EnerSys (ENS) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for joining us today for an update on EnerSys' lithium technology strategy to the development of our lithium-ion cell gigafactory. I'm Lisa Hartman, VP of Investor Relations here at EnerSys. And on the call with me today are David Shaffer, EnerSys President and Chief Executive Officer; Joern Tinnemeyer, Senior Vice President and Chief Technology Officer; Mark Matthews, President of Specialty Global; and Andrea Funk, EnerSys Executive Vice President and Chief Financial Officer. Before we get started, we wanted our Tampa-based team and our new friends and neighbors in the Greenville area impacted by Hurricane Helene to know they are in our thoughts. On September 20, we published a press release with an update on our lithium cell factory and filed an 8-K with the SEC, which are available on our website. As a reminder, we will be presenting certain forward-looking statements on this call that are subject to uncertainties and changes in circumstances. Our actual results may vary -- may differ materially from these forward-looking statements for a number of reasons. These statements are made only as of today. For a list of forward-looking statements and factors which could affect our future results, please refer to our recent 10-K filed with the SEC. In addition, we will be presenting certain non-GAAP financial measures. For an explanation of differences between GAAP and non-GAAP metrics, please see our company's Form 8-K, which includes our press release dated August 7, 2024. Following our prepared remarks, we will be opening the session for questions from the audience. [Operator Instructions] The slides for this presentation are currently available in the Events section of our IR website. We will not be taking questions related to the current quarter financial results during today's webcast as they are outside the scope of this call. Now I'll turn the call over to EnerSys' President and CEO, Dave Shaffer.

Thank you, Lisa, and good morning. Thank you all for joining this update call. Please turn to Slide 6. I'm excited to provide an update today on our progress towards developing our lithium-ion cell gigafactory. Expanding our lithium product offerings and production capacity are top strategic priorities for EnerSys, which we began planning years ago. Importantly, we recently announced that we have been selected to receive $199 million in funding from the U.S. Department of Energy and subsequently received approval from the EnerSys Board of Directors to move forward with this project. We would like to sincerely thank the DOE as well as the State of South Carolina and Greenville County for their continued support. Why are we focused on lithium? Demand for battery solutions continues to grow rapidly, driven by megatrends, including electrification and automation. We are highly confident in the future demand, particularly for lithium batteries for industrial applications. We see that the market is trending toward lithium, and this is further supported by third-party data forecasts. In addition, the U.S. government has announced a significant vehicle electrification strategy, which will require lithium solutions from domestic sources. EnerSys is proud to be a global leader in providing the critical energy solutions to meet these needs across a broad range of end markets and applications. Joern will discuss this in more detail. But as a reminder, demand for lithium batteries is growing also because of their performance characteristics. They are maintenance-free and offer higher energy density than comparable traditional lead batteries. Their lighter weight and higher performance help our customers achieve their operating efficiency and sustainability goals. Starting with a high-level overview of the project, our new factory will be approximately 500,000 square feet in size with initial capacity to produce 5 gigawatt hours of lithium-ion cells annually located in Greenville, South Carolina. Our total investment is estimated at $665 million and will be partially funded by federal, state and local incentives that I just talked about. In addition, a portion of the IRA tax credits we have previously discussed will be used towards funding the strategic investment. Our factory will be dedicated entirely to meeting EnerSys' internal needs for lithium ion cells across all of our lines of business. As part of this project, we plan to build a specialized production line which will produce cells for our Department of Defense battery applications. To develop and operate the factory, we have partnered with Verkor, a proven technology leader and focused on large-scale industrialization of lithium-ion batteries. Verkor brings expertise in electrode manufacturing and high-speed cell production and will help us derisk and accelerate our development process. Finally, this important project is a critical enabler of EnerSys' strategic growth plans and our intent to grow our share of lithium product sales. This product delivers strong -- this project delivers strong long-term financial returns by reducing our costs and supporting incremental revenue growth. Please turn to Slide 7. Our new factory offers a number of compelling strategic and financial benefits. First, the strategic benefits. Our factory positions us to support future customer demand as our mix of products shifts increasingly to higher performance lithium solutions. While we currently source our lithium cells from manufacturing overseas, this factory will strengthen our supply chain, providing us a reliable domestic supply of lithium-ion cells. As a technical note, recall that cells are the building blocks of batteries. Groups of cells are bundled together to create batteries and our factory will provide the cells we need to make lithium batteries throughout our manufacturing operations. This gigafactory will provide us the scale and the flexibility we need to supply EnerSys products across all lines of business and will also provide the ability to create custom cells to meet customer application needs. Our factory will meet DoD's stringent requirements for quality and performance as well as the requirement for U.S.-based supply. Our ability to manufacture cells specifically to meet DoD requirements will help strengthen that customer relationship. Next, the financial benefits. This expansion derisks EnerSys' long-term revenue and earnings growth by making versus buying our own supply of cells and by allowing us to access a huge opportunity in the market, particularly with the U.S. government's electrification objectives. As an in-sourcing effort, it allows us to capture the margin that would otherwise go to suppliers, lowering our cost. This will also allow us to avoid the tariffs on lithium cells sourced from China, which are significant. We see synergy opportunities through our recent acquisition of Bren-Tronics. Bren-Tronics is already part of ground vehicle electrification with DoD, and this factory will enable us to meet DoD domestic source requirements. The specialized line for DoD applications not only enables us to increase production for existing products, but enables us to expand our share with the U.S. government with significant new projects they have in their electrification road map. Their published plans indicate nearly 1 gigawatt hour of battery needs for ground vehicles by 2033, well beyond what is in our current capacity and financial model today. Finally, the cost savings and revenue growth deliver a strong financial return profile, which I'll discuss more in a few more minutes. Please turn to Slide 8. As mentioned, this Gigafactory will supply lithium ion cells for our battery solutions across all 4 lines of business, offering our customers the performance and reliability that they need. In Energy Systems, our lithium-ion reserve power batteries provide critical backup solutions for communications networks, data centers and industrial applications. In motive power, our NexSys ion lithium batteries power electric forklifts. In specialty, our lithium 6T batteries are used in DoD ground vehicles and will be part of the future electrification road map for ground vehicles and ground support equipment. In new ventures, lithium-ion batteries are at the core of our DC fast charge and storage systems. We are excited to announce that the installed -- we are excited to announce that we installed our first commercial ready system at one of our launch customers' properties earlier this month. Please turn to Slide 9. Here are some examples of our lithium-ion energy solutions in the field being used by our customers in the applications I just described, including the recently installed DC fast charge and storage system. These are just a few examples, and we expect in the coming years, our lithium-ion energy solutions will continue to expand across a broader range of applications. Please turn to Slide 10. I'll close with a few comments and recap about our strategy and financial highlights of the Gigafactory. We are confident in our ability to execute this project, which is being managed by a dedicated steering committee led by me to oversee project governance. We have a dedicated operations team focused on the Gigafactory to ensure it is managed successfully according to our detailed plan, which Mark will provide an update on. We are leveraging our 10 years of experience in lithium cell technology and have partnered with a best-in-class industry expert, which Joern will discuss in more detail. Total estimated investment of $665 million will be required to construct and commission the plant over the next 4 years. This includes $50 million for a specialized production line for DoD applications. We plan to break ground in calendar year 2025 with commercial production operations beginning in calendar year 2028. Our investment will be spread over several years with the bulk of the expenditure in fiscal year '26 and '27. As previously mentioned, our investment is supported by $199 million DOE award, which is subject to negotiations that Mark will cover in more detail. The majority of this funding will be used toward the capital investment of the Gigafactory. We also received a $200 million package of local and state short- and long-term incentives, majority of which will help the operations of the factory. From a cash flow perspective, we plan to use a portion of the annual benefits of the $120 million to $160 million from the IRC 45X tax credits to help fund the project as well. We don't anticipate this project will pressure our net debt leverage, and we expect to remain at the low end or below our 2x to 3x target range. Our analysis of this investment included an in-depth study of market trends and a detailed analysis of the future costs and benefits of making our own lithium ion cells rather than buying them. We strongly believe that making our own cells is the best approach. We have taken a conservative approach to our financial model, and we have included contingencies to account for risks and uncertainties. For returns, we expect an IRR of over 20% with a payback within 3 years post plant completion. I will now turn it over to Joern to cover the technology in further detail.

