one, I'll be the driest presentation today. So I hope everybody got coffee during the break. And I don't want that to take away from how excited we are as far as the opportunities we've got within Precision Power. But the real reason I bring it up is right now, the focus for our segment is on execution and delivery. Demand in aerospace and defense right now is immense within each of our PPS end markets and our ability to scale and match that demand is the main driver for our growth. Demand is there. It's ours to capture through our execution.

So this is an exciting time in my 25 years in the defense industry, especially around batteries. This is an exciting time. The only thing I can relate it to is in the second Iraq war, we were at a different battery company. And those supply lines got stopped and a lot of it was based on batteries, and we were able to develop a lithium manganese dioxide chemistry that was -- had 50% more capacity, right, to help alleviate those supply issues.

We're facing the same thing right now with drones, right? They've hit out of nowhere. And it has hit everywhere across the battlefield. We'll talk about it today. Where do the batteries come from, how to charge and where do the cells come from. It's been a huge impact, and we have all the solutions to be able to resolve those problems, right? So the next 20 minutes or so, we'll walk through how we're leveraging our technology leadership and customer relationships to capture growth in the increasingly electrified battlefield.

So 3 key messages I want to take away today. First, we are positioning our portfolio to support the increased electrification of battlefield applications. Our customers have the same needs that Chad and Keith spoke about earlier. Energy security, how and when best to use energy and the different needs for power and energy solutions. Within PPS, this is driven by the need for drones, computing power at the tactical edge of the battlefield.

Second, we are providing turnkey solutions in region. We're taking advantage of our other EnerSys facilities to keep up with the demand, not only in the U.S., but globally as customers are demanding in-region capabilities. And third, we are extending our capabilities into adjacent markets to capture incremental growth opportunities.

At a high level, PPS powers reliable, high-performance solutions for applications across 3 core areas: manned platforms, advanced lithium systems and soldier power and autonomous systems. Our customers include U.S. Defense, prime contractors and allied defense organizations globally. We have a leading position within the U.S. Defense, including portable rechargeable batteries, missile defense batteries and the largest provider of vehicle batteries. We've delivered a CAGR of 20% in the past 3 years, representing 16% of the company's earnings power and only 10% of the total revenue. We are strongly positioned in our core markets supported by robust demand signals and a secure backlog.

So as Shawn and Mark talked about earlier, battery supply chains are emerging as geopolitical choke points, especially for lithium and A&D programs. This has created a need for a trusted partner with an established manufacturing base with global size and scale. EnerSys has been that partner for decades, and we believe we are best positioned to support this increase in demand and further address it on a global scale.

To do so, we have solution offerings in 3 key areas: first, manned platforms. We're delivering highly reliable battery systems for land, sea and air vehicles as electronic loads continue to increase. Second, advanced lithium systems, where our proprietary chemistries support specialized applications like missile defense, counter-drone and space systems where performance requirements are extremely high. And third, soldier power and autonomous systems, providing scalable, integrated energy solutions for mobile and distributed battlefield applications such as drones, robotics, wearables and UAVs. Across all 3, we are focused on custom engineered high-performance solutions.

I'll take a moment just to go through some key solutions in each of the markets. First, looking at manned platform group. EnerSys is the largest supplier of vehicle-based platforms to the U.S. government. The core of our manned solution -- our platform solutions is our Hawker ArmaSafe lead-acid batteries. These batteries are supplied to land, sea and air manned platforms across the U.S. and allied defense organizations.

This past year, Bren-Tronics launched a lithium version of the Hawker battery that is used on vehicles to help manage the additional power needs that are required within the electrification of the battlefield. That was the vehicle that Mark pointed out earlier. We are working closely with key vehicle OEMs to have both the lead-acid and lithium versions of the 6T designed into the new vehicle platforms. This will allow the vehicle to have the benefits of both the lead-acid and the lithium chemistries on board. We are also extremely proud of our Hawker Submarine lead-acid batteries that are on 50% of the U.S. fleet.

Our advanced lithium systems are program-based custom engineered solutions in missile defense, counter-drone and space applications. We typically provide bespoke solutions leveraging our proprietary chemistry and engineering for those mission-critical can't-fail applications. Our lithium cobalt thermal batteries are in every platform of the U.S. missile defense system and in the development of next-generation enhancements. Importantly, our lithium cobalt chemistry leads the industry in energy density and makes it ideal in hypersonic applications. As Shawn mentioned earlier, in the rapid changing counter-drone market, our liquid reserve batteries are being used to power cost-effective countermeasures for small UAVs. These are small primary batteries about the size of an eraser head that are used to create smart 30-millimeter rounds to shoot down small drones in a cost-effective manner.

In the space market, EnerSys ABSL batteries have 11 billion plus cell hours in space operations without failure, and we are used to power systems on the James Webb Telescope as well as Artemis II. Soldier power and autonomous systems is an exciting market that EnerSys has grown in the past 3 years with the acquisition of Bren-Tronics and Rebel Systems. Specifically with the acquisition of Bren-Tronics, we have further deepened our supply of rechargeable batteries to the defense industry by adding the largest supplier of lithium-ion batteries and charging solutions. Importantly, Bren-Tronics also has a solid presence in EMEA markets, an area we are seeing significant growth with the need of in-region, for-region content.

The addition of Rebel Systems has expanded our footprint in the operational power market as the need for distributed power on the battlefield has increased. The Rebel Systems solution uses the Bren-Tronics lithium battery as the energy storage of its core intelligent portable power solution. These solutions offer resilient, intelligent power distribution, managing the power needs brought about by drones, AI and computing on the battlefield, which all represent a significant opportunity for us to capture moving forward.

So looking at the market, the PPS segment operates in a growing aerospace and defense market. As many of you know, this is rapidly changing market right now with a SAM of about $3 billion and growing. Growth is being driven by, first, increase in global spending. We've already seen that with our Bren-Tronics backlog doubling in the past year. Second, rapid adoption of drones and missile defense systems. This includes batteries, chargers and operational power. And it's also being driven from the U.S. -- from a cell standpoint in the U.S. to be able to use FEOC-compliant lithium solutions that we'll be able to supply out of our lithium plant. All this is tied into the broader electrification across all military platforms. These trends are increasing demand for high-performance, reliable and domestically produced energy solutions, exactly where we are positioned.

So when we look at our competitive advantage, it's built on 4 pillars. First, we are a recognized battery technology leader with over 5 decades of experience and proven performance. And with the Rebel acquisition, we are positioned to provide leading hybrid power energy management solutions at the tactical edge of the battlefield. Second, we are a customer-focused solutions provider with agile development that enables rapid response to evolving program needs, ultimately delivering repeat awards and strong customer loyalty. To me, this is what our engineering team does, right, is they are completely linked to our customers, and they are the ones that are winning us those awards and keeping up our customer loyalty.

Third, as I mentioned earlier, there's a clear need from a defense customer for a trusted partner with established manufacturing base with clear size and scale. This is exactly what EnerSys offers. Importantly, with our Hawker lead-acid batteries, we are the only U.S. company combining commercial and defense battery production at scale, which is a meaningful differentiator. And fourth, we are a proven co-developed partner actively participating in 75-plus development programs funded by government agencies, U.S. primes via grants and awards.

So when we talk about EnerGize and what it means to the PPS group, we are executing the EnerGize framework across PPS with a focus on 3 priorities. Optimizing our core by strengthening our positioning in existing defense markets, including the ramp of our thermal and liquid reserve offerings as well as establishing production of our lithium 6T batteries in Arras, France to meet the needs of our EMEA customers.

Second, invigorating our operating model by increasing speed and execution, like leveraging our Rebel acquisition to drive further differentiation and operational power systems. And third, accelerating by expanding into areas like drones, where we are well positioned to capture near-term opportunities and future opportunities for our Greenville plant.

Over these next few slides, we'll discuss each of these initiatives a little bit further. So one of the key growth areas is our thermal and liquids reserve batteries that are used in missile defense and counter-drones. These are primary batteries, long shelf lives often exceeding 20 years and must be produced domestically within the U.S. We've quadrupled our backlog over the past few years with multiyear purchase agreements in place.

And we see demand continuing to rise further as our liquid reserve offerings is powering a crucial element of cost-effective counter-drone defense, as I mentioned earlier. To address the increased demand, we are pairing customer, federal and self-funding to increase our capacity within our facilities. Looking ahead, we see significant opportunity to scale production and capture increased demand in missile defense and counter-drone with tangible impacts in late FY '27 and into FY '28.

So the Bren-Tronics and especially the Rebel acquisition this past year has given PPS a technology differentiation that extends beyond chemistry. Today's battlefield remains heavily dependent on generator-based power, which drives a critical reliance on fuel resupply operations and making those supply lines and high-value and vulnerable targets. The increasing need for resilient, distributed low-signature power solutions is driven by the power demand and computing needs at the tactical edge of the battlefield.

The Rebel Hyper system can address this need by using the Bren-Tronics lithium 6T as the energy storage component of its intelligent power management system. It can gather power inputs from tactical generators, vehicle power and renewable inputs such as wind and solar. The Rebel Hyper system will then intelligently optimize power flows, store energy and reduce generator run time, distributing power to where it is needed through a resilient, secure microgrid. The Rebel system is able to add hyper nodes and storage modules to scale power up to 15 kilowatts and energy up to 60 kilowatts. The results are a continuous efficient, low-signature power that is able to be used anywhere, anytime and reducing the need for generator fuel. The Rebel systems are currently being evaluated on mounted and dismounted solutions in the Army, and we anticipate tangible impact starting in late FY '27 and into '28.

So as we think about accelerating growth, a key focus of ours is capturing opportunities in drones. Within the A&D market, the differentiation starts at the cell level, and we have a deep expertise in lithium cells that can power these drones. While we're in the early stages of this opportunity, we see clear paths for both growth in the near term and the medium term. For the near term, we are focused on smaller handheld drones requiring individual battery packs, some of which you see outside with Kyle. These packs are currently in development, and we've recently delivered prototypes to the Army for evaluation.

Additionally, in the short term, we've won an award to develop a drone battery charger adapter using the Bren-Tronics ABC Charger. This need came about from the Army to have universal charger to handle the variety of drone packs that are being used in the field today. As we think about the medium term, the focus turns to larger fixed wing drones requiring multiple battery packs. We have 10 years of experience in designing and building these type packs. And with the addition of Bren-Tronics design and manufacturing expertise, it furthers our position to win in this segment.

The largest opportunity that we have, though, is in cell production for the drone batteries. The government is transitioning requirements that these cells be U.S.-made using FEOC-compliant lithium technologies. We have clear support from top customers and proven leadership as a trusted partner of FEOC-compliant lithium cell technologies, and this makes our proposed lithium manufacturing facility in Greenville, South Carolina, well positioned to capture this opportunity.

So when we talk about drones, the biggest takeaway that I do want to say here is once we start to add -- once we add the Greenville facility, we are completely vertically integrated, as Shawn alluded to earlier. Greenville, South Carolina will supply FEOC-compliant cells. Bren-Tronics will supply battery and charging solutions, and Rebel will be able to supply operational power solutions to be able to power the chargers from Bren-Tronics.

So to summarize, we are positioning our portfolio to support battlefield electrification brought about by the increased needs from drones. We are delivering turnkey in region, for region, leveraging our global size and manufacturing scale, and we are expanding into adjacent opportunities to drive incremental growth. Overall, PPS is well positioned to capitalize on strong defense market tailwinds and deliver long-term value. So thank you.

And it is now my pleasure to hand over things to someone who has provided our team with strong leadership and guidance, and is not only a great teammate, but a great friend, Andi Funk.

I don't know. He said he was going to be dry, but I think he's a tough act to follow. It's a little hard to follow all those cool things that we do in our PPS line of business. So thank you, John. So I hope you're having as much fun this morning as I am hearing our story. I'll tell you, I couldn't be more proud of the team that we have here or the company in front of us. We're excited about the opportunities that we're going to share with you.

For those of you that I have not met, my name is Andi Funk, and it is my honor to serve as EnerSys' EVP and CFO for the past 4.5 years. I've been with the company over 7 years now and previously served as the CEO and before that, CFO and Treasurer of Cambridge-Lee Industries. I also sit on the Board of Directors of Crown Holdings. And today, I'm going to walk you through how we've been driving greater financial focus and discipline across the organization, how that translates into proved profitability, strong cash generation, long-term growth opportunities and compounding value creation opportunities for our shareholders.

Three key messages that I want to leave with you today. First, we are executing on our energized strategic framework to become faster, more agile and more customer-focused in order to drive accelerated growth. As you've heard today, we are in a variety of exciting diverse end markets that collectively are growing faster than GDP. We have a right to win in those end markets because of our leading #1 and #2 market share positions, deep customer relationships and strong technology stack. And we're doubling down on those focused growth opportunities that you heard about today that leverage those leading market positions and our differentiated tech platforms to make us uniquely positioned to expand our share of wallet with our existing valued customers.

Second, we have enhanced our cost discipline across the company, which has driven margin expansion. Going forward, our disciplined approach will further compound that margin acceleration from the positive operating leverage that we expect to gain on our accelerated growth. And finally, we have a flexible balance sheet, and we generate strong free cash flow. Coupled with our disciplined approach to capital allocation, this will give us optionality for investment decisions and also enable us to continue to return excess capital to our shareholders.

So let's take a look now at our financial results over the last 3 years, which reflect the benefit of our increased organizational focus and discipline, and begins to foreshadow our future financial trajectory. We've driven meaningful improvements across key metrics. While net sales has been relatively stable, our focus on managing costs and making disciplined investment decisions has resulted in our adjusted operating earnings growing faster than sales and our adjusted EPS growing even faster than adjusted operating earnings. This progress is supported by a focus on product price and mix, OpEx discipline, footprint and manufacturing optimization, contributions from recent acquisitions and the benefits of our stock buyback program.

The key point, our disciplined operating performance has driven increased cash flow, which we are strategically reinvesting in targeted customer-focused growth areas where we have a right to win that will drive accelerated growth in the future. And going forward, we expect that acceleration in top line growth will have a compounding impact on earnings through positive operating leverage that the additional volume will bring.

We've made significant progress while also intentionally positioning ourselves for future compounding shareholder value creation opportunities. From a portfolio standpoint, our successful acquisitions like Bren-Tronics and Rebel are synergistically expanding our capabilities and unlocking more growth opportunities in our strategic areas of focus. We're also streamlining our manufacturing footprint. We're leveraging our lead-acid Center of Excellence that Chad talked about to further take out fixed costs from by closing two of our manufacturing plants in Mexico and intentionally increasing our 45X benefits by transferring that volume to our U.S. factories.

On the operational side, we have fundamentally changed this company through our energized strategic framework that Shawn kicked off about a year ago, which we are now operating with more discipline and financial rigor. As one example, in fiscal year '26, we took out $80 million of annualized costs through strategic organization realignment, optimization and efficiency gains. So it's not a onetime action, but it's really a change in the way we're running this business.

At the same time, Mark enhanced the focus of our engineering teams to execute faster on new product introductions through a more customer-focused approach. We removed redundant layers of management, which has enabled us to move faster with greater alignment across the company, and as is evidenced when you have a moment to look further at the product showcase we have in the back. And importantly, we have delivered a TSR of 150% over the past 3 years with strong operating performance, $620 million of buybacks and a 50% increase in dividends. And as a reminder, we still have $875 million outstanding from our previously announced $1 billion stock buyback program. All of this supports our strong shareholder returns and strengthens both our margin profile and long-term ROIC.

One of the strongest attributes that EnerSys has is our ability to generate significant free cash flow. We've delivered $1 billion of cumulative free cash flow over the last 3 years, driven by strong operational performance, disciplined capital spending and improved working capital management. Looking ahead, given investments we've made over the past few years in our manufacturing footprint, we expect to deliver significant revenue growth without the need to increase capital expenditures proportionately. We expect normalized CapEx to be in the range of $70 million to $80 million per year, which is below our current level of annual depreciation and also before the impact of our planned lithium plant.

Additionally, the continued focus by our COEs on working capital will drive further cash flow generation. This will give us flexibility to both invest for growth and continue to return capital to our shareholders. We have this flexibility because we are committed to maintaining a strong balance sheet. We have low net leverage at 1.1x EBITDA, we have ample headroom below our 2x to 3x target ratio to provide optionality. We enjoy ample liquidity. We have no significant near-term maturities, and our commitment to a strong balance sheet has afforded us solid credit ratings, which just reinforces our financial strength. Collectively, this gives us the flexibility to navigate different macro scenarios, invest in growth, pursue strategic opportunities and continue to return capital to our shareholders.

We have demonstrated our very disciplined and balanced approach to capital allocation. Our priorities are clear and consistent. First, we invest in organic growth, particularly high-return investments like our lithium-ion plant facility. The enhanced financial rigor we have put in place ensures that the organic growth investments meet our financial objectives. Second, we maintain a dividend that grows with earnings, excluding 45X benefits. Third, we pursue strategic M&A that aligns with our growth priorities. Fourth, continue to maintain a strong balance sheet. And finally, we return excess capital to our shareholders.

Over the past three years, we have repurchased 15% of our shares outstanding with, as I just mentioned, approximately $875 million remaining on our buyback authorization. This framework ensures that we are allocating capital to the highest return opportunities, investing in our future growth, returning capital to shareholders while also maintaining optionality.

M&A has been a key part of our growth history, and we will continue to be disciplined and strategic. We have a long history of utilizing M&A to strengthen our portfolio. These acquisitions have expanded our capabilities, enhanced our technology base and deepened our customer relationships. Importantly, M&A to us is not simply opportunistic. It is highly strategic and aligned with our long-term objectives. Our recent acquisitions demonstrate the disciplined approach we take to M&A.

We evaluate opportunities through both a strategic and financial lens, including alignment with growth priorities, expansion of technology and capabilities, accretive revenue and earnings growth potential and delivering returns above our cost of capital. The Bren-Tronics acquisition is a really strong example, expanding our presence in critical defense applications like John shared with you, while meeting other strategic filters and financial criteria.

Strategically, Bren-Tronics has expanded our lithium product capabilities across the entire company. It opened the door to the Rebel acquisition, which enables us to pursue the opportunities in drones. While simultaneously, it has deepened our trusted relationship with the U.S. military and bolstered our geographic reach. And ultimately, it has increased our share of wallet with global customers in high-growth markets. Financially, it has been accretive to both revenue and margins, delivering a return that exceeds our weighted average cost of capital in a high-growth market.

As everyone in the room may be aware, we are operating in a very dynamic policy environment. And I am very pleased to say that we have positioned ourselves well to benefit from these changes. Key benefits to our shareholders include favorable tax policies as well as significant value from 45X benefits, which are reported as a reduction to cost of sales and not subject to taxation.

In fiscal year '26, we recognized $159 million of 45X benefits. All of the benefits here have been optimized by our proactive actions to take advantage of opportunities and mitigate exposure from the policy changes, such as optimizing our manufacturing footprint, on-shoring production, diversifying our supply chain and insulating our shareholders from any remaining cost of tariffs through pass-through pricing. The result of our strong execution is a more resilient and regionally aligned operating model.

As you've heard us discuss today, our planned lithium ion facility is a very important strategic long-term growth investment. This project expands our domestic manufacturing capabilities, strengthens our supply chain resiliency and positions us to meet the growing customer demand. To be clear, the Department of War is asking us to make this investment. From a financial perspective, this investment will be phased over multiple years. It will be supported by external grants and incentives, and it can be funded through our own existing cash flow. This is a high-return investment aligned to structural market demand. And importantly, the revised scope, which Shawn shared with you of our lithium plant significantly derisks this investment and is a great illustration to me of the new targeted customer-focused approach that we're making, investing where we have a right to win in high-growth areas while maintaining flexibility to adapt technological advancements that best meet our customers' evolving needs.

You've begun to see our earnings growth potential this past year. And as I mentioned earlier, going forward, accelerated top line growth will have a compounding effect on our bottom line results. This slide is what it is all about and what I'm most excited about, the compounding top line growth in front of us. At first glance, our business can seem a little complex, but really, it's not. You've heard common themes today from all of our segments and presenters. Our customers are struggling with the same challenges, and we're helping to solve those issues with transferable technical service offerings.

Our growth outlook is supported by market growth with very clear focused initiatives to drive incremental growth across each of our segments. So as Keith highlighted for NIS, growth in our communications, data center and industrial power and utility markets are being driven in large part by the build-out of artificial intelligence and network infrastructure fortification.

Simultaneously, labor scarcity is driving the need for intelligence to support energy solutions. These drivers provide a strong market growth base. But as we look ahead, we expect our data center [indiscernible] lithium-ion data center offering, our services expansion and our XM Edge launch to provide incremental growth over and above the market. And in IMS, as Chad discussed, our material handling and transportation markets are expected to see continuous growth as they naturally recover this year and are bolstered by material handling and transportation synergies that Chad talked about as long -- as well as ongoing ICE to electric conversion and forklift.

We expect additional growth in IMS to come from our customers' ongoing enthusiasm for our maintenance-free solutions, including our next-gen lithium and chargers. And we're also excited to be able to expand our market share with our -- expand our share of wallet with these existing IMS customers through our BESS solution, which we are launching this year.

Then in PPS, as John shared with you, there's significant growth across our manned platforms, advanced lithium systems and soldier power and autonomous markets, primarily driven by the increased defense investment and the electrification of the battlefield. We're seeing incremental growth opportunities with the ramp-up of our thermal and liquid reserve offerings, operational power systems growth and the lithium cell offerings for drones and UAVs. Our planned lithium plant enables us to meet this rapidly growing demand with the highly valued FEOC-compliant lithium batteries that our customers need.

So now this slide is going to pull together everything you've heard from our team today, how our long-term financial framework provides a clear path to shareholder value creation. First, most important, top line growth. We anticipate 4% to 8% annual growth revenue driven by both market growth inherent in our diverse end markets as well as targeted incremental growth initiatives. We believe that our diversified end markets will grow above GDP at approximately 3% to 5% in the aggregate. On top of that, we plan to leverage our leading market positions to expand our share of wallet with our existing customers in which we expect to deliver an incremental 1% to 3% of growth on average per year. As you've heard today, we believe, we are uniquely positioned to offer our customers integrated solutions in Fortix BESS lithium data center and FEOC-comliant A&D offerings.

