C&D Technologies Inc. F3Q09 (Qtr End 10/31/08) Earnings Call Transcript

| About: C&D Technologies (CHP)

C&D Technologies Inc. (CHP) F3Q 2009 Earnings Call December 8, 2008 10:00 AM ET

Executives

Ian J. Harvie – Chief Financial Officer, Vice President

Dr. Jeffrey A. Graves – President, Chief Executive Officer

Analysts

Michael Gallo - C.L. King & Associates, Inc.

Todd Cooper - Stephens Inc.

[John Winthrop]

Richard Baxter - Ardour Capital Investments

[James Shantel]

[Bill Gotellio]

[Unidentified Analyst]

Operator

Good morning. My name is [Aldis] and I will be your conference operator today. At this time, I would like to welcome everyone to the C&D Technologies fiscal third quarter earnings call. (Operator Instructions) Mr. Ian Harvie, you may begin your conference.

Ian J. Harvie

Thank you very much, Aldis, and good morning everybody. Let me start by reminding you that this call is the property of C&D Technologies, Inc. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of C&D Technologies is strictly prohibited.

Further, as this call is being webcast live and will be made available for a period of time on C&D’s website, the call contains time sensitive information that is accurate only as of the date of this live webcast for this call on December 8, 2008.

This conference call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. During this call words and expressions reflecting something other than historical fact are intended to identify forward-looking statements that are not the exact exclusive means of identifying such statements. Factors that appear within any forward-looking statement or in a company’s Securities and Exchange Commission filing, including without limitation the company’s annual report on Form 10-K for the fiscal year ended January 31, 2008 and various 10-Q and 8-K filings, could cause the company’s actual results to differ materially from those expressed in any forward-looking statements made herein.

With that, now let me turn the call over to our President and Chief Executive Officer,

Dr. Jeffrey Graves.

Dr. Jeffrey A. Graves

Thanks Ian and thanks everyone for joining us this morning. We’re once again pleased with the continued progress in our financial results for the third quarter as the decisive actions we’ve taken to sharpen C&D’s strategic focus, to improve our operating efficiencies, and to strengthen our market position through new product introductions and a strong customer focus rewarded this quarter with both solid top line growth and our third consecutive quarter of bottom line profitability.

Once again, our performance was consistent with our strategy to reinforce our leading market share position while driving continuous market improvements quarter over quarter. We were also pleased to deliver improving cash flow in the quarter, in this case driving to the best performance over the last three years.

As we’ve noted over the last few quarters, our top line performance has benefited from end market demand that has remained resilient, despite the economic uncertainties and credit market turmoil that has affected so many industries. If we look at the three major segments in which we operate, while the telecom market has been soft our UPS and utility businesses have remained relatively strong. In addition, our international operations have continued to grow as we leverage our strong brand and invest in expansion of our sales infrastructure and channels to market.

In the third quarter, our efforts culminated in a strong 7% sequential unit volume growth, an excellent result in any market environment but particularly so in these tumultuous times. Exiting the third quarter we continue to believe that the fundamental drivers of our end market demand have not materially changed. For the near term, we continue to believe that our strong real growth in Q3 and our steady, one-to-one book-to-bill ratio in the quarter are indicative of both stable end markets and C&D market share gains.

That said, there’s no doubt that in today’s economic environment we remain cautious as to our market outlook and manage our operations accordingly. Let me now open with a few highlights on the quarter, then Ian will summarize the full financial results in more detail.

For the third quarter, we reported net income of $964,000 or $0.04 per basic and $0.02 per fully diluted share. These results included two unusual charges of significance. First, balance sheet currency re-measurement losses of approximately $850,000 or $0.03 per share and second, bank amendment fees of $225,000 or $0.01 per share. Ian will go through more detail with you shortly.

Revenues for the quarter were $93.8 million, up 3% from a year ago on the strength of unit volume growth which was up 7% sequentially and up 2% from a year ago. As we mentioned in our call last quarter, pricing has and will continue to adjust due to the drop in lead costs, so we’re very pleased that we have managed to offset that affect with real growth and market share improvements.

In the quarter, our various cost reduction and margin improvement initiatives achieved further progress. Gross profit of $16.6 million was up 184% in the quarter from $5.9 million in Q3 last year, driven by pricing recoveries, lower lead costs and our cost reduction initiatives. On a sequential basis, gross margins continued their improving trend, rising to 17.7%, up 80 basis points from the second quarter. Absent any impact from market conditions on volume, we expect to show continued margin improvement through Q4 as our cost reduction efforts continue their impact.