Thank you, Dave, and good morning. We move to the next slide, please. So as Dave already mentioned, we've worked for at least the last 7 years on the maturing our product portfolio based on high-performance lithium-ion cells. In that time, we've been working with excellent cell suppliers and concentrated on a one cell strategy. This way, we can leverage our supply chain across all of our lines of businesses, giving us scale. What we have today, the ENS1 cell is a new format prismatic cell, which is different than, say, a pouch cell or more cylindrical cell, which are the round cells work into an AA battery that are a little bit larger than this. And this prismatic cell is perfectly suited for all our applications. What we have today in terms of the standard cells that are available in the market space, there have always been a compromise in placing them within our businesses. For instance, it may not have been a perfect fit for motive power compared to our ESG side of the business. By creating our own cell format, we're optimizing the space and the formatting to be used optimally across all of our lines of businesses, including our new ventures within our new ventures area and also DoT cell applications. One of the derisking paths, and there's 2 main derisking paths that I'll explore in this call is, first of all, the cell chemistry, which is based on a high performance but well-known chemistry used in the automotive industry. In this way, we have eased in the supply chain to access cathode powders. More so, we don't have massive development risk developing a brand-new cell chemistry backbone. Further on, we already have 10 years of experience building and manufacturing lithium-ion cells, albeit in very small low-volume applications. These have been mainly in the aerospace, medical industry. Our knowledge set goes as deep as developing our own cathode and anode powders. Obviously, what we need is experience in order to scale this up at gigafactory levels. When we think about gigafactory levels, we have to think about high-speed manufacturing. These cathode lines and anode lines move in extraordinary high velocities, and they need to be coated at a nanometer level of accuracy. The coating that goes on to it needs to be strictly homogeneous. There can be no differences in those -- in the coating in the slurry powders themselves. As such, it is extraordinarily difficult to do this at this high volume rate. And this is the second path that we're bringing in is to use a -- or work with our technology partner, Verkor. If we imagine the Gigafactory, the building, the manufacturing equipment will all be owned by EnerSys. However, the coating component of that being the slurry development, the coating process, the drying and the calendering will be the responsibility of Verkor. They will specify the equipment, but the equipment themselves will be that for EnerSys. So let's explore Verkor a little bit further. If we move to the next slide. Verkor, we've been working with for the last 3 years. And what really impressed us with Verkor is really their grit and their execution capability. At the very early stages at the tail-end of COVID and all the supply chain crisis, they were able to develop a 150-megawatt prototype production facility in Grenoble at speed and predictability and cost structures that was well known within the industry and at a very positive level. This level of execution gave us -- gave them a lot of credibility to move forward with. Right now, if we look today at their facility, they've raised $3.5 billion or EUR 1 billion in funding to develop a gigafactory in Dunkirk at 16 gigawatts per year with already a call or takeoff order provided to them by Renault. What we're doing is using, in essence, the exact same coating technology that's being developed at that plant and then carbon copying that at our South Carolina facility, thereby reducing the risk of coating for our system such that we then do the final cell assembly. This massive derisk on both the coating process and also the electrochemical process developed in conjunction with Verkor enables us a strong path to success, a level of success that has not been observed by, say, some other cell manufacturers worldwide. With that, I'll bring this over to Mark.