Our revenue outlook takes into consideration that fiscal year '26 reflects very early wins of growing faster than our end markets. I'd like to note that we recognize not every one of our markets will grow at the same rate every year, but it's our diversification and resilient business model will enable us in the aggregate to absorb market-specific nuances.

I'd also like to point out that our targeted new growth initiatives will still be in early innings over the next few years, enabling our growth rate to expand as these offerings take off. With profitable growth and disciplined cost management execution comes the compounding impact of operating leverage. Coupled with efficiencies generated by our centers of excellence and higher-margin offerings such as our maintenance-free conversions and our new targeted growth initiatives, we expect to deliver 50 to 100 bps of margin expansion per year.

With this earnings growth, we will leverage our strong free cash flow conversion and disciplined capital allocation to reinvest in M&A and stock buybacks, further optimizing shareholder return. This framework is dynamic and both achievable and sustainable over the long term. In the near term, you'll see higher return coming from margin expansion with the full year impact of the fiscal year '26 strategic organizational realignment costs taken out and also the savings from our Monterrey and TJ plant closures kicking in.

Market growth should accelerate over the second half of the fiscal year as we have the recovery in the IMS markets in forklifts and Class 8. And then it will be amplified by the targeted growth initiatives we shared with you that will have a more material impact beginning in fiscal year '28. As volume picks up, our margin and earnings growth will be compounded by enhanced fixed cost absorption in our factories, coupled with our disciplined approach to OpEx. And finally, our enhanced earnings will lead to incremental free cash flow generation, which we will continue to reinvest to further accelerate growth and optimize our shareholder returns.

So to summarize, we believe, we are uniquely positioned to execute our strategy and become faster, more agile and more customer-focused. This will drive accelerated growth. Our accelerated growth will create positive operating leverage that will enable us to further expand our margins and compound our earnings growth. And finally, our strong free cash flow generation and disciplined approach to capital allocation will unlock incremental shareholder value creation.

So with that, I'd like to thank you for your time, and I'll now turn it back over to Shawn.

So before I go on to closing remarks and we get into Q&A, just a note from my team, I'm proud of you. I thought you did a great job today. It's clear to me from 12 months ago to today, just a little over 12 months on a job, but we're operating a different company. So kudos to you. And John, you can be -- if you deliver all those batteries, you can be as dry as you want. Well, you can use AI to do the next one. Just get them batteries built and key.

I learned something today. The things that most attracted you to EnerSys, I know it was working with me the whole time. Anyway, listen, it's very important for me that you walk away today understanding the difference in the markets we serve, just how different. So in this large universe of battery and some very large capacities in the world and American automotive companies making deals with some of those companies and purporting to do large energy storage, they can do all that. It has nothing to do with what we're going to do. And our markets are truly unique, very specialized and for some of them, but the volumes they have to put out for us, while these are attractive SAMs for them, the juice isn't worth the squeeze. And so that's the biggest takeaway.

And EnerSys is focused in those markets where we have that right to win. We have those leading positions. And frankly, we have our customers asking us to solve these problems. It's a very, very good position for us to be in. Those problems are only getting worse, this energy issue and the labor issue. And we're right in the middle of being able to solve that. We do stand alone in our space in providing the end-to-end solution. Many of our competitors provide a piece of this. There is a data center lithium competitor today in this area where our customers are afforded [ Five 9s ] reliability. Keith talked a little bit about this. They're afforded 5 minutes of downtime a year.

One of our competitors gives you an e-mail account. And if you have a problem, you send an e-mail, and you're guaranteed a response in 72 hours. It just cannot be. And EnerSys is a company that's there all the time and walking the journey with the customer, and we really stand alone in that regard. And finally, this team, I hope what came through to you today is the unity in this team. I told you it wasn't just a group of people working together. It's a group of people who truly like and trust each other, and we are focused on delivering on our initiatives.

We've accomplished a lot in 12 months. We have a lot to do. We're not perfect as we leave here today, but we know what those things are. We have a much better framework to execute. So again, I think we're a very compelling, a very interesting investment proposition. I know the stock has done some interesting things this year. We've got a lot of growth ahead of us. So I want to thank you again for joining us.

Charlotte is going to come back up and get us ready for Q&A. We're going to have my colleagues join me on the stage. But thank you for hearing our story today.

Thank you, Shawn. So we're just going to take a moment to pause here and get ready for Q&A, bring some seats on stage for our speakers, and then we'll jump right into it. Just a few quick reminders before we get started. Those of you in the room, we're going to have two mic runners. We'll have Molly on this side. We'll have [ Melanie ] on this side. And please wait for them to bring you a mic so we can hear you very clearly here in the room, and they can also hear you joining virtually as well. If you're joining virtually, and you have a question for us, please feel free to use the portal, and I can read that aloud for you here in the room. So with that, just give us a moment to get the stage set up, and we'll get started.

Thanks so much for waiting, everybody. Yes, let's get started here with Noah.

The growth strategy that you've laid out is quite focused and the value creation framework provides a lot of flexibility over a period of time. But I wonder just sort of conceptually how to think about the contributions or at least how you think about the contributions from the different pieces of that above-market growth strategy. If you take 2% at the midpoint and take that out 5 years, you're saying, okay, maybe there's $400 million of potential revenue generation from these growth initiatives. So I guess, conceptually, how would we think about that breaking out among the different strategies that you've laid out?

I mean the important part, so thank you. It's great to have you here, is that we wanted an algorithm that could live. So there's going to be periods of time that it will be more on the earlier side as we're ramping these new initiatives up and that will grow. So with all of these, there's going to be that acceleration. I mean you look at, for example, data center Noir, you know how much that we are selling of our lead acid business. And right now, I'd say lithium and lead acid are probably about the same, but higher growth rate within lithium. So earlier, it's going to be a smaller percentage and then it will start to accelerate over time as an example. So we're not giving specific guide for each one of these initiatives, but collectively, that's how they'll come together.

It makes sense. And maybe one follow-up before I pass it on. The 50 to 100 bps margin expansion per year, you've obviously exceeded that over the past year. I think you commented that margin expansion would be a little bit ahead of that target as we look out in fiscal '27. But it was also interesting going through your re-segmentation to see that you have a really nice margin profile in the A&D, the PPS segment, for example. And so if we think about just how mix might play a role in margin expansion? How would you frame that for us?

I'll take that one, too, if anyone else wants to contribute. But what you can see is the new growth initiatives that we have are all in higher margin accretive portions of the business. So that adds value. You also see that our CapEx for our base business is below our depreciation. That's going to add value. The margin expansion figures that we gave are excluding 45X. So you'll also see some benefits this year and next year, exaggerated benefits coming from the Monterrey and TJ closure. So we intentionally manage that, but we also look at that as not as a long-term focus because there's going to be an end to that portion. So we try to maximize that benefit, but that's why we called out the margin expansion, excluding 45X. But you'll get some more of that in early years as well.

Noah, I'd just like to add back to your first question. One of the reasons for the model, the way that we set it up is we're putting -- I've made these folks' jobs tougher than they've ever been, but I've asked them to be partners in being strong operators. And so I want them -- and we know that our businesses -- these end markets move in different cycles. So we'll have some that are performing well, some that slow down as we saw with Motive Power over the last year.

I'm tremendously proud of the team because it's never been the case before we could set earnings records in a down year of Motive Power. So this is a first in our history, and it just shows the discipline, but I'm requiring this team to be partners in all aspects. So all of those levers, they have to be [ mining ] at the control station and to make sure that we're delivering on our EPS targets. So it's kind of -- the framework is sort of set up to put them on the hook for all of them.

I was hoping we could talk a little bit more about the drone industry. Clearly, this is something I think the team thinks is a great opportunity. I was hoping you could kind of frame how we should be thinking about that over the next kind of 2, 3, 4, 5 years. Obviously, I would imagine bringing on South Carolina cells is going to be critical in kind of helping that ramp. But just given the timing of building out that facility, how should we be thinking about the opportunity in kind of the next 1 to 2 years and longer term? And then is this something that really is critical just in the U.S., or is this something that NATO, we could be -- is an opportunity, just kind of broad strokes around that opportunity.

Yes. I can take a first shot at that. So when we think about drones, think we talk -- I think John and I talked about the ecosystem of drones, right? So there's obviously just powering drones, but there's also the charging element, all that. So what we've seen in our group is the first element of what we're seeing now is expansion in counter-drone activity.

So that's when we talk about the lightweight 30, and we talk about the missile defense piece. And then ultimately, the Rebel systems, we're seeing that ramp up. We do and are starting to see our sourcing of packs and building of packs [indiscernible], we're strategically looking at using that same electrochemistry that would then flow into our plant. So as we start to see the drone demand increase for us to support those drones, we're looking at a strategy of not only doing those packs, but those cells will then be converted to our cells over time.

So as we have that ramp of the plant, we should be capturing some of that drone demand now and then we can convert it over to FEOC compliant cells going forward. At the same time, we're ramping the counter-drone activity now. So we are very excited about what this means to us. We're very excited about what that FEOC compliant means. But it doesn't mean in the short term, we're waiting three years to get those solutions out there.

So our focus with our team at Bren-Tronics and Rebel is to get all aspects of that. And we've almost created an internal infrastructure or almost not only a CoE, but a focus on making sure that we're aligned with that from the integration of chemistry up, but also from all the other elements supporting that, which is where we're starting to see the initial growth is even more the external side of the drones versus drone itself. Is that -- I don't know, John, if you have anything else you want to add there?

Yes. I think you hit it on the short term, right, is that we're building packs long term. So whether we build the pack or not, being able to say it's an FEOC-compliant cell that we're making, whether we're using them or whether we're selling to other folks, that's very -- that mimics what we do with our thermal and liquid reserve batteries, right? It has to be a domestic supply because it is critical. And having that capability, I think, is significant.

We're obviously excited to talk about the lithium plant. Hopefully, soon we can give more details, but it is -- we feel like we put together a plan that really addresses what the DoW needs. And then your other -- the other question I didn't answer was around we see the same needs in Europe. We see the same needs with our allied countries. We're learning as an industry, it's learning what happened in the Ukraine and how that impacts the battlefield. We're seeing those same kind of learnings. And I think that's where John's point around taking advantage of the facilities we have in Europe to expand that capability because it needs to be in continent for continent. And I think we're seeing a lot of more excitement around that than we've ever seen before in terms of the investment into those -- in the European countries.

I would just add one thing that we find very interesting, very compelling. For the lion's share of most of our careers, the DoD or the Pentagon would release a 5-year or a longer-term road map for battery energy storage. They are refreshing that quarterly now in a way they've never done because they are only now beginning to dimension through all the permutations of defense, the enormity of what they need. And so it's -- some of the numbers are showing us now are just a bit mind-boggling, but it's -- they're only -- we put our SAM up there a bit tongue-in-cheek because they're already telling us, guys, that's wrong, and we're going to continue to update you. So we know it's a very robust growth expected there.

Okay. Great. And then as we think about aftermarket, I mean, clearly, this seems to be a growing opportunity across all segments. Somebody mentioned the 750,000 Alpha boxes in telecom. Just kind of curious like how we should think about that aftermarket and replacement cycle and really what that opportunity is.

Yes. I mean for the -- for my business in NIS, I think the build-out and extension of the communication networks continues to provide fuel for growth, right? But on top of that now, we'll have a solution that will enable certain parts of the network to upgrade and deal with where they're most power constrained. So we should see an amplifier from the continued build-out with the new technology that we assume will have more of a value price aspect to it. But on top of that, there will be spots where the network is constrained today that we'll be able to see a bigger upgrade piece.

On the battery side, I think data centers from that standpoint, I showed you the replacement ratios earlier. That's a consistent drumbeat of business for us. What's exciting about the data center space is that you've got the increase in new builds on top of those. And some of the build cycles are starting to come to their first refresh cycle. So we do see a continued fuel, if you will, for growth in that space.

Next question. Take one from online then. So let's see. I think Chip had a question over here. No, Chip. I'm so sorry.

For data center Noir, the lithium product, maybe expand on the OEM certifications. What does that process entail? Where are you in some of those conversations? And then supply chain and capacity? And how should we think about ramp up?

Yes. The things that I'd ask you to kind of look at to determine success as we go forward are our announcements around OEM certifications, service capacity and obviously, early wins. We're trying to be pretty intentional about creating a pull from the end users. If you notice the architecture differentiation that we have, there's a reason to use that product for future builds. But we're also being very intentional about getting the OEM certifications. So we've already seed planted this. We just kind of announced it or come to market here this past Tuesday. But our early dialogue with the OEMs has been very good. We've done some initial testing and trials in the field to demonstrate field reliability.

I think as I think about the OEM certification and field reliability, those are going to be the two biggest hurdles that we have to get across so that when they spec it into the design, it's already proven technology. So I'd ask you to kind of keep an eye on those three things as we move forward, but we're already well down the path of having those conversations with OEMs and end users.

Maybe a follow-up. A lot of -- we get a lot of questions around 800-volt DC and implications for centralized UPS. Just give us your thoughts around that.

Well, I can start because I got to talk about it a little bit at your [indiscernible]. If you look at why they're going to 800 volt, it's just a -- if you know Ohm's law, it's just to reduce resistance and in so doing, reduce the amount of copper because I don't know if you've looked at copper as a commodity, which is expensive, and it's getting harder to get. So if you raised 800 volts, you reduce that resistant picture. For us, it's immaterial. Most data center batteries today are floating somewhere above 500 volts. And as you see from our full technology stack, we can go down to a couple of volts in the defense application up to 48-volt telecom applications, 120-volt utility applications.

For us, it's just a -- it's the same architecture with slightly different settings. And if they want to take the battery to 800 volts, if you look at a battery in series for us, it just means more cells and higher volume. But every one of those systems will still be deployed in a centralized UPS. So the architecture doesn't go away because of 800 volts, just the -- how the architecture contrived is slightly different.

Shawn has been in the industry a lot longer than me, so he speaks really eloquently about that. But from my perspective, quite simply, we want to be in mission-critical spaces, and they're still going to need backup power. So whether it's distributed differently or not, we're still going to have to be there with our solutions in order to keep them running.

And any time we get Shawn talking about Ohm's law, I'm always happy.

Great. Next question. Tackle a couple of online, if that's okay, guys. So let's see here. I have a question come in about acquisitions. So where do we think we're going to see focus going forward?

I can start with that. We have some very attractive -- it's interesting, it got mentioned today with the mass we've achieved with Bren-Tronics and REBEL in the A&D space. We are -- when I tell you, we're in the middle of every conversation with the U.S. Defense apparatus, and what they're trying to achieve. It is in a way that -- and Mark and John have got a lot more pedigree in this space than I do. It's in a way that we've never seen in our career. These are primary conversations. They're direct conversations. And what we're seeing in this administration and with this Secretary of Defense, these folks are willing to move fast and forgo the normal procurement cycles that they've seen in the past. In fact, they're encouraging it. And they like us because we're not out there waiting for a handout to solve a problem. We proactively solve the problem. Mark and John both talked about it, we developed a drone battery, put it in the hands of the Army and said, is this what you're looking for with no program. And they said, that's exactly it. So as you see us lean into M&A, there are further ways and targets out there where we can consolidate even more mass, and in some cases, chemistry and technology and move even faster and more meaningfully. And again, where we might have had concerns in the past about regulatory considerations here. We have an administration. We actually have the customer, the defense apparatus somewhat prospecting M&A for us, which is a unique situation. So you're going to see M&A in that lane. We also know, as we have the [indiscernible] conversation and services conversation that we can accelerate through M&A. We have some targets in those lanes that we're looking at. So you could see us -- Andi talked a lot about our filter. It's got to be accretive. It's got to be strategic. It's got to check enough of those blocks for us that it fits our thesis. But there's a lot of ways that we can develop those capabilities quickly through M&A. And so if those situations present themselves, we're going to lean in. And as she mentioned, we have a lot of dry powder. Our leverage ratio is very low. Our borrowing base is very high in addition to our cash generation. So we want to put it to work.

That's great. If we kind of stick with A&D then, how would we want to dimension the opportunity across the drone ecosystem? How do we want to dimension the opportunity across the drone ecosystem?

I can't. What do you say? Diminish?

Dimension the drone opportunity.

Sorry, sorry, sorry. I struggled with that.

So in the short -- from a financial standpoint, I think our immediate impact is with our lightweight 30 liquid reserve product that we'll start to see those impacts starting midyear this year and rolling into next year. That's all built into our 9% to 11% from a growth standpoint. And then I think in the future, where we're headed with Bren-Tronics, chargers with the packs that we're building, we'll start to see additional growth probably later into this year.

I think, Charlotte, it's important for that question to point out that we -- the reason the anti-drones hitting first because that was the first need generated, and that's where the government worked with us to help expand our capacity. So that capacity is actually coming online with those investments that we've been working on to automate that in our facility over the last year. So you're starting to see those other signs in that business where we're seeing those investments and those needs identified, and we're just how do we accelerate that. And the lithium plant being one of those pieces of that, that we're looking at. So yes, I think you're going to -- as John said, you're definitely going to see it there first because that's -- the defensive piece is the first one. And there's such a different -- in the world of drones, offense versus defense is so out of whack in terms of cost because we were using a $100,000 device to shoot down a $500 device, right? And so what's great about the solution with Lightweight 30 is you now have starting to even that up it's great for us because it's a lot of volume and all those type of things, but it does -- it's one of the first opportunities to really get that balance back in. And that's why there's been such a focus on the anti-drone piece for us.

And it's REBEL and our hyper system, right? That -- when we talk in the short term, we'll have the biggest impact over what I believe is the next year is that it uses the Bren-Tronics 6T battery, and that is what is then being able to use to be deployed and be able to charge remotely. And we're seeing the interest level there is significant. Those are all in testing, and that will be the one that will move the needle for us soon.

Great. Just want to check in with our analysts in the room if anybody wants the opportunity to hop back in queue. We'll take [indiscernible].

With the complexity of digital Lowes kind of changing how your customers view energy, power and a variety of ancillary services, I want to hone in on Fortex a bit and kind of the value creation potential you see there and like how that interfaces with your customer relationships. And so is this -- maybe getting ahead of myself, but do you see this as a solution where it's kind of you drop off the hardware and you're just selling the software sort of platform solution to your customers, or is it something kind of they don't want to deal with it, it kind of sits outside of them, you guys manage it or something else or all of the above? Just curious how you're viewing this in terms of value creation potential because I see immense opportunity. I know Mark was touching on all these other technological solutions you can kind of embed in this, but I think it's a good touch point that has a lot of different opportunities outside of even purely energy and power.

Yes. So I'll take the first part of that. When we look at Fortex is, we go into a warehouse, that warehouse has a cost structure. They've kind of felt that they have no control over their energy costs, right? They just pay what the utility charges. If they plug in all their lift trucks in the middle of the day, they get a peak demand charge. They've had no ability to offset that and control that. We look at customers. This is not a sell, drop off a unit and walk away because they don't have the ability to manage that. We would be managing that for them. So as we look at the revenue stream for us, there is a hardware component, but there's also a software component and a services component that would continue, and that would stack over time as more and more of these systems are deployed.

Yes, we -- go ahead, sorry Chad.

No, that's it. Yes.

No, I was just saying because we -- in the product itself, we've integrated machine learning and AI to be able to make that decision for the customer. We know we see value in that. That's also why I'm hitting around the [indiscernible] conversation, we're on the same page as you are is once we get these assets out there, the aggregation of assets that value. So we're going to have -- as we talk about having 1,000 systems out there in ERCOT, I can then aggregate those into demand response initiatives. So we like the idea of using the software now and then ultimately continuing to evolve that as our space grows there to get additional value out of those units. So I think the idea that we always want to kind of have our hooks into that software to get value for us and our customers is essential because we see the payback is great now, the payback with distributed systems and aggregated systems even gets better, right?

Yes. No, I completely agree. And that's exactly what I was trying to touch on, for now.

So FEOC concerns are rightfully something that DOW is focused on. Regulation has also made that a concern in the commercial space. Given that the DOW is utilizing your capacity in South Carolina, curious what you're hearing from customers on the commercial side, if this is something they're interested in? And are there -- is there an opportunity to meet those concerns given your capital plan for the next year, the medium, long term that Andi laid out?

I'll start with that one. So it's a great question. What we're seeing, and it really depends upon the market, for sure, across the board, every user we have in a Western country, be it EMEA or the U.S. has asked us to ensure regardless of where the constituent elements of the system come from, the controls, the software, the cybersecurity are all domestic and Western controlled. So in other words, some customers are perfectly fine with a supply chain on the battery cell that originates in other places, but they don't want anything on their network that isn't a Western-controlled software that hasn't been thoroughly vetted and tested to ensure there's no back door to access their system because of their cyber concerns. Other customers, they want the entire thing. The way we've conceived of Greenville, and the way that we're looking at it, that property sits on 140 acres. The initial plant doesn't consume 140 acres. But we've designed it to be highly scalable. I can't do it today, but I can't wait to tell you about how we're going to achieve that plant, and how it's going to be outlaid and designed because there are certainly applications we can serve out of that plant into those commercial markets where customers are willing to pay for that domestication. And we've talked to the automotives as a potential partner. Again, the volumes are so high. We had a meeting with one of them that you would know in Detroit recently. They're starting at 5 megawatt. It just isn't purpose-built for our markets. So we see a lot of opportunity there, but we want to get this Department of Work piece done first. We are designing it to be scalable.

Another question check. I'm happy to take one from online. So what should we look for in the next 12 to 36 months to assess the success of your current strategy?

I wouldn't mind if all the business unit leaders talk specifically to their space about what that looks like.

