EnerSys Inc (ENS) Q4 2021 Earnings Call Transcript

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EnerSys Inc (ENS 0.68%)
Q4 2021 Earnings Call
May 27, 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 Q4 2021 EnerSys Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

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

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

Thanks, Lashana. Good morning, and thank you for joining us for our fourth quarter and full year 2021 earnings call. On the call with me this morning is Mike Schmidtlein, our Chief Financial Officer. 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, David, and good morning to everyone. As a reminder, we will be presenting certain forward-looking statements on this call that are based on 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 7, Management's Discussion and Analysis of Financial Condition and Results of Operations set forth in our Annual Report on Form 10-K for the fiscal year March 31, 2021, which was filed with the U.S. 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 May 26, 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. Consistent with our last call, we generated strong results during the period due to rapidly growing demand for our products and services. We reported fourth quarter fiscal 2021 adjusted earnings of $1.30 per diluted share, a 17% increase over the fourth quarter of last year. Our Motive Power business saw another quarter of solid revenue and earnings improvement and our Specialty segment continued its positive momentum, bolstered by strong demand for our transportation products. Energy Systems benefited from telecom driven 5G growth in the Americas, delivering solid revenue, but following short on earnings, which I will soon address. Cash flow was again strong this quarter, producing a record year and leaving us on very solid financial footing.

Although the world has begun returning to some sense of normalcy, we continue to confront ongoing headwinds created by the COVID-19 pandemic. We have seen continued availability constraints in recruiting new employees and select raw material shortages, particularly in resins and electronic components. Prices have been sticky, but always lag rapid cost increases. Our team is responding to the near-term shortages and hiring challenges and expect steady improvement as the supply chain settles down and the rest of the world accelerate.

I'd now like to provide a little bit more color on some of our key markets. Please turn to Slide 4. Let's start with our largest segment, Energy Systems, which faced several input cost pressures during the period, including higher tariffs, increased commodity prices, and expedited freight costs. In addition, our customers continue to struggle with chip and labor shortages that have slowed their build rates, but we expect improvements from these broad upstream and downstream supply chain issues in the back half of the calendar year.

EnerSys is participating in the mid-spectrum wireless U.S. build-out with batteries and outdoor DC power systems. While we remain -- while we maintain our strong market position, we believe our results will further accelerate when customers rotate to higher spectrum small cell 5G build-outs and can benefit from our next-generation line powering products. We are also very excited about U.S. broadband MSOs building out portions of their own wireless networks with their own HFC networks. Today, these MSOs primarily wholesale lease and voice data minute from other network wireless providers.

We have a full suite of DOCSIS 3.1 gateway products that help the MSOs deploy their wireless networks much faster at a lower total cost. Recently enacted extended MSO backup power requirements in California for public safety grid shutdown resilience provide an excellent near-term opportunity for EnerSys as well. If all sites currently identified are deployed, the opportunity is well in excess of $50 million. In addition to telecom, we are seeing favorable industrial-utility trends as infrastructure improvements, reliability and resiliency are expected to provide another growth driver for Energy Systems.

Renewable markets continue to expand with the legislative and regulatory push for energy storage applications for residential solar plus storage, monetization of distributed energy resources and numerous global climate initiatives aimed at vehicle electrification and renewable generation. We will capitalize more in this area as our next generation renewable inverters and batteries are released. We have also made substantial progress on our own battery energy storage system plus DC fast-charging initiative for electric vehicles, which I will speak more about shortly. Data center markets are also improving as areas lift more COVID-related site access restrictions. All in all, global mega trends continue to be favorable to Energy Systems growth.

Please turn to Slide 5. Our Motive Power business performed very well in the quarter. We are now the only battery producer to offer both lithium and TPPL in maintenance free, along with our traditional flooded products. This segment generated strong operating earnings from continued market demand recovery, growing maintenance fee revenues and continued opex discipline. In addition, our Richmond, Kentucky facility has returned to full capacity and efficiency, while our Hagen, Germany, restructuring savings are starting to be realized.

We launched our lithium platform with our four variance this quarter and all of our Motive Power Products passed the internal UO tests. This month we will be launching two additional variance. And we continue to collaborate with multiple material handling manufacturers. While we're only in the early stages of our launch, our customers continue to find this chemistry as best suited for the toughest duty and are actively trialing our offering with excellent results.

Please turn to Slide 6. The third segment of our business, Specialty, reported another strong quarter despite the ongoing impact of COVID on our capacity ramp. Our transportation business is performing well as the OEM Class 8 vehicle market recovers. However, we along with many of our competitors have been dealing with hiring challenges and supply constraints, causing our backlog to remain stubbornly high as demand continues to grow faster than we can supply. As a result, our focus remains on expanding TPPL production, particularly in our three Missouri factories. Our Springfield ramp is behind schedule due to COVID, but we added a second shift to the high-speed line and increased oxide and pasting capacity. High-speed line production doubled in the last three months and continues to improve. Our Warrensburg facility made a significant improvement from the last two years performance as well. Lastly, our aerospace and defense team had another great quarter executing on submarine, tactical vehicles and munitions projects. We won several space contracts with a variety of customers and programs.

