EnerSys (ENS) Q1 2022 Earnings Call Transcript

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EnerSys (ENS 0.32%)
Q1 2022 Earnings Call
Aug 12, 2021, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the EnerSys First Quarter 2022 Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to your speaker today, David Shaffer, President and CEO. Please go ahead.

David M. Shaffer -- Director, President and Chief Executive Officer

Thanks, Victor. Good morning, and thank you for joining us for our first quarter 2022 earnings call. On the call with me this morning is Mike Schmidtlein, our CFO.

Last evening, we posted slides on our website that we will be referencing during the call this morning. If you didn't get a chance to see this information, you can go to the webcast tab in the Investors section of our website at www.enersys.com.

I'm going to ask Mike to cover information regarding forward-looking statements.

Michael J. Schmidtlein -- Executive Vice President, Finance and Chief Financial Officer

Thank you, Dave, and good morning [Technical Issues] management's current expectations and views regarding future events and operating performance and are subject to uncertainties and changes in circumstances. Our actual results may differ materially from the forward-looking statements for a number of reasons. Our forward-looking statements are applicable only as of the date of this presentation. For a list of factors which could affect our future results, including our earnings estimates, see forward-looking statements included in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, set forth in our quarterly report on Form 10-Q for the fiscal quarter ended July 4, 2021, which was filed with the US Securities and Exchange Commission.

In addition, we will also be presenting certain non-GAAP financial measures. For an explanation of the differences between the comparable GAAP financial information and the non-GAAP information, please see our Company's Form 8-K, which includes our press release dated August 11, 2021, which is located on our website at www.enersys.com.

Now, let me turn it back to you, Dave.

David M. Shaffer -- Director, President and Chief Executive Officer

Thanks, Mike.

Please turn to Slide 3. We delivered solid first quarter results due to robust demand for our products and services in each of our business segments. Orders over the last three weeks or 12 weeks, excuse me, are 25% higher than the same period F '20 pre COVID. We reported first quarter fiscal 2021 adjusted earnings of $1.25 per diluted share, a 36% increase over the first quarter of last year.

Our Motive Power business generated strong revenue and earnings growth, while our Specialty business continued its positive momentum, fueled by accelerating demand for our transportation products. Despite challenges in the supply chain, Energy Systems began its rebound from a challenging fourth quarter, driven by growing demand and a variety of end markets, including mid spectrum 5G, broadband and utility markets.

Similar to other industrial companies, we are facing some challenges in the wake of the world's steepest economic recovery as businesses reopen and competition for labor, materials and transportations remains fierce. While we are seeing unprecedented demand growth, we have experienced constraints in our ability to bring on new employees necessary to keep up with demand.

Freight and tariffs continues to be a source of cost pressure, along with a variety of other components, including resins and semiconductor. Our team has responded well to these short-term challenges and we expect to see steady improvements in the supply chain as we work to mitigate its impact by identifying alternative sourcing methods and further leveraging our global footprint to align supply with demand. As these temporary issues unwind, we will benefit from the strong market momentum.

I'd now like to provide a little more color on some of our key markets. Please turn to Slide 4. Let's start with our largest segment, Energy Systems, which saw a modest improvement from the prior quarter, growing revenue by more than $22 million and generating a nearly $4 million gain in operating income versus Q4. Demand for our Energy Systems' products remains strong, with order intake from one of our larger telecom customers picking up after a slow Q4 that was driven by 5G radio availability, labor and permitting challenges. Broadband orders continue to improve and are expected to accelerate dramatically as the California Public Utilities Commission public safety grid shutdown extended network backward -- backup programs roll forward.

While the market is displaying positive momentum, Energy Systems continues to experience drags in three primary areas.

First, we have seen higher tariffs and freight costs as our efforts to move contract manufacturing out of China closer to home is slowed by COVID versus our plan. Also, container shipping rates are in an unprecedented fourfold from historical rates and expedited fees are common. Delayed sales due to supply chain challenges, including semiconductors, continue to constrain our top line and gross margins due to a lack of capacity for higher margin cable power supplies, DC power plants, and Thin Plate Pure Lead products.

Second, we have incurred additional engineering costs to support our Touch-Safe collaboration with Corning as well advancing -- as well as advancing our lithium offerings and the other NPIs supporting 5G and renewables from which revenue will begin to accelerate in the second half of this fiscal year. Our investment in R&D will also accelerate during the calendar year to advance the DC fast charging initiative that will benefit our next fiscal year. These investments will position us to be a significant participant in these new mega market trends.

Third, the ES group has been more heavily burdened with the ramp up of the integration inefficiencies of the NorthStar acquisition. As noted prior, this integration and expansion is roughly nine months behind schedule due to COVID. Despite the short-term cost pressures, we remain committed to TPPL expansion and cost improvements to handle the rapidly expanding TPPL demand in all lines of business. Driven by sound underlying demand, we expect the Energy Systems business to continue its upward trajectory with the full opportunity set to be unleashed as these COVID-related supply chain headwinds subside.

Please turn to Slide 5. Our Motive Power business was a bright spot during the quarter. Despite some lingering supply chain constraints, we returned to the historically higher end of our return on sales for this business. Our backlog is now at historic levels and our NexSys TPPL along with recently released lithium variance continues to gain market acceptance. We anticipate normal seasonality over the summer holiday months. While lift truck industry order statistics remain exceptionally high, we are being mindful of OEM supply limitations. We are confident they're -- we are well positioned to benefit from a steady recovery throughout the balance of the fiscal year.