Yes. So I'll start with PPS. Well, start with technology and then PPS, if that's alright. So technology, it's to continue to release the product. So we have UL certifications that Chad talked about. It's to make sure we get through that with -- we're releasing the Motive Power lithium battery in Europe now. We will release in the U.S. later this summer. So it's staying on track with the product releases and then they're going to track the revenue growth. So that is a focus of us is not losing sight of how quickly can we make through those things happen. From a PPS perspective, it's execution to John's point. We -- our backlogs are the highest they've ever been. And you should be seeing month -- quarter-on-quarter growth in that business, particularly as you get to the back half of this year and you start to see it ramp. So we know that -- and I think John, you and I would agree on this. We know that business. As we are able to execute, we're able to get more orders. So the biggest concern is can we handle the volumes? That's why they like us. So our focus there is really about execution and seeing that top line growth and the bottom line growth will follow with that as we go forward.

For me, I'd put it in two dimensions. I'd put it in the core business, which from a core business standpoint, with strength in the markets currently that we're competing in, we should continue to see growth and margin expansion sequentially. We are a bit project dependent. So we do have big lumpy project orders that come in. Somebody is building a couple of data centers. We supply a lot of batteries. So there's usually a little bit noise period to period. But given the tailwind that we face in the core business, we still see strength in our lead products. So that's an indicator there. I'd say on the growth initiatives, I mentioned a little bit earlier, but on the data center side, clearly, it's those three things I said before. One is we've got to work ourselves through the OEM certifications. Two, we've got to continue to put points on the board in terms of longer-term reliability and durability. And then the manufacturing and operational supply chain needs to continue to come forward. I mean our service business is probably the second catalyst there from a growth standpoint. We are watching closely new customer acquisition and service, and that's something else that we'll look for to prove success as we go forward.

So in IMS, as I spoke, the first one is continued conversion to maintenance-free products. The products we have actually already launched and are launching this year will drive that conversion growth. I personally believe in three years, it's at least 50% of our business is in maintenance-free conversion. Later this year, we launched our new charger line. That will tie in nicely to Fortex as we launch that. So I envision the next 2 to 3 years, we have really transitioned to an energy management consultant to our end material handling customers. So obviously, this year is a developmental year with pilot sites and things like that. But as we get into '28 and '29, we start to get our feet under ourselves, and we start to go out to our existing customer base and solve their energy needs. On the transportation side, we are on several OEM platforms now. There are several other OEMs that we are not on their platforms. We're going to pursue that. But we're also going to pursue a pull-through effect with all of our relationships with the large customers and large fleets that we know today. So -- and that process is just starting because we've just really merged these teams in the last few months.

Okay. Thank you. Last call, we'll take another question if anybody -- Molly?

So a question on culture here. As a business, you're now facing expectations for customers which have accelerated, whether it be on defense, data centers, your people, your processes, these sorts of things. What have you changed to meet that moment?

Yes. When I came in, one of the first things I made very clear in our careers for all of us at EnerSys, it was always a very hierarchical structure and decisions were retained at the very top of the company. And from day 1, I've done everything in my power to design myself out of the end decision-making process, except for the most impactful decisions. And I think, Satya Nadella said something about what ties are you breaking, right? And they should be the only significant ones in the company. That has been the biggest cultural shift. And in fact, at the sales conference that Mark mentioned, we were in Scottsdale earlier in the month, we brought in 50 of our leaders from around the world. And even the construct of the leadership meeting, they decided what the topics would be. They decided what we would learn, what we would do, what our homework would be and what the takeaway would be, junior leaders. And something that Marshall McLuhan said about the medium is the message. And that was the message that our employees are in charge because the CEO can do what. It give you the what we need to do and maybe the why. I'm invoking [ synec ] here a little bit. But the how's got to come from the people. The how's got to come from our employees. So I've been very mindful that we want -- we have 9,500 employees. We want 9,500 teammates, problem solvers, empowered people that are empowered to make decisions. And that's not words. We're even putting into expense allocation and things like that, where if they see what needs to be done, they don't have to ask permission. They're not coming to somebody for money. They're executing as owners of a company with a proprietary interest to move forward and solve problems, and we're already seeing it. So at our sales meeting, we released -- I wish I could do all of them. I was able to, in my town hall, really double-click into four key areas where by grassroots, people have begun to transform the company. So we're seeing this organic groundswell of this happening. We have work to do. But in 12 months, I'm very, very proud of what's been accomplished there. And that's really, I think, at its essence, how we're going to solve these problems because we have -- you're talking to a guy with an English literature degree that runs an energy storage company. If we're all looking for O'Connell to solve every problem, we're wholly and truly screwed. We need all of our people, and we have really bright people in the company. We have -- in the space business, we have astrophysicists. How am I going to tell them about deploying a battery in outer space? So we need those people applying that creativity across the board. And I think the team would agree, we've really been able to start to unlock the power of those phenomenal associates. And we're just starting to see it happen. It's pretty cool.

All right. If there's no further questions, I would like to take those of us here in-house. We'll go ahead and make our way into the product showcase area to learn more about the products and meet with our management team and have a bit of lunch. For those of you that joined us on the webcast, thank you for being here this morning. And yes, we hope you have a good rest of your day.

Hello, and welcome to the EnerSys Q4 and Full Year 2026 Earnings Webcast and Conference Call. [Operator Instructions] Now I would like to turn the call over to Lisa Hartman Langell, Vice President of Investor Relations. Please go ahead.

Good morning, everyone. Thank you for joining us today to discuss EnerSys Fourth Quarter and Full Fiscal Year 2026 results. On the call with me are Shawn O'Connell, EnerSys' President and Chief Executive Officer; and Andy Funk, EnerSys Executive Vice President and Chief Financial Officer.

Last evening, we published our fourth quarter and fiscal year 2026 results and our 10-K 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-K 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. A 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 May 20, 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 fourth quarter and full year fiscal '26 results, update you on our energized strategic framework and demand trends and close with guidance for the first quarter of fiscal year '27.

Please turn to Slide 5. In the fourth quarter, we delivered our highest quarterly adjusted EPS with and without 45x on our second highest quarterly revenue and strong free cash flow driven by favorable price mix, ongoing OpEx discipline and the impact of our accelerating stock buybacks. We ended the year with full year record sales, adjusted gross profit adjusted operating earnings and adjusted diluted earnings per share, all before the benefit of 45x. It is notable that our ability to generate this level of earnings, during the year in which demand in the electric forklift and transportation markets was down is a testament to the effectiveness of our energized strategic framework, the strength of our diversified business and our renewed ability to perform across varied demand conditions going forward. We have structurally enhanced our business and are well positioned to deliver further value.

Please turn to Slide 6. In fiscal '26, we implemented our energized strategic framework and are seeing meaningful benefits across the business. Starting with optimizing our core. This quarter, we announced the closure of our Tijuana, Mexico facility and the shift to production to our Springfield, Missouri plant, which we expect will generate approximately $20 million of incremental 45X benefits beginning in fiscal '28. We also substantially completed our previously announced plant closure in Monterrey, Mexico, in which we expect to yield approximately $19 million of savings in fiscal '27 and have already seen early realization of related incremental 45x benefits this quarter.

These 2 projects will further optimize our manufacturing footprint, maximize 45x tax benefits support the continued transition to our higher-margin, higher-performance solutions and mitigate future risks associated with tariffs, all while better serving our customers. We are also invigorating our operating model to improve execution, speed and strength alignment across the organization. As an example, our centers of excellence delivered early working capital improvements through better collaboration of our supply data purchasing teams contributed to our strong free cash flow.

Additionally, work progressed to accelerate our growth through new product developments and deeper service and software capabilities, 2 top priorities on our road map. Our lithium data center solution and battery energy storage solutions for warehouse operators, both advanced to the customer commissioning this quarter. As these launches gain traction in upcoming years, we expect the driver of our earnings improvement to shift increasingly from margin expansion toward top line growth. Over the past year, we have refined our overall go-to-market strategy to bring new products to market faster to customer-focused projects, optimize product design, streamlined supply chain and the competitive advantage of our technology stack, particularly for our lithium solutions.

As part of this evolution, we have rescoped the strategy for our lithium cell factory in Greenville, South Carolina, with an increased focus on applications for customers that value secure, domestic supply chains, particularly within aerospace and defense markets. The growing need for electrification across defense platforms, drones, counter drone systems and soldier power applications continues to reinforce the strategic importance of trusted U.S.-based battery manufacturing capabilities. We have made meaningful progress in discussions with the Department of Energy regarding our revised plan and are now in the final stages of the grant process. Our updated approach leverages more established and commercial improvement cell technology which we believe significantly derisks the program, reduces complexity, enables a faster path to production.

While we cannot disclose additional details on the planned facility until the award process is complete, we are currently expecting a more focused manufacturing footprint aligned with our competitive advantages and our customer value proposition. As such, we believe that the extra time will ultimately work to our shareholders' advantage.

Please turn to Slide 7. While the macro environment remains dynamic, we've taken actions needed to manage related exposures. Over the past year, our tariff task force has worked across the business to diversify supply chains increased sourcing flexibility and prioritize manufacturing in region for a region. Our total tariff exposure remains stable at around 22% of U.S. sourcing and an annualized estimate of around $70 million before mitigations. As we believe additional Section 122 tariffs announced in February will have an impact roughly equal to the reversed AEFA tariffs. We have filed for reimbursement on all EPA tariffs we are currently able to and begin receiving funds for this month.

Those refunds are not included in our guidance and will not be presented in lines of business earnings. We are beginning to see both direct and indirect impacts from the conflict in the Middle East, consistent with what others across our markets are experiencing. Although we do not have operations in that region, we saw some direct impact in the form of elevated freight and other inflationary pressures emerge in the fourth fiscal quarter and would expect to continue as long as the conflict persists.

While we are confident in our ability to mitigate those higher costs, there may be some temporary pressure metal costs are recovered. The more significant risk remains the effect of heightened economic uncertainty on customer buying patterns of which we experienced a bit this quarter. Across both trade policy and geopolitical disruption, our focus remains the same, actively manage what we can control, mitigate both direct and indirect costs and preserve the flexibility to respond as conditions evolve.

Please turn to Slide 8. All of our end markets are showing encouraging signs yet conditions remain dynamic. We are seeing strong underlying momentum in data centers communications and defense applications, while navigating softer but improving forklift and transportation markets. While volumes were down overall for the strong prior year comp, posted our highest book-to-bill in nearly 4 years at 1.1, with all lines of business Q4 orders outpacing revenue. The early signs of improving trends we mentioned in our previous earnings call for motive power and transportation has continued with Q4 representing a sequential and year-over-year improvement in orders for both businesses. The geopolitical factors that could impact customer purchasing behavior remains but deferred investment in aging fleets and battery replacements is not sustainable, thus the strength and order activity we're beginning to see.

We're cautiously anticipating orders to continue to trend positively gradually increasing through our fiscal '27 with a return to growth expected in both markets as the year progresses, led by motive power. In communications, we saw strong orders and record shipments for our broadband power supplies driven by continued DOCSIS 4.0 build-out as the need for additional power is driving network refreshes. We anticipate these encouraging demand trends to persist as customers modernize network infrastructure replace aging equipment and invest in more reliable backup power and resiliency capabilities to support growing data traffic and connectivity needs. In data centers, we continue to see healthy demand as customers invest in AI infrastructure and data center expansion.

Today's data centers have an increasing need for higher energy density and faster demand response. Our TPPL technology is more suited to these high rate, short duration discharges that can exceed the capabilities of traditional lead acid designs. While a majority of greenfield data centers are adopting lithium, robust demand remains for lead acid solutions where we have a leading market position as evidenced by our high teens fiscal '26 year-on-year growth. Our new data center lithium battery will enable us to capture incremental and accelerating share of wallet while delivering solutions to our customers that best fit their needs regardless of technology. Within aerospace and defense, we saw a particular order growth in munitions and space this quarter and continue to see robust underlying demand with increasing global defense budgets and a compelling long-term trajectory.

We entered fiscal '27 cautiously optimistic around the broader demand environment while continuing to focus on areas within our control, including executing with ongoing operational rigor, driving manufacturing and supply chain efficiencies and accelerating our targeted high-value new product launch initiatives. Reflecting on my first year as CEO, I'm proud of our accomplishments, our enhanced focus on our core end markets where our deep customer relationships and leading market share positions afford us the right to win, provides clarity on the targeted growth opportunities where we are doubling down to expand our share of wallet. EnerSys is ideally positioned to address global secular trends, including limited availability, increasing costs of both energy and labor, AI acceleration and increasing defense spending all of which require reliable, integrated stored energy solutions.

During our Investor Day on June 11, we look forward to sharing an update on our strategic priorities, our technology road map, and how our focus teams accelerating our profitable growth opportunities. I want to thank the entire EnerSys team for the dedication and execution they bring every day in delivering the solutions and performance our customers depend on.

Now I'll turn it over to Andy to discuss our financial results and outlook in greater detail. Andy?

Thanks, Shawn. Please turn to Slide 10. Net sales came in at $988 million, up 1% from prior year, driven by a 4% benefit from price/mix a 3% benefit from foreign currency translation, partially offset by a 6% decrease in organic volume. As a reminder, our prior year Q4 was positively impacted by some customers pulling in volume in advance that the announced tariffs. In Q4 '26, all lines of businesses saw sequential volume improvement with total company volumes at 7% quarter-over-quarter. We achieved adjusted gross profit of $292 million, down $12 million or 4% versus a particularly strong prior year period as higher freight, tariff and inflationary costs weighed on performance. Q4 '26 adjusted gross margin of 29.5% was down 170 basis points with 45x and 190 basis points without 45x versus a very strong prior year comp.

Gross margin in the quarter was in line with recent historical averages despite the margin dilution of the pass-through of tariffs and higher freight costs which were up $20 million year-on-year, net of having produced more products in region for region. OpEx in the quarter improved as a result of our cost reduction initiatives with a net reduction of $14 million year-over-year. Our adjusted operating earnings were $154 million in the quarter, up 1% versus the prior year, with an adjusted operating margin of 15.6%. Excluding 45X benefits, adjusted operating earnings were roughly flat versus prior year with an adjusted operating margin of 10.9%. Adjusted EBITDA was $173 million, an increase of $6 million or 3% versus prior year, with adjusted EBITDA margin up 40 basis points.

Excluding 45X, adjusted EBITDA was $126 million, up $3 million or 3% year-on-year with an adjusted EBITDA margin of 12.8%, up 20 basis points from the prior year. Adjusted diluted EPS was a record of $3.19 per share a 7% increase over prior year, which had been our previous record earnings. Excluding 45X, adjusted EPS was $1.96, also a record, up 5% versus prior year. Our Q4 '26 effective tax rate was 22% on an as-reported basis, higher than prior periods on a onetime impact from restructuring and tax law changes and 20.4% on an as adjusted basis before the benefit of 45X compared to 18.9% in Q4 '25 and 22.4% in the prior quarter on geographical mix of earnings, which can vary quarter-to-quarter. We expect our full year tax rate on an as adjusted basis before the benefit of 45X for fiscal year 2027 and to be in the range of 21.5% to 23.5%.

Full year net sales of $3.8 billion, an all-time high, were up 4% year-over-year. We generated adjusted operating earnings of $540 million, including $159 million benefit from IRC 45X tax credit. Excluding the 45X benefit, we generated record adjusted operating profit of $382 million and realized our highest full year adjusted operating margin at 10.2%. Adjusted diluted EPS was $10.56 per share an increase of 4% and adjusted diluted EPS before 45X benefits was a record $6.41 per share, an increase of $0.82 versus prior year.

Let me now provide details by segment. Please turn to Slide 11. In the fourth quarter, Energy Systems revenue increased 7% from prior year to $426 million, driven by strong price/mix a positive FX impact and volume growth in Power Electronics. Adjusted operating earnings increased 23% from prior year to $42 million primarily reflecting the benefits of favorable price mix from a richer mix of products and OpEx savings from our restructuring efforts. Adjusted operating margin of 10% increased 130 basis points versus prior year bolstered by record sales of our flagship XM products, which we expect to continue, although perhaps not at the elevated level we saw in Q4. Longer term, we anticipate continued data center growth and ongoing network investments to support incremental data traffic stemming from AI, both of which we are well positioned to benefit from although the project nature of this business can cause fluctuations quarter-to-quarter.

Motive Power revenue decreased 6% from prior year to $370 million with lower volumes from ongoing market softness partially offset by FX tailwinds and favorable base mix. Motive Power adjusted operating earnings were $53 million, down 21% from prior year resulting in adjusted operating margins of 14.2% or a 280 basis point decline versus prior year. OpEx savings and improvements in price/mix were offset by lost leverage on lower volume and higher freight and tariff costs. Maintenance free product sales of 30.4% of motor power revenue mix compared to 29.3% in Q4 fiscal '25. Longer term, Motive Power remains well positioned for growth, supported by electrification, automation and strong demand for our maintenance-free and charger solutions.

Specialty revenue increased 8% from prior year to $192 million, driven by favorable price/mix, particularly in A&D, early contributions from the Rebel acquisition and FX tailwinds partially offset by lower transportation volumes. Specialty adjusted operating earnings were $18 million, up 20% versus prior year, driven by continued strong performance in our A&D business. Adjusted operating margin of 0.4% increased 90 basis points year-over-year while being impacted by lower transportation volumes, indicative of the market dynamics we previously discussed. While transportation sales were down high single digits, orders were up over 30% year-on-year, providing indications of an early book bumpy start to the recovery in demand.

We continue to have confidence in reaching sustained mid- to high teens margin performance within this segment, although the progression may not always be linear is the timing of recovery in transportation and project nature of A&D.

Please turn to Slide 12. Operating cash flow of $144 million, offset by CapEx of $13 million, resulted in strong free cash flow of $131 million in the quarter, an increase of $26 million versus the prior year same period. Free cash flow conversion in the quarter was 170%. Excluding the benefit of 45X to earnings and cash Free cash flow conversion was 459%. For the full year, free cash flow was $468 million with a conversion of 159%. Excluding 45X, free cash flow was also impressive at 236%. Our Q4 and full year cash flow conversions were elevated in part by accrued expenses recognized in our GAAP earnings related to the cost optimization initiatives we undertook this year. Primary operating capital decreased to $877 million versus $932 million in the prior year on improved receivable collections and inventory efficiency measured internally by POC as a percentage of annualized sales, improving 170 basis points versus prior year after absorbing the impact of tariffs and tariff pass-through in both our inventory and accounts receivable balances.

As we continue to invigorate our operating model, our COEs are focused on further enhancing working capital discipline, which we expect will unlock additional value for our shareholders over time. As of March 31, 2026, we had $440 million of cash and cash equivalents on hand. Net debt of $684 million represents a decrease of approximately $100 million since the end of fiscal '25. Our leverage ratio of 1.1x EBITDA remains well below our target range of 2 to 3x.

Please turn to Slide 13. Capital expenditures were $13 million in the quarter, ending fiscal year '26 with $80 million in spend and an expectation of about $70 million in fiscal year '27 as we've completed our heavier investments in TPPL capacity flexibility, and we continue to selectively focus on the highest return, highest impact investments. During the fourth quarter, we purchased 410,000 shares for $69 million at an average price of approximately $171 per share. We also paid $9.6 million in dividends. We have approximately $876 million in our buyback authorization as of May 20. We continue to be judicious in our share buyback activity. Our buybacks in addition to the dividend, underscore our long-standing commitment to returning value to our shareholders with a total of $409 million returned during the year.

Please turn to Slide 14. As we look ahead to fiscal year 2027, we are encouraged by the strength we are seeing in data center, communications and aerospace and defense. We maintain cautious optimum forklifts and Class 8 transportation as we've started to see encouraging demand conditions and anticipate seeing volume recovery improving through the year. Our Q1 outlook reflects typical seasonality with strength in price mix and continued benefits from our energized strategic framework, but also lingering market hesitation and forklifts in transportation in response to the macro environment. For the first quarter of fiscal 2027, we expect net sales in the range of $915 million to $955 million, with adjusted diluted EPS of $2.80 to $2.90 per share which includes $42 million to $47 million of 45x benefits to cost of sales.

Excluding 45X, we expect adjusted diluted EPS of $1.61 to $1.71 per share. For the full year, we continue to expect adjusted operating earnings growth, excluding 45X benefits to outpace revenue growth supported by ongoing OpEx discipline, sustained price mix strength and strong or improving markets across our businesses. We remain focused on strengthened execution, operational rigor and driving long-term shareholder value. While the broader macro environment continues to present self variability in certain end markets, we are encouraged by the momentum we are seeing across the entire company.

We believe the actions we have taken to simplify the organization, improve manufacturing and supply chain efficiency and prioritize high-return growth initiatives have positioned the company well for the future. Supported by our strong balance sheet, healthy cash flow generation and disciplined capital allocation, we remain confident in our strategy and our ability to capitalize on long-term opportunities and deliver incremental shareholder value. We look forward to sharing more with you at our upcoming Investor Day, 3 weeks from today at the New York Stock Exchange. With this, let's open it up for questions. Operator?

[Operator Instructions] And our first question comes from the line of Noah Kaye with Oppenheimer. I was looking back at last year's 4Q presentation, just thinking through the comps and then took a little time to read the strategic priorities that were laid out at the time. And so I'll just start off by saying nice job the first year, folks. I just want to acknowledge that. A question on Energy Systems. So I think the point that you called out about the tough prior year comp on volumes is well taken, right? Volumes were up 8% last year. But just trying to understand how still we got to kind of flat volumes this year, given the comments around record XM shipments and what I assume was continued strength in data center. Just were there any offsets? And then I think going forward, I mean, volume comps are still a bit elevated for the next couple of quarters. So how are you thinking about kind of the profile of growth as we move into fiscal '27?

No, I'll be happy to take that. Thanks. Yes, I think the thing that's important to keep in mind is Energy Systems is it's very much a project business. So while we look at our growth and there are a lot of opportunities to continue to grow, it's not always going to be linear quarter-to-quarter. If you look at data centers in the fourth quarter, it was actually flat year-on-year because we had a very strong Q4 of last year. So for the full year, we're up really high single digits. But it was just a tough comp on the data center piece that drug down, even though we know on an ongoing basis, I think we shared, we've got 36% higher orders year-on-year. So the momentum is certainly strong.