Please turn to Slide 6. I am pleased that we officially kicked off our battery energy storage system plus DC fast charge initiatives during the quarter and we are moving fast. Early momentum has been driven by two commercial real estate partners and our engineering team has exceeded my expectation by delivering a 285-kilowatt hour prototype, up and running on our tech center, here at corporate in just a few months. Our launch real estate partner has identified over $1 billion of multi-year revenue opportunity starting early calendar year ''22 if we hit the reasonable cost and performance targets. Our goal is to deliver EV charger that charges any electric passenger car as fast as the car can handle, often changing hours into minutes. By using a large storage battery to quickly charge EVs, we can dramatically reduce system installation costs at many sites, including the size of the AC transformer and high voltage cable from the utility interconnect.

The energy system can also reduce operating costs by lowering peak demand from vehicle charging. In addition to fast-charging EV's, the bidirectional energy system can also help the host site use electricity more cost effectively for its commercial operations and can provide emergency backup power, down power outages. The system is solar compatible and largely made from existing EnerSys lithium battery modules in charge and technology. Our goal from the beginning of our lithium program is to use standardized modular products and use these product -- use these building blocks across all of our lines of business. This drives the economies of scale and accelerate our time to market. We are lining up software partners for artificial intelligence and cloud services and reviewed preliminary business plan with our Board last week. We will provide more color on this excited opportunity over the summer.

With fiscal year 2021 behind us, I wanted to lay out what we're seeing in the market and the opportunities ahead of us. Despite the challenges of the past year, many caused by the global pandemic, we are well positioned for long-term success. We are on the precipice of a massive 5G build-out that will provide a strong long-term tailwind for our business. Recent commentary by the largest telecoms and equipment manufacturers has been unanimous. 5G is gearing up and we should begin seeing the accelerated ramp in the second half of calendar year 2021, with the build-out continuing for five years or many more thereafter.

The factors leading to this 5G growth include T-Mobile's acceleration postpaid [Phonetic], universal and competitive 5G deployments for all carriers, including AT&T, which is expected to spend $24 billion a year on its network. This gives entry into the marketplace with an FCC requirement to deploy 70% of the U.S. population by June 2023. And finally, government spending or government sponsored rural fiber broadband initiatives being rolled out at the federal and state levels throughout the U.S. There are some potential hurdles that could slow the ramp-up, including the success of the C-band auction completed in February for more than $81 billion, which could limit some carriers financial resources to deploy it.

The second hurdle relates to supply chain shortages discussed by the 5G manufacturers, particularly a lack of semiconductors. We will keep a close eye on these developments with the U.S. leading Europe, but remain confident we're at the door of a major 5G expansion in the quarters and years ahead. In addition, the Biden administration has proposed nearly $2 trillion dollar bill, which includes upgrades to traditional infrastructure like U.S. highways and bridges, and we'll also made significant investments in non-traditional areas that should benefit EnerSys directly, such as the electric grid, EV charging and high-speed broadband. While it is far from a done deal, there is bipartisan support for several areas of the build that we are prepared to act on.

Our strategic initiatives outlined in our Investor Day nearly two years ago are worth repeating. 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 from 5G; third, to increase TPPL capacity, particularly for transportation market share and our Specialty business and finally, to reduce waste through the continued rollout of the EnerSys Operating System. In addition, we are now adding our Energy System plus fast-charging to the above initiatives. We feel it is a core competency from decades of experience charging electric forklifts, and we believe it represents an immense opportunity. We will work hard executing each of these areas and to deliver a long-term value our customers and shareholders deserve.

With that, I'll now ask Mike to provide further information on our fourth 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 9 for your reference. I am starting with Slide 10. Our fourth quarter net sales increased 4% over the prior year to $814 million due to a 4% increase from volume and 2% from currency gains net of the 2% decrease in pricing.

On a line of business basis, our fourth quarter net sales in Energy Systems were up 11% to $349 million and Specialty was up 16% to $132 million, while Motive Power revenues were down 6% to $333 million. Motive Power suffered an 8% decline in volume along with a 1% decrease in pricing, net of a 3% increase in FX. The prior year, Motive Power fourth quarter revenues benefited from our recovery of the September 2019 fire in our Richmond, Kentucky facility. Energy Systems had a 12% increase from volume and a 2% improvement from currency net of a 3% decrease in pricing. Specialty had 16% in volume improvements along with 2% offsetting impacts from positive currency and lower pricing. We had no impact from acquisitions in this quarter.

