Exide Technologies F2Q09 (Qtr End 09/30/08) Earnings Call Transcript

| About: Exide Technologies (XIDEQ)

Exide Technologies (XIDE) Q3 2008 Earnings Call Transcript November 7, 2008 10:00 AM ET

Executives

Gordon Ulsh – President and CEO

Barbara Hatcher – EVP and General Counsel

Phil Damaska – EVP and CFO

Analysts

Kathryn O'Connor – Deutsche Bank

Craig Irwin – Merriman

Marc Lawrence [ph] – Solace [ph]

Oliver Corlett – R.W. Pressprich & Company

Milan Gupta – South Point Capital

Brian Gilmore – Westlake Securities

Kevin Smith [ph] – View Street Capital [ph]

Tom Koch – Turnaround Capital

Cory Armand – Rice Voelker

Operator

Good morning, and welcome to the Exide Technologies second quarter 2008 fiscal year earnings conference call. My name is Charday, and I will be your conference operator today. Exide’s earning release can be found on the company’s Web site at www.exide.com. Additionally, presentation materials for today’s earnings conference can be accessed on the company’s Web site by clicking on the Investor Relations tab, and choosing presentation and webcast on the right side of the screen. All lines are been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question and answer period. (Operator instructions).

As a reminder, ladies and gentlemen, this conference is being recorded today, November 7th, 2008. I would now like to introduce Gordon Ulsh, President and Chief Executive

Officer of Exide Technologies. Mr. Ulsh, you may begin your conference.

Gordon Ulsh

Thank you, Charday. Good morning, and thank you for joining us today for Exide’s fiscal 2009 second quarter results conference call and webcast. With me today is Exide’s Executive Vice President and Chief Operating Officer, E.J O’Leary; our Executive Vice President and Chief Financial Officer, Phil Damaska; and our Vice President and Treasurer, Nick Iuanow as well as our Executive Vice President in General Counsel, Barbara Hatcher. Barbara will now receive our Safe Harbor’s Statement. After which, we will provide details of Exide’s second quarter results followed by a question-and-answer period. Barbara?

Barbara Hatcher

Thank you, Gordon. Before discussing our fiscal 2009 second quarter results, we need to remind listeners that certain statements on this call may constitute forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. And as such, they involve known and unknown risks, uncertainties, and other factors that may cause the actual or expected results of the company to be materially different from any results expressed or implied by such forward-looking statements.

These factors are enumerated in further detail in the company’s most recent Form 10-K filed on June 9, 2008, and on Form 10-Q, filed yesterday with United States Securities and Exchange Commission. In addition, any statements made during this call are made as of today, and the company undertakes no obligation to update any of these statements in the future. Gordon, back to you.

Gordon Ulsh

Thank you, Barbara. I would describe our fiscal 2009 second quarter as continuing success with our cost production initiatives, operational improvements, implementation of best practices, and attention to effective pricing. We’ve continued to have several non-operation factors that affected our financial performance for the second quarter and year-to-date period. And Phil will discuss these later in the call.

Excluding the impact of these, our adjusted net income for the second quarter was $18.5 million or about $0.24 per share. This compares to adjusted net loss for the fiscal 2008 second quarter of $3 million or $0.50 per share. Our adjusted net income for the first six months of this fiscal year was $31.5 million or $0.42 per share, compared to an adjusted net loss of $7 million or 11% per share for the prior period.

Operationally, our business has continued to develop improving results with consolidated adjusted EBITDA of $68.2 million, up from $50 million in the second quarter of last year. And we also generated positive free cash flow of nearly $46 million for the quarter as compared – for the period as compared with the free cash flow earned in the prior period of $40.8 million.

Before I begin our performance – discussion of our four business segments, slide four provides a segmentation of our global revenue. As has been the case pretty consistently over the last several years, our current year revenue consists of 61% generated from our transportation segments and 39% from our industrial energy segments. Within our global transportation business 54% of revenues are from our Americas division and 46% from Europe and rest of the world. At a different way, 80% of revenues from our global transportation segment could generate – operator, do we have someone on the line here?

Operator

No, sir.

Gordon Ulsh

Okay. Again, kind of different way, 80% of revenues from our global transportation segment are generated through various (inaudible), with only 20% of our OE or original equipment.

From and end market perspective, industrial energy (inaudible) rise of 42% from network power products, and 58% from motor power products. In these more difficult economic times, we believe the diversification of our revenue based continues to be an important asset for Exide.

Before I discuss our segment performance for the fiscal 2009 second quarter, I want to highlight the newest member of our management team. Exide’s new President Transportation Europe, Rest of World is Michael Ostermann. Michael will be joining and assuming his duties for the commercial and operational aspects in this business on or before January 2nd next year. And he brings a range of automotive industry experience and operation experience to Exide. And we are very much looking forward to him joining our team.

Moving on to the division transportation Americas enjoyed the increased, net sales in the fiscal 2009 second quarter as compared to the second quarter of last year despite softening OE values. After market sales began to slow during the quarter due to unseasonably cool weather in August and September. One notable event this quarter is that Exide was awarded Supplier of the Year by the VIP Retail Chain of the North East.

Additionally, they began experiencing quotation and sales increases of our ATM Group 31 product line with heavy duty plate customers and OEs. Industrial energy America showed continued improvement with both higher sales and gross margin in the second quarter, driven primarily by the network power business, and in particularly, the wireless customer service base. Both network power and motor power experience a slow in orders during the near end of the quarter as the economy became more stressed. An indication of the slowing economy is supported by the recent double digit drop in OEM truck sales supported by the industrial truck. Okay.

On a brighter note, this quarter marked the 11th anniversary of our metal and copper Alaska, large energy storage system. In 1997, this lead acid battery system replaced an inefficient, noisy, and environmentally unfriendly 3.3 megawatt diesel generating system bringing power stability to this remote island using a 1.2 megawatt absolute battery. This system eliminated the need for approximately 1.5 million gallons of diesel fuel each year saving the community millions of dollars. After more than a decade of successful operation, the battery has recently been replaced with our next generation Absolyte GP product.

Transportation Europe and rest of the world experienced lower net sales in margins for the fiscal 2009 second quarter due to both lower volumes in both OE and after market channels in Western Europe and Australia. We’re pleased to report that we received the After-market Innovation of the Year 2009 Award from ITM, the UK Institute of Transportation Management for our Exide evolution program.

Exide evolution is a system to help consumers select the most appropriate battery product based on their driving conditions and driving style. Industrial energy in Europe and the rest of the world increased net sales on somewhat lower motor power volumes offset by higher unit volumes in network power with improving margins. This is due to effective pricing and continued focus on cost productions from our take charge initiatives.

Turning to slide six, automotive battery technology is advancing toward AGM or Absorbed Glass Mat technology, particularly in Europe due to new Dollar Legislation to reduce CO2 emissions by 2012. Exide first introduced AGM products for the industrial markets about 25 years ago. And we’re clearly excited to be able to de-leverage our significant AGM technology in the emerging market of start-stop in the evolving hybrid applications. We are introducing several technologies that will lead to products for these markets. Utilizing an improved lead acid technology, we’re already shipping batteries for start-stop applications in Europe.