I think it's just the project nature. And keep in mind also Q4 of last year was right after tariffs were announced. And so it was before they were in effect and as we said last year on the call, too, we think there was pull-in of orders that came into Q4 of last year that also made that Q4 comp a little bit of a tough comp.

No, for me, I would only add to that, while a step back in volume is never something to celebrate for sure. where I give my team internally a lot of credit. I've been in the EnerSys universe since 2003, so prior to the IPO. And I couldn't remember and I asked the team did they ever remember a time where the company could set records and do what we did with motive power being in a recessionary position. And we couldn't think of any. So we've really feel good about the company's ability to continue to deliver for shareholders even with such a primary segment for us, taking a step back. So -- but we -- to your point, every bit of our focus is on growth. And we have -- we believe we have a lot of really good sales in the win to generate that.

Okay. And then, Shawn, I'm sure this is going to be a big focus at Investor Day. But I noticed in both the press release and your prepared remarks the phrase in commissioning, referring to both the data center UPS product and warehouse best. So just to kind of put a little bit of finer point on that, the difference between customer validation and customer commissioning, is there anything that we should read into that in terms of commercial readiness? Because when I think about commissioning, I think about a product actually being deployed in the field going through commissioning and recognizing revenue. So I would just love to kind of understand what exactly has been going on.

Yes, that's a great question. And you're right about the sort of the connotative differences in those words. We actually -- when we set out to deploy this product a year ago, it didn't exist a year ago, we said, listen, we're not going to do something like an engineering launch or a soft launch. We set our team that they don't get any credit unless they're shipping a product to a customer. So that's exactly what we've done. So in this case, you could see it both ways, validation and commissioning. They're using that battery. But we have a lot of work to do. And the reason we've tempered that you won't see revenue lift until fiscal meaningful revenue until fiscal '28. We have the OEM handoffs to get done, the communication. So it's not just one OEMs EPS.

It's -- there is all the large primary providers, the names who would know -- we need to make sure that they feel comfortable with the communication there that -- and then on top of that, you have the large hyperscalers have their own validation process for the product. So there's a lot of work to do once you've shipped the product. So that should help kind of offer a little clarity there. But we are -- it's not an A sample or a B sample. We've shipped a finished product to the customer.

And your next question comes from the line of Greg Lewis with BTIG.

I was hoping to talk a little bit about your outlook for the data center opportunity. I guess a couple of questions. As we think about the fourth quarter, I'm always like -- I know we talk about it sometimes sequentially sometimes year-over-year. Any sense to think about what that growth rate is looking like? And then just as we continue to think about the data center opportunity, at least in other suppliers to this mega trend -- some of the things we've been hearing is some of the gating factors around the ability to sell product is kind of supply chain. So kind of just be curious how you're thinking about positioning the supply chain and kind of how that's been playing out, just given the exponential growth we're seeing in this opportunity?

Yes, I'll start, and I'll turn it over to Andy for growth rates, Greg. Thank you for joining us. We have spent a lot of time and energy and getting ready to perform in the area of TPPL. And this product, the way that it performs gives a -- you're sort of knocking on the bottom edge of a lithium life experience without any of the inherent risks of lithium. And what's something that standard led calcium can't do or the old lead technology can't do, is answer these high demand rates. So sub-5-minute rates, in some cases, some 1 minute rates because they don't have the surface area of reactivity and I think it's too technical.

So anyway, we've built in that capacity. And we may have had other reasons for building in that capacity in past times, but it lends itself perfectly to this product. And that's an area of very high growth we're seeing before we even talk about launching our lithium battery. So we feel very good about that supply chain. We also -- one of the things that we've talked about on the call, is the amount of dry powder that EnerSys enjoys. And when we talk to our customers and we talk to the supply base, what we're finding is that some of these items like lithium batteries and the cells, their places of origin, they're very long supply chains, but it's compounded by folks that aren't putting that sort of investment together to make sure that they're getting more to these shores and are able to react to customer issues. We're spending a lot of time making sure that's in place. It's on our strategic road map, and we feel very good at the moment about barring any more wars and weird places or further supply shocks, we feel very good about our position to be able to deliver once we have validation on those products.

Greg, I'll just continue a little bit with that as well. What actually we hear is one of the biggest gating factors to the new DC is power availability, which I think what's exciting about that is that just adds to the strengthens the bank proposition that we have with our BSS systems that we're planning on launching and just the importance of energy storage overall as the world is facing. These power shortages. That said, in data centers, as I mentioned, we were up high teens -- mid- to high teens this year. And actually, if Q4 of last year was normalized as far as the percentage of total revenue would have been the same in Q4.

So give us a little bit of choppiness because of the project nature -- as you know, we're just selling the lead acid batteries would have, I would say, on an ongoing basis, it might be more like high single to low double-digit growth opportunities, but then has our lithium offering that Shawn just described begins to add that none of that is cannibalistic. That's just additional share of wallet in a fast-growing market. So we're very excited about the opportunities going forward.

Okay. Super helpful. And then realizing that you called out some of the headwinds in Motive Power and on the transport and the forklift side. That being said, book-to-bill went back over 1. Orders were up. So just kind of curious, is that kind of the early signs that things are getting better? Or is maybe part of that spike in orders in the book-to-bill is some of that just seasonality as we start the year?

I think we're seeing a lot of green shoots. We're seeing a lot of positive activity. But we don't know and why we say we're cautiously optimistic. We don't have any operations in places like the Middle East that -- where we're worried about a direct threat to revenue there. But these businesses, photo power and transportation that have tend to correlate, not perfectly, but tend to correlate with GDP. We don't know what these things do long term to GDP energy prices, that sort of thing. So we're -- all of our demand signals look good. If you've looked at the public remarks of some of the forklift manufacturers that were down mid-teens over the course of the year, they're all seeing green shoots and expect strengthening throughout the year. So at this time we see that coming as well. And we know from talking to our customers, they delayed purchases to kind of let this situation in time work at up out -- so we have seen pent-up demand, and we know that, that is one of those things that can't be delayed forever those purchases. So we're, again, cautiously optimistic, but we do see improving trends throughout the year.

Yes. And Greg, I can just give you a little bit of data to back that. While our sales were up sequentially, down 9% year-on-year as the frustration. Our orders were up sequentially 19%. Motive power is just not a segment I worry about. I think there's a little bit of reaction to the macro going on. But looking forward, there's -- we expect some sequential seasonal Q1 step back in volume that normally happens, but we think that actually could be muted if the early recovery begins to start taking place. I think as a result, Q1 could look a lot like Q4, which is not normal within motive power, which should have growth coming from there. And then longer term, the opportunities that we have on things like our Motive Power BSS, which we're more and more convinced there's just a compelling opportunity there. There's going to be a lot of opportunity there, which will also spur an incremental 45X as well. And this year, we'll begin to benefit from the Monterrey closure, which should impact again both 45X as well as some savings within that segment.

And our next question comes from the line of Brian Drab with William Blair & Company.

Andy, first, I think you just said that the first quarter for Motive could look a lot like the fourth quarter. Is that right? And do you mean -- so would we then expect volume to be up in the first quarter for Motive?

I don't -- Brian, as you know, we don't give that specific of guide. But I think generally speaking, it's just encouraging. We're beginning to see the early signs of this recovery whether it happens kind of late Q1 or early Q2. It's a little hard to tell, but you can see we've got the strength in the order growth. And I'm optimistic. It just can't be that disconnected from GDP. And I think there's a kind of demand that we're going to start to unwind as well.

Yes. Okay. it's challenging to model because looking back at the industry orders. I mean we talked about industry orders in the December quarter being up 40%. And then for forklifts and then the volume was your business was down 10% in the fourth quarter. So just -- everyone is trying to figure out does this business get back to growth in terms of volume in the next fiscal year?

And I would say, I think we called that out as well. We do see that before the ending of this year, it's going to be a return to growth. I'm confident in that. It is true, a lot of the normal indicators that we look at are a little bit out of balance, there's choppiness in it. And I think a lot of that is customer buying behavior reactions to a lot of the macro volatility. But this is a good business. What we feel good about is that the volume decrease we had is less than what we see in the overall market. and the market can't become disconnected from GDP. So there's some pent-up demand being created.

Okay. And then maybe just one more follow-up for now. Can you just go through the current situation with the lithium initiatives and lithium product rollout, our you're going after data center and warehouse and that with lithium. But the lithium plant is still in the works and it sounds like the sales coming out of the lithium plant are going to be at least an area of focus is defense, you talk about drones and mobile soldier power being the source of demand for those cells. So I guess I'm just wondering, like, currently, where are the sales coming from for your lithium products? And how do you transition that over to the new plant and when eventually, I guess?

Yes. So Brian, it's Shawn. Thank you for joining us, good to your voice. Yes. So just to up a little clarity there. EnerSys today makes 9 chemistries of lithium batteries throughout our aerospace and defense complex. We also buy lithium batteries. And for us, with the -- some of the larger lithium supply chains in the world, we will always do a make versus buy analysis because there's no one perfect chemistry even within lithium for every application. And we've -- EnerSys for the entirety of our evolution, even in lead have modified the lead chemistries to support different applications. In this case, because the cell is a part of a larger system and the solution that, that system is providing is the point -- we -- it becomes even more muted whether the cell origin with EnerSys or outside.

So that will be make versus buy. So in some of these commercial applications, where we're using these cells that are ubiquitous or readily available in the world. They still have Asian supply chains, where they are originating in places like China. And for the foreseeable future, that will continue. I think if you looked at the constituent raw materials, 99% of the lithium iron phosphate constituent material supply chain is either in or owned by China, 99% in the world, meeting of a battery was built in South Korea or Japan or in Detroit, that constituent material supply chain still originates there or if the cell was finished in China. So it's just a fact in the world that we're going to navigate until we can get that migrated over.

The Greenville plant is for aerospace and defense, and we have a customer there that's willing to pay for value that is willing to pay to guarantee supply, domestic supply. And it won't be subject to something like EV cell battery pricing in the world. So we have a much -- a better derisked position there. Those cells will be purpose-built for those applications. And so it will make a lot of sense there. There is downstream potential. There are areas of the market that we don't yet play in, in data center that those cells could have an application for. But for now, we're going to continue to buy those cells and incorporate for data center and BSS and incorporate into our end systems until there's a point that it doesn't make sense to do that.

And our next question comes from the line of Chip Moore with ROTH Capital. .

I wanted to ask maybe a follow-up there around aerospace defense. I think you called out some pretty strong demand. And I think it was munitions and space, but just any more color around what you're seeing there and forward trends moving through the year?

Yes. So I'll start, Chip, and then I'll turn it over to Andy for what we're dimensioning. But our backlog continues to grow in areas like munitions. You only have to open Wall Street Journal and see what's going on in the world and what position the defense department is with the expanded munitions and some of these programs and we are -- there's only a couple of people in the world that make those batteries. So -- and we have this advanced technology in our lithium silicon cobalt sulfide which is the highest energy you can get and real estate is at a real premium on a defensive standoff weapon, so they need higher power in the same space, and we can give it to them.

So we're seeing robust demand there. We're seeing robust demand in soldier Power. We continue to see brand tronics and process and do a great job. The Rebel acquisition that we made, the hybridized power systems. The future of the Battlefield is electrified. And now the concern is how do we get the ability to charge rechargeable drones at the forward edge of battle and the Rebel Hyper system is right in the center of that conversation. So we're seeing excellent demand signals there. We're seeing excellent demand signals in our space battery business where we've got 15 million hours or so in space without a single flow and team has done a great job there. And what we've done is we've come up with the answer tests desire to have commercially right available products.

The team got very smart about a year ago and came together and made some standardized products that would reduce the cost and increase the speed going into satellite programs, and they're benefiting from that now. So really across the board. And then one of the things that have surprised us, we're seeing equal demand in the European theater to some of the demand signals in the United States. That's never happened as long as I've been with EnerSys and it speaks to some of the other allied military stepping up and making those investments. So we really feel good about this space.

Yes, I could just add a little bit of color to that, too, Chip. In AMD, our revenue was up mid-20%, both year-on-year and sequentially with orders up sequentially about the same project nature of this business can cause some fluctuations that's important to know both volume and mix. But the orders are really strong. As Shawn mentioned, particularly in munitions and space with their book-to-bill at 1.22 and when mention backlog are increasing, we're going to really start seeing that translation to revenue and liquid reserves throughout fiscal '27 and thermal batteries to follow late this year.

It is really a hot topic. The industry as a whole is working to increase capacity, and we're really uniquely positioned. So this is just an extremely exciting business to be in right now. Other thing I'd mention is the acquisitions are just going phenomenal. We're seeing some lift as well looking at synergies, particularly in EMEA of these 2 businesses put together as well as in the U.S. So good things ahead of us.

That's great. Super helpful. and look forward to hearing about Greenville as well. Maybe for my follow-up, maybe just more on the modeling side. Some of these inflationary pressures, you talked about seeing some impacts there, obviously, just talk about lags and sort of offset with mix and some of the productivity benefits that are rolling through?

Sure, Chip. And I assume you're talking about overall, we -- one thing I couldn't be more proud of. One of the first things Shawn did when he took over as CEO has put together this dedicated tariff task force. We're all over this. So we were early starts for filing for the refund because we got all the data, we got the playbook. This team then quickly was put on to the conflict that we have in the Middle East, trying to understand the impact anticipated, make sure we're doing the right mitigating activities.

If you look at our Q4 year-on-year tariffs from freight, we're up about $20 million. That's a pretty big number to absorb, confident that we were fully able to offset the pricing. When inflation first kicks in, it might take -- some that takes a quarter until you get normalized with the price pass-through, but because you got the inventory flowing off and you had orders already on your books, but we've done a tremendous job managing it. We see probably this quarter, we look to say how has the macro impacted us. My guess is it's not been overly material, but if this conflict hadn't happened, our results probably would have been a little bit better. We got maybe a couple of million dollars of some higher costs directly related to the conflict that we saw. And again, we're on top of it. So I feel good about the outlook going forward.

There are no further questions at this time. I would like to turn the call back over to Shawn O'Connell for closing remarks. Shawn?

Thank you. Also, I would like to thank everybody for joining us today and participating in our results. It was our pleasure speaking with you, and we look forward to talking with you soon. Thank you.

This concludes today's call. You may now disconnect.

Good afternoon. Thanks, everyone, for the time and the opportunity to connect with so many of you here. Really appreciate the opportunity here. Joined with Shawn O'Connell, Andy Funk and Charlotte Merman over at EnerSys.

And look, it's a great opportunity to chat with you guys. Really appreciate the opportunity here to walk through the story with you guys. Again, as usual, folks on the line here, ping myself or Dushyant Ailani on the team with any questions or comments, we're going to try to moderate and facilitate a dialogue with you guys real time here. So stand by on chat or e-mails you guys like.

But maybe, Shawn, with that, I appreciate the opportunity to connect with you. It's a pleasure to make this come together here. And more to the point, Shawn, why don't I let you introduce the subject at hand, introduce EnerSys as far as the background, what you guys are planning to do? And then more to the point, we'll get into some of the details here in a moment.

Yes. Thank you, Julien. Pleasure to be here. And as you mentioned, I'm joined by my CFO, Andy Funk and Charlotte from our IR team. Listen, EnerSys is a long-time provider of stored energy solutions at a time when they're all the rage, we've been quietly doing this for decades and into some of the most important applications on the planet.

We have a full technology stack, certainly starting with the core energy storage unit, the battery. We started as a traditional lead acid battery company, but we've migrated well beyond that. And we make some 9 chemistries of lithium batteries today for various applications. Then we have the power electronics that keep those batteries charged and disperse energy to the end applications.

We have software systems to help manage those systems and aggregate power and help users remotely do this without a lot of human content. And then we have our own service company when human content is needed, and we can help our users with that. And these are EnerSys employees, not subcontracts.

So we're in an amazing opportunity right now. As you know, we're exposed to really 2 of the best super cycles of our time, energy security and also, we're the largest supplier to the U.S. military for energy storage systems and battery. We have really at the core of what we're doing, 2 strategic pillars. One, this energy security issue, we know that our users are facing both power famine and rising cost of energy.

And the other is labor scarcity, whether that's elective or I'll put a spin on Larry Fink's words and say, the data center space is going to run out of electricians before electrons. So we purport to solve both of those issues through our systems, through efficient power systems. And I just want to point out, too, that we really operate in niche markets where we have a 1 or 2 market-leading position.

We are not involved in the EV space. And we're not involved typically in open CI. We're in places where we have deep customer intimacy and we can do application stacking. Let me give you a couple of ideas where we're at. We have the network and infrastructure segment of our business. These are communication service providers, Internet service providers, data centers is another lane in network and infrastructure and then power utility, largely backing up switchgear and control arrays in power utility.

The next part of our business is warehousing logistics. We're predominantly involved in the electrification of forklift fleets and Class 8 over-the-road truck applications and also solving for the total power demand of those warehouses in which those fleets operate with things like battery energy storage systems and forklift power back to best to manage that whole environment. Our final space is aerospace and defense, our specialty business, and we have a multiple of applications in this space, satellite batteries, submarine powering systems, unmanned vehicle, drone, soldier power.

And so we're very diverse in the -- and also munitions. And the collected business is what makes us the largest supplier to the U.S. military and several of the allied militaries around the world. So that's -- those are the markets that we serve. And just again on how we win, we are not an open C&I. So if we go into a warehouse, for example, we know exactly how that forklift battery is operating.

In fact, we know how all the OEMs forklift trucks are operating. So we have a primary knowledge there from decades of experience, the communication interface, how you achieve that battery, what the optimum operating condition is that we then bundle with our charging systems, our battery energy storage systems. So it's a real knowledge base there that we have that some of the new market entrants for mass energy storage don't have.

And in fact, because we're in niche markets, in some cases, our total SAM and TAMs just aren't large enough to catch the attention or to garner the investment from some of those other players. I'm about -- Julien, I'm about a year on the job. I'll be a year on the job in May. And since I joined, I launched a program called Energize. And Energize is all about doing a couple of things really well. One, I think we're really strong. The research will tell you, companies are stronger when you start with your core and lean out sequentially from your core.

So the first pillar of this program was optimizing our core business, flattening management layers, cutting out extraneous costs and things that we shouldn't be doing. The next pillar of the system was what we call optimizing our core and invigorating our operating model, I should say. And that's about putting in centers of excellence operationally and the operating rigor that enables us to execute. And then the final pillar is accelerating our growth. Incidentally, EnerSys is a net positive cash generator, extraordinary track record in cash generation.

We have a lot of dry powder, very low leverage ratio. So accelerating our growth is about investing internally in the right things, using that dry powder and also being opportunistic with things like M&A and share buybacks where necessary to get us to where we want to be. But we're focused on growth. And I'll just -- I'll sum that up so we can get to your questions by just saying we have a really invigorated management team, some of the most talented people you'll find in our industry in any industry, I think, but I'm biased. and they are working together to solve our biggest challenges, pick bets together and full ownership on executing on them. And there's never been -- I started doing this in the '90s. Never been more time in our industry and our company where there's more opportunity and really thrilled to be here in this position.

That's awesome. I appreciate that. Look, maybe just at the top, you probably got to lead with this question in as much as how do you think about the company seizing the data center opportunity here? Just a little bit more specific, you kind of framed it a little bit there. You touched on it. Let me ask you to double down, if you don't mind on that statement.

Yes. So I'd love to go heavier into data centers. So EnerSys has been -- if you look at our lead acid position, we've got like 55% market share in the U.S. in powering data center historically. And that started decades ago when data centers were largely positioned towards financial institutions. Now with the hyperscalers, that business has just grown for us very, very well. But our position in the data center to date has been centralized UPS support.

So some of the large UPS OEMs, names you know, Vertiv Schneider, Eaton, these are our customers as well as the hyperscalers themselves. We have a seat at the table with the hyperscalers. And these are -- Julien, these are high-trust environments. So having a product is one thing, having the knowledge and the experience in the space, being able to deploy at the pace that the customer needs you to deploy, being -- our industry council is called the 7x24 exchange, just implying that you always have to be available.

The systems have to be available and you have to be available to the customer. EnerSys does this, and we wrap that all in a service experience, again, with our own service company. So our opportunity is this. If we have 55% market share in lead and we're only now deploying our lithium battery, lithium is now every bit of 60% to 70% of greenfield data centers for AI.

So our lead battery business is going to grow at about 20% this year, but we know that the real robust growth and breakout growth for us will be in the lithium space. So we're really, really pleased that we have now, this month, launched our first customer trials of our lithium battery offering in the data center. And again, because of that high trust, because of our right to win, customers are already so enthusiastic. Now it's just about validating the product, making sure it communicates well with the UPS and in the environment, and then we're confident that we'll be able to get into the deployment cycle.

Now you talked about getting [indiscernible] the deployment cycle. How do you think about what this looks like in terms of order activity here real quickly? I mean you kind of lay out a time line there. And then separately, we've -- not that we've talked about, the industry has talked about this 800-volt DC transition and the architecture there. How does that impact you guys as well, right? If you think about that in tandem with what you guys are kind of scoping out here as well, right? So there's industry changes that are ongoing, but also you kind of lay out a little bit of the time line that yourself there implicitly.

Yes. So let me start with the time line piece first. So I said these are high-trust environments, they are, and we have that trust, but it's trust in the [indiscernible] sense of the word, trust but verify. So what will happen is we will go into these customer trials. It will take time to validate the system, make sure everything is working the way that they want it to work. And as soon as that happens, then we can get into the order side of it.

We are level setting expectations with our investors that because we're April to March, by the way. So we're about to start our fiscal '27 fiscal year. We think that the lift will begin to show up in the sales for lithium and data center in fiscal '28, just to kind of give you an idea of what that time line looks like.

That being said, we're already quoting some of these systems even as we validate. And with that being said, the nice thing is when you hear things like transformers having a 2-year lead time, batteries are usually ordered towards the end of the cycle. So we typically aren't waiting the full lead time as maybe the UPS system itself or the transformers or switchgear or some of the other ancillary items. Now the other part of your question, 800-volt DC. Now you have to understand a little bit the architecture of the UPS system. And Julien, I know you're very knowledgeable in the space. If you look at the old architecture of double online conversion, you had AC power coming in, a rectifier changed that to DC.