Longer term, as we look to the next year and beyond, we continue to believe the gross margins have the opportunity to reach 25% through a combination of continued top line growth, higher margin new product introductions, and additional cost reduction initiatives. The combination of top line growth and margin expansion has yielded a significant improvement in our cash flow in the quarter. EBITDA for the quarter was $6.1 million and excluding the aforementioned balance sheet currency re-measurement losses and bank amendment fees, adjusted EBITDA in the quarter was $7.2 million.

This earnings progression and lower lead costs supported our best quarterly cash performance in over three years. Cash flow is an important fuel for growth, as it allows for the investment in new products and enhanced productivity that enable us to meet the continually evolving needs of our end markets around the world. In combination with our efforts to reduce working capital, increasing cash flow is also helping strengthen our overall financial condition and improve our competitive position in the marketplace.

Last quarter we discussed an increased emphasis on leveraging our relationships with some of the world’s leading engineering firms. These firms have come to rely on C&D for their needs in North America, especially in the UPS industry, but they’re performing similar projects around the world; projects for which we are ideally suited and yet historically under-represented. To capitalize on these opportunities, we’ve expanded our sales and distribution resources, including in Europe where we enjoyed some nice projects in the third quarter.

Although still small, we’re seeing noticeable market share gains in Europe and the Middle East against our historical competitors. While the volatility of international exchange rates may affect the European opportunities and competitiveness in the near term, over the long term we’re seeing ongoing growth opportunities in these markets. In China, we’re seeing a steady trend of quarter over quarter sales growth, supported by the expansion of our sales force and the opening of new channels to market.

More importantly, operational improvements and increased plant utilization in China through unit volume growth has enabled us to achieve our first full quarter of positive EBITDA performance for our new China operation. Growth opportunities in this market leverage our North American customer relationships with global firms and have a significant share of the China infrastructure market.

These trends are anticipated to continue and to accelerate as we broaden the range of products manufactured in this plant and as we expand our local sales efforts. Overall, we believe our prospects for international growth outside of North America are quite exciting and we intend to continue to invest in developing these markets by expanding our sales and marketing efforts.

With our strong brand, recognized worldwide for technology and quality excellence, we’re especially encouraged by our opportunity for growth in the emerging economies, where development is focused on building basic infrastructure such as hospitals, utilities, and power plans. Stand by power markets where C&D is an acknowledged industry leader.

In addition to international growth opportunities, we have a strong focus and commitment to develop new products that will allow us to both gain further share in our existing markets and to penetrate adjacent markets where we believe there is significant growth prospects. Through the first nine months of this year, as many of you know, we’ve introduced a number of new products. In the first quarter we introduced the msEndur, our new green battery system, targeted to wireless telecommunications and data center applications.

And in August, we announced our new line of C&D True Front Battery Systems, which are advanced valve regulated lead acid or VRLA batteries, designed specifically for telecommunications applications. Significant new capital has been invested this year to support the ramp up in production of the True Front Access product, which is scheduled to be up and running on a mass production basis by the end of this fiscal year.

Utilizing the most modern materials and novel design features, we believe this battery system will deliver the highest power density and longest life of any VRLA Front Access battery on the market today. Importantly, in October we began selling this product in limited quantities into the marketplace. With this initial production volume, qualification testing of the new True Front Access product is now well underway with many of our key telecommunications customers.

While there is a cost associated with these introduction and qualification efforts that is noticeable in a somewhat higher overhead spend in this quarter, it’s a necessary condition for the significant volume growth and contribution we expect from these new products over the next several quarters and beyond. As we’ve come through our turnaround, a key part of our strategy addresses how to best leverage our technology base and brand recognition for energy storage worldwide.

As such, we’re aggressively evaluating technology partnerships on a global basis, to penetrate new markets for our company. As an example, our partnership with Firefly Energy, announced in the third quarter, to manufacture micro cell phone batteries for the trucking and related markets, provides a great opportunity to leverage our deep resource space and provide added growth momentum to the company.

While we’re excited about the prospects of assessing this new market, and will continue looking for opportunities to build upon this foundation in the future. Longer term, we also continue to invest in alternative energy source technologies which may provide benefits to our commercial customers and provide an inroad into the military market for energy storage.

As an example, we’ve had lithium ion battery systems on test now for over six months in a cable television end market, and the test data from these systems continues to look very good. These are real world tests in active systems exposed to the full spectrum of environmental and customer driven system requirements. Based upon this success, we’ll next shift lithium ion battery systems into the telecom end market to do cooperative testing with our customers to validate the technology for their specific applications.