For the last seven years, we’ve been shipping spiral round AGM for automotive applications and will be supplying AGM products for start-stop applications within the next 12 months. Our current production capacity is based in North America for flat AGM and in Europe for both flat plate and spiral bound AGM. And we are expanding this capacity significantly over the next two to three years in both Europe and the US.

As reflected on page seven, we’re very excited about our acquisition of the principle lithium ion technology assets that Mountain Power announced yesterday. This transaction is consistent with our R&D strategy to accelerate the development of other battery chemistries and energy storage capabilities. Mountain Power specializes with design and commercialization of high performance, large capacity, rechargeable lithium ion batteries primarily for telecommunications, utility, industrial, medical, and military markets. These markets where we have a strong presence with our lead acid battery products so it fits nicely with our current commercial structure.

As many of you may know, lithium ion technology is not the same in every application. Mountain Power lithium ion technology uses a proprietary battery management system that links together multiple cells, with each cell having safety safeguards. The battery managed resistant consists of hardware and proprietary software that control all aspects of the battery’s operation, including remote communications.

As we’ve said previously, we’re committed to increasing our development spending in both lead acid technologies as well as alternative chemistries for energy storage. And this is one step in that journey.

Turning to slide eight, we continue to estimate capital investments that are approximately $100 million during fiscal 2009. Capital investments amounted to $24 million during the second quarter, which brings our fiscal 2009 year-to-date spend to a total of $36 million. And the year-to-date spending relates to approximately $90 million of projects, which have been approved as of September 30th, this year.

Two manufacturing technologies that we are expanding our implementation are fast formation and continuous casting in several of our manufacturing facilities. Continuous casting technology is used to cast the leg grids for both positive and negative plates in a battery cell. The fast formation technology is used to charge these cells of the battery. The formation technology reduces process time, lead time, eliminates internal acid mixing, provides automatic control of formation parameters, and has efficient temperature control features, to name a few of its advantages.

Reflected on page or chart nine, restructuring investments for the first six months of fiscal 2009 were $12 million. If you recall, we previously announced that we expect restructuring cost to exceed $20 million for 2009. Today, we’re revising that figure to an amount in excess of $30 million. These restructuring investments are expected to result in annualized savings in excess of $50 million.

The increase in our estimated restructuring investments is to recognize cost associated with the reduction force program in our transportation Europe and rest of the world segment. The program is intended to identify approximately 300 positions for eliminations. And these are in addition to an estimated 300 positions being eliminated primarily in our industrial energy Europe business.

In addition to these position eliminations, we’re evaluating other restructured initiatives to better align our production capacity with the softness we’re seeing in our markets. As previously communicated, we believe the greatest opportunity for these initiatives continue to be in both European segments.

Reflected on page nine is a recent investor event, and as many of you are aware that US Environmental Protection Agency is tasked with providing regulations for maintaining our nation’s clean air. On October of this year, EPA lowered the national ambient air quality standard for lead from 1.5 to 0.15 micrograms per cubic meter of air. This new rule will be incorporated into state implementation plans, which are administrated by state regulatory agencies. EPA sets the minimum standards, and state agencies enforce and regulate these standards. While we are reviewing and assessing the potential impact of the new rule may have on our operations, we will not know the full impact on our operations until the various states act to adopt or incorporate the new standard.

Furthermore, the likelihood of the implementation of the rule as recommended has not been determined. States are required to meet the standard no later than January in 2017, but may accelerate to an earlier date. It has always been Exide’s desire and intent to operate responsible in compliance with applicable regulatory requirements. Exide has been handling lead for more than a hundred years, and we’re very aware of its potential hazards. We place a high priority on maintaining compliance and protecting people inside and outside of our facilities, and we’ll continue to do so.

Our fiscal 2009 second quarter provided us with increase sales and margins as we continue to focus on executing our business strategies. We recognize that the current economic environment certainly provides headwinds for the remainder of fiscal year. However, we remain committed to improving efficiencies and reducing costs, deploying our capital effectively, and basically controlling the things in our business that we can control.

Now our Executive Vice President and Chief Financial Officer, Phil Damaska will provide you with financial details of our fiscal 2009 second quarter. Phil, go ahead.

Phil Damaska

Thanks, Gordon, and good morning. Before I begin, I want to remind you the Exide uses adjusted EBITDA as a key measure of its operational and financial performance. We continue to believe it provides a more useful measure for Exide at the present time than does net income.

We defined adjusted EBITDA as earnings before interest, taxes, depreciation, amortization, and restructuring charges. Our adjusted EBITDA definition also adjusts reported earnings for the effect of non-currency re-measurement gains or losses, the non-cash gain or loss from evaluation of the company's pension liability as well as impairment charges gains or losses on asset sales and the one time debt extinguishment charge incurred in the fiscal 2008 first quarter. We also provide a summary of our calculation of adjusted earnings per share in our press release to exclude the impact of certain non-operating items impacting our financial statements with the intent of providing information more comparable to those some of our major customers, our competitors, and peer group companies.

Please refer to the press release and the tables at the end of this presentation for our reconciliation of adjusted EBITDA and EBIT for a breakdown of net sales and adjusted EBITDA by segment, and for a summary of our adjusted EPS calculation and our definition of free cash flow.

As Gordon indicated, our fiscal 2009 second quarter’s result from a certain continued operations operating performance improvement. As seen on slide 13, net sales, gross margin, adjusted EBITDA, and free cash flow all improved with the prior periods.

For our fiscal 2009 second quarter, net sales increased $52 million to $914 million. A weaker dollar against most foreign currencies accounted for approximately $14 million of the increase. And excluding the impact of foreign currency translation, net sales increased 1.4%. This is due principally to effective pricing in all of our business segments offset by buying softness in most of our segments. Adjusted EBITDA for this current quarter improved 36% to $68 million, from $50 million in the fiscal 2008 second quarter. And we generated free cash flow during the quarter of $46 million, compared to a free cash flow burn in the prior year period of $41 million, while almost doubling our capital expense as compared with the prior year period.

Slide 14 provides reconciliation of our net loss to adjusted EBITDA for the second fiscal quarter with comparative data from the prior year second quarter. Although we reported a net loss in the current quarter, we continue to be encouraged with improving operating performance as measured by adjusted EBITDA. The improvement in this metric is driven by an increase in gross profit to 17.7% of sales or $162 million, as compared with a $132 million or 15.1% of sales in the prior year period.

The improvement in margin quarter-over-quarter continues to be driven by improved plant and distribution productivity as well as effective pricing to offset higher input cost and somewhat lower volumes reflecting the difficult economic conditions these days in North America and Western Europe.