That's when our battery came in. And then on the other end, an inverter changed that back to AC for the loads. So if you look at it, EnerSys has always been providing a DC system from the battery perspective. The only difference is traditional architectures were 480 volts. To get the efficiencies we need now and to cut down on the copper and all the things we want to do, we have to go to 800 volts. But what that means for EnerSys is we're going to sell more cells. So we see that basically as a lift in volume and accretive lift in volume, and we're very excited about it. For us, it's more battery.

That was awesome. I mean how do you think about the traction, right? You talk about -- I think the term [indiscernible] is trust but verify, but also the fact that you have these entrenched relationships. How do you think about scaling? How do you think about taking this to the next level? How do you think about having this position gaining maybe a share of wallet or maybe that's the expression you want to use here if you think about it. Pivoting from time line.

We don't want to approach it from a position of hubris, but I would tell you that we have deep customer relationships and in many cases, global contracts with all of the hyperscalers that are buying lithium. And so they know us, and they have a very long track record. And in many cases, we've got all the master agreements done, which sometimes you get the lawyers involved and that could be a long tent pole. We have all that done. So really, for us, it's about adding products to our existing agreements. where all of our service companies have been vetted.

They've been vetted at the sites. They've got all their certifications for the safety and the data center and this kind of thing. So really, the reality for us is that we're in a much expedited position once the customers are happy that -- and it's more that they've tested the system, they've done some discharges and the communications are where they need to be. So they're getting all of the data back at where the monitoring location will be or at the NOC to make sure that the system is functioning, it's communicating with the downstream gear.

So those are really the longer tent poles for us. It's just getting that validation. But the ones that would traditionally hinder a new market entrant are the areas where we have a real advantage. And I'll tell you one more thing. Customers are asking us for this. So it's not like we're on the hunt to go out and see if one of these folks will talk to us. It's been the other conversation, which has been very telling for me as a new CEO saying, "Hey, O'Connell, hurry up. We need what you bring to the party in this space."

And Julien, as far as lead time on orders you mentioned, some of these very large data centers can take up to 10 years to build. But the lithium versus lead decision is typically made about 12 to 18 months before completion. And the orders for us come in about 3 months. So while there's very long lead times, we're able to get into the mix, even though it will probably take about a year until we get through validation, et cetera, as Shawn mentioned.

Awesome. Excellent. Appreciate that. Maybe let's talk about pivot at this point over to the -- well, let's talk about power quality before we move away from this, right, because there's another angle here. There's [ UPS ], there's the signal conditioning angle here. How do you think about your contribution on that front? Any angles that you'd flag in particular here?

And then ultimately, how do you think about competitive positioning and rollout of products for large, whether it's tailored to the DC end market or otherwise? Again, Sean, new in the role, how would you set expectations on what is to come, if you will, given it's tied to UPS and signal conditioning or otherwise?

We're very excited about this. So just starting on power quality. The battery is -- and battery technology is the absolute best capacitor that we're going to have to address this variability of load of AI -- and it's the only near-term solution until some of the other ones come online downstream, which might be years away. So we see this as a real opportunity. It's not an insignificant issue that a large language model center could go from 100% load to 20% load in milliseconds.

So this is a big deal for us. We deploy power systems in a variety of applications where we are addressing power quality, where we are removing those surges, spikes, where we are cleaning up that -- if you looked at some of these utility feeds coming in under an oscilloscope, we call it dirty power, right? I mean it's not a nice clean sign wave. So EnerSys systems do that today, and the battery is the first and best line of defense. So for us, -- that variability does a couple of things.

One, when you have the battery clean that up, it is taking life out of the battery, the best of technologies. I don't care what it is. lithium, long-life lead, sodium, whatever these are, every time the battery is used in power quality, it's like using some of the -- not life, it is using some of the battery capacity. So what that means for us is that it will hasten end of life and certainly sell more batteries in the aggregate.

The other thing, though, where EnerSys believes we have a real right to win in a niche area and something we're looking at very carefully, we make rapidly deployable smaller scale power systems that we are already participating in the edge, and we've been doing so through our telecommunications and cable and broadband business. So as we start looking at enterprise-level inference models for AI data centers, -- these are smaller systems where EnerSys has some -- a real long legacy and experience where we think we can deploy these systems because we're doing it in other markets very quickly, very elegantly.

And then we have all of the service companies involved that can do the public right away, that can get things connected in and get them installed. And sometimes that's the long tent pole. So we're excited about it. The power quality issue for us is very good, and we believe it's opening up some other applications where we've got a right to win.

That's awesome. Well, look, why don't we talk about, how do you think about the lithium strategy here? You guys talked about lead acid, et cetera. How do you think about what this gigafactory ramp and road map looks like? You talking about 28 here in South Carolina. How do you think about what that looks like? What does that do? Maybe Andy tag in here as well, talk about the financial side of it, too. But where does this go? What does this look like over time? And we'll go from there.

Yes. So let me start with a bit of the strategy piece and what's going on there, and then Andy can give you some of the modeling. But this factory, when we started, it was under the Biden administration. And everything at that time was around EV and a little bit different experience. When the Trump administration came in, everything changed a foreign entity of concern. And so the EV credits went away. The original premise for our facility went away.

But then by merit of our Bren-Tronics and Rebel acquisition, and our position with the Department of War, we actually began to pivot those conversations to could we face this entire facility towards helping the U.S. government with its domestication goals for the U.S. military. And those are the types of discussions we've been having. I can tell you that they've been very positive.

Right now, and we've said publicly, this is aspirational until we have a definitization with the government, but it's going very well. And the premise would be there are some, let's call it, 42 programs for soldier power or radios or things embedded on the soldier that all originate -- the vast majority originate in China. So the #1 peer threat in the world from a military perspective is your #1 supplier of battery. It makes little sense for the government of the United States.

So what they want to do is consolidate those down to less than 10 programs because a lot of these are very similar in size and scope and have that come out of one facility. EnerSys believes we can help with that. And the really nice thing about that, Julien, is that we have a customer, these are program sales. So we're not out in the open commercial market competing with the next drop in a lithium pack price based on electric vehicle.

So there's a lot of derisking that goes into that equation for us. Now in commercial markets, what I'd like for you to know, first of all, EnerSys makes 9 chemistries of lithium today for certain -- for different applications. But in areas where commercial markets won't pay a premium for a higher quality cell, they just need the base unit of the cell. We have no problem having a make and buy strategy, and we can buy those cells in the open market.

Here's why. Because by the time we get done, taking that cell, putting the power system around it, the BMS, the logic, the communications, making that system in the case of a forklift, communicate with the forklift or communicate with the telecommunications power system, all of the regulatory stuff, it's all different than EV. Everything we do from the battery forward is the rest of our value add.

And again, our industry is by of the elephants of meal for us, our SAM and TAM is just not big enough to get the attention of Tesla or BYD or some of these other bigger guys and have them make all that investment for this size of a market. So we really believe that our right to win is preserved. We don't mind having make and buy. And if we have our way, the Gigafactory will be totally positioned for the U.S. government and military. And Andy, do you want to add any comments about the financials?

I'm probably going to disappoint you a little bit, Julien, but I don't want to get too far ahead of the DOE with our revised plan. So we will be providing updated financials both when that is communicated as well as our Investor Day that we're going to be holding on June 11 at the New York Stock Exchange.

The only 2 things that I think are worth mentioning is we have been given a $200 million grant through the Department of Energy, and that's what we're looking to reaffirm. It is a grant, not a loan. It's a cost share program. So depending on the scope change, there may be adjustments there, and that's what we're waiting on the finalization of that announcement. And then the state of South Carolina also gave us about $200 million of incentives. Those are a little longer term in nature, but this is solving a critical need, and we're very excited about it.

That's awesome. I appreciate it. I mean when you think about milestones here, whether it's with DOE, Army, et cetera, on this sort of on this venture here, what would you be flagging or pointing out? -- you talk about this. You alluded to this earlier. If you think about tangible data points here, what are the next pieces to really watch for as far as it goes? Even if the financials per se, and we got to hold out for June here are forthcoming, what would be the critical milestones here be?

Yes. It's -- everything is about when a battery factory stood up, we did a lot of prework on the environmentals. So we were able to do that. So we think we can expedite that. Construction cycles being equal. So the building hasn't gone up yet until the environmentals get done. So you want to keep an eye on that. We will talk -- as we release more information, we'll talk about how we think we've been able to expedite time to first article where we're putting out minimal scrap rates and very high OEE. But that's the whole game in lithium, right, is achieving that scale and getting to that production level.

The good thing is we have a customer that wants us to do it yesterday. And we believe we will take a technology position that will help us get there quickly. But the big things I can tell you about now are look for what we released publicly about technology partners, how that will expedite construction, but more importantly, how that will expedite getting to the OEE we need to achieve that profitable scale for the government in the fastest amount of time.

Right. Let me ask you just a quick elaboration here. So FEOC, there's been some talk about FEOC being a little less being more workable for other parties here. How do you think about FEOC and where kind of initial guidance is playing. I know that everything is resolved here. But how do you think about that relative to the competitive landscape? How would you frame that out? What are we waiting for?

And how do you think about the overall supply/demand of domestic and global battery alternatives in both the qualification of the context of CAC as well as how does that fit against your own efforts, where obviously, you're targeting such a niche player, right? Because at times, people are focusing on all these headlines around the landscape and also focusing on what FEOC means specifically here. I threw it all together, I figured it made sense. take any piece you want there.

Yes. Yes. No, it was a very elegant framing actually. As I said, because we're going after niche markets, we have a customer that needs to move as quickly as possible because they're really exposed at the moment. So even before you start talking about domestic economic security, domestic security for the war fighter, I think we have very close relationships on the hill.

And it's bipartisan, by the way. So it's great because we -- the last thing we'd want to do is build a plant and then have an administration change and have somebody say this isn't a good idea. We get broad bipartisan support. But the military is very mindful that the world went ahead and allowed 96% of the supply chain for all materials to get tied up in one country. And that's a reality.

I think they're taking an eyes wide open approach right now. So what we're seeing is they're going to phase the requirements of how deep they go in the supply chain over time to sort of slowly get to where they want to be to have total domestication. If they did it today, it would be impossible, they wouldn't get any material. Even some of the other Asian countries like Korean manufacturers are sourcing anode and cathode materials in China.

So again, 96% is a big number. So -- but for us, everything is around foreign entity of concern. Everything is geared towards starting the process to build to that eventuality where we can get everything domesticated. Now there are resources that are available to us. And I will just give you, for instance, most of our 9 chemistries of lithium that we're building today have predominantly domestic supply chains and domestic sources.

The issue is some of these are so specialized, like our munitions weapons batteries. We make standoff weapons and hypersonic weapons batteries. We're talking about much smaller quantities than the quantities we would produce in the gigafactory or quantities that you're seeing being produced in EV factories even if they're being repurposed for energy storage.

So the question is, how do you achieve scale in those quantities in rare earths and cobalt and nickel and these other things -- and that's what's going to take a little more time. But as I told you, I think the folks within the apparatus, within the customer are being very mindful about how to pace that so that they don't overstir the sauce and leave themselves without the ability to source material on the front end, even if the goal on the back end is complete domestication.

Excellent. And then how do you think about the scaling? I mean this is a question that's come in from others out there is how do you think about the confidence in getting the milestones? At times, we've seen folks out there just face a protracted ramp of storage-related manufacturing, right? Again, I think you probably know what I'm going to get in some other cases here. How do you think about getting to a quality product and feeling confident about that where you are today?

Yes. We feel very good about it. I'll give you -- a lot of people have tried to go this alone and they've tried to take novel approaches, and that usually doesn't go well. And I don't know why they did because Elon showed us all in spite of him with all the pictures of him sleeping in the middle of the factory with sleeping bag and all that. The reality is, as he went to Japan and got one of the best partners on planet Earth that knew how to get the system up to OEE and knew how to spec the equipment and put it in, and he partnered with them from day 1, and they brought in their electrodes and they began stuffing cells as they began to determine how to do his own coating and some of the other parts of the process. That's the right model.

We think that's the right model. we would purport to take a similar technology approach to where we're not going it alone. So what that allows you to do, and I don't want to give away too much of our secret sauce here, but what that allows you to do is to start building a product using help from a partner and content from the partner as you are developing some of the other high tentpole competencies that usually result in high scrap and low EEE, it allows you to do them in tandem so you can begin producing high-quality cells sooner.

And you'll see -- we'll be releasing more of this strategy over time. But you'll see us taking an approach like this where we're not going it alone, where we're not, I'll call it, taking a missionary stance in the marketplace where we're going to use a very tried and tested partner to help us out.

Sorry, let me -- can I go back -- I don't know how to think about -- try to answer this because someone is asking more from a higher-level perspective. How do you think about -- you kind of frame this military approach and specifically kind of a soldier approach. How much content, if you think about it like in content dollars, how do you think about like a single soldier battery pack, right, and think about like what you're contributing from a content dollar perspective? Any thoughts or perspectives, heuristics even that you would use? I mean I don't want to get ahead of your update here coming up, but how would you try to tackle that?

Yes. Well, it's interesting. Because of the fact that we've been sort of quietly assembling more and more parts of the supply chain and vertically integrated, our content has increased dramatically. So if you look at our Bren-Tronics acquisition that we made a little over 18 months ago, -- what that is, what that organization does and that outfit does is they assemble batteries into the end packs. So they are assembling cells into the end packs that then power the various applications.

They also make the charging systems that go along with it. And these can be vehicle mounted, soldier mounted. There's a lot of optionality there. So what we're really going to be purporting to do today, those are all purchases for us when we purchase the cells and integrate them into the packs. After the plants online, we'll just be basically solidifying the end-to-end piece of the supply chain where we begin with the cell and with the pack.

And that pack business for us is highly value add. Now we'll control the supply input of the battery cell itself. So it's really -- in the case of the battery, it's getting now moving towards 100% of the content. The other thing that we did by merit of the Bren-Tronics acquisition is we bought a company called Rebel. And Rebel uses Bren-Tronics batteries as its core energy storage device. And what Rebel is, is a hybrid power system that is now -- from the information we're receiving is now the #1 forward operating base hybrid powering system for rechargeable drones.

And so we have a massive uplift coming for our Rebel systems. And again, with the Bren-Tronics battery pack assembly, when the plant comes online, making the core element of the cell itself that are going into these packs and the Rebel system powering it, we'll have end-to-end the entire supply chain for deploying energy and recharging it at the most forward edge of battle for the biggest growing application on the planet in drones for that space.

I mean, you talk about this massive growth, right? And certainly, I would imagine even independent of a secular acceleration in adoption, probably militaries themselves are accelerating procurement given the backdrop today. Any -- people want to know, how do you think about acceleration of that back to your core financials and business prospects? Again, I know we're knocking on the door here of what's coming up. But how do you kind of marry that up into your outlook, right?

I mean you guys had this pretty successful and meaningful acquisition earlier. You talked about being deeply entrenched here in the right places. I mean, being tied into drone tech and batteries is a pretty interesting place to be. You say yourself, you use the word massive. I try to quantify that a little bit more.

Yes. So if you follow any of the [ substack ] stuff that comes out of the hill, there was a great one over the last weekend for [ Bruce Mellman ] and it's the future is electric. And what's gone on in the Ukrainian conflict has demonstrated to the whole world, the real future of warfare and what it's going to look like and it's drums. So for us, it's a very large opportunity. In terms of how we're going to approach it without giving you too much dimensionality around numbers, but how we're going to approach it is this. A couple of things.

One, we mentioned -- or we may not have mentioned we have a lot of dry powder. We have a 1.2 leverage ratio. Most of our investors tell us they're comfortable with 3 and under. So we have a lot of room. I mentioned our cash generation, and we want to put that to work. We still think there are some really nice targets out there for us that we're looking at. The nice thing is we have a lot of sponsorship from the government customer to help us consolidate.

They're actually -- in times past, you'd be worried about some of these deals getting blocked. Now we have a lot of -- we feel like a lot of support. The other thing is part of that energized strategy I told you about is we launched centers of excellence. And what that means is, as you might imagine, the asset-heavy operational structure and procurement structure that goes into managing lead acid is completely different from the asset-light manufacturing apparatus for power electronics and microprocessor supply chains and which is entirely different from manufacturing lithium battery, believe it or not, and advanced technology. We've now candidized that.

We've made that official where we have groups in our company that specialize in each of these cases. So in the case of advanced power systems, we make advanced power systems for cable and broadband, for telecommunications for a variety of our markets. So now what we have the ability to do is when we have the government come in and say, Hey, listen, we like a platform, could be -- I'm not specifically talking about the Rebel platform, but it could be, we can now pop that right into our operations and other places where we already have the ability to scale, react very quickly. All of the expertise is there, and we can deploy rapidly.

And everything you hear out of the Pentagon with [indiscernible] and the whole crew is about how do we disrupt the century long program sale, big budget, over budget, how do we get people to think entrepreneurially, act like start-ups even if they're big companies, and EnerSys has spent a lot of time over the first year of my tenure sort of in breeding that entrepreneurial spirit, inbounding that ability to react and move quickly and execute, we feel pretty good about it.

That's awesome. Nice stuff. And just do you want to comment -- I don't know if this is any question or what have you, but do you want to talk about the cash piece in M&A? I mean how do you think about use of cash and capital allocation here? And then again, Sean, admittedly, someone else wants to ask, can you be a little more specific, how are you thinking about this? I mean I know you just spoke to it a little bit, but size, scale, et cetera, but both kind of go in the same direction.

I'll let Andy kick it off with the capital allocation piece.

I'll take a first crack there, Sean. Thank you. So our first priority is always to invest internally. But fortunately, our lead acid plants are -- we've done all the necessary expansions that we need there. So you're probably talking between $75 million and $100 million of on an ongoing basis before you get to the new lithium plant that we're looking at. So lower than our depreciation, which is certainly a nice position to be in.

We have a dividend that grows with earnings, excluding 45X. We didn't talk about 45x. We could talk about that more. But after that, we are big on acquisitions. We've done over 36 acquisitions since we went public in 2004. It's certainly a big piece of our growth strategy. Bren-Tronics acquisition, which Sean just mentioned, was really an ideal type of acquisition for us, that $100 million to $300 million range, we could easily absorb 1 to 2 of those a year with our current cash flow, something that is in a growth market and is margin accretive.

We're not looking for turnarounds. We're not looking for real start-ups. We want something that really makes sense, why EnerSys. And the nice thing is we're in a lot of growth markets. So there's a lot of opportunities out there, although we are disciplined to make sure that the valuation is appropriate. And after that, we're buying back stock. Our Board announced a $1 billion buyback program. We've been buying back pretty aggressively. We think our stock is a nice deal. So at 1.2x, we've got a lot of room to get to our 2x to 3x levered. I always look at it excluding 45x because I don't want to go too far out in my skis, and I want to leave some dry powder to act quickly.

Yes, that 45X, do you want to talk about the 45X recognition here and how that scales as well here as far as go forward?

We get about $40 million a quarter of 45X benefits. It's treated as a reduction of cost of sales, not subject to tax. A lot of that we haven't yet monetized. When we look at our free cash flow conversion, there is some seasonality in our cash flows. We tend to look at it over a multiyear, multi-quarter period. We're above 100% free cash flow conversion historically. So our business does kick off a lot of cash.

With the 45X, we right now are not paying federal income tax because our credit is bigger than our federal tax liability. And then we've received our refund last year, and we are due to receive that $120 million as a refund, which should come in. It's due this month, but is it delayed, it would be received with interest. So that's our 45X. And we use the 45x as the law intends to invest in our internal capacity, qualifying batteries. We had closed our Monterrey plant and moved that production to Kentucky.

We also have just announced a closure of our Tijuana plant, moving that production mostly to our Missouri facilities. We've expanded our capacity in Missouri. And then, of course, as you know, the lithium plant that we're looking to build as well.

Awesome. Yes, I hear you on that front. I mean, what does your pro forma footprint look like after you get these -- the build-out done, right? I mean just to summarize there, you got a lot of moving pieces. Someone asked me earlier, it's probably the right time to throw it in here. Do you want to speak to that real quickly? I mean you want to keep the mic there, and we'll pivot back to Shawn in a second.

Sure. We have about 15 gigawatts of capacity right now. So the plant would be incremental to that, if that's the question. And that's all on -- of course, right now, it's mostly on the lead acid side and the additional lithium plant would be on lithium capacity.

Julien, it might be just a good reminder to interject if any of the folks on the call didn't know. We received initially a Department of Energy grant for this plant, which was on the order of magnitude of approaching $200 million, a cost share model. But also the state of South Carolina had another group of incentives up to another about $200 million in things like tax incentives in that. So even though we're not going to release the financials of the plant today, if you think about all that 45X money coming in on top of $400 million in cash to build this plant, and with a pretty solid road map of the types of equipment we need and being able to really keep that controlled, this is something that we feel is going to be when the plant is up and running, really quickly accretive to shareholders and the model will look very good.

Awesome. Excellent. Actually, someone asked me earlier, why would you lay out this one? I mean we talked about strategic a second ago. You came into the business and you laid out your own kind of turnaround aspirations a bit ago. Do you want to talk about where you are against those targets you articulated a little bit ago and how you think about kind of scaling on that, right? Does that make sense?

Yes. Well, I'll give you an answer and tell me if it's on track. So I would tell you that everything we've set out to do has exceeded my expectations. I didn't -- we've been a little -- I've been a little blushing a bit at the increase in the stock price. That's been a real surprise, a pleasant surprise. We knew with $1 billion in buybacks, taking out $80 million in cost, operating more effectively, getting OEE up in our plants, we would have demonstrative shareholder benefit. All of those things are firing. All those cylinders are firing. And with my internal team, we dimension these things in terms of what we can control.