On a geographical basis, our net sales for the Americas were up 4% year-over-year to $557 million, with a 6% more volume and 2% less pricing. EMEA was up 2% to $203 million despite 3% volume and pricing declines due to an 8% improvement in currency. While Asia was up 19% at $55 million on 9% volume and 10% currency improvements.

Please now refer to Slide 11. On a sequential basis, fourth quarter net sales were up 8% compared to the third quarter, driven by 9% volume improvements, net of a 1% price decline. On a line of business basis, Specialty increased 21% with our TPPL continuing to provide more capacity for transportation sales, while Motive Power was up 9% as rebounds from the pandemic and Energy Systems was up 3%. On a geographical basis, Americas was up 12% sequentially, while EMEA was up 5%, but Asia was down 7%

Now a few comments about our adjusted consolidated earnings performance. As you know, we utilized certain non-GAAP measures in analyzing our company's operating performance, specifically excluding highlighted items. Accordingly, my following comments concerning operating earnings, 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 May 26, for details concerning these highlighted items.

Please now turn to Slide 12. On a year-over-year basis, adjusted consolidated operating earnings in the fourth quarter increased approximately $7 million to $78 million, with the operating margin up 50 basis points. On a sequential basis, our fourth quarter operating earnings dollars were flat at $78 million, while our OE margin dropped 80 basis points to 9.6%, primarily due to Energy Systems results, which I will address shortly.

Operating expenses when excluding highlighted items were at 14.6% of sales for the quarter compared to 16.4% in the prior year as we reduced our spending by $9 million year-over-year and by 10 basis points sequentially. Excluded from operating expenses recorded on a GAAP basis in Q4 are pre-tax charges of $27 million, primarily related to $6 million in Alpha and NorthStar amortization, and $21 million in restructuring charges for the previously announced closure of our flooded Motive Power factory in Hagen, Germany.

Excluding those highlighted charges, our Motive Power business generated operating earnings of 15.6% or 300 basis points higher than the 12.6% in the fourth quarter of last year, due primarily to improvements in manufacturing costs and lower operating expenses. OE dollars for Motive Power increased over $7 million from the prior year. On a sequential basis, Motive Power's fourth quarter OE decreased 230 basis points from the 13.3 -- excuse me, increased 230 basis points from the 13.3% margin posted in the third quarter, again due primarily to improved manufacturing and operating costs along with better price mix.

Energy Systems operating earnings percentage of 2.6% was down from last year's 4.1% and from last quarter's 7.4%. OE dollars decreased $4 million from the prior year and decreased $16 million from the prior quarter despite slightly higher volume on lower margins and higher input costs. These costs range from higher tariffs, freight, materials and manufacturing costs.

Specialty operating earnings percentage of 13.2% was up from last year's 11.7% and up from last quarter's 11.9%. OE dollars increased over $4 million from both the prior year and prior quarter on higher volume and lower operating expenses.

Please move to Slide 13. As previously reflected on Slide 12, our fourth quarter adjusted consolidated operating earnings of $78 million was a increase of $7 million or 10% from the prior year. Our adjusted consolidated net earnings of $56.5 million was $9 million higher than the prior year. The improvement in adjusted net earnings reflects primarily the rise in operating earnings along with lower interest expense. Our adjusted effective income tax rate of 19% for the fourth quarter was slightly higher than the prior year's rate of 18% and higher than the prior quarter's rate of 17%. Discrete tax items caused most of these variations. Fiscal 2021 tax rate of 18% was consistent with that of the prior year.

Fourth quarter EPS increased 17% to $1.30, which was near the top of our guidance range. We expect our weighted average shares for the first fiscal quarter of 2022 to remain relatively constant to be approximate $43.5 million of the fourth quarter. As a reminder, we now have over $75 million of share buybacks authorized and we have made modest purchases recently. Last week, we announced our quarterly dividend, which remains unchanged from prior levels. We have included our year-to-date results on Slides 14 and 15 for your information, but I do not intend to cover these details.

Please now turn to Slide 16. Our balance sheet remains strong and positions us well to navigate the current economic environment. We have $452 million of cash on hand and our credit agreements leverage ratio was 1.7 times, which allows over $600 million in additional borrowing capacity. We expect our leverage to remain below 2.0 times in fiscal 2022. We generated a record $288 million of free cash flow in fiscal 2021. Capital expenditures of $70 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.

Even with these investments, we have also retained the agility to flex our manufacturing footprint as needed. Our decision announced last November to close our Hagen, Germany facility has progressed better than our expectation in terms of speed and the cost. The expected $20 million in annual savings are starting to be felt already with the full benefit arriving by our fourth fiscal quarter of this year. We anticipate our gross profit rate to remain near 24% in Q1 of fiscal 2022, and we expect expanding margins thereafter.