I would now like to focus our attention on a couple of significant items affecting our net results. On slide 15, you will note a negative effective tax rate for the current quarter resulting from the recording of a tax provision on a pretax loss. Major causes of these are continued pretax losses in certain foreign jurisdictions, in which we are not able to record tax benefits. These include Australia, France, Italy, Spain, and the UK. And the pretax losses in some of these jurisdictions increased during the current period. The result of restructuring initiatives designed to improve results in future periods. Another item which causes an unusual relationship of taxes to pretax results is the unrealized gains or losses resulting from the mark-to-market of our world’s liability. Given these factors, it is likely that our effective tax rate will continue to be higher than normal success prior rate and will be volatile in the future.

As a result, we continue to believe cash factors to be a more meaningful measure at this time. We are revising our previous estimate of cash taxes for fiscal 2009 from $25 million to $30 million to $15 million to 20 million. The reduction is principally the result of the identification and implementation of various tax plane strategies designed to minimize cash taxes.

Next ,I would like to take some time to explain to discuss and describe our currency re-measurement loss or gain, which is reflected in other income expense in our condensed consolidated statement of operations. You will note on slide 16 that this item had an unfavorable year-over-year impact on pretax earnings of $37.3 million and $38 million for the three and six-month periods, respectively. These swings in earnings are the result of the dramatic changes in the relationship of the US dollar to the Euro as well as the Australian and New Zealand dollars, and their impact in the value of certain assets and liabilities recorded in the books of certain of these – of our global distributions.

More specifically, as part of our debt refinancing in May 2007, a portion of the term loans borrowings in Europe were in US dollars. In addition, in the past, the US parent has funded certain foreign subsidiaries by providing them with inter-company loans in foreign currency resulting in foreign denominated assets on the books of the US energy. These non-functional currency assets and liabilities must be re-measured into functional currencies in the respective entities in each reporting period with the change in the value caused by exchange rate movements reported in the income statement.

To mitigate some of this volatility going forward, we have hedged the European dollar term loan to its 2012 maturity, and capitalized approximately $50 million of the inter-company debt. We still, however, have other charges of foreign denominated inter-company debt outstanding, which could continue to result in the bulk of currency re-measuring result in the future.

Turning now to slide 17, where I’ll discuss our four operating segments. Despite a decline in OE volume due to continued reduction of curbed builds, transportation Americas net sales for the 2009 second quarter increased 14% to $316 million, compared with $276 in the same period last year. The increased reflects favorable price actions on slightly lower overall volume.

Gross margin for the second quarter of fiscal 2009 was 17.7% of net sales versus 18% in the same period last year reflecting a slightly lower sales volume as well as lower margins and third party lead sales reflecting lower lead prices with the late reduction and core cost to produce the lead. Even with a slight decline in gross margin percent, the business continued to show a positive year-over-year operating performance as measured by adjusted EBITDA.

Slide 18 provides a picture of our transportation Europe and rest of the world segment. And as you can see from the table, the segment’s operations have been impacted by the slowing economy in Europe as well as Australia and New Zealand. Net sales for the transportation Europe and rest of the world segment were $245 million in the fiscal 2009 second quarter versus $257 million in the capital period last year. Net sales excluding the favorable impact of foreign currency translation of $18 million decreased by approximately 11.5% versus the prior year period. The decrease was mainly a result of lower unit volumes in both the OE and after market channels partially offset by favorable pricing actions.

Adjusted EBITDA in the fiscal 2009 second quarter declined to $3.4 million from $16.3 million in the fiscal 2008 second quarter, primarily due to overall lower unit volumes and higher non-lead lobby cost partially offset by favorable pricing actions.

As Gordon tackled on earlier, we have taken some initial actions to address the performance of this business. These include a reduction in force in our Australian manufacturing facility and the implementation of our reduction in force program across Europe. We are evaluating other restriction initiatives as we speak.

Net sales for the industrial energy Americas increased 5% to $77 million in our 2009 second quarter versus $73 million in the prior year quarter. The increase in sales over the prior year is due to strong network power sales as well as favorable pricing actions in both network power and motor power markets, partially offset by lower units sold in the motor power market.

Gross margin for the current quarter compared with the 25.6% in the previous year, the result of good mix and improving productivity. And adjusted EBITDA rose 27% to $15.5 million in the fiscal 2009 second quarter from $12.2 million in the 2008 second quarter despite rising non-lead commodity cost.

Turning to the next slide, slide 20, fiscal 2009 second quarter net sales for industrial energy Europe and rest of the world increased 8% to $274 million, compared with $256 million for the capital period last year. Pricing and favorable foreign currency were the primary contributors to the increase. Network power sales continued stronger in the quarter, and were partially offset by a reduced volumes in motor power.

Gross margin in the 2009 second quarter was 20.3% versus 12.4% in the same period of 2008 reflecting the full value of favorable pricing actions and continued productivity improvements to our take charge initiative. The improvement gross margin of adjusted EBITDA for the quarter to $21.4 million, compared with $4.6 million in the second quarter of 2008.

Finally, a few segments on liquidity and debt position as of September 30th, 2008. The company had cash and cash equivalents of $170 million, and availability under the bank revolving vault facility of $147 million. Net debt as of September 30th was $522 million, $59 million less than that of June 30th, 2008, primarily reflecting our cash – our free cash generation of $46 million during the second fiscal quarter. Our liquidity is further supplemented by availability under various credit facilities in Europe, including factoring facilities. As a reminder, the company has no significant debt maturities until 2012 and has no financial maintenance covenants.

In light of the state of the credit markets, we believe this will – along with our liquidity condition provides the company’s financial flexibility. We continue to be committed to reinvesting in our business to drive improved results. And now Gordon will make a few closing comments before we open the call to your questions. Gordon?

Gordon Ulsh

Thank you, Phil. All of you were certainly aware of the state of the economy. And while the economy does create headwinds for certain pockets of our operations, we believe that our product diversity and the diversity of markets in which we compete do not overexpose us to significant downturns in any one of our businesses. We are committed to executing our long term strategy to grow market share, add new products, and diversify our business portfolio as evidenced by the acquisitions of certain assets of Mountain Power.

We continue to focus on improving margins in all of our business segments and we recognize that we have the opportunity to do so as you’ve heard in the discussion of our planned restructuring investments. We are pleased with the disciplines we have in place to effectively manage cost, pricing, product development, mix of businesses, and our financial strength as we operate in these challenging times.

And lastly I would like to remind you that we’re hoping to investor – we’re hosting an investor day in our Bristol, Tennessee facility on November 18th. Manager presentations will be followed by a tour of the facility. If you’re interested in attending this event, please contact Carol Knies at 678-566-9316. Thank you for participating in today’s call. And now Charday, will be happy to entertain any questions that may be asked.

Question-and-Answer Session

Operator

(Operator instructions) We will pause for just a moment to compile the Q&A in a roster. Please hold for your first question. Your first question comes from Kathryn O'Connor with Deutsche Bank.


Kathryn O'Connor – Deutsche Bank

Good morning.

Gordon Ulsh

Good morning, Kathryn.

Kathryn O'Connor – Deutsche Bank

I was just wondering, listening to the commentary about the end markets in the US versus Europe transportation. It seemed like you guys were saying that volumes in Europe slow down before North America. I’m just trying to figure out why that would be just given the fact that North America has been slowing down for quite sometime and I feel like Europe is lagging North America. Is there a difference in the customers you’re serving? Or are there any explanations to what the differences there?