So if our transportation market is exposed to the great freight recession, we can get market share. But in the end, we can't increase the overall aggregate market until that turns around or if motive power has got pressure because of a variety of industry factors. Those are noncontrollables for us. But what our controllables are is being mindful of our OpEx, placing the right bets on where we're putting capital and ROIC.

And I can tell you, those things are going extremely well. And then the other thing that's going extremely well to go from a year ago and say, we are going to deploy our own battery energy storage systems by the end of the year into these customers where -- as I said, it's a niche market. So it's less than 4% of the open C&I market. We will go from 0 to customer trials. We will also go from 0 to customer trials with a lithium data center battery, and we would have the ability to monetize Internet of Things, real-time monitoring of these systems.

We are being successful in all of these areas. So it shows you that the strategy is working, the operating environment is working. We socialized in our second quarter. In order, we were able to go after for 5G macro sites that the customer came to us and said, listen, if you could redesign the power cabinet, the power distribution, make some changes for us, give us a first article inspection within a couple of weeks, you'll get -- and you can deliver in the quarter you can get the order.

So you saw a big uplift in sales from us in Q2. That came from executing on that order before at EnerSys, that would have been an 18-month process. This time, we had that cabinet redesigned. We had the power distribution redesigned. We had those first articles to them in a couple of weeks. They placed the order, and we were execute -- able to execute in the quarter. So for me, all of the plumbing we've been building to give EnerSys the ability to execute is going extremely well. We need the markets to cooperate. And then, of course, I would share with our investors and prospective investors.

You got to look at us over the course of a year or an extended period because every one of these markets, even data center it's going like gangbusters, there are build cycles. And so you'll have the sprint and this lag, the sprint and this lag. So on a quarter-by-quarter basis, the comps get a little goofy in cyclical businesses. But in the aggregate, I'm very pleased with where we are. We're ahead of where I thought we would be. That's a credit to my team, not the CEO and the amazing people that we have working with us, but very, very bullish on the EnerSys future based on the execution I've seen so far, less than 1 year into my tenure.

That's awesome. I mean it's a nice way to start the conversation. I mean, how would you set -- just for those listening, what are the breadcumbs? What are folks got to listen for at this Analyst Day? How do you think about what your -- what vision you're looking to articulate here a year into it? What's the purpose for this Analyst Day, if that's another way to ask the question?

What was the last question? I'm sorry, Julien.

What's the purpose, if you will? Why are you doing it? I mean I don't mean to facetious about it. I mean like how would you set expectations or thoughts around a year in? What kind of milestones do you want to lay out for yourself?

Yes. Our purpose is very clear. These -- I talked about these deep relationships. And we -- they're so deep. Our customers, we make them members of the family and friends. And because these are high consequence environments and friends don't let friends down. Our job with the world is shifting on them as much as it is anybody else. Our job is to help them in novel ways solve for this energy security issue and help them do it with less people.

And so when you are listening to our story, and let me hopefully stitch it together. when you hear that we're deploying a data center battery, it isn't just deploying data center battery. When you hear that we are now -- customers have ordered it and validated it and we're taking first orders for that, you'll know that we're being successful in helping them do that.

When you hear about battery energy storage systems working in tandem with a forklift fleet in a warehouse because if you're a warehouse operator, you're not Microsoft. You can't go restart 3-mile Island to get more power. You have far less options. So to solve for power fan, you need help. Our systems can help with that. So when you hear us talk about, hey, we've got a flagship customer and they are deploying BES in conjunction with forklift batteries to offset the -- you know EnerSys is being successful that, that story is resonating.

Even our cable and broadband business, we talk about that much. If you look at cable and broadband, hybrid fiber coaxial networks, -- we have 96% supply chain market share in the United States for the powering systems for hybrid fiber coax. Well, they have to expand their data capabilities if they're going to stay in the game because right now today, they're responsible for 80% of the backhaul of Internet traffic from wireless traffic.

Well, think about what we're talking about in data center, it's AI use cases. You and I as a consumer are not going to accept a world where we don't get that AI use case to our handset. That means those guys have got to provide more data. So they're concerned with things like DOCSIS 4.0, the data over the Internet cable interface. And our systems are going to enable that. Here's the problem. DOCSIS 4.0, it's more power hungry and the broadband company needs to save energy.

So you'll see our new systems. When you hear about our new systems, reducing the power consumption or the actual total energy consumption or spend even as we increase the bandwidth and capability and you hear about that trial being successful and you hear about that customer and that success story, you'll know EnerSys is firing on that cylinder in that market to enable exactly our strategic premise and that big -- that's a big sale to be -- to use a maritime analogy. That's a big sale out there in the wind for us and something to keep an eye out for.

Nice. All right. Well, we're basically at the top of the hour here. That was a nice way to call it. Anything else that you guys want to add? I think that was a fine moment to end this thing up.

I was at another conference, Julien, very recently, and somebody said to me, listen, you guys are in battery, Tesla is in battery, CATL is in battery. How do you win against those guys? We're in different games. We're in different games. And I hope what came across is our application stacking in these niche markets that are -- they're meal to us even though they're a vitamin elephant, but our total SAMs and TAMs are just not big enough and meaningful enough for those guys to put the investment in to come after our markets because the juice won't be worth the squeeze for them.

It will be very worth to squeeze for our shareholders. And I just want people to know EnerSys is in a different ball game than those guys. We -- at some point, if their cell is cheap enough, we may buy it, but all of our value add comes after that, and we're going to make a lot of our own cells, too. So that's what I would have people know about us, totally different -- it's apples and oranges, totally different applications that we're pursuing.

Yes. Thanks for clarifying that. I know that at the surface level, someone might conflate that. But your point is very well made on the niches and making it worth their while. So well, look, maybe with that, thank you, Shawn, Andy, Charlotte, thank you all for jumping on with Dushyant and I. And again, I got to stress, thanks to everyone on the line for sending in your questions and reactions and comments to the whole conversation here. So it was great. It was a pleasure rather. Wish you guys the best of luck, both into the preparation for this Analyst Day and frankly, beyond that.

Thank you so much. It's really a pleasure to join you. Appreciate it. Thank you,.

Pleasure to talk to you.

Absolutely, guys. All the very best. Have a wonderful day.

Hello, and thank you for standing by. My name is Bella, and I will be your conference operator today. At this time, I would like to welcome everyone to EnerSys' Q3 Fiscal '26 Earnings Webcast and Conference Call. [Operator Instructions] I would now like to turn the conference over to Lisa Langell, Vice President, Investor Relations and Corporate Communications. You may begin.

Good morning, everyone. Thank you for joining us today to discuss EnerSys fiscal third quarter results. On the call with me are Shawn O'Connell, EnerSys' President and Chief Executive Officer; and Andi Funk, EnerSys' Executive Vice President and Chief Financial Officer.

Last evening, we published our third quarter results with the SEC, which are available on our website. We also posted slides that we'll be referring to during this call. The slides are available on the Presentations page within the 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 February 4, 2026.

Now I'll turn the call over to our CEO, Shawn O'Connell.

Thank you, Lisa, and good morning. Please turn to Slide 4. During the call today, we will provide an overview of our third quarter results, share progress on our energized strategic framework, update you on the latest demand trends we are seeing in our diverse end markets and provide guidance for our fourth quarter.

Please turn to Slide 5. We delivered strong earnings in the third quarter with adjusted diluted EPS ex 45X of $1.84, up 50% year-over-year and a company record for our third fiscal quarter. Net sales were up 1%, in line with the low end of our guidance range as strong price/mix and favorable FX offset lower volumes. Earnings growth outpaced revenue growth, driven by favorable product mix, pricing discipline and our cost improvement efforts resulted in adjusted operating earnings up 34% and adjusted EBITDA up 30%, both excluding 45X.

We continue to be excited about mounting growth catalysts across all of our end markets, though near-term softness persists in Motive Power & Transportation. A few highlights from our lines of business. Energy Systems delivered its first double-digit AOE margin on modest sales growth. Despite slightly lower year-on-year sales, Motive Power margins remained in line with prior year. And finally, Specialty delivered remarkable performance improvement with sales up high single digits and AOE more than twice that of prior year, resuming double-digit AOE margins for the first time in 3 years. Free cash flow in the quarter was also particularly strong, and we are pleased to return $94 million in capital to our shareholders this quarter through share repurchases and dividends.

Please turn to Slide 6. Through our energized strategic framework, we are continuing to further optimize our core, invigorate our operating model and accelerate our growth. We are capturing realignment savings as planned, and our centers of excellence are continuing to improve execution, speed and consistency. We are also progressing on some of our key growth verticals. The reduction in force actions we announced in July are now largely complete, and we are committed to preserving these savings by disciplined cost management going forward.

The closure of our Monterrey battery plant is substantially complete with all manufacturing transition to our Richmond, Kentucky facility in November, 1 month earlier than planned. We expect to begin realizing the benefits mid-fiscal '27 as the savings work their way through our inventory. We've turned the corner on our services improvement, having delivered revenue and margin expansion over the past 2 quarters in this important growth vertical. This is a direct result of improved execution enabled by deploying new project management tools to bring real-time visibility, clear communication and tighter project control.

We are also seeing encouraging momentum in our new product development pipeline, aided by our invigorated operating model in which we have enhanced alignment between our engineering teams, centers of excellence and lines of business. This renewed collaboration is helping us accelerate innovation, focusing on expanding our share of wallet in our core markets where we have a right to win. From battery energy storage systems to next-gen power electronics, TPPL and lithium solutions with embedded software, we are developing products that solve our customers' most critical energy challenges.

Although the progress on optimizing our core is already becoming evident in our financial results, I am most excited about the speed and focus we're making on our new product development initiatives. While this work won't materially impact revenue in the next few quarters, the milestones achieved represent important building blocks for our future growth. We will have more to share on our long-term technology road map during our Investor Day on June 11. We have also made notable progress aligning our planned lithium cell factory with current administration priorities, and we believe we are close to finalizing our updated plan with the Department of Energy.

Progress has been slower than anticipated, but we believe the extra time will result in very favorable outcome adapted to current market dynamics. We will provide updates when our plans are finalized. Please turn to Slide 7. We continue to manage the impact of tariffs on our bottom line. In the third quarter, we fully offset the tariffs realized in our P&L through proactive supply chain actions and pricing strategies.

While we anticipate continuing policy shifts, our total exposure remains stable at around 22% of U.S. sourcing with our estimated direct tariff exposure unchanged from last quarter at around $70 million annualized for fiscal '26. Our task force and lines of business continue mitigating risk and enhancing supply chain optionality.

Please turn to Slide 8. Our diversified business model is proving its resilience as positive demand signals across most of our end markets help offset near-term softness in tariff-sensitive industries such as forklifts and Class 8 trucking. Both Q3 orders and backlog were up sequentially and year-over-year in all business segments, except Motive Power & Transportation, illustrating the near-term dynamic conditions we are seeing market to market.

In Motive Power, industry data for forklift orders in December were up 40% versus prior year, a leading indicator for us, which gives us optimism. However, we are not yet confident a firm recovery is underway as our battery orders were up only 1% sequentially, and thus, we expect the slowness may continue into mid-fiscal '27. In Transportation, Class 8 trucking is still at the bottom of the cycle, but we are managing the impact through pricing, cost improvement and aftermarket growth.

Based on conversations with our customers in both trucking and logistics, we understand that fleets are aging and investment is being deferred through delayed ordering cycles, which translates into pent-up demand. This underinvestment is unsustainable and when our customers need to ramp up swiftly in future quarters, we will be prepared to address the demand associated with the technological deficit that has been created. In communications, our customers are updating their networks and planning upgrades.

We are continuing to see constructive momentum as they review the need to replace aging equipment across their installed base and improve capabilities to meet the expanding consumer and government demand for quicker and more reliable data delivery and backup power. Our data center business remains strong with Q3 sales up 28% over prior year. Despite the acceleration we've seen to date, the data center market remains in the early stages of a multiyear growth cycle, driven by the rapid expansion of AI workloads and a rising need for energy resilience.

Our customers rely upon our solutions to help safeguard essential energy infrastructure. While deployment timing can vary by affecting quarterly trends, we look forward to continuing to benefit from the critical role our products play in the AI development super cycle and compounding that impact with new product offerings in the future. The dynamic geopolitical environment continues to drive an increase in global defense budgets and demand for next-gen power technologies for both tactical and mobile software applications as well as military drones. As such, A&D activity remained robust in the quarter.

Overall, we're pleased with our earnings strength and margin performance, reflecting our renewed disciplined execution and operational rigor. As we look ahead, our teams are aligned around the actions that will drive long-term value, including organic innovation and strategic opportunities to expand our capabilities. We are highly confident in our focused growth strategy, supported by durable secular demand trends, including the growing need for energy security and high-performance energy storage solutions.

Now I'll turn it over to Andi to discuss our financial results and outlook in greater detail. Andi?

Thanks, Shawn. Please turn to Slide 10. Net sales came in at $919 million, up 1% from prior year, driven by a 3% benefit from price/mix, a 2% benefit from foreign currency translation, partially offset by a 4% decrease in organic volumes. We achieved adjusted gross profit of $278 million, down $22 million year-on-year, but up $19 million or 8%, excluding 45X benefits. Note that 45X credits in the third quarter of last year were $75 million and included a onetime catch-up of $36 million compared to $35 million in the third quarter of this year. The prior year catch-up impacts the year-over-year comparison of our adjusted gross margins and adjusted earnings, clouding the impressive year-on-year improvement, excluding these benefits.

Q3 '26 adjusted gross margin of 30.2% was up 110 basis points sequentially and down 280 basis points versus the prior year. Excluding 45X, adjusted gross margin was up 150 basis points sequentially and up 170 basis points versus prior year. OpEx in the quarter improved as a result of our cost reduction initiatives. As expected, we realized approximately $15 million in Q3 from these actions and anticipate similar savings in Q4. Our adjusted operating earnings were $142 million in the quarter, up $13 million versus the prior quarter and down $13 million versus the prior year with an adjusted operating margin of 15.5%.

Excluding 45X benefits, adjusted operating earnings increased $28 million or 34% with a record adjusted operating margin of 11.7%, up 290 basis points versus the prior year. Adjusted EBITDA was $160 million, a decrease of $12 million versus prior year, while adjusted EBITDA margin was 17.4%, down 150 basis points versus prior year. Excluding 45X, adjusted EBITDA of $125 million, a company high, was up $29 million or 30% year-on-year with a company record adjusted EBITDA margin of 13.6%, up 300 basis points versus the prior year.

Adjusted diluted EPS was $2.77 per share, a decrease of 11% over prior year. Excluding 45X, adjusted EPS was $1.84 per share, up 50% versus prior year and also a third quarter record. Our Q3 '26 effective tax rate was 14.9% on an as-reported basis and 22.4% on an as-adjusted basis before the benefit of 45X compared to 23.3% in Q3 '25 and 23% in the prior quarter on geographical mix of earnings, which can vary quarter-to-quarter. We continue to expect our full year tax rate on an as-adjusted basis before the benefit of 45X for fiscal year 2026 to be in the range of 20% to 22%.

Let me now provide details by segment. Please turn to Slide 11. In the third quarter, Energy Systems revenue increased 3% from prior year to $400 million, primarily driven by strong price/mix and a positive FX impact, partially offset by the anticipated softer volumes due to the customer pull-ins we noted last quarter and some deferred year-end CapEx spend, both of which included lower-margin product sales that propped up this segment's third quarter margins. Adjusted operating earnings increased an impressive 67% from prior year to $42 million, reflecting the benefits of favorable price/mix from a richer mix of products, OpEx savings from our restructuring efforts and the service margin improvements Shawn noted earlier on the call. Adjusted operating margin of 10.5% increased 400 basis points versus prior year.

While we expect some variability in margins quarter-to-quarter due to the project nature of this business, the overall trajectory of this segment remains very encouraging. Motive Power revenue decreased 2% from prior year to $352 million with lower volumes from ongoing market softness more than offsetting FX tailwinds and favorable price/mix. Motive Power adjusted operating earnings were $53 million, roughly flat to prior year, resulting in adjusted operating margins of 14.9%, up 20 basis points versus prior year with OpEx savings mostly offset by the lost leverage from lower volumes.

Maintenance-free product sales increased 5% year-on-year and were 29% of Motive Power revenue mix compared to 27% in Q3 of '25. As the pause in capital investments for many in the logistics market continues, we expect improving but still soft volumes in Q4 with this trend likely continuing into the first quarter or 2 of fiscal '27. Longer term, Motive Power remains well positioned for growth, supported by electrification, automation and strong demand for our maintenance-free and charger solutions.

Specialty revenue increased 8% from prior year to $168 million, driven by a 4% benefit from price/mix, a 2% increase in organic volumes, a 1% FX tailwind and a 1% contribution from the Rebel acquisition. As Shawn mentioned, Specialty's Q3 '26 adjusted operating earnings of $20 million were more than double that of prior year. Adjusted operating margin of 11.8% was up 560 basis points as this quarter reflected ongoing strength in A&D and transportation aftermarket growth, helping offset the Class 8 OEM softness as well as benefits from manufacturing cost improvements and restructuring efforts. As we've shared previously, this segment is capable of sustained double-digit margins and our efforts to accomplish this are taking hold with additional opportunity in front of us.

Please turn to Slide 12. Operating cash flow of $185 million, offset by CapEx of $13 million, resulted in strong free cash flow of $171 million in the quarter, an increase of $114 million versus the prior year same period. This increase was aided by the expansion of the company's receivable purchasing agreement during the quarter. Free cash flow conversion in the quarter was 190%. Excluding the benefit of 45x to earnings and cash, free cash flow conversion was 300% and without the impact of the expanded receivable purchasing agreement, still over 120% free cash flow conversion.

Primary operating capital decreased slightly to $934 million versus prior year on the benefits of our expanded receivables purchasing agreement with our working capital efficiency measured internally by primary operating capital as a percentage of annualized sales, improving 70 basis points versus prior year after absorbing the impact of tariffs in our inventory and accounts receivable balances. As we continue to invigorate our operating model, our COEs are focused on further enhancing working capital discipline, which we expect will unlock additional value for our shareholders over time.

As of December 28, 2025, we had $450 million of cash and cash equivalents on hand. Net debt of $743 million represents a decrease of approximately $38 million since the end of fiscal '25. Our leverage ratio remains well below our target range at 1.2x EBITDA. Our balance sheet is strong and well positions us to invest in growth and navigate the current economic environment. During this period of heightened geopolitical uncertainty, we anticipate maintaining our net leverage at or below the low end of our 2 to 3x target range, providing us with ample dry powder for our capital allocation choices and to remain nimble to absorb any macroeconomic dynamics that may impact us.

Please turn to Slide 13. During the third quarter, we repurchased 672,000 shares for $84 million at an average price of approximately $128 per share. We also paid $9.6 million in dividends. We have approximately $931 million in our buyback authorization as of February 3. We continue to be judicious in our share buyback activity. Our buybacks in addition to the dividend, underscore our long-standing commitment to returning value to our shareholders. Our M&A pipeline for small and midsized tuck-in acquisitions remains active, supporting continued growth and innovation across the business. We are focused on ensuring alignment with our disciplined strategic and financial criteria of any M&A.

Please turn to Slide 14. As we navigate the current environment of mixed end market demand trends, we remain optimistic but cautious about the near-term outlook. Year-over-year, our Q4 outlook reflects continuing positive price/mix, the benefits of OpEx improvement from realization of our restructuring efforts, healthy demand in data center and A&D, steady improvement in communications and continued volume softness in Motive Power & Transportation relative to the underlying market needs. For the fourth quarter of fiscal 2026, we expect net sales in the range of $960 million to $1 billion with adjusted diluted EPS of $2.95 to $3.05 per share, which includes $37 million to $42 million of 45X benefits to cost of sales.

Excluding 45X, we expect adjusted diluted EPS of $1.91 to $2.01 per share, up 10% year-on-year at the midpoint of the range. Our CapEx expectation for the full year fiscal 2026 remains approximately $80 million. While we are encouraged by the company's overall trajectory and momentum in several key growth areas, we continue to see the impact of a dynamic macro environment on customer buying patterns. Consistent with our fourth quarter outlook and expectations we set at the beginning of the fiscal year, we expect full year adjusted operating earnings growth, excluding 45X benefits to outpace revenue growth, supported by ongoing OpEx savings, sustained price/mix strength and improving though still soft Motive Power volumes.

Operational efficiencies aligned with our energized strategic framework are taking hold with continued progress in process optimization, capital allocation discipline and manufacturing performance. These actions are positioning the business for long-term top line growth and margin expansion. In closing, this quarter showcased the strength of our operating model and the discipline of our team, delivering record results, advancing our strategic priorities and positioning us well for fiscal year '27. We have clear priorities, aligned leadership and momentum in the areas that matter most to our long-term value creation.

With this, let's open it up for questions. Operator?

[Operator Instructions] your first question comes from the line of Noah Kaye with Oppenheimer.

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

Yes. So Noah, it's Shawn. Good to hear your voice. Listen, we're very excited about this opportunity, obviously. And if we look at it from a lead acid perspective, let me start there. We have a commanding market share in data center. It's over 50% in the United States as an example. And we serve those same hyperscalers around the world. And we're seeing grower demand -- growing demand for higher density products. And so TPPL for us in this space is doing very well. What we're most excited about, though, for all of that strength and all of that growth, we have yet to release a lithium battery product into the marketplace. So for over 50% market share in the lead acid for all the greenfield data centers that are going lithium, today, we have 0% market share.

So our product teams under Mark Matthews are doing a tremendous job to get that product over the finish line. We're not being very public about dates and that kind of thing because we'd rather have done it and told you about it than foreshadow something that we didn't deliver on. But that is a massive growth opportunity for us. And it's the exact same customers that we're serving with that great growth in lead acid. So it's just a lot -- a tremendous amount of upside for us and a tremendous amount of willingness on the side of the customer because with EnerSys, you get -- it's not just the product, you get the before and after sales services and care, the logistics support, the staging support. So our customers are very keen to get us involved in that. And it's probably our largest opportunity to date.