The restructuring of our Hagen, Germany facility remains ahead of schedule in regards to cost and timing, with most of the cost savings yet to be realized. We will further evaluate our global footprint to ensure we can meet strong current order patterns and continue to extract savings with further standardization of our legacy product offerings and other business transformation initiatives.

Please turn to Slide 6. Our Specialty business contributed another strong quarter to our overall results despite the NorthStar-related cost drag I mentioned earlier. As the high-speed line and other productivity capacity enhancements are installed in our TPPL factories, we will enjoy lower costs and increased capacity in our second half results. Demand in our transportation business remains exceptional, buoyed by significant incremental revenue that we are positioned to win as additional Springfield capacity comes online. US transportation grew rapidly from the year ago quarter and our backlog remains at record levels. We expect continued strong demand for the remainder of the calendar year from the US economic recovery.

We delivered exceptional results in aerospace and defense, as all of our markets were strong including tactical vehicles and munitions. Munitions recorded several key wins based on our industry-leading technology that provides 40% extended life in thermal batteries. We will have doubled this business since the acquisition in just five years. Positive recent conversations with several large customers, combined with the US source lithium initiatives the Biden administration is highlighting in their infrastructure legislation, gives us great confidence in the future growth opportunities in many of our businesses.

Please turn to Slide 7. As you all know, we announced our battery energy storage system plus DC fast charge initiative in the fourth fiscal quarter, which remains on track regarding product development and performance all while this tremendous market opportunity continues to grow. Our goal is to deliver an EV charger that charges any electric passenger car as fast as the car can handle, reducing the process from hours to minutes. By using a large stationary battery to quickly charge the EVs, we can dramatically reduce system installation costs at many sites, including the size of the AC transformer and high voltage cabling from the utility interconnect, as well as the opportunity to provide optimized energy usage and emergency backup power. Feedback from our potential launch customer has been very positive, both on the speed of the development and level of software maturity, and we will continue to provide updates on this exciting initiative as we move forward.

Please turn to Slide 8. Although we expect to continue to face some supply chain disruptions in the near term, the fundamentals of our business are stronger than ever with global demand for our products and services growing by the day. The massive 5G build out is getting underway and will provide a strong multi-year tailwind for EnerSys. Thin Plate Pure Lead demand is growing rapidly in all lines of business, and the launch of best-in-class modular lithium systems in Motive Power and Energy Systems further enhances our market-leading positions. Lastly, a large bipartisan infrastructure bill is moving through Congress with additional bills being discussed, which could provide another catalyst for EnerSys in areas such as the electric grid, EV charging, and the rural build out of high-speed broadband.

Please turn to Slide 9. I'd like to close by recapping our strategic initiatives, which remain unchanged. One, to accelerate higher margin maintenance free Motive Power sales with NexSys iON and NexSys PURE. Two, to grow the portfolio of products in our Energy Systems business, particularly in telecom, with fully integrated DC power systems and small cell site powering solutions, which will accelerate our growth in 5G, as well as the addition of our battery energy storage system plus DC fast charging initiative. Three, to increase Thin Plate Pure Lead capacity, particularly for transportation market share in our Specialty business. And finally, four, to reduce waste through the continued rollout of our EnerSys operating system. We will continue to execute on each of these initiatives and look forward to providing you updates on our progress in the quarters ahead.

With that, I'll now ask Mike to provide further information on our first quarter results and go forward guidance.

Michael J. Schmidtlein -- Executive Vice President, Finance and Chief Financial Officer

Thanks, Dave.

For those of you following along on our webcast, we have provided the information on Slide 10 for your reference. I am starting with Slide 11.

Our first quarter net sales increased 16% over the prior year to $815 million due to a 12% increase from volume and 4% from currency gains.

On a line of business basis, our first quarter net sales in Energy Systems were up 5% to $371 million; Specialty was up 21% to $108 million; and Motive Power revenues were up 28% to $336 million. Motive Power's growth was mostly from 22% in organic volume and 5% in currency improvements. The prior year Motive Power first quarter revenues were impacted significantly by the pandemic, with a 24% decrease in revenue. Our Motive Power revenues for Q1 are now comparable to the first quarter of two years ago. Energy Systems at a 3% increase from volume and a 3% improvement from currency, net of a 1% decrease in pricing. Specialty at 18% in volume improvements along with 2% positive currency and 1% in pricing. We had no impact from acquisitions in the quarter.

On a geographical basis, net sales for the Americas were up 13% year-over-year to $557 million with the 12% more volume and 1% in currency; EMEA was up 27% to $201 million from 18% volume, 10% improvement in currency, less 1% in pricing; Asia was up 3% at $57 million on 9% currency improvements, less 6% volume decline.

Please now turn to Slide 12. On a sequential basis, first quarter net sales were flat to the fourth quarter. On a line of business basis, Specialty decreased 19% from a very strong Q4 due to resin shortages, which are largely behind us; Motive Power was up 1% as it rebounds from the pandemic; and Energy Systems was up 6% from organic volume. On a geographical basis, Americas and EMEA were relatively flat, while Asia was up 5%.

Now a few comments about our adjusted consolidated earnings performance. As you know, we utilize certain non-GAAP measures in analyzing our Company's operating performance, specifically excluding highlighted items. Accordingly, my following comments concerning operating earnings and my later comments concerning diluted earnings per share exclude all highlighted items. Please refer to our Company's Form 8-K, which includes our press release dated August 11th for details concerning these highlighted items.