All right. Thanks, Joern. So I get to go through really the site selection and what we've done over the last few months to prepare ourselves to make this plant a reality. So you can go to the next Slide 15, please. So as we talked about, as everyone is aware, we have already did a down select over the last year, 1.5 years to find Greenville as our home for this facility. And with that, we've really taken a look at how do we make this successful in the long term. The first piece, as Dave mentioned, was to establish a steering committee that would guide us over the coming months and years to make sure that we have the right project governance to make it a success. The next piece really was to establish a presence in Greenville. We know the success of this project is going to be a function of how well we can retain and recruit talent and become a prominent employer in the area. So with that, over the last year, we've developed 14 strategic local relationships that focus on workforce development, career readiness, diversity, accessibility, risk management, safety, technology development. And what we've been able to do is create a nice ecosystem for EnerSys so we can hit the ground running as this facility becomes a reality. We've taken together a hiring plan, so the steering committee led identifying leadership that not only has battery experience, but greenfield battery and building experience to help us set up structure and structure the proper way to move this plant forward and to make it the most successful way possible with the initial focus on strategic sourcing, product development, process engineering. And one of the reasons we focus on that is we knew with the Department of Energy, several things were critical. One, that we had an offtake agreement that Dave talked to, that we knew where we were going to take and use these cells; two, that we had a very good supply chain, and we established a risk register to identify how we're going to be able to supply the raw materials to this plant, have as much domestic material as possible or foreign entity of concern compliant supply chain as possible and then dual source those critical materials. So our focus has been initially not only in engaging the local community, finding the site location, but also creating the right supply chain such that we have a plan forward to have supply for this facility going forward, which is a requirement for a lot of our customers, including the Department of Defense. The other thing we've engaged upfront is to really start the pre-NEPA work, the environmental work at the location in Greenville, South Carolina. And the reason why is that, that takes some time. So we wanted to lean forward on that environmental work. So as we receive the Department of Energy grant and work through this negotiation, we'll talk about on the next slide, we wanted to make sure that we were in a position to move as quickly as possible once that was complete. So really from an overall setup standpoint, we've established a community, a great relationship with the community. We now have an office to bring our employees to the area and then work to develop the supply chain and path forward. Next slide, please. So there's a couple of things I want to highlight on the site itself, and we'll start with the DOE. So we were fortunate enough, as Dave mentioned, to win this $199 million award. And as you noticed in the award, we are now starting negotiations. To be clear, we expect to receive the full amount of $199 million. The DOE has laid out a very aggressive negotiation time frame, 120 days. And what that negotiation really is, is to finalize the terms of agreement to review the budget, the time line and the allowable cost and then transform our proposal that we provided into a workable agreement with the DOE so we can have that 1 quarter lag on reimbursement of costs that we incur as we build the plant. So we feel very confident, the meetings to date have been very positive, and we'll try to work through that between now and the end of the calendar year, so we hit the ground running in calendar year '25 with a contract in place. The other things that we've done has really been focused on establishing a partnership. Just as Joern mentioned on Verkor, establishing a technology partner on the anode and cathodes, we want to develop expertise in our partnerships to bring this greenfield to reality. So what we've done is we work with Ghafari, IPI Industrial Project Innovation, Ramboll from an environmental standpoint, Yates Construction from a site selection process. All of these players have significant experience in making lithium-ion facilities, gigafactories a reality. So we partnered with what we think is the best-in-class that have created U.S. lithium-ion plants as our partners to go forward. So next stages for us is to complete the NEPA process, Down select a general contractor that's going to be our partner in this moving forward. We're going through that this week, facility design, supply chain and then construction beginning in calendar year '25. So as we get forward and go into questions and answers, we've done a lot of work over the last 2 years to get to the point where we are today, to hit the ground running as the DOE became a reality for us. And I think we're in a position with the right partnerships, both from a technology and a construction standpoint to make this project a huge success. With that, we'll move to questions and answers.