It’s through this testing that we and our customers can be assured that the potential advantages of these new technologies are fully validated. We’re taking a unique approach to the lithium ion technology, and we believe it adds exciting potential and select customer applications in our core markets. In support of this technology initiative, we’ve been awarded government funded R&D contracts to further the development of lithium ion technology for stationary power applications in the military and renewable energy marketplace.

We see these efforts expanding as we enter the New Year, and we’ll keep you posted on our continued progress. In short, as we approach the end of fiscal 2009, we feel very good about the significant progress we have achieved this year and the preparations we have made for the long term success of the company. As we look to Q4, we would expect the success of our sales efforts and in the back end of the quarter some added contribution from our new products, which will provide a further buffer against the risk that economic conditions will impact our customers spending patterns.

While we’ve been pleased with the resiliency of our end markets to date, the volatility of commodity costs remains extreme. Over the last few months, the price of lead has dropped off very quickly and is now at a 30 month low, which will flow through our customer contracts to bring down pricing in the coming months. This has obvious implications for total revenue reported in future quarters as lead in this case is a pass through item.

In addition, due to the rapid pace of lead cost declines, we’re impacted by the short term negative effects on financial hedge positions that we’ve placed, which we commonly use to align our contract prices with lead costs, as well as the lags that can occur in the lead supply chain for recycled or [tolled] lead that we commonly purchase for a portion of our operations.

This lag in price decline, specifically around junk battery prices, that are the feed stock for recycled lead that we purchase, means that the full benefits of lead cost reductions are delayed until the supply chain is fully rationalized. While this might delay the benefits of lower lead costs, from a strategic standpoint we welcome the decline in lead prices, as our intrinsic costs for lead are then better matched to those of our competitors who are vertically integrated, having lead smelting operations. In addition, lower lead costs obviously provide us with working capital improvement opportunities.

I want to again express my appreciation to our shareholders for their support and encouragement, particularly in these tumultuous economic times, and to our employees for their contribution to our success this year and beyond. Now let me turn the call over to Ian to discuss the financial results in more detail. Ian.

Ian J. Harvie

Thank you Jeff. Net sales for the third quarter were $93.8 million, up 3% from $91.3 million in the third quarter of last year, and also up sequentially compared to $92.5 million in the second quarter. The primary driver of higher revenue was unit volume growth, which was up an estimated 2% in the third quarter from a year ago and 7% sequentially.

We continued to experience strong demand for our UPS systems and from the utility industry, while demand in the telecom market outside of cable continues to lag. Growth was especially strong internationally. In the quarter, pricing offset much of the strong unit volume growth, as the average cost of lead has fallen both from a year ago quarter as well as sequentially from the second quarter.

As Jeff mentioned, the book-to-bill ratio for the quarter was one-to-one. I would only add that the implied unit book-to-bill ratio would be about one-to-one if orders were booked to progressively lower prices throughout the quarter coincident with the drop in lead costs.

For the quarter we reported net income of $964,000 or $0.04 per basic and $0.02 per fully diluted share. Compared to basic EPS, diluted earnings reflected an adjustment of $0.02 of non-cash deferred compensation income. In the quarter a year ago, we reported a net loss of $9.3 million or $0.36 per fully diluted share which included $2.3 million or $0.09 of loss from discontinued operations.

In the current quarter, we incurred $0.04 per share in unusual charges. $0.01 is associated with the amendment of our bank agreement and $0.03 from balance sheet currency re-measurement losses arising from a significant drop against the U.S. dollar of both the Canadian dollar and the Mexican peso. Because the U.S. dollar is the functional currency for accounting purposes of our subsidiaries in most countries, balance sheet translation adjustments run through the income statement not cumulative translation adjustments in the balance sheet.

From an income statement geography perspective, both of these charges flowed through the other income expense line. Gross profit in the quarter was up 184% to $16.6 million from

$5.9 million in Q3 last year as pricing recoveries and our various cost reduction initiatives continued to widen margins. This quarter, the gross margin improved to 17.7% more than double last year’s margin and up sequentially from 16.9% in the second quarter.

For the quarter, the combination of revenue growth and margin expansion led to EBITDA earnings before interest, taxes and depreciation of $6.1 million and our best quarter with cash flow performance in three years. Adjusting for the bank amendment fee and balance sheet currency re-measurement charges, adjusted EBITDA was even stronger at $7.2 million.

Selling, general and administrative and technology expenses in the quarter were $11.8 million, up 15% from $10.3 million a year ago, but down sequentially from $12.1 million in the prior quarter. The increase from a year ago is primarily due to high business development costs to qualify our new products and prepare for their launch, increased warranty costs and a rise in labor fringe costs such as incentive compensation, workers compensation, and medical benefit costs.