Gordon Ulsh

I think that’s a fair comment, and certainly the North American OE market have slowed down more dramatically and more quickly than that that we saw in Europe. Our comments may be reflective of both seeing that slow down come, Kathryn, in Europe and OE and the results of some of the customer rationalization that we’ve done in Europe as we have done in North America over the last couple of years. So we didn’t mean to imply that it’s slowed down ahead. We’re just seeing the implications of that certainly later than we saw in North America.

Kathryn O'Connor – Deutsche Bank

Okay. So maybe there was some of that customer pairing in the US as sort of masked because we weren’t having such a decline in terms of North American OE whenever you did those customer kind of bettings?

Gordon Ulsh

Well I think that’s fair reflective.

Kathryn O'Connor – Deutsche Bank

Okay. And then just thinking about the end markets going forward, can you just give us a little bit of guidance in terms of where you think these end markets could go and where they have been in the past that? And we’ve been dealing with the kind of the downturn. If you could just give us some color on where you think transpo OE could go and after market end also industrial motive and network?

Gordon Ulsh

Why certainly. I’m nearly afraid to comment on any sort of forecast for the OE markets as the economy continues to sort of tighten. Not only is the economy coming down, but the availability of credit. I believe that the OE business is going to be soft or maybe facing further decline in North America in line with the trend that we’re seeing. You will wait and see how the credit markets play out the availability of purchasing power of the consumer. But I think that’s going to be a tough market in North America and Europe.

While we’ve seen some slowing in the OE, in Asia, there’re certainly seemed to continue to be a stronger market that we’re seeing and as we kind of indicated earlier that we are working to improve or increase our participation in the Asia markets.

I think the telecomm business in the back of the power supply business is strictly going to be a reflection of cash availability. We would expect normally the cycle of capital spending to return. So I think obviously as we’re continuing to – as we see our business continue to invest in that infrastructure in consolidations of the providers, we’ll se a pick up again as credit opens.

The industrial power plant business both in the OE and the after market level are the most closely tracked on a global basis in terms of GDP. They trail some of the indicators, but it’s easily most likely – most closely linked with GDP and trails at as retail shipments in revenues for now. So I think we’re probably still in for some tough times at those end markets. Hopefully, we’re near the bottom list from the OE side of the business, Kathryn.

Kathryn O'Connor – Deutsche Bank

Okay. And then just a follow up maybe on transportation aftermarket, how should we think about that just given the nature of your product. I mean, can people really put off getting a new battery? So what should we think about that?

Gordon Ulsh

No. We’ve really said that – certainly we’ve seen an unprecedented reduction in the utilization of the aftermarket flea with billions of miles driven being reduced from prior periods. So we know that the consumers are not using their vehicles much. While the use of the vehicles slows down, usage to some extent, the battery sitting around particularly in extremely cold or hot environment also decreases the life of it. So we certainly think it’s more stable. We continue to see increase participation end market from us. And we think it continues to be solid channel force.

Kathryn O'Connor – Deutsche Bank

Okay. And then maybe just on the industrial side for some larger orders. Have you seen any cancellation of orders as of yet?

Gordon Ulsh

I would tell you that we’ve seen cancellations where we have seen telecom or infrastructure investments. We’re not seeing cancellations, but we certainly seen a slowing in the phase of the quoting and the award of the business. Clearly there’s work out there to be done, but I would say it slowed. But not to cancellations not we’ve seen in some economic periods.

Kathryn O'Connor – Deutsche Bank

Okay. And then just maybe in terms of competition as times get tougher, are you seeing anybody act irrationally any of your competitors in the different segments?

Gordon Ulsh

I wouldn’t say irrationally. Certainly the OE business decline has opened some capacity for some other folks to rely more heavily on that channel of the business. We see more activity in the markets. What we really rely on our history, on our ability with our customers to grow their business as oppose to just go out and sort of pick off volume opportunity. I wouldn’t say irrational, but I would say that the competitiveness in the market continues to be pretty heightened.

Kathryn O'Connor – Deutsche Bank

Okay. And then just a maybe a question on investment and your capital structure, given where we are with the macroeconomic side of the story and then you guys within that. You guys are obviously performing better than you’ve ever had and have significant amount of free cash flow. And you want to obviously spend for the future. But how do you think of that in your most recent acquisition announcement? How do you think of that in terms of where we are with the economy? And also just with where your debt is rating, how you sort of looking at the whole picture in terms of acquisitions, capital spending, possibly repurchasing debt and keeping a good amount of liquidity on the book?

Gordon Ulsh

Sure. Good question. And we’ll hand a list of that. I think if it’s all right, Kathryn, I think we need to move on. But certainly as you’ve recognized we worked very hard to strengthen the balance sheet. We’re very proud to where we are from a case close stand point. The availability of capital, I think most people know from looking at public documents we’re being prohibited from going out and repurchasing debt or stock today by our current bank agreement.

Obviously, as the business continues to be sort of soft in terms of the markets having that case on hand is extremely attractive to us. We don’t anticipate until there’s quite a significant stabilization in the markets to consider sort of restructuring that event. But note we’ve had a temporary certain reduction in our net debt. So we think it’s going to be – we think we’re going to continue to stay in the course. Use our money for investing in other acquisitions as opportunity might present themselves or certainly reinvest on these agencies of the business. But I wouldn’t expect that you’re going to see us do anything significant in the way I tried to change the capital structure.

Kathryn O'Connor – Deutsche Bank

Just a follow up to your comment on the documents. The acquisition that you’ve announced yesterday, does that fall within what’s allowed on your credit agreement? In other words I think there’s a cap on the amount you can spend on permitted acquisition. Is the acquisition that you’re doing going to be less than the amount that’s stipulated on the credit agreement, which I think–?

Gordon Ulsh

Well certainly we’re going to stay within the bounds of the agreements. This is this, and this is done. It’s not a huge acquisition, but yes it’s within the agreement, of course.

Kathryn O'Connor – Deutsche Bank

And do you want to give us a purchase price or –?

Gordon Ulsh

No. We’ve not disclosed that amount yet.

Kathryn O'Connor – Deutsche Bank

Okay. Thank you.

Gordon Ulsh

Thanks, Kathryn. Charday?

Operator

Your next question comes from the Craig Irwin of Merriman.

Gordon Ulsh

Good morning, Craig.

Craig Irwin – Merriman

Good morning. Congratulations on a strong performance.

Gordon Ulsh

Thank you, sir.

Craig Irwin – Merriman

First question, really is something I just wanted to ask you if you could respond to – really it’s been said by some investors out there that there was potential for Exide to be selling lead into the MLE last October when it was about a buck 80 and that the decline you’ve seen in lead prices down to about $0.60-$0.65 has eliminated that opportunity. I know what I say about this, but how would you respond to investors about this assertion that made sometimes?