[Operator Instructions] Our first question is from Chip Moore.

I guess first, maybe you could put a finer point on CapEx timing and maybe how to think about annual spending ranges. I think you were targeting $100 million to $120 million previously. And then I think you mentioned bulk of the spending in fiscal year '26 and '27. Just any way to think about CapEx over the next several years?

Yes. That is what you said is directionally correct. I'm going to let Andy chime in. She's closer to the exact model and the cash flows. Andy, do you have any update for Chip on where we stand just to confirm what we just stated?

Sure. Chip, it's great to have you on the call here. Thank you. We will provide updated guidance for this fiscal year at our earnings call that we're having on November 7. As we've called out, we're in the process of doing negotiation with the DOE, which will dictate some of the timing. We expect it's probably going to be about a quarter lag for reimbursement, but that's one of the items that would be negotiated as part of the final agreement. I would say probably 75% to 80% of the net spending is going to occur during fiscal '26 and '27 is what we're looking at, but we'll be providing additional information as things progress.

Perfect. That's great, Andy. And just a follow-up there on reimbursement. Does -- will that take into account any capital you've already deployed or to be determined?

Yes. So the way we've deployed a little bit. We bought the land. We have some of those types of spending that's already been absorbed in our cost. But the $665 million would be the total project cost. And as you know, about $199 million would be the DOE reimbursement. So that would all still be to come. State and local incentives, the biggest portion of that is OpEx related over the course of the project. So there's a little bit that's upfront, not significant. But the other piece to it is we plan on using a lot of our IRA proceeds as the law intended when it was put into place to fund some of this. So if we're figuring $120 million to $160 million annual IRA spend during the course of time while the plant is in construction, that would more than offset any of the capital requirements that we would have. So we wouldn't even be using all of the IRA proceeds for this. So I hope that helps.

Yes. No, that's very helpful, Andy. And if I could ask one more, -- can you give us a sense of lithium-ion penetration today across the segments? I know it's small and you know maybe where it's highest and where you see the most growth. And then for that 5 gigawatts hours of initial capacity, I think you produced something like, I think, 13 gigawatt hours last year. Just how should we think about that mix when you have that capacity coming out? And is that mostly new market opportunity, cannibalization of existing products and your thoughts there?

Yes, it's a combination of all of that. It's certainly going to include entry into new markets. The energy storage and energy management piece of our business has an exciting trajectory ahead of it. And then as it relates to existing markets, there's a bit of a price elasticity element to it. So as the costs come down, these systems will win more market shares. But there's just a really exciting growth in markets like data center. We're seeing some real opportunities for these lithium solutions in telecommunications networks. And just -- so it's very broad. And then, of course -- and a big part of the reason, we received the award from the DOE was the support for some exciting growth in defense applications, where as we referenced in the prepared remarks, they've been fairly vocal about their 2033 timetable. And Mark, I mean, if you want to add a little additional color for Chip in terms of some of the new markets. So this isn't cannibalization per se, Chip, but new markets for lithium-ion batteries in your space.

Yes. I think from a defense department, Dave, what we've seen is a significant growth and the need for both hybrid electric vehicles, silent watch capabilities as well as lithium-ion taking advanced applications such as directed energy, site locations before operating base, energy smoothing from generators. So there's a lot of new applications for where lithium-ion is taking hold. But really, the ground vehicles and ground support vehicles is where the projected growth really is. That's why we were very excited about the Bren-Tronics acquisition and their lithium-ion 6T that they have becoming that standard product that provides not only vehicle starting but vehicle support for silent watch, for electronic systems, for communications and for security applications. So it's a very exciting new opportunity for us as we see this growth and the need that the DOE has for a domestic source of lithium-ion.

Right. And Chip, I think that a lot of our growth is based on our confidence in these various areas for lithium-ion expansion into these industrial markets. And so that's why it was so important for us to make this make versus buy supply chain. And it was a unique point in time at which the U.S. government clearly saw the criticality of securing a U.S.-based supply chain for this ultra important element on these energy storage systems underpin and underlie so many critical infrastructure areas to which EnerSys is exposed to. So it just was the right time to make this announcement. But it's -- I also want to make sure I reiterate that, we've been working for years now. Joern has been on board for quite a bit of time, on the software, on the battery management systems, on the packaging, on all the UL testing, the product placement, the product approvals. We've been at this a long time to make sure as we execute on the factory, we have the demand. That's not something that happens overnight. It's been a long journey, and I'm extremely proud of the progress we've made on the product front. And this investment is principally about a derisking our supply chain and doing it cost effectively.