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

Sure. Noah, this is Andi. Nice to hear from you. Consistent with what we've said in the past, as you know, our Energy Systems business is very project oriented, which also has some mix opportunities that can cause it not to be a pure linear progression. And as we talked about in Q3, we both had some pull-ins into Q2 that we had talked about on our last call. And then we had a couple of customers that pushed out one customer in particular in order at the end of the calendar year into our Q4. So that put a little bit of pressure on our volumes in Q3 in Energy Systems, but also aided the margins a little bit.

So what I would look at is if we normalize for that, we would continue with the improvement trajectory, but probably a little bit of that 10.5% OE margin in ES, some of that probably should have propped up Q2 a little more and propped up Q4. So if you normalize for that, you would continue to see an improvement and we might be sub-10%, but not much. It will still be in that -- trending in that direction. But I would expect probably a little bit of a step back in Q4, but a continuation of the improvement that we've seen so far to date. Does that make sense?

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

It's -- I'll take that again. Noah, it's Shawn. This is why we've been so reticent for full year guidance because it's just all the leading indicators have been tough for our forklift manufacturer OEMs, let alone us on how to gauge this market. And of course, there was tariff exposure particularly in heavy steel and then there were the interest rates and just all sorts of things that affect these heavy capital purchases. With that being said, as we said in the prepared remarks, we know for sure, this is pent-up demand that as these trucks age, if there was 0 growth in logistics, which there won't be, that just to keep the fleet moving today that exists, they have to order trucks.

We saw evidence of this in December. We mentioned a 40% increase in December in the Americas in the trucking orders. To put that in perspective, about 22,000 units. That's a record December. We've never seen that kind of number. And it's not that the market just decided to grow that much. That's that pent-up demand. So where we're being careful, though, is we saw earlier this year, we talked about some strength coming back in. And historically, when Motive turns, it's basically a linear climb out. This has been a little more choppy for us. But that 40% new truck order number is a big one for us. And typically -- and the reason we're saying, hey, it may take a couple of quarters of fiscal '27 to iron out, that's usually the lag time between trucks being ordered and our batteries being ordered, but it's a very positive sign for us.

Adding a little bit to what Shawn said as well, Noah, if it's okay. One thing, while we're not thrilled with obviously the volume being down, what I do feel good about is we know that we are outperforming the market. It's not lost share. Our industry data that we received showed that while our volume was down high single digits, the industry indicators were down low double digits in the quarter. So I think we're doing better than the market. Motive Power is not a segment I really worry about. Chad does a tremendous job managing it. We know over time, as long as materials are moving, our products are needed. And there's -- as Shawn mentioned, it will come back. It's a question of when, and I think the team does a great job managing through it.

Your next question comes from the line of Chip Moore with ROTH Capital.

Maybe I could ask about lithium battery. I know you're limited on what you can say, but you sort of alluded to expecting -- I think it was a favorable outcome. Just anything you can share there and how we might think about how the strategy has evolved and when we might see a final decision?

Yes, I'd be happy to do that. Thank you, and good to hear from you. We are very encouraged, I'll just say that, of where we're at in our discussions with the Department of Energy and the overall administration. If you recall, and we go back to the beginning of this administration, what we saw were grants being canceled, projects being canceled. And we didn't know at the time that the batteries would survive the One Big Beautiful Bill Act. And all that is sort of ironed out, the government priorities being clarified and then putting the people in place that they wanted to put in place on their side to get these initiatives across is what's taken all the time.

But I'll tell you that our grant has remained intact. It was never canceled. And we had a really strong audience with the government to talk about their new priorities. And what is that? It's secure domestic supply chains free from foreign entity of concern, content, particularly for the U.S. military and the Department of War. And of course, grid resiliency and electrification is still there, U.S. manufacturing and job creation. But the really interesting thing for us is this has been a bipartisan supported issue.

And I've said previously that if we could -- in terms of what the plant does and what its purpose is, if we could point the whole thing at a secure supply chain for the military, we would. I'm not saying that, that's where we're going to end up. And I don't want to get in front of the administration and determining yet what that looks like. What I can tell you right now is it's very positive. We believe we're in the final stages. We were hoping to have some information by -- a little more concrete by this call, but we can only go as fast as the customer on the other side, which in this case, is the government, but we remain very optimistic about where this is trending.

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

Yes. Well, we are well positioned. The actions we've taken in our factories to be more efficient, to increase the effectiveness of our supply chains, the work we've done through tariff mitigation, we're ready. I mean there's no question about it. And just to give you -- you mentioned Transportation, I didn't really give that color. We have a fleet operator, who is one of the largest in the U.S., and they operate over 400,000 tractors. And they told us today, they have -- they told us if they had to order today, they have some 50,000 tractors to order just to maintain the fleet as it is without any additional growth. Think about that.

So they've just delayed and nobody wants to go first because they don't know when this is going to turn back on. But they told us all of their conversations now with the OEM tractor providers and Class 8 OEMs is how fast can you restart? What does that look like? What does that pipeline look like? Because they know -- and they represent just a bit of color, that 412,000 tractors or 450,000 -- whatever that number is, they represent a number approaching 20% of their portion of the market. So it just gives you an idea of the dimensionality of the number of tractors that need to be ordered now just to sustain the fleets out there due to the aging issue, let alone growth. So we're ready. We have ample capacity. We've got Missouri up and running. We've hit all of our milestones there that we committed to. We've got scrap coming down, productivity increasing. OEE looks good at our bottleneck points. So when those drivers turn back on for us, we can execute pretty quickly.

Yes. I'll just add a little bit more on to that. One thing that's interesting, Chip, and good to hear from you is you mentioned Transportation right after Motive Power. With invigorating our operating model, one of the things that we've been looking at is having Chad, who does a great job leading our Motive Power business, also begin to look at synergies that we have with our Transportation business. And there's immense synergies there because as you can imagine, you've got warehousing and distribution. You have both forklifts and trucking in there. We actually had a really nice quarter for Transportation with the market still being soft. And I think that's aided by some of the benefits from this invigorated operating model as well as the improvements the COE are having in our manufacturing costs, both absorption with a little bit of the volume pickup we had and Shawn's monthly trips that he's taking out to Missouri, I think you're really seeing improvements across the board.

And only other thing I'd mention since we're talking about Transportation as you get into the whole specialty line of business, we couldn't be more pleased with our A&D business. That's an area where we mentioned our A&D backlog, I think, up 27% year-on-year. Munitions, in particular, has had a 230% growth in their backlog year-to-date, really a 29% CAGR since we acquired the business in fiscal '19. So lots of opportunity in front of us with the geopolitical environment continuing to drive this increase in defense budgets as well. So bright spot there for us.

Your next question comes from the line of Brian Drab with William Blair.

I just wanted to talk about the Energy Systems segment first and the outstanding growth that you're seeing in data center, I think you said up 28%. If I look at that segment and think about, I think data center revenue for you is over $400 million on an annual run rate now. I think, Shawn, that you had said it was around $425 million. If data center is up 28%, I guess that implies or tells us that the balance of the Energy Systems segment was down maybe low single digits to mid-single digits. And I'm just -- that's being driven, I guess, mainly by dynamics in telecom and broadband, but I don't know if I missed it, but I didn't hear a lot of comments today yet on the call around telecom and broadband. So I'm just curious what is happening in those end markets? And what's the outlook in those end markets?

Yes. And good to hear from you, Brian. We -- I think Andi went into a bit on timing and margin normalization. What I would tell you is that we see only positive signals in the rest of the segments there. Q3 to Q4 for us because we are on this April to March fiscal is always a little weird in the telecom space for us because you either have the communications folks trying to increase their year-end spend before the calendar year flip or they have -- or they're deferring CapEx based on what their CFO is wanting them to do to restart it again in the -- our fourth quarter, their first quarter. So -- and then as Andi mentioned earlier, too, we had the pull-in issue from Q2 into Q2 that if you normalize Q2 and Q3 look a little better. But all of the demand signals are good. We don't talk about it because it's a small segment for us, but we have over 50% market share in power utility. And that specific application for us is electric substation, switchgear and control. That business is up 15% and just doing very, very well.

So we see very positive demand signals. I'll tell you the engineering team, particularly under the Center of Excellence realignment is doing a fantastic job with the XM product. The broadband people are under the same pressure everybody else is under. They're trying to plan for more expensive energy, more frequent outages. And so that product achieves a lot of that for them. So we've been in trials and co-developing that with a key customer partner. So I would tell you that there's all positive demand signals for us there. You're probably just picking up on a little of that year-end choppiness and project staging.

Yes. And just to echo that, Brian, and good to hear from you. As we mentioned, this business is project driven. There are some large customers. So when you look at growth rates quarter-by-quarter, both with volatility in last year as well as volatility in this year quarter-to-quarter, you see some spikes up and spikes down. But I would expect our comms business overall in '26 will be up mid-single digits. Our data centers will probably be up high teens year-on-year. So quarter-to-quarter because of some of these, you have a customer year-end, you have budgets, you got a project that completes early or you're behind, you can have some shifts quarter-to-quarter. But the trajectory is really in good shape.

And I would say, while we're not in kind of this robust build-out like we've seen maybe in some of the past communications expansion, it's more slow and steady, continues to improve. This fiscal year, we probably won't be back at the fiscal '24 level, but we'll be trending towards it with opportunity in '27 to get above.

Okay. And the guidance for Energy Systems and -- or I guess the guidance for the revenue overall, does that imply for the fourth quarter, like would I be correct in thinking that Energy Systems revenue is up a little year-over-year and Motives down a little year-over-year? Or any detail there you can help with?

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

Whatever you want to give would be great.

Sure. I'll give you a little -- and hopefully, this will help. Energy Systems, we'll continue to see some growth from data centers, although, again, as we mentioned, the choppiness, prior year is probably a little bit of a tough comp. The comms network refresh will continue with the build-out to enable the AI data delivery necessary, but at this measured pace. And again, some of those pushouts that we had will be materialized, so that will benefit us. Just as the Q3 volume was pressured and margins were aided by this quarterly phasing, that will be normalized. So you'll get a little bit more of the pickup from the volumes as we talked about, but probably a little bit of pressure from the margins quarter-on-quarter. Our cost actions are holding and again, normalizing towards double-digit margins. So very pleased with the progress.

And as you know, we've talked about several quarters, service having been a headwind for us. It's now -- we believe we've turned the corner and going to start to become a tailwind, an important part of our strategy going forward. In Motive Power, again, I would use hesitant as probably the best word to describe the market. We see that continuing into fiscal '27. We had a 0.9 book-to-bill in Motive Power, but we're really returning our backlog more to pre-COVID levels. So there's more book and ship business. And again, we -- as Shawn mentioned, we definitely see pent-up demand there that it's just a question of when that's going to be unloaded.

There's going to be the Q4 seasonal volume lift that always happens. So we'll benefit from that. We continue to see customer enthusiasm in our maintenance-free solutions. And we will also see some higher cost pass-through from tariffs as our cost optimization opportunities and volume grows. Our Monterrey closure, as we mentioned, is ahead of plan. We substantially closed that 1 month early. You'll probably begin to see that benefit in -- starting around the middle, maybe second quarter or third quarter of next year as we work through the inventory that we had. But that along with the BESS opportunities.

There's a great article we just read about how 15% of warehouse operators costs are their operating expenses or energy, and they're asking us for these solutions. So that's on the horizon for next year. And Specialty, I think not unreasonable to expect double-digit AOE for Q3 that we saw and beyond as our A&D business continues strength, aftermarket Transportation picks up and the lead acid COE is driving cost improvements in both trans through automation and the growing benefits of the restructuring. So hopefully, that was a little color that could help.

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

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

Thank you for calling in and joining us. It's a great question and the right question. Lithium as a technology does some very interesting things for the user, but also carries risks that lead acid does not carry. And as such, it's the adoption rate for it, to your point, I think to your question, is that you get trials in the field and these centers are so large, that the amount of power that you're generating or the amount of power that are going through the systems is substantial. So what you would expect to see for us is trials, which have already pretty much been pre-agreed by our customer base.

Again, I mentioned earlier, there's a lot of pull-through from our customers, and it's more than just the product. It's how we handle them, it's how we service them. It's our global presence. So there's a high desire for our customers. This isn't something we're going out and trying to pitch. But with that being said, we have to get through these trials. They have to get comfortable with the technology. We have to be sure that we're making the little tweaks because our battery doesn't go in isolation. It's communicating with the OEMs UPS systems, and you know the big names and who they are. So that all takes a little bit of time. So what we suspect is that when the trials come in, that will be probably a, let's call it, a 6-month period for that fine-tuning and that customer comfort and then we begin to get into the project queue.

And then, of course, the other issue there for us that we have to mitigate is that these data centers are planned a long time in advance and lead times are long. So when we get into that queue, you shouldn't expect a hockey stick ramp in the first year, but a steady growth for us climbing out. And just to give you some context, there are really only 1 to 2 other credible lithium providers in the space today. And so it's not a crowded or mature field. And again, we have a lot of pull-through from customers. But I don't want to dimension it that there will be this astronomic ramp for UPS. It will take a bit of time.

Okay. Great. And then, Andi, real quick on Motive in terms of the upward price. I know you called out in the slide deck about the maintenance-free solution growing. Just kind of curious what drove that price mix? And I'm curious, was any of that kind of just tariff pass-through?

Well, tariff pass-through would be at a lower margin, and we are starting to begin to see more of the tariff impact coming through. We had a nice margin in Q3 '26, again, at 14.9%, up year-on-year and up sequentially. A lot of the volume softness that we saw was in our flooded business. And so that mix really helped us. We think those are the smaller manufacturers, smaller warehouses that are feeling some of the pressure. And those are the ones we think that are kind of holding back and driving some of the mix benefit we're seeing. But of course, our restructuring efforts are holding.

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

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

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

Hello, and thank you for standing by. My name is Mark, and I will be your conference operator today. At this time, I would like to welcome everyone to the EnerSys, Inc. Q2 [ Quarter ] 2026 Earnings Webcast and Conference Call. [Operator Instructions]

Now I would like to turn the call over to Lisa Langell, Vice President of Investor Relations and Corporate Communications. Please go ahead.

Good morning, everyone. Thank you for joining us today to discuss EnerSys fiscal second quarter results. On the call with me are Shawn O'Connell, EnerSys' President and Chief Executive Officer; and Andi Funk, EnerSys Executive Vice President and Chief Financial Officer.

Last evening, we published our second quarter 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 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 5, 2025.

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 the call today, we will provide an overview of our second quarter results, share progress on our EnerGize strategic framework, update you on the latest demand trends we are seeing in our diverse end markets and provide guidance for our third quarter.

Please turn to Slide 5. Our performance in the second quarter was strong, with net sales up 8% year-over-year. Earnings growth outpaced revenue growth, driven by favorable price/mix more than offsetting higher costs, resulting in both adjusted operating earnings and EBITDA being up 13%.

Excluding 45X benefits, adjusted diluted EPS on our base business was up 15% versus prior year on the higher earnings as well as our lower share count. Our net sales and adjusted diluted EPS both marked new Q2 records driven by strong growth in data center, industrial and A&D. We are seeing positive trends in the majority of our markets, albeit with some lumpiness.

Energy Systems led the way this quarter with year-over-year sales growth seen across all end markets, data center, industrials and communications as well as continued margin improvement. Motive Power improved sequentially, but was lower versus prior year as expected on suppressed volumes.

Specialty delivered notable performance improvement, nearing double-digit AOE margins on A&D revenue and margin expansion. Free cash flow in the quarter was particularly strong, and we are pleased to return $78 million in capital to our shareholders this quarter through share repurchases and dividends.

Please turn to Slide 6. Through our EnerGize strategic framework, we are optimizing our core, invigorating our operating model and accelerating our growth. We are reallocating resources to higher impact projects, and we are focusing on where we have a right to win. We're putting in place the structure that enables our people to focus, specialize and execute with agility and speed. We've made great progress over the past 2 quarters, and I'm excited to update you on these recent highlights.

First, the reduction in force actions we announced in July are nearing completion and support our efforts to rightsize the organization. Early benefits are materializing from the $80 million annual cost-saving initiative and the realization of these savings will grow in the third and fourth quarters.

Next, we launched our 3 centers of excellence: lead-acid, power electronics and lithium, which are leveraging innovation and best practices across these critical areas to deliver products faster and lower costs. We are already beginning to see ensuing benefits.

As an example, our exceptional performance in Energy Systems was bolstered by improved agility from our Power Electronics Center of Excellence. The CoE cut validation time on new components from weeks to days using in-region audits and smarter collaboration. This effort, along with other optimization improvements in our Missouri plants and SIOP helped to support a major communications customer. We delivered a solution within 1 quarter on an initiative that previously could have taken up to 18 months. This is just one instance of how our transformation initiatives are improving execution and accelerating revenue growth.

We are also leveraging AI to drive increased efficiency. For example, our lead-acid Center of Excellence has implemented AI-trained inspection cameras and software. This tool enables us to identify defects in battery plates faster and lower scrap rates. We are increasing our rigor around new product introductions and CapEx investments, reallocating resources to focus on higher return opportunities and executing with greater speed.

As a data point, our capital spending in the quarter was reduced to 30% to $21 million from $30 million in Q2 '25, even with much of the spend this quarter coming from projects we started last fiscal year. Aligned with our new product road map for lithium technology, we are evaluating our make versus buy options for our lithium cell supply, which includes our planned lithium cell factory. Recent discussions with relevant government officials have been constructive, and we expect to provide an update to you on our new lithium factory plans next quarter.

Please turn to Slide 7. In the second quarter, we fully offset the tariffs realized in our P&L through proactive supply chain actions and pricing strategies. As we've previously shared, approximately 22% of our U.S. sourcing is from countries affected by direct tariff costs. Our estimated direct tariff exposure is now some $70 million annualized for fiscal year '26. This has improved from our prior estimate of $94 million as a result of supply chain mitigation activities.

While we anticipate ongoing volatility and further policy shifts, we remain confident we will be able to fully offset the impact of tariffs to our P&L. Our task force continues to proactively mitigate direct and indirect exposure of tariffs, enhance supply chain optionality and assess impact on demand.

Please turn to Slide 8. Market uncertainty abated somewhat in the quarter. However, our order book does not yet reflect normalized market conditions. We expect that improving macro conditions and increasing clarity on public policy will continue to support more stable dynamics in the coming quarters.

Q2 orders [ pared ] back sequentially after strong orders in Q1, which illustrates the dynamic conditions we are currently seeing in the market. In Q2, backlog in Specialty was up, supported by strong demand in A&D. However, backlog was down in Motive Power on a mix of tariff uncertainty and a return to pre-COVID buying patterns, with levels of book and ship business continuing to increase.

Energy Systems backlog is stable. In communications, we are seeing more spending on network refreshes than network expansions. We remain encouraged by the opportunities these customers are reviewing to replace large inventories of older equipment out in the field.

Data centers continue to be a key growth vector for EnerSys. While deployment timing can vary by project, demand in this market remains strong. As part of our strategy to accelerate our growth, we are focusing on opportunities to leverage our leading lead-acid market share and expand our share of wallet through new product introductions in this segment.

The data center market is in the early phase of a multiyear growth cycle driven by the rise of AI and the increasing need for energy resilience. The dynamic geopolitical environment continues to drive an increase in global defense budgets and demand for next-gen power technologies for both tactical and mobile soldier applications.

A&D activity in the quarter was robust with visibility to increasing sales for upcoming quarters as the government personnel and spend disruptions settle. Although the Class 8 market remains soft, we saw some improved demand signals in transportation with significant order inflection both sequentially and year-over-year.

Please turn to Slide 9. We are proud to have published our fiscal year 2025 sustainability report in October, highlighting how we are delivering measurable energy savings, improving efficiency and reducing costs for EnerSys and our customers. It emphasizes our commitment to communities, operational excellence and our role in supporting global energy resilience.

The report reflects the progress we've made and how our sustainability journey aligns with EnerGize, demonstrating how strategic improvements in energy usage, data and systems management drive both efficiency and financial performance. My vision for EnerSys is clear: to embed sustainability, resilience and operational excellence into every part of our enterprise. These principles are not just strategic. They are foundational to delivering long-term value to our customers, communities and shareholders.

Please turn to Slide 10. We are excited to announce that we plan to hold our next Investor Day on June 11, 2026, in New York City. We look forward to sharing more details and progress on our strategic road map and longer-term financial targets with you then.

In summary, our progress this quarter reflects not only strong execution, but also a shared commitment to continuous improvement and collaboration across the company. We are positioning EnerSys for long-term sustainable success in delivering solutions for our customers and generating value for our shareholders.

Now I'll turn it over to Andi to discuss our financial results and outlook in greater detail. Andi?

Thanks, Shawn. Please turn to Slide 12. Net sales came in at $951 million, up 8% from prior year and a record high for our second quarter, driven by a 3% positive impact from organic volumes, 3% positive price/mix, a 1% tailwind from FX and a 1% benefit from Bren-Tronics. The sales growth was driven by strength across most of our end markets.

We achieved adjusted gross profit of $277 million, up $23 million year-on-year and up $16 million, excluding 45X benefits. Q2 '26 adjusted gross margin of 29.1% was up 70 basis points sequentially and up 40 basis points versus the prior year. Excluding 45X, adjusted gross margin was up 80 basis points sequentially and mostly flat versus the prior year.

Our adjusted operating earnings were $130 million in the quarter, up $15 million versus prior year with an adjusted operating margin of 13.6%. We had a $40 million benefit from 45X in the quarter. Excluding those benefits, adjusted operating earnings increased $8 million, or 10% with an adjusted operating margin of 9.5%, up 20 basis points versus the prior year.

Adjusted EBITDA was $146 million, an increase of $17 million versus the prior year, while adjusted EBITDA margin was 15.3%, up 70 basis points versus prior year. Adjusted diluted EPS was $2.56 per share, an increase of 21% over prior year. Excluding 45X, it was $1.51 per share, up 15% versus prior year, both representing record highs for our fiscal second quarter.