As Dave just described, we believe all three of our lines of business are well positioned and their diversity provides us with a stable earnings platform. Despite some concerns over the potential for late arising shortages, we feel we have enough visibility to provide guidance in the range of $1.15 to $1.25 in our first fiscal quarter of year 2022.

Now let me turn the call back to Dave.

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

Thanks, Mike. Lashana, we will now open the line for any questions.

Questions and Answers:

Operator

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

Noah Kaye -- Oppenheimer -- Analyst

Well, good morning, and thanks for taking the questions. So lots of details here and a fair amount of commentary on the eyesight to improving supply chain constraints in the back half of the year, the calendar year. And so, I wonder how that might set up sort of an cadence basis some of your top line recovery trends? Historically, I think your 2Q has been a bit soft just to due to the European holidays. But if indeed there is going to be some debottlenecking here and you think that's going to take place in the September and December quarters, then how do you think about the set up for a sequential revenue improvement over the course of the year?

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

Thanks, Noah. Mike, you want to --you want to help Noah.

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

Yeah, I would say, we are in the low $800 million range and that will probably stay, will probably stay $820 million, $830 million in the first half of the year and that will probably expand in H2 by at least $50 million per quarter. So we would expect that kind of, not quite a 10%, maybe a 7% to 8% improvement sequentially from H1 to H2.

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

And Noah, the supply chain issues as I noted we're upstream and downstream. So we're getting some pressure. but are pressures -- our customers are getting some pressure to. So one of our big telcos couldn't get chips for their radio, so they put their order for the power systems on hold. So, we're, I think we're feeling the same way as everybody else, the business just came back too fast. But the feedback we're getting is mostly, as we noted, it should slowly improve.

Noah Kaye -- Oppenheimer -- Analyst

Yeah, and then maybe just on the internal side. Do you think you could give us a little bit the impact of some of the cost headwinds you mentioned around expedited freight and increased commodities? I know the manufacturing inefficiencies are part of this as well, right? But just in terms of materials and site, can you give us those numbers?

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

Yeah, I'm sure Mike can give you some direction on that. But you're right, the manufacturing piece was a big part.

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

Yeah, depending on which piece you are comparing it to or what base period, but typically the drag we are seeing is the tariffs add a couple of million dollars per quarter. The freight, which is primarily a freight rate increase is probably in that same footprint. Some of the manufacturing variances which at least in Q4, still have the incurred variances from as early October of last year when we were still little deeper in the grips of the pandemic. So as we move forward beyond there, that those manufacturing variances going into, let's say, particularly as we move into Q2, where we have the current levels of operations and volume benefiting, you're going to see a nice expansion there.

Some of the other things that will drive margin expansion as we go through the course of this year is going to be a number of price increases, which we have done recently, which as they move through the order book will start to impact late in, let's say June of this year. So starting this upcoming month, you'll start to see some pricing moving through. You're going to see the fact that for all of our factories moving up from, let's call them deep in COVID-type utilization rates where you were running at 50% to 70% capacity will move back into their normal 80% plus capacity. So across our factories you would expect to see that.

And the one that's been the biggest drag and this has been well-known and well publicized when we bought the NorthStar business, which included two factories in Springfield, Missouri, we knew that those factories based on the NorthStar book of business were drying up quickly, but we bought them for their TPPL capacity and not their book of business. So as we've made that integration, moved some EnerSys product in their, done some transitions of their product to be closer to their end customers, and then we've added the high speed line in the second of their two factories. Right now that drag has been $5 million to $6 million per quarter, which we expect to abate as we go through the end of this fiscal year. So that's a big piece. The Energy Systems took a big chunk of that. They have in terms of their allocation of that variance. As I mentioned in my remarks, the Hagen restructuring will be generating $20 million of benefits, one fourth of $20 million of benefit in our fourth quarter. So that's a big upside.

We've made some transfers in our contract manufacturers to move them out of China, to move them into other non-Chinese locations, including Mexico, where we would therefore not have to pay the tariffs, which are now 25% to 30%. We would shorten that supply chain, cut down our freight costs, so we think that is going to add to our benefit. And we do think from a mix standpoint some of our highest -- the best business we have typically is in our outside plant in the Energy Systems, particularly Alpha, and that outside plant revenue has been mostly weather-related, but for other COVID reasons has been slower than normal. We would expect that to expand now that it's the time where that kind of work does go on, and we've seen evidence of that. So we would expect the normal margin improvement just from the normal cycle -- seasonal cycle that we'd see.

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

Yeah, Noah, just a couple of points, just to add to what Mike said is the -- the Energy Systems business, the quote [Phonetic] cycle is much longer than the other two businesses, so we'll put proposal out, because it is very project oriented, so the price changes have always been slower in that business to push through. So there is some lag on that. There are some note. And then, clearly our Energy Systems business is with a higher inclusion of electronics. Has been exposed much more to the tariff pressures. So that business has caught a lot of this. But as Mike kicked off, we've got good line of sight and a lot of pressure on the teams. COVID made competition for CMs moving out of China. It's just slowed everything down. But we do have good line of sight and that's why we remain confident things are going to slowly get better.