Interest expense was $2.1 million for the quarter, up 12.8% compared to $1.9 million in last year’s third quarter but down $200,000 sequentially from the second quarter. The increase relative to the year ago was attributable to the borrowings from the current year being related to continuing operations, whereas borrowings last year principally arose from discontinued operations.

Other expense in the quarter was $1.2 million, primarily the aforementioned currency re-measurement charges and bank amendment fee. In the third quarter last year we had a corresponding currency gain which was the primary component of last year’s $1.2 million of other income.

Income tax in the quarter was $551,000, attributable to both foreign taxes on profits and non-cash FAS 1 in our tax expense related to the amortization of intangibles for tax purposes. We still have significant tax loss carried forward, which can be used to offset future taxable United States profits.

We’ve made continued progress in improving our overall financial [inaudible] and building our liquidity. For the quarter, cash flow from operating activities was $6.3 million, the highest level of quarterly cash flows in over three years. We are also continuing to reduce our investment in working capital, as lower lead prices are helping reduce inventory levels. Since the beginning of the year, our inventory investment is down $17 million.

Accounts receivable did float a bit higher in the quarter, which was principally a function of some timing patterns we expected to see reversed in this quarter. Capital spending for the quarter was $3.5 million, up from $3 million last year. As we close out the year, we now forecast total CapEx for fiscal 2009 to be between $15 and $17 million, primarily to support new product launches and ongoing cost reduction initiatives, the single largest capital investment for this year being new equipment and support of the full scale launch of our new True Front Access product.

Long term debt, net of unamortized finance costs at the end of the quarter was $122.9 million, down from prior levels as a result of the $2.5 million in debt that was converted to common stock late in the quarter. Cash balances have been relatively stable over the course of the year and at October 31, 2008 were $6.9 million, up from $4.6 million at the end of our second quarter. In addition, we have another $2.1 million restricted cash.

Overall, we are quite comfortable with our financial position. At the end of the quarter we had nearly $9 million in cash balances and a little under $40 million of unused capacity on our credit facility. Importantly, our credit facility is committed through December, 2010 and is substantially financial covenant free. Also, the first option for maturity of our convertible notes absent the [inaudible] does not occur for another three years in November, 2011.

Together with our recent quarterly high EBITDA and cash flows, reduced investment in working capital, precipitated by falling commodity prices and miss liquidity base, we believe that we have more than adequate financial strength and liquidity to meet our capital expenditures and other planned investment needs in these uncertain and volatile economic times. With that, now let me open up the call for questions. Operator, if you could please compile the Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Michael Gallo - C.L. King & Associates, Inc.

Michael Gallo - C.L. King & Associates, Inc.

First, Jeff, could you give us some color on what your expectations are for the Firefly relationship? What kind of revenue and margin contributions do you expect that to have in the coming year?

Dr. Jeffrey A. Graves

Mike, as we put out in the press release, that both we announced and Firely announced from their perspective, we were very pleased with the relationship and very happy that they came to us and are asking us to build the product for them. It’s obviously it’s an advanced technology product. We’re very excited about the extension in performance it provides lead acid batteries, and that said it’s a difficult product to build. So I was flattered and pleased that they came to us to build it for them.

In terms of overall market potential and growth, I think it’s more appropriate that they comment. It’s really their sales plan into the truck and off-road vehicle market. It is significant to us. We do view it as further buffer in these uncertain economic times. As we look to next year, this should help us on the revenue line obviously and it’s fully consistent with our margin objectives.

So while I’m reluctant to give you firm revenue guidance, because we don’t control the direct sales of that product, we are happy with the plan that they brought to us. It is significant for us and obviously in these times it’s wonderful to have a buffer on the upside and the margins look very attractive to us. So we’re pleased with the whole package, Mike.

Michael Gallo - C.L. King & Associates, Inc.

Just general order of magnitude, I mean is it a $5 million opportunity? I mean, is it bigger than that? I mean, I just want to get a sort of general framework about, you know, how big or small it could be.

Dr. Jeffrey A. Graves

Again, Mike, I’m reluctant to give precise numbers. I mean, certainly it’s measured in millions not hundreds of thousands of dollars, so it’s significant to us. You know, it’s noticeable to us. It provides, you know, again nice buffering as we enter an economically uncertain time. But I’m real reluctant to give you the exact guidance on revenue numbers because again we don’t control the direct sales of that product.

Michael Gallo - C.L. King & Associates, Inc.