Gordon Ulsh

Well first recognize that sales of the third party lead in the market are very small part of our total revenue. Once again, our battery recycling capacity around the world is fully consumed inside of our – nearly fully consumed inside of our battery business. We’ve said that there’s normally around 6% of our revenue that’s generated by third party sales. Six percent of our lead production – this is consumed by our third party sales. So it just now a significant amount. Yes, we are still selling some product on the MLE. Yes, we’re balancing – if third part MLE sales with the need for totaling conversion in the market. But it’s not a huge part of our revenue. But from the recycling standpoint, we like the dollar a sixty better.

Craig Irwin – Merriman

That makes sense. So of this 6%, is it fair to say that the vast majority of that is on long term fix price or semi-fix price contract that would –

Gordon Ulsh

No. As I’ve said it’s a very slow amount and we move only in the stock market.

Craig Irwin – Merriman

Okay. Okay. Excellent. Excellent. Then just moving over to transportation Europe, I was hoping you might be able to help us understand a little bit better about what happened there during the quarter. I know they’re been some recent changes there, but what can you say about that? And really should we give this a sort of one time in nature or this more sort of a function of what’s going on in the market and what have to be achieved there?

Gordon Ulsh

Well I think there’s three points. Recognize that what we’ve been talking about in terms of the news of the reinvestment dollars in transportation Europe. First of all remember it’s very much of addressing a legacy issue. We have been speaking for the last two to three year that we’ve had higher cost in Europe. We’ve had a bit lower capacity utilization and have been inefficient compared to what we thought we could optimally get into. So we stabilize the business, we put cash on the balance sheet and we’ve been able to give ourselves the tools to go address that.

So the first part of it is addressing sort of a legacy inflation or inflated cost based. Add to that the impact in both pairing down the less desirable or the less margin based customers primarily in the after market. That’s added sort of the volume decline. And then thereby adds to the requirement to right size the sales force. So it’s more a legacy issue where it’s much a legacy issue as it is sort of a reflection of near term. And I understand that the investor based can get a little – it’s not transparent to the investor bases in terms of how we’re addressing that cost.

Craig Irwin – Merriman

Okay. Excellent, excellent. Then in if we can talk about industrial Europe. We saw sequential improvements in margins pretty nicely there even though there’s a obvious weakness in this market. Could you talk a little bit about what’s driving that margin improvement? I mean is this really successful use of the escalators? Or is there something else that’s behind this?

Gordon Ulsh

We remember that we spoke pretty openly and clearly even six to nine months ago about the less desirable position we have in the market earnings wise in that period. And we’ve said that we were working very diligently to get the escalators in and continue to work on productivity. And so couple of what we said about putting the escalators and pricing discipline with the continued improvement we’ve had from out take charge productivity and of course the reflection of largely implemented reduction in force. I think this is a terrific story of understanding the problem, putting an effort in place to stabilize it and executing. It’s a reflection on I think if we go back and look at what we’ve said in the last three quarters, it’s a reflection on delivery what we said.

Craig Irwin – Merriman

Excellent, excellent. And then just touching on transportation North America, the 14% gross sale that earlier suggested pricing is still coming through even though lead is down dramatically. Is that something you expect to persist over the next couple of quarters given the vast majority of the market buys lead on contract?

Gordon Ulsh

Well the vast majority of the market – I’m trying to really understand when you say vast majority buy by contract. We buy cores and we convert that into lead and sell that into the market. And the cost of that product is reflective of current market price. So we believe that we’ll continue to face as in any softer market price competition, but it’s our goal as we’ve said before to maximize the margin we have in the market place. And in terms of the rest of exposure and in terms of lead, we’ve said what escalators and pricing discipline that we don’t expect wild fluctuations to affect the margin. So we’re pretty committed to try and retain that.

Craig Irwin – Merriman

Excellent. And then last question if I may? On the restructuring side, it’s nice to see you increased your restructuring plan for the year. Can you give us a little bit more color on where you’re going to be spending the incremental dollars? And really what you expect to get out of those specific projects?

Gordon Ulsh

Well as I’ve said in total, it looks like it will be up to around $20 million to $30 million. It will give us an annual margin improvement of cost reduction of around $15 million or maybe if that’s higher our annual basis. And we’ve said that it’s primarily in Europe. Although as you can understand as we’ve had some volume fluctuations in North America there’ll be some there. We also have – we’re very aggressive in improving both the manufacturing cost and right sizing the business both in direct and SG&A cost in Asia and again primarily Australia as opposed to other parts of that region.

Phil Damaska

Craig, this is still on the stand. We’ve indicated about 600 positions most of those in Europe, but we also have some on Australia as well. And as Gordon said, in the direct, indirect as well as SG&A areas. So there are across the gamut of our cost structure.

Craig Irwin – Merriman

Excellent. Thank you very much.

Gordon Ulsh

Thanks, Craig.

Operator

Your next question comes from Marc Lawrence [ph] of Solace [ph].

Gordon Ulsh

Good morning, Marc.

Marc Lawrence – Solace

Hi. Good quarter.

Gordon Ulsh

Thanks.

Marc Lawrence – Solace

Just want to follow-up on one of Kathryn’s questions. Does your bank deal restrict you from repurchasing your bank debt?

Gordon Ulsh

It does. I’m sorry. It restricts – Phil, go ahead and answer it.

Phil Damaska

It restricts us on repurchase of our high yield notes, but not restrict our ability to repay the term loan itself.

Marc Lawrence – Solace

But could you go out into the market and purchase its trading $0.70. Do you have the ability to go out and capture that $0.30 discount?

Phil Damaska

The agreement itself would not limit our ability to do that.

Marc Lawrence – Solace

Would you consider retiring some of your debt with these prices with your –

Phil Damaska

Well every body said as kind of like my closing discussion on liquidity and debt. Now these are pretty tough credit market as you’re well aware. Would we consider going out and reducing term loan debt? Yes. That’s something we would consider, but we’ve got to take that in consideration of the credit markets and our ability to continue generate cash flow to support the investments that we think we need to make in this business at a going forward basis. We’re inclined at this point in time to believe we have greater use of those funds to drive profit in operations performance improvement to restructuring investments and capital spend.

Marc Lawrence – Solace

Great. Thank you.

Gordon Ulsh

Marc, my comment was on the restriction on the common stock repurchase.

Marc Lawrence – Solace

Okay. It sounded – but you can go repurchase your bank debt?

Phil Damaska

That’s correct. We can.

Marc Lawrence – Solace

Thank you.

Gordon Ulsh

Thanks, Marc.

Operator

Your next question comes from Oliver Corlett of R.W. Pressprich & Company.

Gordon Ulsh

Good morning, Oliver.

Oliver Corlett – R.W. Pressprich & Company

Good morning, Gordon. Just following up on the lead price decline, we had I think three sequential quarters of decline now. When can we expect to see negative comparisons year-to-year in terms of pricing in your different segments?

Gordon Ulsh

Item and the Pricing? Obviously, the pricing that we have in the market today will have some lower pricing on the escalator base contrast and that will start to flow through sometime in the next quarter and thereafter. But again, what we’ve said is that we believe the construct of these agreements should not have dramatic impact on our margins. But most of these escalators, which then would have inside the MD escalator, are quarterly based.