Please now turn to Slide 13. On a year-over-year basis, adjusted consolidated operating earnings in the first quarter increased approximately $14 million to $75 million, with the operating margin up 50 basis points. On a sequential basis, our first quarter operating earnings dollars declined $3 million from $78 million, while the OE margin dropped 40 basis points to 9.2%, primarily due to Energy Systems results, which Dave has addressed. Operating expenses, when excluding highlighted items, were at 14.5% of sales for the first quarter compared to 16.1% in the prior year, as our revenue growth exceeded our spending.

On a substantial -- excuse me, sequential basis, our operating expenses declined $1 million and 10 basis points. Excluded from operating expenses recorded on a GAAP basis in Q1, our pre-tax charges of $14 million, primarily related to $6 million in Alpha and NorthStar amortization of intangibles and $8 million in restructuring charges for the previously announced closure of our flooded Motive Power manufacturing site in Hagen, Germany.

Excluding those charges, our Motive Power business generated operating earnings of 15.1% or 470 basis points higher than the 10.4% in the first quarter of last year due to easing of pandemic-related restrictions and demand, coupled with ongoing OpEx restraint. The OE dollars for Motive Power decreased over 20 -- excuse me, increased over $23 million from the prior year. On a sequential basis, Motive Power's first quarter OE decreased 50 basis points from the 15.6% margin posted in the fourth quarter due to higher lead and other input costs.

Energy Systems operating performance percentage of 3.5% was down from last year's 8%, although it improved from last quarter's 2.6%. OE dollars decreased $15 million from the prior year, however, it increased $4 million from the prior quarter on higher volume. The cost of higher tariffs, freight, materials and manufacturing costs continues to create headwinds.

Specialty operating earnings percentage of 10.6% was up from last year's 6.5% on higher volume, but down from last quarter's 13.2%. OE dollars increased $6 million from the prior year, but declined $6 million from a strong fourth quarter on lower revenue.

Please move to Slide 14. As previously reflected on Slide 13, our first quarter adjusted consolidated operating earnings of $75 million was an increase of $14 million or 23% from the prior year. Our adjusted consolidated net earnings of $54.4 million was $15 million higher than the prior year. The improvement in adjusted net earnings reflects primarily the rise in operating earnings along with lower interest expense and a small currency gain.

Our adjusted effective income tax rate of 18% for the first quarter was slightly lower than the prior year's rate of 21% and lower than the prior quarter's rate of 19%. Discrete tax items caused most of these variations. We have made no adjustments for any proposed changes in taxation announced recently.

First quarter EPS increased 36% to $1.25, which was the top of our guidance range. We expect our weighted average shares for the first quarter -- excuse me, second quarter fiscal '22 to remain relatively constant with approximately 43.5 million outstanding. As a reminder, we now have over $55 million in share buybacks authorized, and we purchased nearly $32 million recently. This recent buyback reflects the return to our normal pattern of removing the dilutive impact of our stock comp program. Last week, we also announced our quarterly dividend, which remained unchanged from prior levels.

Please now turn to Slide 16. Our balance sheet remains strong and positions us well to navigate the current economic environment. We have $406 million of cash on hand, and our credit agreement leverage ratio was 1.95 times levered, which allows over $600 million in additional borrowing capacity. Last month, we extended and amended our credit facility on favorable terms, which is now in place through 2026. We expect our leverage to remain near 2.0 times in fiscal 2022.

We spent $26 million on our Hagen restructuring along with $46 million in inventory growth to support higher backlogs. And as a result, our cash flow from operations was negative $48 million in the first quarter as we expected. The balance bits [Phonetic] from the Hagen, Germany restructuring started in Q1 and we should exit the year with a $20 million annual run rate. Capital expenditures of $16 million were in line with our prior guidance. Our capex expectation for fiscal 2022 is $100 million and reflects major investment programs in lithium battery development and continued expansion of our TPPL capacity, including the NorthStar integration. We anticipate our gross profit rate to remain near 24% in Q2 of fiscal 2022.

As Dave has described, we believe all three of our lines of business find their products in high demand. Near-term supply challenges are restricting our ability to execute fully on these opportunities. Our guidance range of $1.03 to $1.13 for our second fiscal quarter of FY '22 reflects the impact of these challenges along with the normal seasonality of Q2 and the added investments in product development and personnel.

Now, let me turn the call back to Dave.

David M. Shaffer -- Director, President and Chief Executive Officer

Thanks, Mike. Victor, we can now open up the line for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Noah Kaye from Oppenheimer. You may begin.

Noah Kaye -- Oppenheimer -- Analyst

Good morning, and thanks for taking the questions. To put it mildly, this is a very dynamic production environment across the industrial space and we've seen any number of companies talk about the impacts on supply chain from chip shortages and the like. So, I was wondering if you can help us maybe dimension out a little bit some of these moving parts what you saw on the quarter and what you expect in the upcoming quarter, from tariffs to higher freight costs, components cost increases, you mentioned the pull forward of the wage increases in the next quarter, and the EV investment? So, if you can give us any granularity on some of those moving parts would be greatly appreciated.