Yes. And Chip, maybe I can provide a little bit of data to back some of the things that Dave and Mark commented on. As you mentioned, this year, we'll probably be around 5 gigs of energy storage. And in our Investor Day, we called out the CAGRs mode of power 5% to 7% largely by maintenance-free conversion. Energy Systems, 6% to 8%, Specialty 10% to 12%. Our new ventures, which is largely ESS, so heavy lithium focused, we called out $400 million to $700 million by fiscal '27 but being in really early stages of a ramp. So that 8% to 10% average, even if you eared on the low end and said 8% CAGR. And that ignores that incremental volume that Mark talked about that would get you to 25 gigs by the time this plant was operational. So our concern is not so much where we have offtake agreements. It is going to be enough capacity. So we're trying to go into this conservatively. This year, we are in the early stages of our lithium ramp, but '25 will probably be about 3x what we sold in '24. So we're -- we think this is really the perfect time for us to be kicking off this plan.

Chip, and just one -- just to put a minor clarification. Andy referenced offtake agreement. That's internal to EnerSys. I just want to reiterate that this plan does not call for the sale of any of these cells outside of the EnerSys product portfolio or channels.

Our next question comes from Greg Wasikowski from Webber Research.

Can you hear me okay?

Loud and Clear.

Well, thanks again for doing this. It's good to see the tech talks back on the calendar. First question from me guys is just asking about the operational ramp period. So once you're technically operational, how long do you expect it will be before you reach the 5 gigawatt hour run rate? Are we talking more weeks, months, quarters?

It will be quarter. Mark, do you want to -- do you have that ramp schedule in front of you as to kind of like post launch when -- how long it's going to be until we get to the 5 gig?

Yes. I think post launch, Dave, we're looking to get to a gig within the first year and then ramp thereafter to be fully operational within 18 to 24 months, at the 4 to 5 gigawatt hour capacity.

Greg, is that what you were looking for?

Awesome. -- helpful. Yes, perfect. And then you kind of already touched on this, but with the 3- to 4-year time frame, between construction and then like operational ramp, how are you guys thinking about technology advancement in that period? Is it something that you think you'll be able to kind of seamlessly work into your construction plans? Or is there any sort of like complications that you could run into by just simple technological advancement at a high rate over the next 3 to 4 years?

Right. I'll start with my thoughts, and then I'll let Joern sort of weigh in. He's much closer to the technology, what's in the headlights. He's very close to that. From my perspective, we are an energy systems solutions provider. So in terms of what our customers are looking for is it's a highly integrated solution. And one of the things that's most important to me with this ability to source our own cells is the way for us to maximize the value by the integration of all the software, the hardware, the mechanical packaging and the ability to control all that gives our engineers a tremendous capability. So as I foresee the road map we've laid out and the cell chemistries we've chosen, given that we're going to be an energy solutions provider across our 4 lines of business, I have a tremendous amount of confidence. And certainly, there is some flexibility within the manufacturing equipment to alter or change the chemistry now if there's something -- and this is what I'll let Joern address if there's any sort of imminent strategic change. I don't know how quickly we could adapt this equipment. But that's -- we would have made this investment had we thought that there was anything within that time horizon. Joern, can you sort of comment on kind of a major technology shift as it relates to this production equipment?

Sure. Of course, Dave. So what we're seeing in the headlines is obviously a lot of cost down motion that's occurring -- and one way that we're safeguarding it is that a lot that depends upon the production is the humidity and the drive room capabilities that you're putting in place. And so since we're using a high nickel-based chemistry, we already have a fairly high dry room capability. Meaning that if we want to switch to other chemistries, say something new comes down the road, it allows us to do that without creating strong additional investment had we not gone this route. So -- but we are constantly -- we're very vigilant looking at new types of chemistries that are becoming available. And -- but what's most important is that we derisk this, that we look at it holistically from a supply chain perspective and not just hunt down on the most highest performance. That's not what our customers want. Our customers really want energy density and reliability of those systems, and that's exactly what we're building to. And as Dave mentioned, if we can start from that electrochemistry, build up and optimize up right through the system stack, this gives us tremendous opportunity in the market space and the high degree of uniqueness.

And Greg, just one other final thought on the topic. I've been in this business now for 35 years. And most of the customers are looking for stability and reliability in their supply chain. And many of the applications, especially in Mark's area, it's decades before the customers make any sort of major shift. So the stickiness is one of the critical elements of this proposal because the customers can't get that level of stickiness from the electric vehicle cell manufacturers. They're constantly chasing vehicle range. And it's frustrating for the folks that especially in the defense areas that don't need those sort of changes every year that can't handle them when you go through mill spec and all the different approvals. So the stability and reliability is part of this whole business proposition.

Got it. Perfect. One more, if I could. This might be a little premature, but I wanted to ask about expansion, of course. Is there space for expansion in facility beyond that 5 gigawatt hour run rate? And then more specifically, just thinking about it from the non-DoD business versus the DoD business, if the -- if your non-DoD customers want to expand or have needs for you guys to expand, is there a room in the current facility? And then alternatively, if that DoD business expands or doubles or something like that, does that cut into what you're thinking about for your internal expectations for what you have left over in the facility? Or could you use the space on the current site? Does that make sense?