Noah Kaye -- Oppenheimer -- Analyst

Yeah. A lot of questions, but I'll probably take offline, I guess in the interest of sharing the ball. But let me ask just one more that I've been getting from some investors. I think November 2019 feels, a lot of us like a really long time ago. But you did mention on the Investor Day, Dave. And so, maybe can you just help us calibrate where we are now versus sort of that outlook from Investor Day? Is it fair to say that some of those targets for 2024 have been pushed a few years to the right? How would you kind of gauge the trajectory the company is on here in terms of earnings power?

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

No, it's Mike. I would say because we refreshed this last September, October, which was not completely through the pandemic, but had most of it in our rearview mirror. So, our assessment was that it probably pushed us a year out overall. And none of the premises that we or that the takeaways that Dave enumerated in his remarks about increasing maintenance free Motive Power sales with NexSys iON and PURE, growing the portfolio of products in Energy Systems, increasing TPPL for transportation, reducing waste through EOs. All of those were still there. We are -- And Dave's remarks commented about how important he thought that the new, I'll call it battery storage and DC fast charge initiative is, how much potential is out there. So I would say beyond the fact that the pandemic year kind of was just a dead space in some respects for advancing some of these initiatives, I would say it's -- you can still take that model and add a year to it, and you'd be there.

Noah Kaye -- Oppenheimer -- Analyst

Yeah. That's super helpful, guys. Thank you.

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

Okay, thanks, Noah.

Operator

Your next question comes from the line of Greg Wasikowski.

Greg Wasikowski -- Webber Research -- Analyst

Hey, good morning guys, how are you.

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

Good, Greg.

Greg Wasikowski -- Webber Research -- Analyst

Thanks for taking the question. Could you elaborate a little bit more on the labor shortages you're seeing just across the different segments? We see seen similar issues with the availability of skilled labor following the stimulus checks. I'm just curious is that driving the majority of the labor shortage that you're seeing or are there other contributing factors there?

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

I think it's the -- the biggest pressure for us is the ramp in Springfield, Missouri. We just needed to hire a lot of folks and this is direct labor mostly, direct skilled labor. And yeah, it's just -- I think it's the same issues that many companies are facing in the U.S. right now. Obviously, the COVID fears of return to work, some of the benefits extended, unemployment benefits -- it's, we're not immune from all of those pressures. So it's the same thing for us. Most acutely felt in Springfield. Though we see it in Poland. We see it in France. We see it around the world. But for us, the most acute pressure is in Missouri.

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

And don't forget the acute pressure that our suppliers are feeling, because piece part availability becomes -- can become fire drill distractions as you try to work arounds for that. So it's not just us. It includes our supply chain, including getting drivers and trucks to line for getting shipments out in the timely fashion.

Noah Kaye -- Oppenheimer -- Analyst

Got it. Yeah, it's helpful color. And then for for the lithium-ion, at last quarter we talked about ramping in material handling through fiscal '22 with introductions coming in storage and telecom, presumably over the course of the next year with a meaningful revenue contributions toward the end of fiscal '22 into fiscal '23. Is that still the general timeline or could we see these supply chain constraints and labor issues meaningfully affect that rollout? Or alternatively could we see -- if you continue to see positive reception there, could you maybe accelerate that timeline and rollout into other business lines?

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

I, we're not, I'm not hearing the labor narrative on any of those initiatives. We currently have our lithium facility in the U.S. is handling everything, but we are ramping up a site in Asia and also a site in Europe. So we're going full steam ahead. The feedback on the motive side has been very positive. And as you noted, is the same core technology we're using in telecom and data center, and really that system I spoke of, the Energy System with the fast-charging capability is also based on the same technology. So it's broad based. And I would say if anything, we're more excited than we've ever been about the potential.

Greg Wasikowski -- Webber Research -- Analyst

Great. Okay, thanks for the time, guys. I'll turn it over.

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

Thank you, Greg.

Operator

Your next question comes from the line of John Franzreb.

John Franzreb -- Sidoti & Company -- Analyst

Good morning, Dave and Mike. Guys, I want to talk about pricing. You touched a little bit on it. But in Slide 10, all three segments were down year-over-year. And best I could tell, was the commodity cost up and volume is up. Could you just explain to me why that happened?

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

Well, John, remember on that slide, it's a combination of both pricing and it is a combination of mix, so there is -- it's a little bit of a tale of two stories. On the pricing side, our pricing typically lags the lead cost structure by about three months to four months and lead costs have more recently risen. But if you went back four months or five months, they were declining. So you've got that tail which is, while your lead costs are going up in the near term, the revenue adjustor is reflecting a period earlier, which is putting a little bit of compression, particularly in those lines of business that use those pass-through mechanisms, which is about 30% of our revenue now. So it's not huge, but it is notable.