Oliver Corlett – R.W. Pressprich & Company

Right. Okay. And then some of the cost go – we have a big decline in oil and I guess plastic customs are one. How soon do you see those and what kind of magnitude move can we expect there?

Gordon Ulsh

It’s anybody’s guess on terms of whether the petrol related products are going to be. Obviously, the oil pricing stage at the level it is, we’ll expect to see continued decline. We have bought some fuel on forward contracts. So it will begin to phase itself through the next quarter or two. And we believe that that’s going to provide us efficiency and margin improvement in the market. It’s especially good for our customer based. As you know the North American aftermarket, the global aftermarket all of our customers face further down on the chain distribution cost. That’s good news for them as well. So I think in the quarters – the next two or three quarter as we see stability on the reselling fuel we’ll see it start to phase through.

Oliver Corlett – R.W. Pressprich & Company

Right. How far did you go forward in that market and how much of your exposure did you hedge can you say?

Gordon Ulsh

Most of those will come off in terms of fuel and things during this current quarter. We didn’t go out very long.

Oliver Corlett – R.W. Pressprich & Company

Good. Okay. Just on the working capital, it seems like your receivable and your inventory have been sort of atypically low for the last quarter of quarters. Is this something that changed and can we expect this to go back up in terms of in ratio to sales in the next quarter or two?

Gordon Ulsh

Phil, could you comment on both what’s happening in the economics and our working capital programs.

Phil Damaska

Part of it is due to the point you made in your initial question, Oliver, for both the inventory end and receivable perspective and that’s the lead impact. I mean clearly as lead has reduced some price. The amount of value per unit has come down. And that has come through in terms of lower pricing as it relates to the escalators. So that has the impact on both inventory and receivables.

From a days perspective, we’re trying a better way to measure it. We’ll continue to see improvement in both day sales outstanding as well as well as days on hand of inventory. We’ve taken out two and a half days of inventory if you compare September ’08 versus September ’07. And if you look at day sales outstanding, we’re at about 50 days outstanding at the end of September versus 58 for the same period a year ago. So again, I think it’s clearly managing obstructive collection and inventory as well as the lead impact on both those nature working capital equities.

Oliver Corlett – R.W. Pressprich & Company

Right. And you think you could keep those days at that kind of level?

Phil Damaska

Yes. Obviously, if you look at the day sales outstanding I would suggest that we probably maximize to a great extent what we are going to be able to achieve in that area. I think there’s always room in inventory and managing days of inventory on hand. So that will continue be a focus of ours as we move forward.

Gordon Ulsh

And we’re developing some plans in-house to optimize our distribution network, which could provide us some good opportunity. And we have the funds to implement that. And while I agree with Phil, that largely on the receivables number, we’re probably at a pretty good place. Within the global business units there are some significant opportunities in from of us. Yet we’ll continue to work on optimizing that and our growth, Oliver. As you know, while we talk significantly about customer rationalization on margin, it also shows up clearly in the quality of the customer and the ability to handle that lower receivable days.

Oliver Corlett – R.W. Pressprich & Company

Right, right. Okay. What is just – one final have a feebly question. The pension lien, where does that stand now? Do you know?

Phil Damaska

That was the waiver we got back for ’04 and ’05?

Oliver Corlett – R.W. Pressprich & Company

Yes.

Phil Damaska

That was to be paid back as you all recall over a five-year period. We’re in the fourth year. So we continue to bring that down as we make our normal quarterly pension payments. And that lien or waived them out should be fully repaid by the end of fiscal 2010.

Oliver Corlett – R.W. Pressprich & Company

Right. And do you know how much it is at this point?

Phil Damaska

It’s below $20 million, Oliver, probably $15 million to $20 million.

Oliver Corlett – R.W. Pressprich & Company

All right. Great. Thank you very much. That’s all I have.

Gordon Ulsh

Thank, Oliver.

Operator

Your next question comes from Milan Gupta of South Point Capital.

Gordon Ulsh

Good morning, Milan.

Milan Gupta – South Point Capital

Good morning. Thanks guys. I had a question on volumes. You guys touch a little bit on some of the segments, but if you could just tell me a ballpark rough borders of the magnitude how much bonjour down into the different business units. I mean they’ve been down most single digits to go double digits. Can you give me handicap that better?

E.J O’Leary

Hi Milan. This is E.J O’Leary. We’re not seeing double digits, but obviously what Gordon talked to you before is that we are seeing softness on the motor power side. We have been somewhat pleased on the network power side primarily with the telecom and the data sector. The one area of focus obviously for us it comes through on the numbers is transportation Europe and rest of the world. As Gordon talked about that before is some of that was our choice. Take a look at the portfolio. Some of it is just a dynamic on the retail side as well as the OE side. But that’s an area that we haven’t seen and have to address.

Milan Gupta – South Point Capital

Got you. I mean you said it’s not double digits is it higher or lower in terms of single digits?

Phil Damaska

Well I think – This is Phil. I think we counted in the transportation in Europe and rest of the world segment actually had sales declined 7.5% from a net sales perspective. I mean we did see a drop off as a result of one, the OE built coming down, but in E.J’s point we also saw reductions in our after market business principally driven by our continuing plan and execution of our plan to call our low margin customers.

Milan Gupta – South Point Capital

Got you. Got you. Different question on lead, how much are your lead is sourced from the MLE and primary lead versus how much is recycled at your own centers and how much is third party corporate?

Gordon Ulsh

In North America we do all of our battery – well 95%-97% of our lead which recycled. There’s a few alloys that we buy just because of purity levels for extreme applications. So our North America business is more than supported by our recycling. We go out in the markets depending on the return rates and buy support in the market. But most of it comes from our own channel. In Europe, we supply through our recycling about 15%, 15% to 18% of our lead consumption is recycled and balanced b on the MLE. In an Asia pact, which is primarily Australia, New Zealand, we supply about 70% of our internal leads to our recycling. We buy the rest on the market.

Milan Gupta – South Point Capital

That’s through across the three different businesses, the industrial and transportation the way you cut it geographically?

Gordon Ulsh

It is. It is.

Milan Gupta – South Point Capital

Okay.

Gordon Ulsh

Yes. In those regions it’s reflective of total consumption.

Milan Gupta – South Point Capital

Okay. Got you. And then last question I have. Could you just talk about pension and retirement benefits a little bit more? You guys have outlined your minimum requirements or how much are you going to fund over the next few years. How much of that is minimum versus discretionary? And how much of that exceed the amount you’re charging on the P&L? And then when lines with the current equity market declines, is there any way handicap how much increase funding requirement?

Gordon Ulsh

I’ll ask Phil to address that one for me.