My second question is just on the back up for cell towers. Obviously it’s gone back and forth for a while. It looks like the FCC is now going to revise some of the proposals. I was wondering if you had any feel for how long you think that that process will take. It doesn’t seem like anybody is objecting to that, that the towers ultimately need to be backed up for more than four hours. It’s just timing and the mechanism for which it’s done. So can you give us some color on where you think that stands? Is this something that’s now going to be kind of delayed a year? Are some carriers still kind of gradually rolling it out? I mean, where do we stand there?

Dr. Jeffrey A. Graves

Mike, again, and it’s just my opinion from what we hear from our customers, is it seems to be generally accepted that directionally that’s where it has to go. And the discussion is around details of timing. And it’s again just my opinion, it looks like in terms of government oversight and mandates for directions on many things, the government’s exerting a stronger hand in the future about where things need to be. So I don’t think there’s a lot of wiggle worm on where it ultimately needs to get to.

There may be on timing, because clearly in these economic times I think even the government’s reluctant to put in place things that require companies to spend certain amounts of money. So there’s probably more negotiating on the timing and pace at which companies move rather than the direction and objective that they have. So I think it’ll get there. For us it’s worked out well, because many of our new products are fully aligned with that direction. And the fact that it took a little longer to get there with regulation was a good thing for us, because we had time to get those products fully in production.

So I can’t give you any more specifics than you can read in the newspaper, but I am convinced more than ever that the regulations will exist out there and it’s just a matter of these telecom customers negotiating the timing. And directionally you see them kind of moving one by one in that direction.

Operator

Your next question comes from Todd Cooper - Stephens Inc.

Todd Cooper - Stephens Inc.

I guess a question for Ian on the 10-Q you talk about expense related to deferred compensation plan. I assume this is required contribution to your pension plan?

Ian J. Harvie

It’s actually the mark to market. There’s some deferred compensation that has been deferred by I’ll call it officers and directors that is payable in common stock. And that, I’ll call it liability, is mark to market based upon our stock price in any particular quarter. So basically there’s some income in the third quarter results that for diluted EPS purposes over the accounting rules needs to be added back.

Todd Cooper - Stephens Inc.

But it has nothing to do with under funding of your –

Ian J. Harvie

Correct. No, it’s got nothing to do with I’ll call it defined benefit pension plan or obligations.

Todd Cooper - Stephens Inc.

Jeff you talked about this a little bit. What was the net impact of the drop in lead on your gross margin? You talked about some totaling issues, which I would think would hurt gross margin versus a lag in surcharges impact that would help. So net net, you know, did it help or hurt the gross margin?

Ian J. Harvie

I’ll take that one, Todd. I would say it was probably neutral within the quarter in terms of the impact. I think because given we’re on the slight permit of inventory accounting I think it may have I’ll call it some slight I’ll call it depression on margins in Q4, but I think it’s still minimal. We still look at the whole lead impact as being transient, but there’s I’ll call it some slack timing issues quarter-to-quarter.

Todd Cooper - Stephens Inc.

Jeff, can you give us an update on the business that you’re doing in Europe and the Middle East? What are the opportunities, percent of revenues right now, that kind of thing?

Dr. Jeffrey A. Graves

Yes. You know, Todd, obviously in the shortest of terms, currency changes can have a near term impact on competitiveness. But we’ve been very pleased in the last – well, jeez, over the last several quarters, in our ability to win new business in Europe and the Middle East. We’ve expanded the sales team somewhat and I think we’re selling more effectively than ever there, our technology position. So we’re trying to leverage the global relationships we have from North America into Europe. Many of our same customers do a lot of business there and we’ve been very successful doing that.

So those revenues continue to grow. The Middle East has been a double bonus because of the obviously the amount of revenue that they’ve generated through the sale of oil has given them a lot of cash to invest in infrastructure. And that’s strongly the direction that they want to go clearly. So we’ve been successful for winning new business there. We’ve actually expanded the sales team in the Middle East and that remains a real hot spot for us. Now those currencies are largely pegged to the U.S. dollar, so in that sense our competitiveness in the Middle East remains very strong.

Europe is probably less so because of the strengthening of the dollar. So I’d say there’s certainly some headwinds we face right now on the European continent. Middle East still remains strong for us. But all in all we like the business in Europe. We’ll continue growing that business and we’ll just have to fight the currency effects to get there.

Todd Cooper - Stephens Inc.

Most of those geographies, where are the batteries actually made?

Dr. Jeffrey A. Graves

A variety of spots. We can service those markets out of China, which has been beneficial when you look at the difference in currencies between China and Europe. Until recently, that’s been helpful to us. We also manufacture a lot of the product in the U.S. and in our [Rinoso] plant in Mexico. So it’s pretty evenly split between all of our locations. It does come out of North America and China.

Todd Cooper - Stephens Inc.