And then the other piece is mix, and what you're selling and the service work that you're doing and what margins that you have. Dave, you can...

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

Yeah, I would say on the Energy Systems piece what we've experienced is some of the shortages we've been feeling have been on some of our higher margin products. So we've been pushing more because availability and the work we have to do right now on service and some of the lower margin stuff. So that-yeah I'm glad Mike cleared that out because it's really price/mix. And so that's been a big part of it on the Energy Systems side.

John Franzreb -- Sidoti & Company -- Analyst

Okay. So it's not a competitive landscape issue or anything of that?

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

No, I would say it's more COVID-related, supply chain related. And then the other big piece I noted is, especially on Energy Systems is just timing. I'm getting things to -- I'd say freight, it's not insignificant. It's millions of dollars of the freight rate changes we're seeing and that's why we're pushing price increases across the board to recover, because everything has gone up.

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

And we did have one of the things that the NorthStar sellers did slightly before they started their process was engaged or contracted with a couple of good-sized players in a couple of different markets for pricing to get a healthy book of business, which was at low margin business. And for one of those big players, that term or that agreement is pretty much up. And so we anticipate a significant, either increase in price or the ability to take the volume which we had dedicated to higher margin business. So we're going to see a nice, just in that one alone, because it's a fairly good size entity that we should see an improvement on that one just based on a a lapse of time and being able to move out of a pre-acquisition agreement on the NorthStar side.

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

And that contract would have been, there's one in Specialty and one in ES. So it's an excellent point. We're starting to get out from underneath those.

John Franzreb -- Sidoti & Company -- Analyst

That actually helps a lot down, Dave and Mike. And then just shifting over, I guess, specifically to the Motive segment. With your backlog up strongly and the WITS data through the roof. But shipments are down at the OE side. How long it's going to take you to catch up and reach equilibrium?

Is this going to be into the 2023 year or is it going to be back-half of 2022?

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

It's hard to judge. The order data which we usually provide on WITS is extraordinary. But when you look at the shipments data, it tells a much different story. In fact, I think throughout the course of the year to date shipments are actually down because of supply chain shortages at the truck OEMs. I know that they're working through that. They have very complicated supply chains, and so the feedback we're getting is a pressure. All of the OEMs are putting more pressure on us and asking us to ramp and be ready to handle it as they can expand their production capabilities. And then there is some recent -- this announcement about some internal combustion engine business on forklifts in the news that is going to maybe even put more pressure on electric demand for electric forklift trucks, some emissions issues. So, yeah, it's -- the signals are all very positive. The backlog is very strong. And it's just a question of how quickly these OEMs can get their supply chain stuff ironed out.

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

Yeah, and in that they've made that point that some of the truck data is up as high as 86% year-over-year on a three-month trailing. But their orders have actually slightly declined. So it's the shipments. I'm sorry, their shipments have actually slightly declined. So it's taking them time to catch up, and obviously, our battery sales are more linked to their shipments than their order intake.

John Franzreb -- Sidoti & Company -- Analyst

Right, great. Okay. And I guess one last question, just on the fast-charging technologies. Can you just give me a sense of context of how quick is your fast-charging existing technologies and how much quick to make it in order to be -- for it to be viable for a commercial electrical vehicle?

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

Yeah, it's, I probably need to get a good way of simplifying it because you know the engineer in me. It just depends on how state of charge of the battery, the type of car. All of the cars charge at much different rates, like the Porsche Taycan can really take charge extremely well, but other cars can handle it. But in general, you can think roughly most electric cars have like an 18-kilowatt charger on board. So typically what people are doing is just plugging that charger into AC power and it takes literally hours to recharge to fully recharge the battery. What we're doing is we're actually charging the battery directly. So it's DC fast-charging. So we're going around that on-board AC charger. We're charging the battery directly. And again, as I said in my remarks, our goal is to be able to provide as much juice as any car can handle. But at their fastest charge rates, you can see -- you can see people starting to get enough range added to their vehicle in 10 or 15 minutes, which again, we're trying to create that experience more similar to refueling at a fuel station.

So, but yeah, as I said, it's going to turn hours in the minutes in most cases. It's very, very exciting. But john what's really great about the project is that that same investment, that same Energy System also has a day job. It's also helping the customer save electricity. It's also being a renewable integration. It can be slaved with other systems to create a virtual power plant for the utility. It's amazing, all the functionality just one investment can handle. And that's why these commercial real estate guys are so keenly interested. And they're pushing us, and they're pushing us hard.

John Franzreb -- Sidoti & Company -- Analyst

Great. Thanks for that, David. Appreciate the color.

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

Okay.

Operator

Your next question comes from the line of Brian Drab.

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

Hi, Brian.

