EnerSys (ENS) Q2 2026 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call summary and Q&A reveal strong financial metrics and optimistic guidance, particularly in data center growth, margin improvements, and a $1 billion share repurchase plan. Despite elevated lithium costs and government-related uncertainties, the company is mitigating risks well. The market cap of $4.17 billion suggests a moderate reaction, leading to a positive stock price movement prediction of 2% to 8% over the next two weeks.
Key Financial Performance
Net Sales $951 million, up 8% year-over-year. 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.
Adjusted Gross Profit $277 million, up $23 million year-over-year. Excluding 45X benefits, it was up $16 million.
Adjusted Gross Margin 29.1%, up 70 basis points sequentially and up 40 basis points year-over-year. Excluding 45X, it was up 80 basis points sequentially and mostly flat year-over-year.
Adjusted Operating Earnings $130 million, up $15 million year-over-year. Excluding 45X benefits, it increased $8 million or 10%.
Adjusted Operating Margin 13.6%, up 20 basis points year-over-year. Excluding 45X, it was 9.5%.
Adjusted EBITDA $146 million, up $17 million year-over-year. Adjusted EBITDA margin was 15.3%, up 70 basis points year-over-year.
Adjusted Diluted EPS $2.56 per share, up 21% year-over-year. Excluding 45X, it was $1.51 per share, up 15%.
Energy Systems Revenue $435 million, up 14% year-over-year. Driven by stronger volumes, favorable price/mix, and a slightly positive FX impact.
Energy Systems Adjusted Operating Earnings $34 million, up 38% year-over-year. Adjusted operating margin was 7.7%, up 130 basis points year-over-year.
Motive Power Revenue $360 million, down 2% year-over-year. Lower volumes from macro headwinds offset favorable price/mix and FX tailwinds.
Motive Power Adjusted Operating Earnings $48 million, down $10 million year-over-year. Adjusted operating margin was 13.3%, down 240 basis points year-over-year.
Specialty Revenue $157 million, up 16% year-over-year. Driven by a 7% increase in organic volumes, a 7% benefit from Bren-Tronics acquisition, and a 1% increase from FX and price/mix.
Specialty Adjusted Operating Earnings $15 million, nearly double year-over-year. Adjusted operating margin was 9.2%, up 380 basis points year-over-year.
Operating Cash Flow $218 million, offset by CapEx of $21 million, resulting in free cash flow of $197 million, up $194 million year-over-year.
Free Cash Flow Conversion 288%. Excluding 45X, it was 196%.
Net Debt $842 million, an increase of $61 million since the end of fiscal '25. Leverage ratio at 1.3x EBITDA.
Share Repurchases 636,000 shares for $68 million at an average price of under $107 per share. Additional 325,000 shares repurchased post-quarter for $37 million.
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Operating Highlights
Energy Systems: Revenue increased 14% year-over-year to $435 million, driven by stronger volumes, favorable price/mix, and FX impact. Adjusted operating earnings increased 38% to $34 million, with a 7.7% adjusted operating margin.
Motive Power: Revenue decreased 2% year-over-year to $360 million due to lower volumes from macro headwinds. Adjusted operating earnings were $48 million, down $10 million year-over-year. Maintenance-free product sales increased 14% year-over-year.
Specialty: Revenue increased 16% year-over-year to $157 million, driven by organic volumes, Bren-Tronics acquisition, and FX. Adjusted operating earnings nearly doubled to $15 million, with a 9.2% adjusted operating margin.
Data Centers: Strong growth driven by AI and energy resilience needs. Market is in the early phase of a multiyear growth cycle.
Aerospace and Defense (A&D): Robust demand with visibility to increasing sales in upcoming quarters due to rising global defense budgets.
Communications: Spending focused on network refreshes rather than expansions. Stable backlog.
Transportation: Improved demand signals with significant order inflection both sequentially and year-over-year.
Cost-Saving Initiatives: Reduction in force actions nearing completion, supporting $80 million annual cost-saving initiative. Benefits expected to grow in Q3 and Q4.
Centers of Excellence (CoEs): Launched three CoEs (lead-acid, power electronics, lithium) to improve product delivery and reduce costs. Examples include faster validation times and AI-driven defect detection.
Capital Spending: Reduced by 30% year-over-year to $21 million, focusing on higher return opportunities.
Lithium Cell Factory: Evaluating make versus buy options for lithium cell supply. Discussions with government officials are ongoing, with updates expected next quarter.
Tariff Mitigation: Offset $70 million annualized tariff exposure through supply chain actions and pricing strategies.