And while we’re on China, what is the current capacity utilization at that facility?

Dr. Jeffrey A. Graves

It continues to rise. Our volume growth in Asia is fueled out of that China plant. So while it continues to rise, and I could cite some impressive percentage growth rates, that plant remains under utilized as we’ve got a long way to go to fill that plant up. We’ve been quoting numbers, Todd, of like 30, 35%. And while I’m pleased with the growth percentages on that, we’ve got a nice opportunity ahead of us, put it that way to fill that plant up and really get it growing.

Because again it was designed and built in part for an export market back to North America which because of tariffs and currency changes, largely went away. And we’re now filling that plant up with via sales into Asia and China specifically. So again I’m very pleased with quarter on quarter growth and volumes in Asia that are coming out of that plant specifically. We’ve just got a ways to go to fill it up.

Todd Cooper - Stephens Inc.

I know you said you’re pleased with the demand levels you’re seeing but can you give us any demand type measurements or anecdotes, book-to-bill on that facility? Backlog up or down or anything like that?

Dr. Jeffrey A. Graves

Yes, Todd, I would tell you that when we closed Q3 we had actually strengthening business all the way Q3 through Q3. Our book-to-bill closed out at one and that’s probably a little bit of a conservative measure because there’s a few things that we don’t actually book that we ship in a quarter. So we closed the quarter formally at one, I mean it was probably actually a little bit better than that. It was driven mainly out of UPS in terms of market sectors, UPS and utilities markets. Telecom was relatively weak and kind of weakening through the quarter.

So it was driven mainly out of UPS and the utility – what we classify as the utility market. Cable television resurged a little bit there and we generally put that in telecom. If you excluded that, the rest of the telecom market was down a bit. And so we felt very good about that. I would tell you – and backlog was up a little bit over where we were at in Q2. So we saw a book-to-bill of one and maybe even slightly better, if you counted the normal turn through that is a book. And we saw backlog growing slightly.

That said, it’s impossible to pick up a newspaper and not be worried about in demand. So I would still flag that for you as our major risk item going forward. We’re really pleased with our cost reduction I initiatives. You know, lead is now a transient for us so it’s neutral. Our cost reduction initiatives are going very well. Our new product launches are going really well. That said, we just continue to fret about the end markets like everybody. All the facts that we have from Q3 point to very positive news, but we continue to watch that really closely was we go into Q4 and look into next year.

Todd Cooper - Stephens Inc.

Just to be clear, Jeff, the comments you just made are regarding the overall state of demand for the company.

Ian J. Harvie

Exactly. That’s correct. That’s correct, Todd. I think in terms of your specific question I think as it related to China, I think the comments would be, I’ll call it similar for China, in terms of I’ll call it auto book sort of activity and performance. Clearly the Chinese market itself is being historically over the last few years grown at double-digit rates. Maybe there’s some pull back from those double-digit rates but it’s still showing, I’ll call it high growth, in other sort of markets around the globe.

Operator

Your next question comes from [John Winthrop] – Unidentified Firm.

John Winthrop – Unidentified Firm

Let’s just stick to the order rate and the book-to-bill. Could you talk a little bit about the progression of the order rates throughout the quarter and maybe give us some color to how they stand in November?

Dr. Jeffrey A. Graves

Sure. And a little bit of it’s a repeat, John. We actually had strengthening sales and bookings through the entire Q3. I mean, we ended on our best month in the quarter at the end of Q3. We continue – and I already gave you the numbers. We ended up at a book-to-bill formally of one and a slightly rising backlog in total. All of our major geographies showed a similar trend, a similar order pattern, so that was good news. As you look at the October effects, certainly you started seeing some very big currency swings which would make us a little more conservative on the our European sales going forward.

We’d be a little more nervous about that. As we enter Q4 and move through Q4 you continue to read a newspaper about cutbacks. You know, a lot of the major telecom guys have announced layoffs; everybody’s watching their CapEx spend; so all of that would cause you to worry about the future. The facts that we have as we closed Q3 were very positive. You know, the worry going forward is it’s impossible to not sit in this economy and worry about end demands across the board.

That said, I do love the business we’re in. I think we’re relatively insulated compared to most industries from direct consumer driven end demand. But eventually it does catch up to you and it’s reflected. So as I said before, telecom was a little weaker. Utilities and UPS remain very strong and that trend would be the same today as we would’ve told you right as we closed Q3.

John Winthrop – Unidentified Firm

So I mean I’m reading the same thing you are about the telecoms laying off and cutting back in the spending in ’09 versus ’08, so it’s fair to assume that the book-to-bill’s probably dipping below one-oh at this point.