Brian Drab -- William Blair -- Analyst

Hi. Hey, good morning. Can we just talk a little bit more about the second half of the fiscal year. And one thing that stood out to me in that long list of items that you gave us in terms of what could help margins in the second half of the year was some $5 million to $6 million, I think its opex drag or cost drag from NorthStar and per quarter. And that -- I mean, on an after-tax basis that seems that translate to like $0.08 or $0.10 a quarter, just that one item, and then you listed a bunch of other items that would help margins. And then you also said, I think that revenue would be potentially $50 million higher in the third and fourth quarter relative to the first-half run rate. So, and then you get, obviously, operating leverage on that. So I'm just wondering -- it seems like you could see material -- a material step up in earnings in the second half of the year in terms of the quarterly run rate. And I just want to clarify that or get you to comment further on that?

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

Mike can get you some better dimensions. I think it wasn't opex, it's manufacturing variances. So it's in the cost of sales area, and the factors were under-loaded when we bought them. And we are ramping. And as I said in my remark, I've said, we are well behind our ramp schedule that we had put into the Investor Day model, and that's all related to COVID purely. And, but what we said in the Investor Day model is we were going to by fiscal year '20 to increase our TPPL production capacity to $1.2 billion in revenue and from -- at that time, we were sitting at about 650 [Phonetic]

I feel pretty good right now that we will exit our fourth quarter at a $300 million plus run rate before TPPL expansion. And so the -- we're well over -- we're more than halfway of where we wanted to be. And the other thing we're trying to do, which is going to again help us this drag is, we worked with the Board last week at the meeting and we actually got permission to accelerate some of the capex on TPPL to help alleviate some of the pressure. Frankly, demand has exceeded our best case as expectations we used for the model. So all of this and then the stabilization, getting the folks hired, the training, the productivity, scrap rates, everything has been really kind of lousy, frankly, from that factory. But it's getting better, it's getting better every day. And again, I'm really excited about being on that $1.2 billion pace. And then with additional capex, we can continue to grow that revenue. So Mike, do you want to add more color?

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

Yeah, to your question, Brian. I wouldn't anticipate -- we gave guidance with a midpoint of $1.20 for Q1. I would expect Q4 is going to be 20% to 25% higher at the EPS level, which is the embodiment of all of those improvements that I enumerated earlier.

Brian Drab -- William Blair -- Analyst

And so on a -- you say just in Q4 of 20% to 25% higher than Q1, is that what you just said?

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

That's what I just said.

Brian Drab -- William Blair -- Analyst

Got it, OK, got it. And kind of progressing not so linear, not necessarily in a linear fashion from 1Q to 4Q, but kind of stepping up in the second half. I imagine third quarter and fourth quarter might be similar. Is that fair or no?

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

Well, I guess it's not too -- you don't have a line for H1 and then a line that's higher on the Board for H2. I would say that there is two lines where Q2 Q2 is better than Q1. But there is a step up to go to Q3, which then improves to Q4.

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

A lot comes down to resins. Some of our best margin products were just out of. And it's because there is a shortage globally of polycarbonate, which is blended into our resins. So it's -- I think Mike is a little hesitant to tell you what the shape is because we don't really know when some of that resin availability is going to open up. We're hearing -- we're hearing in the summer time. So, but yeah, I would say largely you captured it, that probably Q3 will be better than Q2. And Q4 should be better than Q3.

Brian Drab -- William Blair -- Analyst

Okay, OK, thanks. And then I'm just curious if there's any way to size how large this issue of the hiring constraints was in the quarter, and do you have any sense for how much that limited your capacity? Maybe like what might revenue had been in the in the fourth quarter if you had no hiring constraints?

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

We should have been by now, we should have already been on the $1.2 billion according to the original plan. So as such, you can say that topline has been impacted probably, let's say for the past few quarters the topline is probably $200 million like annually. And then you put that in a per quarter basis. And then as Mike said, the manufacturing variances have been huge, and $5 million to $6 million those quarter is a huge number.

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

Yeah, and sometimes it's a story. You cannot oftentimes hire the people, but to retain them past that, say 90-day training period where they're really starting to provide a return on that investment of training -- the work -- a lot of times people find well -- I was getting paid more than I might be able to do sitting at home. But in light of the level of work activity, I think I'm going to go back to sitting at home. [Speech Overlap]

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

That's part of it. We don't want to get too deep in the psychology. But we fully expect with the vaccine rates, with things starting to settle down that there is going to be a general, a more confidence and our HR people are confident that things are going to get better.

Brian Drab -- William Blair -- Analyst

Okay. So you're saying really, Dave, the $1.2 billion target, you feel like you're limited primarily though by hiring constraints in terms of expanding the TPPL capacity that you're ready to go or you've seen the people?

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

I think absolutely. The majority of the issues have been personnel related, Mike?