Phil Damaska

Yes. Clearly the payments that we disclosed in our filings and has been pretty consistent over the last – since we’ve been here have been the minimum required contributions. Clearly, and that includes obviously paying off the waived amounts for 2004 and 2005. Clearly, we do have the ability to make amounts in addition to the minimum required. We are studying that as it relates to utilization of cash that we generated this year. We recognize that the equity markets are going to result in lower assets in the plan as we approach the end of the year. And clearly the revised Exide evaluation that will get shortly after March 31st. We’ll allow us to make some decision with the respect to whether or not we want to accelerate some payments either in the latter portion of this year or early next year.

Milan Gupta – South Point Capital

Okay. Thanks a lot guys.

Gordon Ulsh

Thanks, Milan.

Operator

Your next question comes from Brian Gilmore of Westlake Securities.

Gordon Ulsh

Good morning, Brian.

Brian Gilmore -Westlake Securities

Hi guys. I think my question has been answered. Thank you.

Gordon Ulsh

Thank you.

Operator

You’re next question comes from Kevin Smith [ph] of View Street Capital [ph].

Gordon Ulsh

Good morning, Kevin.

Kevin Smith – View Street Capital

Hi. Good morning. Guys, I’m a little new to the company and I apologize if this is a bad question. But going forward in a general way on the working capital front, what do you expect to be a net cash generator versus how much commodity cost have gone up in the past as that flows through the system. With you expect that the working capital is actually going to produce cash, pre-cash for the company over next say, two to three quarter. Is that an accurate statement?

Gordon Ulsh

Phil?

Phil Damaska

Well Kevin, historically, since your new to the company I’ll give you a little bit of our history. Historically, Exide has used cash in the first half and generated cash in its second half of the fiscal year. Obviously, given what’s happened with a key commodity, lead. We’ve seen cash generation in the first half of this year. And really what we expect to see in the second half or in the next several quarters is highly dependent on what lead does as we move forward.

Lead for me equal – again as I pointed out. I think we have a little bit more opportunities from an inventory perspective. And the other leverage that we haven’t talked about is accounts payable. If anything that provides with some amount of opportunity to generate cash as we again push our suppliers to provide us with more commercially acceptable payment terms going forward. So lead stability we had to generate some free cash flow going forward, but how much and what they’re losing in that direction is really highly dependent on what happens with lead process.

Gordon Ulsh

Add to that in the automotive segment of the business there’s always some cycle ability in terms of what we need for inventory as a result to seasonal changes and how severe our winter gets. We can end up having more cash out of that inventory number. Or milder could leave us in the shelf a little bit longer.

Kevin Smith – View Street Capital

And then on the – do you have a hurdle rate that use for the cash and the new products or projects that you got coming up as well as the capital expenditures? Do you have an internal sort of an IRI that you expect as the hurdle rate?

Gordon Ulsh

Phil?

Phil Damaska

Yes. Kevin, you may have heard about our economic profit plan, but it’s our annual incentive plan. And it’s premise on economic value added concepts.

Kevin Smith – View Street Capital

Okay.

Phil Damaska

And our businesses are charged for the use of capital employed 2% a month or 24% a year.

Kevin Smith – View Street Capital

Okay.

Phil Damaska

So whether they want to add a customer that’s going to increase receivables or inventory or where they want to make an investment in new capital and a plant. There all looking at whether or not it’s going to return 24% as a basis of making that investment or they’re annually set up against it. Let’s put it that way.

Gordon Ulsh

Clearly, we use that as a measurement not only in the customer analysis in terms of the customary the margin that customer will deliver, but its ability to support payment terms that would be attractive. Obviously when we get into some longer term investments for new products we have to be judgmental in terms of how something more strategic is impacted. We don’t have an environment whereby folks make short term decisions at the expense of a long term of product portfolio of the business, but that’s our general guideline.

Kevin Smith – View Street Capital

Okay. And correct me if I’m wrong. But it doesn’t sound like you’re worried at all about your debt level. It sounds like you’re more interested in the higher return projects you’ve got coming up. And it sounds like you’re very comfortable. Is that accurate?

Gordon Ulsh

Well I would say that we’ve sensed since several of us has been with the company for three, three and a half years. A hallmark of Exide over the years was the lack of investment both in the product and the technology, the ability to be global and competitive in our manufacturing environments and to have the right people on the team that have access to the right people. We feel very good that our disciplined approach over the last couple of years has positioned us to affect our strategy.

Now, when you say we don’t sound worried about the debt levels in today’s market. We look at it worried everyday. But we think the instruments that we have in place allow us to run our business. And the best thing we can do for the shareholders is to continue to drive efficiency and its four customer base. So I wouldn’t say we’re not concerned, but I think we’re comfortable where we are in and the tools that we have.

Kevin Smith – View Street Capital

Okay. Well thanks. Great job, guys.

Gordon Ulsh

Thanks very much. Operator, we’ve got two more calls in the queue, I see, and we’ll probably have to wrap up after that.

Operator

Yes, sir. Your next question comes from Tom Koch of Turnaround Capital.

Tom Koch – Turnaround Capital

Yes. Hi. I was wondering if you could help me understand a little better your gross margin expansion. Can you talk about how much of that is a result of the favorable spread between I guess timing of the lead pass through, which have a little bit of delay versus you got immediate benefit of the reduction and the cost, And how we can look at that over the next 12 months?

Gordon Ulsh

I’ll let Phil fill in that detail. But what we’ve said is that on the spread clearly there are going to be quarter-to-quarter variations as we were behind the curb and the escalator going up. And we’ll get a little tail on it when the escalator is coming down. But we don’t portray or don’t want to portray that lead by itself is responsible the margin enhancement. We’ve been disciplined in terms of customers that we sell and the services that we provide. And we believe that we’re going to continue work on margin growth. And we should work to be overtime kind of neutral on the impact of lead.

Tom Koch – Turnaround Capital

So does that mean that in this quarter that just finished that that would have been in fact the case that there really was no benefit on the lead side? Anything significant and that you also expect that over the next couple of quarters. Is that what you mean?

Gordon Ulsh

No we said early on that the part of the quarter is sort of being as lead continued to decline that there’s a bit of a tailwind on the way down. And it will settle in whenever lead stabilizes. So yes, we’ve said certainly we had some benefit. I don’t know that we can or would break it out in terms of how much specifically that we’ve related to. But no, we acknowledge that there’s been some tail wind coming down, but if we go back and look at sort of a head wind we had going up the bigger the customer we serve we’ve sort of manage that efficiently.

Tom Koch – Turnaround Capital

When would you expect that tail wind would come down to stay zero? And would you expect it to actually go the other way when you start to – your escalators start to go down and your lead won’t go down anymore because price is stabilized?

Gordon Ulsh

If lead stabilizes at the end of this quarter, by the end of next quarter, it will be sort of zero tail wind. And in the quarter after that, if it begins to pick up then we’ll have some head wind to the extent of we’re able to get out and accelerate pricing when we see it coming. We’ll try to offset that, but we could have quarter-to-quarter of head wind if it turned upward.

Tom Koch – Turnaround Capital

And could you remind me again, is all of your business kind of on that one quarter lag or is it just some?