Dr. Jeffrey A. Graves

Yes. You know, you kind of have to look market by market, but I think the trends are consistent. Telecom is continuing to be weak and probably weakened as you go further into Q4 here and we’ll see how it looks next year. That said, as you look at these new devices being sold, it’s the holiday shopping season, you know you look at the amount of these very complex cell phones, wireless systems that are transmitting all this data, all of that requires higher back-up power time. So eventually that in demand has to be reflected in higher battery purchases or back-up power purchases.

It just is a timing issue. It may be something they can push off for a quarter to two but they eventually need to have. The regulatory environment’s getting tougher for them. They have to have longer back-up times. That will help us eventually. Again it’s more of a timing issue. UPS has been a very pleasant surprise. Data center construction remains very strong. IT spending on data centers, I saw some reports earlier this week, they’re talking about flat kind of numbers as you go into next year but we’re on the heels of a couple of years sharp rise in their investments.

So flat is actually pretty darn good with where we’ve been, and I think we’re very we’re launching a lot of good new products. We’re holding share in that market or maybe growing a little bit. So we feel very good about that. And the energy market, utilities and transmission infrastructure, all of that everything you read is about continued investment in that area because power plants are running near capacity, transmission lines are very old. You see the new with the new president coming in and the talk about more infrastructure investment that helps us.

That’s a good thing for us. So I could point to depressing future trends, I could point to encouraging future trends. I would tell you I love being in this business right now. I think we’re more insulated than most and the facts that we have from Q3 point to continued solidity in terms of the order book. But I would never tell you one day I’m not nervous. It’s a continual watch the business. And we’re managing our costs accordingly.

John Winthrop – Unidentified Firm

Can you just talk a little bit about what percent of your sales is actually directly tied or your total business to a pass through lead clauses versus how much your businesses we’ll call it list pricing at this point?

Dr. Jeffrey A. Graves

Yes, we’ve talked, John, historically about 50 to 60% of our business being on some type of contract and we’ve driven all those contracts to have lead clauses because I really think for the long term good of this business, the industry lead needs to be a pass through. So that’s the way we’ve treated it. Those percentages have not changed materially at all. The customers that have contracts seem to like them. The business that does not go through contract generally are large projects. You know, if you’re putting in a large data center you generally bid on those.

And after market resale product through distribution is kind of a day-to-day pricing activity, so that’s the other 40%. And on that I would tell you we’re very aggressively trying to hold prices because as you know in the while commodities have come down, there are some isolated things like acid and other things that are stubbornly high. And things like medical costs are doing nothing but going up, so we’ve got cost pressures that we need to compensate for and certainly customers are relatively open to discussions around commodity costs.

So lead is a big drop but other ones have hung in there and we continue to drive for pricing wherever we can get it to hang onto.

John Winthrop – Unidentified Firm

Now Jeff can you just reopen the conversation about your 25% gross margin target and given the current conditions what kind of timeline do you think it would take you to achieve that number?

Dr. Jeffrey A. Graves

Well, the question, John, really is around volume growth. I mean, I think we are very comfortable with our cost reduction initiatives, whether they’re related to new products or sourcing activities, anything else. We’ve been very successful in those and we’ll continue to deliver on that. The variable that’s dependent on customers obviously is volume growth and that depends somewhat on the economy.

So I feel very confident that we’ll reach that 25% objective that we set for ourselves. We said this company, I believe this industry can support those kind of margins and it should. And we’ve said that we would target that at the end of next year. At this point, the end of next year there’s a lot of ground between now and then in terms of the overall economy and the volume demand. So that gets beyond the point where we can project clearly and I would say that’s the biggest risk issue.

If volume demand remains strong and we continue to see an upside there, we’ll deliver on that. If not, it could stretch in time but it’s just really volume dependent, John. We just have to continue to see growth in the order book and delivery on new volumes.

John Winthrop – Unidentified Firm

Ian, could you just talk what is the bank amendment fee related to?

Ian J. Harvie

Yes. Back in it was late in August we amended our bank facility. The main areas, John, were to basically give us more flexibility. We did a bank amendment at that point in time that allowed us to borrow incrementally in China to the extent that we desired to do so. It allowed us to I’ll call it change some baskets within the credit agreement in terms of asset sales, ability to incur indebtedness under capital leases. It really was designated to give us some more flexibility and also changed I’ll call it some adjustments to the borrowing base calculations in terms of customer concentrations.

So I’ll call it all things that gave us more flexibility in terms of how we can I’ll call it fund growth in our initiatives as we move forward. And the fee for that was 30 basis points or $225,000.