Sustainability: Published FY 2025 sustainability report, emphasizing energy savings, efficiency, and alignment with EnerGize framework.
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Risk or Challenges
Tariff Exposure: The company faces an estimated $70 million annualized direct tariff exposure for fiscal year 2026, down from $94 million due to supply chain mitigation. However, ongoing volatility and policy shifts could impact operations and financials.
Market Uncertainty: Order book does not yet reflect normalized market conditions, with dynamic conditions affecting demand. Q2 orders declined sequentially, and backlog in Motive Power decreased due to tariff uncertainty and pre-COVID buying patterns.
Motive Power Segment Challenges: Revenue decreased 2% year-over-year due to macroeconomic headwinds and lower volumes. Margins are temporarily pressured by higher costs from China tariffs and elevated lithium costs until sales volumes increase.
Supply Chain Risks: The company is exposed to supply chain disruptions, particularly in sourcing from countries affected by tariffs. Efforts to mitigate these risks are ongoing but remain a challenge.
Geopolitical and Defense Budget Volatility: Dynamic geopolitical environment and defense budget changes could impact demand for next-gen power technologies, creating uncertainty in the A&D segment.
Lithium Cell Supply Strategy: The company is evaluating make versus buy options for lithium cell supply, including plans for a lithium cell factory. Delays or challenges in this strategy could impact growth and operational efficiency.
Economic Environment: Mixed end-market demand trends and macroeconomic dynamics create uncertainty, affecting customer buying patterns and financial performance.
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Guidance & Outlook
Q3 Fiscal 2026 Net Sales: Expected to range between $920 million to $960 million.
Q3 Fiscal 2026 Adjusted Diluted EPS: Expected to range between $2.71 to $2.81 per share, including $35 million to $40 million of 45X benefits. Excluding 45X, adjusted diluted EPS is expected to range between $1.64 to $1.74 per share, up 46% at the midpoint.
Full Fiscal 2026 CapEx Expectation: Approximately $80 million.
Full Fiscal 2026 Cost Savings: Expected to realize $30 million to $35 million of net savings related to cost reduction initiatives.
Full Year Adjusted Operating Earnings Growth: Expected to outpace revenue growth, excluding 45X benefits.
Motive Power Segment Outlook: Volumes expected to regain year-over-year growth in Q3 Fiscal 2026 as macroeconomic conditions stabilize. Lithium sales are expected to grow but may temporarily pressure margins due to higher costs.
Energy Systems Segment Outlook: Margins expected to improve as data center demand and communications recovery continue, supported by structural cost reductions.
Specialty Segment Outlook: Near-term margin expansion expected, driven by robust Aerospace & Defense (A&D) demand and ongoing cost and delivery gains from automation.
Data Center Market Outlook: Expected to remain a key growth vector, driven by a multiyear growth cycle fueled by AI and energy resilience needs.
Aerospace & Defense (A&D) Market Outlook: Visibility to increasing sales in upcoming quarters as government spending disruptions settle.
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Shareholder Return Plan
Dividends Paid: EnerSys paid $10 million in dividends during the second quarter.
Share Repurchases: EnerSys repurchased 636,000 shares for $68 million at an average price of under $107 per share during the second quarter. Additionally, since the quarter ended, the company repurchased an additional 325,000 shares for $37 million, leaving approximately $960 million in buyback authorization as of November 4th.
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Key Q&A
Q:What end markets are most impacted by demand pull-ins and customer spending shifts, and what would provide more long-term visibility?
A:The communications sector was the most impacted due to a customer front-loading their year because of a large acquisition. Motive Power is seeing a restoration of book and ship business. Tariff activity is not causing significant volatility, and customers are reacting to localized order demand patterns. Large capital spending, such as buying motive power forklifts or Class 8 trucks, shows hesitation due to economic uncertainty.
Q:Is the elevated cost of lithium batteries a temporary phenomenon until the new cell plant comes online?
A:Yes, elevated costs are due to most lithium cells coming from China, leading to higher costs in the U.S. Additionally, the company is still ramping up production and not yet operating at maximum efficiency. Lithium battery sales in the Americas were up 45% in Motive Power, but pack assembly costs remain elevated until standardized volumes are reached.
Q:What are the main drivers of gross margin changes, and what is the outlook?
A:Sequentially, gross margin improved. Price/mix improvements are happening across all lines of business. Lithium ramp-up and tariffs put pressure on gross margin, but continuous improvement is expected. Adjusted gross margin excluding 45X was 25% this quarter, showing a steady trajectory. Historical gross margin levels in fiscal '25 included one-time items and higher volumes, which are not expected to repeat.