Gordon Ulsh

No. It’s just some. I would say in Europe the majority of our OE business both industrial and OEM and transportation is on an escalator. And most of our after markets are predominantly in transportation. It’s on sort of lead based pricing, but it’s not as fixed or inflexible as a contract. In North America, our OE business is virtually all based on small as it is, is basically all on escalators. And escalators are uncommon in the after market.

Tom Koch – Turnaround Capital

Okay. Thank you.

Gordon Ulsh

Thank you.

Operator

Your next question comes from Cory Armand of Rice Voelker.

Gordon Ulsh

Good morning, Cory.

Cory Armand – Rice Voelker

Hi. Good morning. You recently announced that you’re investing in new research and development initiatives. What types of incremental expenses should we expect from this? And over what time frame should we expect to see some benefit?

Gordon Ulsh

Well I think the things that – I don’t know if we captured in terms of dollars and R&D, but let me give you an example. We’re probably in the 60% to 75% increase in headcount around the world. And we have approved all those tactical resources and are involved in hiring. We said as well that we are working on consolidating the facilities. So you’ll see an increase on those resources predominantly in North America, predominantly in Georgia, predominantly in Europe and most of those wound be in our industrial facility in Budikan. And you’ll see that – we have also put real R&D as opposed application engineering instead of resources that would be based here, but about the 60% to 75% increase in the engineering and R&D sort of headcount.

Cory Armand – Rice Voelker

Okay. Then I believe if I have this right. One of your competitors mentioned that they have exclusive supply relationship with Ford. Is that something that should concern us at all? Does it relate to your relationship with Ford?

Gordon Ulsh

Well I think one of the competitors mentioned that they acquired or beginning to supply all the Ford motor company. We have been supplying Ford Motor Company since we relocated or we’re able to attract their business some two and a half years ago. So that’s a loss in some volume. In the OM business as you could imagine everyone screened for sort of the next deal. You’ll see some dislocation of business coming the other way in the future as we continue to be competitive and supply and work with the folk that are most stable at the market as we go. And you’ll see us utilize some of that OEM capacity and what we consider to be the more attractive replacement channels.

Cory Armand – Rice Voelker

Right. Okay. Good. And then I guess with volumes under pressure, can you describe the steps that you’re taking to reduce six cause and expenses in the phase of a potentially declining sales environment just to protect the margins. I think that’s one thing that’s definitely a prevalent concern for all of us.

Gordon Ulsh

Sure. As it’s been for us. So if you reflect on the comments that we made earlier. That we’re pursing primarily in Europe some 600 both direct, indirect, and SG&A base employees. You’ll know that not only are we addressing some legacy issues, but some right sizing cost by the business contractions in Europe. I’ve been in Asia Pacific, you heard us speak about the down sizing or right sizing of some of our manufacturing and our commercial regularization as our penetration got lower in that market. So we think we’re being appropriately aggressive in terms of keeping the business sized. We continue to have very targeted focuses on corporate cost. And we have some opportunities on the legacy structure there as well that we’re addressing and looking at our investments in business automation et cetera that will drive that. We think we have been and continue to be relentless in the pursuit of efficiency in our business.

Cory Armand – Rice Voelker

Right. Right. Okay. I guess one of my concerns was that maybe some of this is just part of your legacy plan rather than be an anticipatory of the current environment with volumes, but it sounds like you’re looking ahead here.

Gordon Ulsh

I think we’re doing both. We’ve seen some softness in telecomm. We have to adjust schedules in North America in the industrial. We’ve adjusted some schedules in manufacturing plants. And I think the further reflection is if you look at our days on hand on inventory, you’d see that we’re not over producing. We’re not over producing. We’re not putting in any volumes in inventory. So I think we’re being appropriately aggressive. You always worry, Cory about the timing when one lags those adjustments with the market. But I think our team around the world is certainly sensitive of that. And to the extent that we can we’re moving very aggressively.

Cory Armand – Rice Voelker

Okay. Well great. Thank you very much.

Gordon Ulsh

Thanks for your interest, Cory.

Cory Armand – Rice Voelker

Okay.

Operator

You have a follow-up question from Kathryn O’Connor of Deutsche Bank.

Gordon Ulsh

Okay. We need to that, Kathryn?

Kathryn O'Connor – Deutsche Bank

Hi. I just have a quick one on the bad debt expense. I just want to know what exactly that was if you incurred any more after the close of the quarter.

Phil Damaska

No, we have not.

Kathryn O'Connor – Deutsche Bank

And then any color on who the customer was or –?

Phil Damaska

I don’t think it’s appropriate for us the customer. It was a UK based company and unfortunately kind of surprised us as we approach the end of the quarter.

Kathryn O'Connor – Deutsche Bank

Okay. So this is not a trend? It’s just some kind of a one of –

Gordon Ulsh

It’s definitely that –

Phil Damaska

I mean obviously as we’re all aware the economy is in a pretty difficult time. And clearly we’re beginning to increase our focus in terms of credit reviews as we look at customers around the world. And it’s something that we’ll continue to be diligent with as we move forward.

Gordon Ulsh

But this is the part of our calling of our customer based over the years that again not only as focus on customers and more attractive margins, but financial stability.

Kathryn O'Connor – Deutsche Bank

Great. Thank a lot.

Operator

You have a follow-up question from Craig Irwin of Merriman.

Gordon Ulsh

Okay. We’ll take that and then I think we’re going to wrap up after. Go ahead, Craig.

Operator

Mister Irwin, your line is open.

Craig Irwin – Merriman

Thank you for taking the questions. I want to understand your payables a little bit better. Again they went down this quarter. I was under the impression that the given the significant financial improvement of the company over the last several quarters, the outlook was that you probably start getting more favorable terms from your suppliers. Is this something that we’re building towards a transition point where we can probably start seeing the payables take up? Or can you speak a little bit to sort of how this likely come together over the next few quarter.

Phil Damaska

Yes, Craig. This is Phil. I’ll take that. Currently, we are continuing down that path of attempting to improve commercially – commercial terms with our supply based. Margin is not part of the equation. I mean we did have terms with some of our lead suppliers, but not all of them. And as lead has come down that has negatively impact if you will the payables. Measured it in terms of days payable without outstanding, there’re about flat this year to last year as the same point in time, which would suggest that we have more room to go in terms of bringing – taking cash off the balance sheet with respect to payable. Clearly, it continues to be a focus of our global procurement group. And we should be able to turn that into cash as we move forward.

Craig Irwin – Merriman

But should we expect payables to continue to decline over the next couple of quarter? Or should they start to tick up probably?

Phil Damaska

Well, yes. I guess assuming stable lead my expectation is you’ll see them tick up.

Craig Irwin – Merriman

Okay. Fantastic. Thank, Phil.

Gordon Ulsh

Thanks, Craig.

Operator

There are no further questions at this time. Mr. Ulsh, do you have any closing remarks.

Gordon Ulsh

Well we certainly like to thank all of our participants on the call and your interest in Exide. Again, we feel very good that we’ve done the work that we needed to do to position the company for very, very challenging times. And we look forward to continue to advance the company. And thanks once again for your interest.

Operator

This concludes today’s conference call. You may now disconnect.

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