Our Q2 '26 effective tax rate was 10.5% on an as-reported basis and 23% on an as-adjusted basis before the benefit of 45X compared to 19.4% in Q2 '25 and 21.4% in the prior quarter on geographical mix of earnings, which can vary quarter-to-quarter. We expect our full year tax rate on an as-adjusted basis before the benefit of 45X for fiscal year 2026 to be in the range of 20% to 22%.

Let me now provide details by segment. Please turn to Slide 13. In the second quarter, Energy Systems revenue increased 14% from prior year to $435 million, primarily driven by stronger volumes, along with favorable price/mix and a slightly positive FX impact. Adjusted operating earnings increased 38% from prior year to $34 million, reflecting the benefits of the increased volume and favorable price/mix. Adjusted operating margin of 7.7% increased 130 basis points versus prior year.

As Shawn mentioned, we saw unique wins in this business during the quarter that we expect to normalize next quarter. We remain confident in our margin trajectory with upside from here as data center demand and ongoing communications recovery should allow us to generate operating leverage and higher margins with additional support from our structural cost reductions.

Motive Power revenue decreased 2% from prior year to $360 million, as anticipated, with lower volumes from macro headwinds more than offsetting favorable price/mix and FX tailwinds. Motive Power adjusted operating earnings were $48 million, down $10 million versus prior year, primarily on those lower volumes.

Adjusted operating margins were 13.3%, down 240 basis points versus the prior year. Maintenance-free product sales increased 14% year-on-year and were 29.9% of Motive Power revenue mix compared to 25.8% in Q2 '25.

Looking forward, we expect Motive Power volumes to regain year-over-year growth in the third quarter as the macro settles. We expect lithium sales to make up a bigger portion of this growth, which will temporarily pressure margins on higher cost pass-through from both China tariffs as well as elevated costs, which we will experience until lithium sales reach higher volumes. Longer term, Motive Power is well positioned for growth, supported by electrification, automation and strong demand for our maintenance-free and charger solutions.

Specialty revenue increased 16% from prior year to $157 million, largely driven by a 7% increase in organic volumes and a 7% benefit from the Bren-Tronics acquisition as well as a 1% increase from FX and price/mix. We remain impressed by the contributions from Bren-Tronics and the cultural fit between our companies, both of which have surpassed our initial expectations. As we acquired Bren-Tronics in the second quarter of our fiscal '25, the results will be included in our ongoing operations in future quarters.

Q2 '26 adjusted operating earnings of $15 million were nearly double that of the prior year when we entered the transportation down cycle. Adjusted operating margin of 9.2% was up 380 basis points. We continue to see the near-term opportunity of margin expansion in specialty, driven by robust A&D demand and ongoing TPPL cost and delivery gains from automation under our lead-acid CoE.

Please turn to Slide 14. Operating cash flow of $218 million, offset by CapEx of $21 million, resulted in strong free cash flow of $197 million in the quarter, an increase of $194 million versus the prior year same period. This increase was bolstered by the receipt of our U.S. federal tax refund.

Free cash flow conversion in the quarter was 288%. Excluding the benefit of 45X to earnings and cash, free cash flow conversion was still an impressive 196%. Primary operating capital increased slightly to just over $1 billion during the quarter on higher sales, with our working capital efficiency measured internally by primary operating capital as a percentage of annualized sales, improving 120 basis points versus prior year and 130 basis points sequentially. As we invigorate our operating model, we will continue to focus on delivering value from enhanced working capital discipline enabled by our CoEs.

As of September 28, 2025, we had $389 million of cash and cash equivalents on hand. Net debt of $842 million represents an increase of approximately $61 million since the end of fiscal '25. Our leverage ratio remains well below our target range at 1.3x EBITDA. Our balance sheet is very strong and positions us to invest in growth and navigate the current economic environment.

During this period of heightened geopolitical uncertainty, we anticipate maintaining net leverage at or below the low end of our 2 to 3x target range, providing us with ample dry powder for our capital allocation choices and to absorb any macroeconomic dynamics that may impact us.

Please turn to Slide 15. During the second quarter, we repurchased 636,000 shares for $68 million at an average price of under $107 per share. We also paid $10 million in dividends. Since quarter end, we repurchased an additional 325,000 shares for $37 million, leaving approximately $960 million in a buyback authorization as of November 4th. We continue to be opportunistic in our share buyback activity, particularly as market conditions remain volatile.

Our buybacks, in addition to the dividend, underscore our long-standing commitment to returning value to our shareholders. We continue to evaluate accretive bolt-on acquisitions such as Bren-Tronics and Rebel, that align with our disciplined strategic and financial criteria and are focused on strengthening customer intimacy, expanding share of wallet with our leading positions in exciting end markets and advancing our transformation progress.

Please turn to Slide 16. As we navigate the current environment of mixed end market demand trends, we are optimistic but cautious about the near-term outlook. Year-over-year, our Q3 outlook reflects OpEx improvement from realization of our restructuring efforts, healthy demand in data center and A&D, improvements in Motive Power and relatively flat communications revenue following a particularly strong Q2.

For the third quarter of fiscal 2026, we expect net sales in the range of $920 million to $960 million, with adjusted diluted EPS of $2.71 to $2.81 per share, which includes $35 million to $40 million of 45X benefits to cost of sales. Excluding 45X, we expect adjusted diluted EPS of $1.64 to $1.74 per share, up 46% at the midpoint of the range. Our CapEx expectation for the full fiscal 2026 is approximately $80 million.

As a reminder, we expect to realize $30 million to $35 million of net savings in fiscal year '26 related to our cost reduction initiatives. While we are pleased with the EnerSys' overall trajectory and are seeing positive momentum across several growth areas, we believe it remains prudent to keep full year quantitative guidance paused due to the dynamic macro environment and its downstream effect on customer buying patterns.

That said, we reaffirm our expectation that full year adjusted operating earnings growth, excluding 45X, will outpace revenue growth. We remain confident in the earnings power of our business and our ability to navigate through evolving policy and macroeconomic conditions.

With this, let's open it up for questions. Operator?

[Operator Instructions] And your first question comes from the line of Sherif Elmaghrabi with BTIG.

When you talk about demand pull-ins and customers shifting their spending as they manage tariffs, can you tell us what end markets are most impacted? And what do you need to see from some of these customers that would give you more long-term visibility?

Sherif, this is Shawn. I think the big pull-in that we had was in the communications sector. But I don't think it was relative to tariff activity. It was more that customer front-loading their year and opportunity because they were involved in a large acquisition that was going to dominate the second half of their year.

So we -- the good news with that is with our centers of excellence, we were able to accommodate them and move very quickly to help them do that. And it provided a little lumpiness in our order book in that front-loading did have a result of a higher Q2. But beyond that, it's not that difficult for us to manage.

I will also say in Motive Power, what we're seeing is a restoration of our book and ship business which incidentally was sort of the character of that business for decades where you have a higher percentage of book and ship in the period and a lower percentage of backlog.

And as we mentioned in our prepared remarks, [ we're ] started seeing a restoration back to that, which really supports our ability to do quick ship out of our factories. We've spent a lot of time putting that in place.

So we don't see a lot of volatility in terms of tariff activity with these pull-ins, as we did in the first quarter. It's more just customers reacting to their localized order demand patterns.

And Sherif, if I could just add one comment on to that. Shawn is absolutely correct. But the only other comment I'd make with the tariff environment is our customers, particularly on the large capital spending. So buying motive power forklifts or buying Class 8 trucks, that's where we think there's some, I would call it, hesitation in the market.

I don't know if you saw the Hyster-Yale release yesterday, they called out a 4% reduction year-on-year on lower forklift truck volume, and they specifically said from ongoing economic uncertainty dampening customers' bookings over the past several quarters.

We feel that also. And fortunately, our business isn't affected as much because we have a diversity of end markets. And also we do the replacement cycle as well as the initial battery in the first truck.

Got it. And when we think about lithium driving elevated costs, is that about operating leverage as sales ramp? Or is this kind of an interim phenomenon until the new cell plant comes online?

Yes. There's actually 2 aspects to that. First of all, obviously, most of the lithium cells right now come from China across the market. So that elevates the cost of lithium batteries in the U.S. in particular. And so we've got that higher cost pass-through, which affects the value proposition. And then we're still in early -- we're ramping up right now, but we're still in early innings.

Our lithium battery sales, for example, in the Americas were up 45% in Motive Power. But because we're not yet at full out one, 2 shifts, we're not able to operate at the maximum efficiency that you have when you reach a certain volume level. So even independent of the sourcing of the cells, our pack assembly costs are elevated for the short time until we reach more standardized volumes.

And your next question comes from the line of Brian Drab with William Blair & Company.

Could we first just talk about gross margin? And I think you mentioned it somewhat on the call, but the step down somewhat sequentially and like what are the main drivers of that? I think it's some of the absorption issues, Andi, that you just mentioned. But going forward, how should we think about gross margin at least directionally? And are we going to get back to the levels that we saw in the second half of '25?

Brian, thanks for the question. Just to clarify, sequentially, we had a pickup in gross margin, both with and without 45X. Are you referring to a specific segment?

No. I'm probably looking at a model that we're just in the process of updating. But can you just comment on the outlook then, how we should think about gross margin from here?

Yes. So we certainly have price/mix improvements happening across all of our lines of businesses, as you saw in this quarter as well. We've got some mix improvements. There's some dynamics segment by segment. For example, we talked about Motive Power, depending on how quickly lithium ramps, that does put some pressure on gross margin because you have higher cost pass-through as with tariffs in general. But there's no reason to not expect ongoing continuous improvement in gross margin similar to what we've been seeing.

Okay. Got it. Yes. No, I'm looking at updated numbers now. I'm just seeing -- I'm seeing 28.7%. Is that right?

So if I look at actual reported gross margin, we're at 29.1% versus 28.4%...

Adjusted...

Adjusted, excluding -- yes, adjusted, maybe that's right. If you exclude 45X, we're at 25% versus 24.1% in Q1. So we look at it both ways.

Okay. It was just much higher in the second half of fiscal '25 unless I'm really off. And I'm wondering, are we going to get -- with some of the cost cutting and all these initiatives and as the capacity -- as the utilization ramps up, these levels that you saw in the second half of '25, is my main question.

Sure. Good point, Brian, because you bring up an important aspect. In Q3 of '25, it was a 33% reported gross margin. But if you recall, we had the 45X electroactive material catch-up that had prior periods in it.

If you look at gross margin, excluding 45X, it was at 24.7%. So again, Q2 was at 25%. Q4, we had -- there was a lot of -- it was a great quarter. But of course, we had also mentioned there were a lot of onetime items that wouldn't repeat. That was at 26.7% and was on much higher volume as well. So the 24.7% in Q3 '25 and then we were at 25% last quarter, and 25% this quarter, I think it's a nice, steady trajectory.

And the additional tariffs will certainly give a little bit of pressure with the higher cost pass-through. And there's a nice trajectory in front of us. So I think it's a bright spot.

Okay. And then can you just talk about data center for a second, just how much revenue are you generating in data center? What was the growth rate specifically in data center? And what products are you winning the most with there? And is this including like lead-acid batteries that are being sold in conjunction with generators? Or is it more your stand-alone UPS products? And would love an update there.

Sure. I can give some of the numbers and then maybe Shawn can follow-up a little bit with the specific products. As you know, in data centers, it is mostly lead-acid and some UPS systems that we have right now with, again, work underway, with Mark leading our engineering efforts for some new product introductions, which we're excited about.

That's not yet in the current quarter. Current quarter data centers year-on-year were up 29%. And in the first quarter, they were up 14%. So obviously, it really continues to be a bright spot for us with a lot of opportunities going forward. And Shawn, I don't know if you have anything to add.

Yes. I would just say -- I would say, you have the same thing occurring in the data center environment that we have in Motive and other places and that our TPPL products are resonating very well. We have a leading lead-acid market share that is quite compelling. So most of the products, to Andi's point, are like our HX product line that is valve-regulated technology. And then TPPL is growing at a similar CAGR to what you would have seen in Motive Power and NexSys.

And then to Andi's point, I just want to give a little shout out to Mark Matthews. We have a very commercially minded CTO, who's also a lithium expert. And today, the business that he comes from, A&D, we deal in 9 chemistries of lithium, very advanced technological applications. And so Mark's applying that knowledge. Also, our lithium CoE is moving so much faster than it ever has. And he's quickly -- we have some -- we will update you in future quarters on some NPI activity, that's very encouraging to expand that lead-acid market share into other products like lithium. But today, it's lead-acid.

And your next question comes from the line of Chip Moore with ROTH Capital Partners.

I want to ask -- on communications outside of that large customer that was front-loading, just maybe you can speak to what you're seeing in that end market in terms of less break and fix, but more network build-out and some pull-through on power electronics? It sounds like you think margins should go higher from here, but just any more color?

Yes, Chip, I didn't want to over-index on the pull-in there. The pull-in is just a good sign of what's going on. And the reason for the pull-in, we talked in the prepared remarks about network refresh. And what I'd like to point out is with all of the rise in data and data that -- whether it's the AI or other use cases, the overall aggregate volume of data that has to move around the planet is increasing.

And so when we talk about network refresh, it isn't just about updating aged equipment. It's about putting equipment in that can handle the traffic and handle the increase in data traffic. And when we do that, it's also -- that equipment tends to be more power hungry and require more advanced solutions. So I would tell you that we're seeing fairly encouraging demand signals across that marketplace. And while it may not be the 2G or 3G or 4G consistent build-out that we've seen in the past, what we see is users sort of picking -- our customers picking their spots and how they're going to participate in that next evolution in demand.

So I would tell you, it's very good. It's not a -- we're seeing singles and doubles. We're not seeing network build that I would call the home run. But again, very encouraging demand signals across communications.

Great. Very, very helpful color. If I could ask one more, probably more specialty A&D, but just the government shutdown is -- any impacts there or any risks as we look forward? And it doesn't sound like it, but I'd be curious to get your thoughts.

Yes. I would tell you that we've had -- it's sort of a mixed bag. We've had good discussions with our government counterparts relative to our lithium plant and the DOE folks seem to be in the office and working.

On the other hand, we saw some of the impacts of the shutdown are main defense type warehouses that aren't as active. But generally, across the board, I'll tell you that the impact has not been substantial. And we're seeing just extraordinary activity in what Andi mentioned the Bren-Tronics folks and how pleased we are with that acquisition. They're doing a great job. They're seeing quite a bit of demand.

And then I'll also tell you, we have -- because of our technology position in thermal batteries -- there's only about 3 companies in the U.S. that make thermal batteries, and we have a leading position in advanced technology for thermals. And we're just seeing excellent demand signals across about 12 programs. And what those -- just so you can conceptualize what that is, those are the types of batteries that are used for all -- when you hear talk about hypersonics and advanced defense applications, it's being powered by EnerSys lithium cobalt technology. And so we're very encouraged by that. So I would tell you, overall, A&D demand for us in spite of the lumpiness and the shutdown looks very good.

And your next question comes from the line of Noah Kaye with Oppenheimer.

So it seems like restructuring benefits starting to hit their run rate here, some additional levers being pulled as well on productivity and just overall increased focus on thoughtful resource allocation. So as we think about how that translates to operating margins, what's sort of a fair way to think about the trend in Energy Systems and kind of overall operating margins, even on a sequential basis for what's implied for 3Q, but just sort of directionally, where should they be heading?

Well, I'll start, and I'll give it to Andi to talk more specifically on numbers. But I would tell you that what we're seeing in the CoE realignment is that we have a target-rich environment to continue to work on our costs and gain efficiencies. There's a lot of positive momentum in Keith's business in Energy Systems.

I will tell you that they have more opportunities to continue to increase their efficiency there. So we're going to stay on that path. And one of the reasons we're excited to have Keith join us is just because he has that strong operator background, and you're seeing it in the numbers. But we continue that -- we fully expect that trend to continue.

And then what I'll also tell you, along the lines of the CoEs, I've been making a concerted effort to get down to Missouri once a month personally and work with the team and walk the factory floor there. And every one of our metrics is improving from OEE to decreasing scrap rates to increased productivity. So the team is doing a fantastic job. You're seeing the evidence of the focus that people aren't too spread thin. They can specialize focus on doing what matters, and that's our bread and butter. So again, we expect that those efficiencies continue. It's early days. We're very encouraged. Andi, do you want to add to that?

Yes. Thanks, Shawn. As we said on the last call, we had expected that Q1 would be the low point of the year. And in fact, with our dramatic improvement in Q2, that just demonstrates that. Obviously, Q-on-Q adjusted EPS, excluding 45X, was up $0.41 or 37%. Our underlying business is really good. It's actually more compelling than we would have even said a quarter ago.

We anticipate full year AOE growth, excluding 45X, will continue to outpace revenue, which obviously implies, Noah, that we'll continue to have margin expansion. I'll give you a little bit of color for each one of the segments of what we're expecting. But as a reminder, our cost reduction program, which was $80 million, $70 million of OpEx and $10 million of manufacturing will start kicking in more. We had a couple of million dollars this quarter, but it's really going to start ramping up in Q3 and Q4.

Energy Systems, we're on the path to continuing to improve the margins there. Cost actions have been taken, and there's more work that's central to the strategy. We're seeing steady volume growth for data centers. The comms network refresh is continuing. And while we don't think that might happen this year, but we're confident a build-out has to happen to be able to get all of that AI data delivered into users' hands like you and I.

So we think that's going to be more at a measured pace, but ongoing. And the services area is also a key focus for us and has been improving. And Motive Power, as we mentioned, market conditions, hesitant is probably the best word to describe it. But from a positive standpoint, maintenance-free conversions are going great, although lithium might be a little bit of a headwind on margins in the near term.

Our soft book-to-bill is a little bit of a concern, I'll be honest. We're not sure how much of that is return to pre-COVID buying patterns versus just this hesitancy that we're talking about. So we're keeping an eye on it. But if you recall, longer term, we've got the Monterrey closure happening next year. We've got our new TPPL and lithium offerings coming online, new chargers, the BESS on the horizon.

So we feel really good longer term. And if you look at some of the industry data on Motive Power, I think what you're seeing is very consistent with what we're seeing as well, a little bit of hesitation near term, but no concerns longer term for that business.

Specialty, not unreasonable to expect double-digit AOE by next quarter and beyond as our A&D business continues to gain strength. The aftermarket and transportation is starting to pick up, right, from a low starting point. The lead CoE is driving cost improvements, that Shawn mentioned when he's visiting Missouri, it's going well through the automation.

And then just as clarity, we don't expect Class 8 to pick back up this year yet. So, I think generally speaking, I'd say the margin improvement, bottom line you saw this quarter is not unreasonable to expect that same level on an ongoing quarterly sequential basis near term.

That's perfect and comprehensive color. And I'm glad you mentioned the Class 8 aftermarket, which is something that we thought of as a great growth lever for the company and kind of watching for inflection. It sounds like you do expect some growth even this quarter. Maybe just frame up for us where that business stands now? What's sort of driving now improved traction? Any way to think about magnitude of contribution, how meaningful a growth driver this can be?

Yes. No, we don't give -- we don't specifically guide down to those -- that seg markets. But I will say that we -- the aftermarket business is picking up double-digit. It's just off a slow starting point, and some of that's being offset by the OEMs.

But if you look in the aggregate for Specialty, we did have some nice order books for our transportation. Q3 orders sequentially were up 26% and 20% year-on-year. Again, a lot of that is coming from the aftermarket. But you have to remember, it's coming off a low base. So it's not an area that we're -- we expect is going to make a meaningful movement to our bottom line numbers in the short-term. Manufacturing improvement is helping that as well. And the lead CoE will also help us with, I think, more success in transportation longer term.

Yes. And I think Andi mentioned it earlier, and it's just something to just sort of, I think, repeat a bit. If you think of new trucks in Class 8, if the new trucks aren't being built at the same rate, then fleet operators are going to have to do more to keep old trucks on the road or existing fleets on the road, and that bodes well for us.

So just like in the forklifts, Andi mentioned that if you're looking at material handling order rates for new trucks, it's more suppressed than we are because we have the replacement and the ability to help them keep those fleets in the warehouse and fleets on the road. So we -- that's part of our -- this renewable component of battery where we'll get a second bite or third bite at the apple with the fleet that -- when new trucks aren't being sold. So I think that's a piece of it.

Okay. Perfect. If I could sneak one more in. Just outstanding cash generation this quarter, even exclusive of the tax refund, leverage back down to 1.3x. A lot of dry powder for that buyback. Just how are you thinking about repurchase activity here? And maybe kind of update us on your M&A opportunity set as well?

Yes, sure. Thanks, Noah. We are really pleased with the cash flow generation. And I will say that's an area with invigorating our operating model that we are being intentionally more disciplined and focused on as a management team. So I'm very excited about the outcome of the effort that we've had.

So it's a $1 billion buyback, we intend to continuing buying back stock. It's part of our ongoing basis. We generate a lot of cash, and we're committed to returning value to our shareholders. And I would say in periods of dislocation between our stock price and intrinsic value, which we believe is the case now, we're going to continue to buy back at elevated levels.

We do want to keep a portion of our available capital capacity to be opportunistic with M&A activities. M&A will continue to be part of our growth strategy going forward. But we don't have anything specific to announce right now. Shawn, I don't know if you want to add any color to that?

Yes, I would just say generally, we -- with all of the focus on operating rigor, I want to make sure we're not giving the impression that we're not going to deploy capital. We're just going to deploy it for high-quality investment opportunities. We have a few M&A opportunities in the pipeline that we think are compelling.

But again, for us, it's going to be free cash flow margin and increasing free cash flow margin and then deploying that for the right ROIC, and we're going to stay opportunistic. So I think you can expect us to deploy that discipline and rigor to those opportunities. But definitely, we're going to put that cash to work. And to Andi's point, whether that's buying our own shares when they're undervalued or investing internally in our business for the right opportunities and certainly M&A.

There's no further questions at this time. I will now turn the call back over to Shawn O'Connell for closing remarks. Shawn?

Thank you, Mark. I'd like to thank everybody for joining us on the call today. We look forward to updating you again next quarter. Hope you have a great day.

That concludes today's call. You may now disconnect.