Q:What is the revenue growth and product focus in the data center segment?
A:Data center revenue grew 29% year-on-year in the current quarter and 14% in the first quarter. The focus is on lead-acid batteries and some UPS systems, with new product introductions underway. TPPL products are resonating well, and the company has a leading lead-acid market share. Future updates on lithium product expansion are expected.
Q:What is the outlook for the communications end market outside of the large customer front-loading?
A:The communications market is seeing encouraging demand signals due to network refresh driven by increased data traffic. Equipment upgrades are needed to handle higher traffic and power requirements. While not a large-scale build-out, there is steady demand for advanced solutions. The market is seeing singles and doubles rather than home runs.
Q:Are there any impacts or risks from the government shutdown on the A&D segment?
A:The government shutdown has had minimal impact. DOE activities related to the lithium plant are ongoing, and defense warehouses are less active. The A&D segment is seeing strong demand, particularly for thermal batteries used in advanced defense applications like hypersonics. The Bren-Tronics acquisition is performing well.
Q:What is the trend in operating margins and the impact of restructuring benefits?
A:Restructuring benefits are starting to show, with dramatic improvement in Q2 adjusted EPS. Full-year AOE growth is expected to outpace revenue, implying margin expansion. Energy Systems is improving margins through cost actions and steady volume growth. Motive Power faces near-term hesitancy but has strong long-term prospects. Specialty is expected to achieve double-digit AOE by next quarter. Cost reduction programs will ramp up in Q3 and Q4.
Q:What is the outlook for the Class 8 aftermarket and its contribution to growth?
A:The Class 8 aftermarket is growing double-digit but from a low base. Sequential orders in Q3 were up 26%, and year-on-year orders were up 20%. Growth is driven by fleet operators maintaining existing trucks due to lower new truck production. While not a significant short-term contributor, manufacturing improvements and lead CoE advancements support long-term growth.
Q:What is the company's approach to cash generation, buybacks, and M&A opportunities?
A:The company is focused on disciplined cash flow generation and has a $1 billion buyback program, continuing to repurchase undervalued shares. M&A remains a growth strategy, with a few compelling opportunities in the pipeline. Capital will be deployed for high-quality investments, internal business opportunities, and opportunistic M&A.
Q:Review of Unclear Management Responses
A:Management avoided directly addressing the specific magnitude of growth in the Class 8 aftermarket and the exact timeline for achieving full efficiency in lithium battery production. Additionally, while they mentioned M&A opportunities, no specific details or timelines were provided.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AD backlog
AD margin
AI efficiency
AI inspection
AI need
AOE AD
CEO President
Center Excellence
City detail
Class market
CoE validation
Day New
Director Slide
Electronics Center
EnerGize framework
acid
agility
collaboration
commitment
community
energy resilience
example
excellence
exposure
force
government
initiative
lithium cell
product introduction
project
resource
road map
saving
speed
sustainability
tariff PL
ENS Transcript
EnerSys (ENS) Q4 2026 Earnings Call Transcript
Neutral5-21
EnerSys (ENS) Q3 2026 Earnings Call Transcript
Positive2-5
The earnings call reveals strong financial performance with significant growth in adjusted operating earnings, EBITDA, and free cash flow. While there are concerns about margins and lithium battery product timelines, management's optimism about future demand and strategic initiatives like the lithium project and data center growth provide a positive outlook. The market cap suggests a moderate reaction, leading to a predicted stock price increase of 2% to 8% over the next two weeks.
EnerSys (ENS) Q2 2026 Earnings Call Transcript
Positive11-6
The earnings call summary and Q&A reveal strong financial metrics and optimistic guidance, particularly in data center growth, margin improvements, and a $1 billion share repurchase plan. Despite elevated lithium costs and government-related uncertainties, the company is mitigating risks well. The market cap of $4.17 billion suggests a moderate reaction, leading to a positive stock price movement prediction of 2% to 8% over the next two weeks.
EnerSys (ENS) Q1 2026 Earnings Call Transcript
Positive8-8
The earnings call reveals strong financial performance in Energy Systems and Specialty Revenue, alongside positive guidance for margin improvements and strategic cost savings. Despite some challenges in Motive Power and unclear full-year guidance, management's confidence, evidenced by the $1 billion buyback program and strategic growth initiatives, indicates a positive outlook. The market cap suggests moderate stock reaction, leading to a 'Positive' prediction of 2% to 8% stock price increase.
ENS Slides
ENS Report
Frequently Asked Questions
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