David M. Shaffer -- Director, President and Chief Executive Officer

Sure. Thanks, Noah. In terms of the supply chain pressures, there's really four areas that are impacting, I'd say, the first half of our year so far. So, what we posted in Q1 and what we're forecasting in these Q2 numbers, I would say, the first one, and we talked about this last quarter, was freight. The base freight situation I think is stabilizing. So relative to where we were 90 days ago, the -- unfortunately the base freight rate is higher and the lead times are longer than historic norms. But I think that situation is stabilizing. So, our supply chain folks are just having to adapt, but it seems like that situation is OK. It's more on the expedited freight where things are still crazy. And so, you can imagine in this era of all these supply chain surprises that more often than not and too off, especially in Q1, we've had to expedite things and that -- those costs right now are exorbitant. So, we're trying very hard to minimize the amount of expedited freight we use, because that continues to be a major pressure on the organization.

Obviously, another one is just -- lead, we've talked about for years and that's something that we have to deal with. But what we've seen this year is, obviously just like everyone else is inflation on other things, not lead. And I think we've done three price increases already in our three lines of business so far since April. And we'll continue to push these costs through. It's just -- no one likes -- our suppliers don't like giving us price increases and we certainly don't like giving them to our customers. It's just -- it's the world we live in right now, and I think we're all hoping for a little bit of stability. But in general, I would say, the price stickiness is good. Our Energy Systems business has a longer tail, because of the nature of the businesses. So, getting pricing from that piece of the business a little harder than the other two. But that said, all of our sales leaders are committed to protecting our gross profit dollars.

Resin shortages was a real acute problem 90 days ago when we spoke. And it really has limited our ability to ship TPPL, both in our Specialty transportation business as well as our reserve power -- legacy reserve power Energy Systems battery business. And it really put one of our factories, especially in Q1 and Q4, on their tail, because they just couldn't get enough product. And so we've absorbed a lot of variances. I'm happy to report that we should exit this quarter with enough resin for the rest of the year. So that situation has dramatically improved versus 90 days ago. And when you combine that with the improvements we've made in terms of our ramp in Springfield, we're much more optimistic about our production levels on Thin Plate Pure Lead in the second half.

And then, finally, the semiconductor issue, this is like many companies. Now again, the amount of semiconductors we have in our revenue stream is different than other companies. So, I would say, in the first half, Mike, I would say, semiconductors is equated to about 40 bps of gross profit pressure so far in H1 and it's really an issue, Noah, of mix because a lot of our higher margin products were on allocation right now on some of these chips. So, we can be doing a lot more. We certainly have the backlog. And a lot of the shortages we've had, resins included, have been for products that are on the higher end of our mix. So, the mix has been dragged. And the chip situation, I think, our allocations are going up a little bit as we go forward per quarter. But that's -- that one is just something we have to adapt to.

I know that [Indecipherable] and the engineering group have been feverishly trying to redesign things and our supply chain folks are jumping through hoops and obviously we're having to do some spot buys that we don't normally do to secure some of these. I mean, one of the things we've talked about is we have to protect the customers throughout all this craziness. And as I was laughing to myself this morning, I think our ops team is probably had more sleepless nights sort of post COVID than during COVID. It's just been that sort of crazy environment right now. But that said, we're hanging in there, and we're still extremely optimistic about our end markets.

And in terms of the sequential, Noah, you mentioned, I would say, yeah, we're definitely seeing some pressure in the second quarter, sequentially, from the DC fast charge. We -- again, because of COVID, we retimed our normal annual wage increase. I'd say, it's been 3% for ever. It's just been retimed, and I wanted to make sure that we adjust to that. I think we're going to stick with this timing going forward, Noah. So, we just wanted to call that up to make sure we have that -- we've got our normal seasonality in the second quarter as a lot to do with the -- a lot of the OEM customers in Europe, they've told us they're going to take their normal holidays. No one's working through the holidays. We thought maybe they would, but everybody has taken their normal holidays. And so, seasonality is certainly part of their. And then, I think, there's probably about $0.02 like below the line FX and so forth. So that's sort of -- I think the supply chain pressure we're feeling and then some of the sequential. I would say, really right now, H1 and H2, operationally, feel pretty similar. There's just these other pieces to Q2 versus -- issues in Q1 and Q2 feel, operationally very, very similar. It's just that there is these other pieces we just called out for the second quarter versus the first.

Noah Kaye -- Oppenheimer -- Analyst

That's very helpful, Dave. You mentioned the stickiness of pricing. Just given all of the cost that you're talking about incurring, I guess it's a little bit hard to see in the quarter or the results, I mean, price is basically flat. And even in Motive and Specialty, looks like you're getting maybe a couple of million dollars of pricing benefit year-over-year, it doesn't seem enough to offset some of these increased cost pressures you're talking about. So, help us understand, because the Company [Phonetic] have talked about 5% to 10% type price increases, when do we start to see more of that price flow? And when could potentially you'll be getting into a more favorable price cost dynamic?

David M. Shaffer -- Director, President and Chief Executive Officer

It's -- there's always a lag, always between when these things are executed. We've -- it's been a worsening situation in some of the commodity categories, it's been a stabilizing situation in others. None of them have really receded. So, we're just executing prices, but the most recent one -- most recent price increase just went out last week. So, it's just -- there is just delays on how long it takes to get these through the system. And I think it's a longer tail, as noted, on the Energy Systems business relative to the other two businesses.

Mike, you want to add anything?