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

But it is mostly personnel related. There are some capital spend gating items which in our most recent Board of Directors meetings, our Board authorized the acceleration of some of that spend, so that we could meet that. But, so it's -- but to Dave's earlier point, we expect to exit nearly at full capacity.

Brian Drab -- William Blair -- Analyst

Okay, got it. And then just one last question for now. I'm just curious where we are in terms of Alpha's opportunity for small cell sites? My sense is that that still really hasn't started yet. And has Alpha enabled any small cell antenna sites at this point? And do you still see this as a $1 billion revenue opportunity for Alpha?

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

Yes, I do. I think small cell has been de-prioritized by couple of big carriers. Everyone has put more emphasis on mid spectrum versus where we thought we would be with small cells when we did the Alpha acquisition. We've been plenty busy on the mid spectrum build out. So we're fine. We just need -- we need the supply chain issues to settle down. On the small cell, we got to two good place, two good shots on goal. One is the gateway products. And we just got our first significant order yesterday, frankly, for some gateway products for one of our MSO carriers to start to install radios right on their HFC backlog. So the gateway gives them not only a way to backhaul the call traffic, but also provides the power. So yesterday was a big day. Drew was really excited.

And then on the flip side, the other major project we have on small cell is our project with Corning. And they've been an unbelievable partner. I even have sort of regular calls with their CEO, so that we stay calibrated. And I think Wendell and I are both extremely excited about the program. And again, though it's -- the millimeter wave spectrum has been a little bit behind schedule, whereas where we thought it was going to be prior. Mike, is there anything you want to add?

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

Well, and don't forget we also mentioned in Dave's remarks about the opportunity that just recently came up through the California Public Utility Commission for some of that grid resiliency, which in network resiliency is really going to fill a lot of the gap, the whole of that higher spectrum range if it gets pushed out, would nicely fill in it.

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

Yeah, I think that'll help. That's mostly related to the wildfires and the power shutdown, so the CPUC [Phonetic] is asking for longer standby at network critical sites. It's well over a $50 million opportunity. It's here and now. And I think that just trying to get to the -- I made this comment many quarters ago and it's -- this business is a little bit peaky. It's -- there is high watermarks and we're going into one of those periods without for right now. So that's why we have to get some of the supply chain stuff ironed out. So we expect to come back off this low cycle we've been on. And unfortunately, everybody is trying to come back too fast, and it's just catching all the supply chains off guard. But we're very -- I think that opportunity alone, even without the 5G narrative is big.

Brian Drab -- William Blair -- Analyst

Okay, thanks very much.

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

Okay.

Operator

[Operator Instructions] Your next question comes from the line of Jacob Greene [Phonetic]

Jacob Greene -- Analyst

Thank you. So a lot of saw already been asked, so I'll just keep it quick. Just trying to frame the bigger picture on the energy storage side and kind of the microgrid opportunity. How should we think about you're charging station progression over the next few years? And on the margin side, is there an opportunity to say, utilize any of your recycled Motive batteries that may be at, call it 80% of a new capacity, so not ideal for Motive, but would work just fine for energy storage.

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

It's a great question, frankly. And it would -- mechanically it would work because they're are the same models. So it's not something we're focused on right now that's -- but it's great food for thought. The way this is rolling out, the system we saw in a few included a picture of. We need to get a 100 of those systems done quickly, and that's what we're working on. We've got a nice supply chain partner, nice contract manufacturing partner lined up, and they've been fantastic. We've got to get a 100 systems out as fast as we can.

And then as I noted, if things go well and they go according to plan, this customer has identified $1 billion of potential sites where they want to install this kind of system. So a lot's going to depend on how these first 100 go. And then after the first 100, we -- the engineering team and we just put in Rex for hiring a new group just dedicated to going to a costed down versions. So the initial prototype is probably much more expensive than what we will be selling in the end because we just wanted to get something out fast. And everything I'm talking about is just one customer. And as I said in my remarks, I think the Biden administration is wildly committed. I think this new ATV [Phonetic] incentive that they're talking about. And Mike, was it $12,000.

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

$12,500.

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

$12,500. We think that that incentive can have a very meaningful impact on how many people choose electric. So we think that this administration is very committed. So we like the timing here. And again, it's really -- the system is amazingly similar to frankly one of our forklift batteries.

Jacob Greene -- Analyst

Great, thanks for that. I'll turn it back.

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

All right.

Operator

There are no additional questions in queue at this time. I'll turn it back to Mr. David Shaffer for closing remarks.

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

Well, thank everyone for attending our call today and we look forward to providing further updates on our progress on our first quarter 2022 call in August. Have a good day and a good holiday weekend.

Operator

[Operator Closing Remarks]

Duration: 62 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

Greg Wasikowski -- Webber Research -- Analyst

John Franzreb -- Sidoti & Company -- Analyst

Brian Drab -- William Blair -- Analyst

Jacob Greene -- Analyst

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