Sure, it does. And I'll start, and I'll let Mark kind of fill in the details. The part of the factory right now, as we alluded to, as or mentioned earlier in the prepared remarks, is dedicated to a certain cell type. In the long run, we want to move as much of our business, including the DoD business and DoE business into the EMS 1 cell that you're in reference. So we've specifically designed that cell to reach is broadly, including Mark's end markets as possible. But in the meantime, we needed the capability to manufacture a certain cell that the Department of Defense is really wants to make sure they have domestic supply chain on. And then geographically and within the constraints of that piece of property, Mark, we can expand beyond it to 8 to 10 is where we think we max out on that piece of property. Are those numbers right, Mark?

Yes, that's right, David. So when we did the site selection, we had in mind that we wanted to be able to basically duplicate the current facility that we have outlined on the site that we have. So we have the physical space to do that in that greenfield site that we have purchased.

And Mark, just -- what percentage of the footprint of the operation is like would you say is dedicated to the cell assembly for this particular cell that the government is looking for. It's not a very big percentage of...

Less than 15%, Dave. It's a small percentage of the current facility.

Yes. Exactly right.

Single digits.

Yes. So I just want to make sure you had that clarification as well, Greg. It's not a significant part of the footprint of the factory.

Our next question is from [ Andre Evans ] from Oppenheimer & Co.

Andre from Oppenheimer dialing in for Noah. I was hoping for a little bit of details on the excellent supply chain sourcing perspective of what the main decision points you still have to work through are? And how do the tariffs kind of impact those decisions?

Right. Well, we'll certainly -- we'll start with the tariff piece. The recent tariff announcements have only raised the bar higher for the importation or import of lithium-ion cells from China. So as you look at our business model, it just makes it more compelling as the buy versus make. Of course, tariff decisions can change. And so you don't want to put all your eggs in that basket. I think as much as the tariffs is part of the narrative or discussion with the customers, I would say coming out of COVID and all the supply chain disruptions just shortening the supply chains in general beyond the specific geopolitical issues with China are equally important. So there's -- it's not just Mark's customers that have reached out to us and reached out to me personally about having a U.S. source of non-EV lithium-ion cells. I think there's a lot of excitement about this project beyond that specifically. And as it relates to the supply chain, that was a massive -- a significant portion of the process with the deal E in their selection of the recipients is what we're proposing in terms of the viability of long-term supply chain and as much of that as being domestically sourced as possible. So Mark, do you want to kind of weigh in on some of the supply chain discussions you had along the way and address any of other issues Andre may have brought up?

Yes, I think so, Dave. So a couple of things to keep in mind is when we responded back to the DOE, as Dave mentioned, one of their main criteria was the solidification of our supply chain. So we have visibility now for what we call an FEOC or Foreign Entities Of Concern supply chain compliance, which basically is domestic and NATO country compliance for all of our raw materials and components to go in. That being said, we're going through testing on those materials to make sure we have 2 sources for each. And some of those materials were actually created through a lot of the recent investments and expansion in the U.S. to provide raw materials into our products that are domestic source. So we have visibility to that. What we probably get more concerned, and we're working through that now, is the raw materials to those suppliers. So the true mining element of the materials and where that's coming in. And we've engaged a company called Circular, which actually help us to really dig into our supplier supply chains to make sure we have visibility all the way up through to our end product of where those raw materials are coming from and that we have an ongoing source of supply for those that is compliant with the Department of Energy. So a lot of work has been done there. I feel like we made a lot of progress, and that's really the key for our success over the next 12 months to get that supply chain completely solidified and able to execute on.

Very helpful. And what would you expect to be the impact of the plant on corporate margins once you're fully ramped? And why?

Andy, do you want to do you want to -- just speak in on that?

Sure. Happy to take that. Well, obviously, there's 2 major drivers of the benefit that we have here and that is the make versus buy as well as the incremental business that we expect from the DoE. So this is a net positive make versus buy. So obviously, the implications of that Andre, would be favorable impact to margins. I mean, while Dave mentioned supply assurance is a key piece of the consideration, we said we weren't going to move forward unless this actually reduce costs. Our IRR is conservatively in the mid-20s. We have intentionally put a high amount of contingencies that we built into that we were hoping to manage to not need both on time as well as on cost. So we recognize this is a multiyear project. So we fully expect this to have a nice benefit to margins.

And just, Andre, one of the things that Andreas, who's very much responsible for the construction of the factory and is leading our effort. He's been through this a few times, and he understands that we absolutely have to keep this as lean as possible with a kind of a frugal mindset as it relates to the buildup and the ramp-up and the hiring. So there's a tremendous amount of focus in effort through the SteerCo and especially through Andreas, to make sure that we manage incremental cost for this project as carefully as possible and certainly in line with what we've included in our ROIC model to make sure that the 20% is absolutely guaranteed in terms of the ROIC impact of the project.

Next question comes from Tyler DiMatteo from BTIG.

I wanted to follow up on the capacity of the 5 gigawatts. I mean obviously, there was a certain level of demand you had in mind when you guys came out with your initial capacity thoughts. I guess I'm curious, though, in terms of lead times and how much time in advance you would need to in terms of demand to then go beyond that 5 gigawatts, I mean, what would that time line be like if you wanted to expand and how much visibility would you need in terms of that time line as you kind of think about future demand beyond that initial capacity?