Michael J. Schmidtlein -- Executive Vice President, Finance and Chief Financial Officer

No. We expect price improvements in the upcoming quarter as much as $10 million. The -- some of that is absorbed on some of the costs that continue to increase, but by and large, we have been running at about $0.20 of headwinds for the last two quarters, as we looked at -- and some of those will be abating in the upcoming quarter. And we've done a great job on things like resin shortages and chip shortages of doing work arounds and substitution. So, we haven't -- it hasn't had the -- as big of an impact. But moving into Q2 from Q1, the investment in the fast charge engineering costs, the raise at least temporarily, I would say, it would have a little bit of drag. And the seasonality will disappear. And a higher tax rate and a little bit higher interest and FX headwinds will go away. So we don't necessarily see those as permanent. And we do expect sequentially improving top lines, particularly once we move into H2.

Noah Kaye -- Oppenheimer -- Analyst

Okay. Thanks. I'll take the rest of my questions offline. Appreciate it.

David M. Shaffer -- Director, President and Chief Executive Officer

Thanks.

Michael J. Schmidtlein -- Executive Vice President, Finance and Chief Financial Officer

Thanks, Noah.

Operator

Your next question will come from the line of John Franzreb from Sidoti. You may begin.

David M. Shaffer -- Director, President and Chief Executive Officer

Hi, John.

Operator

John, your line is open. All right. Our next question will come from the line of Brian Drab for William Blair. You may begin.

Brian Drab -- William Blair -- Analyst

Hey, good morning. Thanks for taking my questions.

Michael J. Schmidtlein -- Executive Vice President, Finance and Chief Financial Officer

Hi, Brian.

Brian Drab -- William Blair -- Analyst

Hey. Can you, maybe Mike, quantify a little more specifically the sequential impact of these temporary issues from first quarter to second quarter like the EV investment, the wage increase in terms of EPS impact for first quarter relative to the second quarter?

Michael J. Schmidtlein -- Executive Vice President, Finance and Chief Financial Officer

Yeah. No, as Dave said, we -- the investment in additional engineering resources in the second quarter is about $0.03 of headwind. The annual increase in raises for that quarter is about $0.06, our normal seasonality. And I will say that our second quarters is more often than not less because of the European -- primarily because of the European holidays situation. It doesn't always work that way because there's other dynamics that could impact the Q2. But one thing that is always constant is that seasonality is a drag. It just may be offset by other items as we report Q2 results. But that we expect to be about $0.05 to $0.06 worth of a drag. And then, as Dave mentioned, there is $0.02 to $0.03 on the FX interest and tax rate below the op earnings line.

Brian Drab -- William Blair -- Analyst

Yeah. Is it fair to say that when we talked, I think, last in May, end of May probably, that you felt like maybe other factors would overshadow these and kind of offset some of these headwinds, or -- and that the second quarter is shaping up below where you would have expected previously, or is this kind of -- has this kind of guidance been contemplated you think -- if things gotten worse in terms of your outlook for the second quarter since May?

David M. Shaffer -- Director, President and Chief Executive Officer

Yeah. Brian, this is Dave. I'll start. I tried to make the point that I think operationally really H1 has been one set of circumstances. So, there is no major changes there in terms of the seasonality and these things we've pointed out, yeah, I guess that they've been there as often is the case, as Mike said, in case of seasonality. The engineering, certainly, that's an investment we've signaled that we're really excited about this opportunity. So, yeah, it's really the first half has been sailing into some fairly strong headwinds. I personally have a lot of optimism about the second half versus the first half, I'd say, we're going to more TPPL, which is going to help margins. It's going to help revenue. We should have less manufacturing variances. Some of this COVID stuff gets out of the way. I think even though we're adding in this engineering, I think, OpEx as a percentage to sales should stay in check in the second half. I think we're going to come into the second half this year with the strongest backlog we've ever had going into the second half. So, that certainly can't be a bad thing. I think as Noah and I were discussing earlier, some of the pricing should start to catch up. And I think that Hagen, we haven't really realized much of those savings, and we're going to start to feel that more acutely in the second half. So, those are sort of my key reasons for optimism.

Of course, the supply situation, as we noted in the press release, is fluid and you just don't know what's going to further happen. But most of the signal -- we've got some signals from our OEMs. I think, like -- for example, the semiconductor issue has been probably more of a downstream issue for EnerSys than an upstream issue, because a lot of our OEM customers aren't building vehicles at the rate they would like to simply because they can't get enough chips. And we've had a few of them signal to us and sort of gave us advance warning that they're going to ramp back their production rates higher in our fiscal second half than where they've been running in our first half. So, these are sort of the reasons for optimism. By no means, are we discounting the pressures that we're seeing on the supply chain side. But you worry about what you can control and we're just -- we're trying to get pricing as often as we can. So, that's my best sense of the situation.

Mike, do you want add anything to that?

Michael J. Schmidtlein -- Executive Vice President, Finance and Chief Financial Officer

No, I think you covered all the relevant items.

David M. Shaffer -- Director, President and Chief Executive Officer

Okay.

Brian Drab -- William Blair -- Analyst

Hey, I guess, this is -- it's such a challenging situation given that we're in middle of a global pandemic. I mean, Mike -- early on Dave, you mentioned, you used the term post COVID, I don't know if everyone's feeling that way at the moment.

David M. Shaffer -- Director, President and Chief Executive Officer

Yeah.

Brian Drab -- William Blair -- Analyst

Like cases in Illinois doubled again last night. So, I know it's a tough situation. But it's just, I guess, as a stock analyst, looking at this and trying to model the second half of the year, and right now the consensus estimate, you like the average EPS for the third quarter and fourth quarter is $1.48. And when we see the guidance for the second quarter, I'm just wondering can you make any comment as to weather -- I mean the $1.48, it's feeling like a stretch to me at the moment. And I just wonder if you could comment on that since you obviously have much better visibility than I do.

Michael J. Schmidtlein -- Executive Vice President, Finance and Chief Financial Officer

Well, Brian, I think we've done a pretty good job of navigating COVID for the last 18 months. I'm not saying that it's behind us. Clearly, it isn't. But I think that is OK. The inflationary pressures is somewhat of a guess. We really just do not know how much more headwind we have. There is always a drag between some of what we incur versus what we can do in pricing, particularly in our order book where some of that pricing, not all of it, but some of it set. Others are indexed to things like lead, adjustments, etc. So, there are plenty of things that you could say could make the second half not as good as the analysts' expectations for H2, but the demand for our product across every line of business has been unprecedented.

And just for example, the drag we've had on resins that we've really just kind of gotten behind, to be able to unleash the TPPL capacity up to $300 million per quarter run rate and get our Springfield Plant 2 and it's high speed line up to full operational speed, will have great benefits, which we haven't really enjoyed to date. So, there are plenty of reasons for optimism. The Hagen factory, which as I said, only just started to deliver benefits. It's going to start showing up on our bottom line and ever-increasing amounts per quarter for the rest of this year. So, there is a lot of things that we're excited about it. And there are some things that are going to be a detriment. There is some unknowns we just can't comment on. But I don't know that -- I don't think anyone here is ready to throw out H2 and say it's not going to be the step-up that you expect, that we expect.

David M. Shaffer -- Director, President and Chief Executive Officer

Right. Brian -- and you're right, it's probably just poor choice of words on my part. There is certainly -- we're living with the pressures every day. I meant that was really a -- about the shutdowns that we saw last year and we're -- so -- yeah, we were very concerned about the Delta variant and the transmission ability. And I think I'm more optimistic than I was a year ago. I think we've got protocols in place. We've got a fair number of vaccinated folks. We got a lot of folks that had the virus already, and I haven't seen any signaling from really anyone about the draconian type of shutdowns we saw or the precipitous type of shutdowns we saw. So -- but I agree with you 100%. We are, by no means, out of the woods. And our EH&S folks, we still meet on a very regular basis and review all the data. So I -- that was a poor choice of words on my part.

Brian Drab -- William Blair -- Analyst

All right. Yeah, sorry, I wasn't meaning to emphasize that. I was just -- obviously, still a tough situation and good luck to you guys.

David M. Shaffer -- Director, President and Chief Executive Officer

Thank you.

Operator

And our next question will come from the line of John Franzreb from Sidoti. You may begin.

John Franzreb -- Sidoti -- Analyst

Can you hear me now, guys?

David M. Shaffer -- Director, President and Chief Executive Officer

Yes, we can.

John Franzreb -- Sidoti -- Analyst

All right. Thanks to the operator. Dave, I wanted to go back to your commentary about the EV market and calling it an immense opportunity. From my understanding, I think the original expectations was something around $100 million. Has that changed? And can you talk about the investment that's involved in the EV opportunity?

David M. Shaffer -- Director, President and Chief Executive Officer

Yeah. It's really exciting. We've slated -- and again it was about $0.03 of pressure in Q2 for additional engineering support we need on the systems integration side. We've got a launch customer that we're focused on. And the forecasts are so big, I'd only want to talk about it, because it's just unbelievably exciting. But that said, our initial focus in the next 12 months or less is to secure an order for the first 100 systems. And that 100 systems could be between $50 million and $100 million depending on what variation of the systems the launch customer wants to look at. And we're particularly excited about this system, because there's a lot of intrinsic benefits of combining this battery energy storage system with this DC fast charge. So, these BES systems are just now starting to pencil, because the cost of the lithium batteries has come down so much. So, the systems are just starting to pencil.

But then, when you layer on the ability to really rapidly hyper fast charge in electric car, it really pushes the math over the top. And we've just seen tremendous. And our focus, I know that the EV market is wild west right now. And we're really trying to hunt with a rifle nor a shotgun, and we've really zeroed in on these commercial real estate partners that have big portfolios where they can benefit from the battery energy storage system, the Energy Systems, the demand charge mitigation, the emergency backup power, but then they also for their tenants, for their clients, want to offer fast EV charging as part of their services that they provide. So, it's -- we're locked in. We've got a great software partner. We've -- and I'm just really proud of my engineering team and how fast and how far we've come already. And then I think a lot of what we're going to see hopefully this gets passed this stimulus bill, but as you see, there is an astronomical amount of funds that are going to be allocated toward EV charging and the space where we're trying to compete, which is above 50 kilowatt. So, fast charging is 50 kilowatt. We're trying to -- our chargers are more like in the 160 kilowatt range. So, these are hyper fast chargers. That's a much less crowded space. So it's -- and we think the macros are lined up. In the end -- and we just had this discussion at the Board meeting last week, it's really in the end, in the system we're putting together, it's batteries and chargers. And this is what we do at EnerSys. We do batteries and we do chargers. And the systems integration piece, we've come a long way over the last four years, five years. So, we're a different company in a lot of ways, and it sets us up perfectly for market opportunities like this.