Yes, that's a great question. I think -- and Mark probably has a little bit more color in terms of what lead time the construction folks would need and what time. And I would think Mark, I would think the long tent pole of that decision would be the building. I think we could be ordering the process equipment inside of that time horizon. And I don't think it would -- these are the kind of decisions I think we would know before this first phase is completed anyway. I think we would have visibility or a sense as to whether or not we were going to exceed the capacity of this factory by then. But Mark, do you agree that, that -- or maybe Joern, you want to weigh in, too. Do you guys agree that it would be the building expansion that would be the longest lead time? Or do you think some of the equipment has longer lead time?

I can jump in and then Joern jump up in on equipment. But from -- just from the facility side, one of the things that we were most concerned about was just having the power for the facility for that site because that is the longest lead time. If you have to put infrastructure in from a power perspective, just to have the incoming power to run a facility, that is the longest lead time. So we don't have that issue. So you're right, Dave. The next issue is just the building of the equipment. And right now, it looks like just the facility build time would outweigh the equipment, but I'll let Joern jump in as well.

I think on the equipment side, we're getting great support from our partner, of course, with Verkor and able to access their equipment manufacturer. At that point, we would have already ordered equipment if we wanted to choose to expand. So being that that new relationship would have matured, we would have then stronger understanding for those lead times moving forward. I think the only dynamic that comes into place is what's happening in the lithium world at that time. If there is another boom that's occurring with multiple factories that has a potential slowing things down.

Joern, I was just having the same thought. So right now, equipment lead times are not terrible. But you're right. You just don't know what's going to happen at that -- in the future. So -- but I think with confidence, Mark, how long would it take you? Once we had a Board approval to do an expansion, how much advanced notice do you think the team would need?

The mode we are now with the existing equipment, I think it would delay us anywhere from 12 to 18 months and not delay us, but the additional capacity would take another 12 to 18 months on top of where we are today. The sooner we make that decision, the faster it is to turn, obviously, as we'll be expanding with the current environment, the current construction company today. But yes, that I think 12 to 18 months is a realistic time. If we're in this process over the next few years to expand it, that seems realistic to me, but that's something we'd have to dig into.

Yes. I think it'd probably be closer to 18 months, but just to be a little bit more conservative. Is that what you were looking for? Is there any additional color you need?

Yes. No, that was great. Thank you. Really appreciate the comments there, guys. And then just a follow-up on that. As you think about kind of the capacity there, obviously, you have the DoD taking a specialized line in the facility. But I'm curious, just more broadly speaking, how do you kind of think about prioritizing that capacity across the different lines. And obviously, a lot of that's going to be driven by demand, down market. But I'm just curious, what is that kind of decision-making process look like in terms of how you allocate resources, maybe beyond the demand component across the various business lines?

Right. Well, I think you should -- and we can dig into this detail with your team whenever you want to, as you kind of look at can't do it today. But if you look at the plant layout drawing and the process equipment, we will modularize a lot of these decisions. But the -- some of the equipment comes in specific gigawatt hour chunks like the coating lines, for example. So I think in terms of what you'll see right away is we will match the equipment as closely as we can. But I think the main coating line is the big chunk, Mark and Joern, in terms of the investment. And we'll -- that will be priority 1 is to get that running. And then we will have at least 1 or 2 of the prismatic cell assembly lines in as a priority and then the cell line for the DoD is going to be going in kind of priority. And then we would just continue as we ramp, we would just continue to cut and paste additional lines, calendering lines, stacking lines to meet the production requirements. So we'll modularize the spending as best we can to match, but there's just a couple of big chunks like the cell assembly line for the DoD, the coating line. Those are the biggest chunks that will be priority one. Do you guys agree? Did I miss anything?

No, I agree with you, Dave. And I think just in terms of prioritization out of the facility, we live this every day in our Warrensburg facility, where we sell 60 batteries on the lead acid side and our Odyssey products and others. So we have a lot of experience in being able to optimize defense priorities and commercial priorities out of the same facility. And I think that's what gave the DoE a lot of comfort level with us as they chose us going forward.

So any additional comments, color that you require? Any additional questions? Moderator?

Any questions flocked in the queue?

Next question comes from Brian Drab from William Blair & Co.

Can you hear me? Everything went quiet for the last 30 seconds.

We can hear you now.

I can't hear anyone.

I can hear you, Brian, but I can't hear [indiscernible] for the moment. So we're just checking on that.

Okay. Yes, I can hear you, but I can't hear anyone else.

Right. One second, won't be long.

Testing 1,2,3.

Dave, I hear you.

Okay. So the speaker line is not connected to the ...

We might be live.

I think the audio is very garbled. I'm sorry, on my end. I can't here if anyone's speaking. I just had a few questions, how many different equipment manufacturers roughly are you dependent on in sourcing equipment for this plant?

That's a great question for Joern or Mark. I don't have that number ahead of me. I would think it's under 20.