I think the other part of the stimulus bill, two, that we mentioned, we're excited about is this rural broadband initiative. That's really big for us. We are so well positioned with the Lex, like Windstream, Century, Frontier, we're well positioned with the MSOs, Comcast, Charter, Cox folks like that. And these are going to be the big winners in this rural broadband initiative. And then the -- I don't know if you've read the bill yet, but a lot of the -- it's fairly prescriptive on what equipment is going to attract subsidy. It has to be part of the core. And all of the products that we make even really to new Corning project we've been working so hard on that fits right in the sweet spot of what this rural broadband build out is going to be like. So the demand side of things, the strategic plan we laid out, the product portfolio, we're really in tremendous shape. It just comes down to getting through this period. And I could spend the whole call complaining about it, but there is no use in complaining about it, we're just going to continue to fight through it.

Mike, you want to add anything?

Michael J. Schmidtlein -- Executive Vice President, Finance and Chief Financial Officer

Yeah. And the other program that we mentioned that we're really excited about is probably the most immediate of all of them is the California Public Utility Commission's back up for that, which is for us is just starting out, it's a $50 million opportunity. And it's providing turnkey operations in both -- with both lithium cells and our TPPL cells. And that's -- this is for the cable MSOs and to keep their networks up and running in case of fires, high wins, etc. So, it's -- that is something we're working on and finalizing some of the details right now. And so there are a number of things. And the last one I think most people know, the 5G build out right now is kind of that mid spectrum, which we are participating in. But the one that we're really excited about is the small cell at the ultrawide band. That's where we think things like the Touch-Safe program is really going to shine. So there are probably five different projects, including the RDOF or rural digitization program that Dave mentioned, there is a lot of great things in Energy Systems coming down the road in the next three years.

John Franzreb -- Sidoti -- Analyst

Okay. And I guess more immediately when we think about how the resin shortage has hit the TPPL line that you put in price increases, that semiconductors have impacted your higher margin products by 40 bps, when you think about the second half of the year and that stuff is presumably behind you, what kind of gross margin benefit would you anticipate from a normalization of those sales of those products?

David M. Shaffer -- Director, President and Chief Executive Officer

I don't have that number in front of me. Mike, will you be able to get estimate for that?

Michael J. Schmidtlein -- Executive Vice President, Finance and Chief Financial Officer

We talked about the fact that just the drag we've been experiencing thus far from some of the lost sales of those products was about a 40 basis points to 50 basis points improvement. We probably incurred nearly 100 point space -- 100 basis points drag from expediting fees and higher freight. Now, I can't promise that that's going to normalized or I don't know when it's going to normalize, but I don't see it staying at this sustained rate. So [Technical Issues] there are.

And as we said, the other things that we expect to see improving, the manufacturing variances, which were kind of dragging back as these plants come out lower capacities and they step up their operating efficiencies, Springfield gets better, you're going to see sequentially better manufacturing variances coming through on the P&L. OpEx should stay the same and even drive a little bit lower, allowing us to make some of these investments in engineering costs. And the pricing will stick and it does take a quarter or two, but we will start recovering on pricing. And the hog and savings are going to be there. So, I can't promise when it's going to happen, but there certainly is enough opportunities to get over 200 basis points of improvement in margin.

John Franzreb -- Sidoti -- Analyst

All right. Perfect, Mike. Thank you very much for that color. I'll get back into queue.

Operator

All right. [Operator Instructions] Our next question will come from the line of Greg Lewis from BTIG. You may begin.

Gregory Lewis -- BTIG -- Analyst

Yeah. Hey, thank you, and good morning everybody. Just following up, Mike, on the Energy Systems, I realize it's kind of been picked over throughout the call. But is really that lag time on pricing -- it sounds like that's a quarter or two before. Is that the right way to think about Energy Systems? Or is it kind of longer lead times just as we've been thinking about inflation in the market for the last couple of quarters? And I'm just trying to understand that, if you can provide a little more color there?

Michael J. Schmidtlein -- Executive Vice President, Finance and Chief Financial Officer

Right. Greg, I think that the Energy Systems business has a much different supply chain than our other two businesses. And whether it's our old Purcell asset that we own before the Alpha acquisition and certainly the Alpha piece has -- it's really more of a -- an integrator business where we have a lot of the components and sub-components and sub-assemblies made in Asia with a very long supply chain. And relative to our other businesses, it has more semiconductor content just a far more complex supply chain. And there is -- and as we've talked about, those long supply chains right now are getting brutalize [Phonetic]. So, the longer the supply chain, the tougher it's been. So whether it's freight, expedited freight, we couldn't even get sea containers for a while. We had products sitting in warehouses in China that we just couldn't get. So, it's -- if the length of that supply chain -- and tariffs obviously has been a major headache for us. And we've been pushing really hard to bring that stuff closer to home and shorten up these freight lines and supply chains. But you can imagine, during COVID, it's just been -- it's been the Wild West trying to get anything done with these contract manufacturers with all the supply shortages and so forth. So it's just a much different business. But that said, the outlook is fantastic. And we just have to get through this period.

Mike, is there anything you want to add? Well, yeah, I would say, that the pricing in Energy Systems and in some cases in our aerospace and defense tend to be fixed for a period of time, a contractual period, maybe a year. And there is little or limited ability to move pricing. Some of those agreements may have some escalators. But there are some where you're limited by time or certain amount of time to do any pricing. Motive Power tends to be more adapt to changing quicker in the market, but -- so we will come to a point where those prices will be renegotiated, those costs can then be recovered. And that's just things that we're working through on a case by case basis.

David M. Shaffer -- Director, President and Chief Executive Officer

Yeah. I guess the other piece to that, along that line is the Energy Systems business is dominated, say, some very big customers, Comcast, Charter, AT&T, Verizon, T-Mo, Sprint. So, it's just -- it's a very different business in that sense, but we just need to manage through this and the upside potential in the long run is tremendous. But Mike's point is right, the price tail is much different than it is in the other businesses.