I know it's not a specific number, but even like is it closer to 100? Or is it now I'm just trying to get a sense for it.

Mark, do you want to ...

I will take this one, if you wish. Major suppliers, I would say, for the equipment, say for the coating, calendering, ovens and so forth. Finally, in the formation area, filling area, you're looking at less than 10 different suppliers for that. Unfortunately, outside of China, there's not just one supplier that will go end to end for that type of equipment. So we do have to use a number of them, but we try to minimize that as much as possible.

So Brian, when we order an assembly line, for example, we're not going to order cylinders from this person and conveyor rollers from this person. These will be integrated lines that are delivered from credible, as Joern said, non-Chinese suppliers.

Right. Okay. So you're ordering an assembly line from one like system integrator or from Verkor or through Verkor?

Through their content. But yes, through a system integrator, correct, you got it.

Yes. And that system integrator is going to be dependent on putting together these pieces of equipment from like 10 different suppliers. Is that how to think about it?

No, I think that we'll be dealing with 10 system integrators. And then those system integrators will be dealing with hundreds of sub suppliers that they source from.

Right. Okay. Okay. And then it looks like you made the decision to -- since the initial announcement, which is a little over a year ago to increase the capacity from 4 to 5 gigawatt hour and the cost is up a little bit. What is part of the thinking around that maybe that you're so successful in winning some of this incentive subsidy? Or what else went into that thinking of expanding that capacity?

I think it's mostly the nameplate capacity of some of the production equipment. So it was just the 5 was a number that was associated with the equipment that Verkor uses for coating. That was the denominator. So it wasn't 4, it was 5 was the number. So we scaled accordingly. There's been some -- since we first talked about the project, there's been a lot of moving pieces on CapEx. It's not really the gigawatt hours that's been driving things as much as it's been inflation. And various other cost-related issues, but the nameplate capacity of the building is mostly a function of the coating line. Joern and Mark, is there any additional -- as it relates to the CapEx numbers that we've tweaked over the last few quarters? Is there any other major -- besides the inflation piece or Andy, is there anything else to ...

I can add a little bit to that as well, Dave. So, Obviously, Brian earlier, it was -- we were using rough rule of thumb right now with our specific CapEx requirements, we spent a lot of time in a lot of research, also some projections. So you can imagine, if this is going to be over the course of the next 4 years, we've built in potential inflation. And we also have included a sizable contingency, which we hope to not use, but our goal is to under-promise and over-deliver. So certainly, contingency, dedicated requirements for the DOE to strengthen our relationship with them and meet some of the requirements they were looking for as well as the past and projected inflation.

Okay. And then if I could ask 2 more quick questions. So Andy, while I got you, the gross margin on this -- was asked earlier, what's the margin impact of this plant after it's fully ramped. But at least want to make sure that I understood this clearly that I understand that it's clearly advantageous to make versus buy, and that will be beneficial to margins. But how is the gross margin expected to look for this product coming out of this lithium plant, in terms of gross margin relative to your corporate gross margin?

I hesitate, Brian, the reason that we're not giving that data, as you can imagine, we're looking out 7 years. So a lot of the raw material cost pass-through is to be determined over what happens. And the way we've modeled that is it would certainly impact our cost as well as either our sourcing cost or our production cost. So to give an absolute number on margins, we feel it would be a little bit misleading. For us, it was the delta in the savings that we have. And we've looked in the past, I know we've spoken many times about the margins we have flooded versus simply pure lead versus lithium. And this will be a key factor to really making our lithium margins more in line with our other maintenance-free offering of the template you are in.

Got it. And then my last question is we talked a lot about coating today. I guess there's probably several different types of coating, but is this a coating of the separator material, like a ceramic coating? That's the only coding I happen to be familiar with, mike what kind of coating we are talking about?

This is the application of the act of the cathode and the anode active materials onto the metallic strip. So there's an aluminum and copper strip. Joern, if I mess up, fix me. But then the -- in a very precise way, you coat these active ingredients that are used in the anode and the cathode onto these metallic strips. And it's something we do already. but we've just never done it at the speed and magnitude that's discussed here, and that's why we felt it's so important to go find a partner who's more credible in Giga scale versus us.

Joern, is there a separator manufacturing component to this facility in terms of that part of the cell production process for this type of cell?

No. There'll be a supplier that we have and that supplier and those separators will become pre-coated with any type of ceramics or the doping agents that we would need. So just to emphasize on a base point, and as I mentioned in my remarks, the coating process is the most challenging of all when it comes to lithium, and that's why also the -- why we chose Verkor to derisk it. we needed that experience to come in-house.

There are no further questions at this time. I would now like to turn the call over to Dave Shaffer for closing remarks.

Well, that's -- I just want to thank everybody for joining us today. And thank you for your interest in EnerSys. We're excited about our lithium-ion cell giga factory. It really is a critical enabler for what we consider an ambitious growth strategy. We intend to more move quickly to advance on this project. And of course, we're going to keep you updated regularly as we progress. We look forward to speaking to you again on our earnings call in November. So everyone, please have a great day.