Gregory Lewis -- BTIG -- Analyst

Yeah. Okay. I appreciate that. And then, Mike, inventories went up sequentially. Was that largely on the back of those, I guess, pre purchases or inventory building of resin, is that maybe the right way to think about that?

Michael J. Schmidtlein -- Executive Vice President, Finance and Chief Financial Officer

Well, I would say that a couple of things. Number one, given the size of our backlog and when our production planners look at the order book, they start ordering product and assume that the production plan can be executed. So whenever you're backlog goes up, your inventory or process goes up. In some cases where you've seen some spot shortages, you can find that they will try to cover with a little bit more safety stock. So some of that [Technical Issues] trying to just be have enough on hand, because sometimes just getting containers becomes a hit or miss thing. So some of that is just being prudent in some of it. So -- and I will say that typically our fourth quarter tends to be the low point on inventory, and then it kind of start growing throughout the fiscal year. But -- so it wasn't unexpected. I would say, that the two things we probably done this quarter, we've made sure we paid our suppliers on time, because we don't want to cause ourselves to drop in anybody's priority list, because we weren't paying on terms. And we, in some cases, order a little more than we need for a safety factor.

Gregory Lewis -- BTIG -- Analyst

Yeah. And then just [Indecipherable] I think about this, I mean, obviously, supply chain issues globally are a mess. I mean I guess today or this morning, China announced that like they're closing -- shutting temporarily one other ports down. Is there any kind of way like as we think about your different segments maybe which ones are more exposed to the Asian supply chain than others?

Michael J. Schmidtlein -- Executive Vice President, Finance and Chief Financial Officer

So, as Dave just mentioned, Energy Systems has the most exposure with the contract manufacturing. Other than that, we try to build in the regions that we sell in. So, we're typically insulated for the most part on a batteries side. But when it comes to the electronics and the people of manufacture...

David M. Shaffer -- Director, President and Chief Executive Officer

There's still pressure in Motive with some chargers and stuff, but it's manageable. The sales teams are doing a tremendous job of substitution. So, it's for us, it's an ES problem.

Gregory Lewis -- BTIG -- Analyst

Okay. Perfect. Great. And then just one final one from me. Dave, just because it is -- I mean it's good hopefully largely good, but as I think about that backlog and it's kind of hitting that record level, is there any kind of way to parcel out how much of that backlog is there because of the supply chain issues, i.e., would it be maybe 5% or 10% lower if you weren't having these issues in that revenue maybe last quarter would have been higher? Is there any kind of way to think about it that way or like that?

David M. Shaffer -- Director, President and Chief Executive Officer

It's a good question. I would say that when I pressed during our monthly business reviews with my leaders, they pretty much time most of this to particular jobs. And so whether it's a T-Mo cabinet that's going out or whether it's a Motive Power battery that's tied to a truck, it's mostly accounted for. So I haven't been able to -- I try to pressure test that, but that's -- and Mike can certainly add some color here. But that so far, we just haven't been able to look for any real kind of softness in the backlog number.

And the one of the things and we tried to point out, if -- in the worldwide industrial truck data, we see these unbelievable 80% kind of growth rates on orders. But then the forklift market continues to -- the revenue, so their orders are just like a Mount Everest, but they're actual sales. So, our sales are really linked to their sales, not to their orders. We're not going to -- the truck lead time is so much longer than the battery lead times. So that again gives me some comfort that we're just in great demand environment right now. EnerSys is well positioned in some great macro markets and we just need to execute through the supply chain issues and keep our chins up and not get too dejected about it and stay optimistic, and that's what we're trying to do.

Mike, you want to add anything?

Michael J. Schmidtlein -- Executive Vice President, Finance and Chief Financial Officer

Yeah. Our backlog is probably $200 million higher than it might be on a typical quarter historically. And we've already said that there is probably $10 million to $20 million that we leave on the table any quarter from missed revenue because of these shortages we've been describing. So you could probably take that off our backlog if you executed. There is probably some people ordering from us and other suppliers just to get in the queue, but I think that's fairly limited. That might be $20 million, $30 million, so collectively I think what's left is at least $150 million, which to Dave's point, reflects core demand that is real and that is a reflection of what the markets for our products are doing.

Gregory Lewis -- BTIG -- Analyst

Okay. Perfect. Super helpful, everybody. Thank you very much. Have a great day.

David M. Shaffer -- Director, President and Chief Executive Officer

Thanks, Greg.

Michael J. Schmidtlein -- Executive Vice President, Finance and Chief Financial Officer

Thanks, Greg.

Operator

Thank you. And I'm not showing any further questions in the queue. I would like to turn the call back over to David Shaffer for closing remarks.

David M. Shaffer -- Director, President and Chief Executive Officer

Thanks, Victor. And I want to thank everyone else for taking the time to join our call today. We look forward to providing further updates on our progress and on our second quarter 2022 in November. Have a great day.

Operator

[Operator Closing Remarks]

Duration: 61 minutes

Call participants:

David M. Shaffer -- Director, President and Chief Executive Officer

Michael J. Schmidtlein -- Executive Vice President, Finance and Chief Financial Officer

Noah Kaye -- Oppenheimer -- Analyst

Brian Drab -- William Blair -- Analyst

John Franzreb -- Sidoti -- Analyst

Gregory Lewis -- BTIG -- Analyst

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