John Winthrop – Unidentified Firm

I don’t know if I caught this from the previous question but do we get the percentage that was in European sales and related? What percent of your sales is we’ll call it utility related, if you could break out those two market shares.

Dr. Jeffrey A. Graves

If you mean European utilities, John, it’s very –

John Winthrop – Unidentified Firm

No, European total, the European total.

Dr. Jeffrey A. Graves

We haven’t traditionally broken out Europe or the other geographies independently. We’ve typically talked about an international sales number meaning sales outside of North America at about 15%. I think we’ve done real well on that piece of our business this year and it’s probably up from there. With the currency changes in Europe, there obviously will be some pressure from Europe. But when you look at Middle East and you look at Asia and Central and South America, which doesn’t come up on the call that often but it’s a really nice area for us for potential growth.

I think those markets remain really really very nicely positioned. And we’re not fighting quite the currency headwinds. So we’ve historically said 15%. That’s probably headed up and I don’t think Europe will be a major drain on that although Europe is probably the toughest spot for us.

John Winthrop – Unidentified Firm

How about the utility market in total? You cited that as a good growth opportunity, Jeff, what percent of the total does that represent?

Dr. Jeffrey A. Graves

The way we’ve historically measured utilities, it’s probably a 10% kind of number. In terms of total revenue we really believe we can define that market to be larger than what we historically have. Because we’ve got a large market share percentage in that business, John, so the challenge when you have a big market share is to try to define the market larger than that. So you push your share down and you challenge your sales team to go out and get the business. So we continue to focus on expanding what we define as utilities.

So the pieces of that market are energy generation, that’s like power plant business. Obviously we have a great position in nuclear power, batteries for nuclear power, which continues to be a nice revenue stream. Fossil fuel plants are running pretty hard right now so they continue to talk about having capacity on the generation side. Transmission is the large cross country transmission piece of that business, and then what we call distribution of electricity or the small substations. Those are the three major pieces.

Those are all growing and we continue to try to expand in what we call those pieces. And the other piece on top of that is renewable energy, both wind and solar. And I’ve been very encouraged with the new president coming into office soon about the continued talk about expansion of renewable energy in the United States. Certainly it plays to a strength of ours and we’ve got that market fully in our sights. And in spite of oil coming down, I hear nothing but positive things about wind and solar and we spend a lot of time on that right now.

Operator

Your next question comes from Richard Baxter - Ardour Capital Investments.

Richard Baxter - Ardour Capital Investments

Can you talk a little bit about your replacement sales as a percentage of total sales and how you see the current downturn affecting these size purchases?

Dr. Jeffrey A. Graves

Well, replacement is a broad word. You’ve got the replacement of batteries in the UPS data centers in the UPS systems and you’ve got replacement in telecom which if you run your business well is a very high percentage of like for like replacement if they’ve been happy with the product and the service they’ve gotten. So that’s good. And having the biggest install base in North America it’s always a great thing for us if we run the business well, we feel very competitive in the replacement business.

I would tell you it’s probably north of 25%. It’s pretty easy to talk about what we service through distribution through the distribution channel but then we’ve got individual sales we make directly to, for example, big telecom end customers to replace batteries in their installations. So it’s certainly north of a quarter of our business, Richard.

Operator

Your next question comes from [James Shantel] – Unidentified Firm.

James Shantel – Unidentified Firm

You guys continue to execute on your plan. Just kind of going through the gross margin, walk through 2009, obviously you have the articulation of exiting 2009 at around 25% gross margin which if you kind of assume kind of flat lead adjusted sales or even slightly down, we can see some level of EBITDA at minimum around $40 million which puts your stock around 4 times EBITDA right now. Explain to me the puts and takes and where I can be surprised perhaps on the upside or on the downside.

Ian J. Harvie

I guess in terms of calendar year versus fiscal year, James, I’d make sure that you’re looking at the 25% for fiscal 2010, so that would be my first comment. I think clearly as Jeff mentioned in terms of as we evaluate risk, when we originally talked about a 20% target for exiting this fiscal year that was much more focused around cost reduction efforts. And we continue to be confident in terms of those programs and activities. The 20 to 25% growth in terms of what we thought the ability of this business to generate in terms of gross margins was a combination of cost reductions in volume.

And I think as we talked about clearly there’s more uncertainty on the volume side of the win markets today than there was I’ll call it six months, 12 months ago. So volume is going to be the greatest dictator in terms of when we can get to that 25% level. And as Jeff mentioned is it next year or the year after, time will tell. And we would continue to ramp down on our cost structure every opportunity we get.

James Shantel – Unidentified Firm

Within the bank amendment, are you able to repurchase your convertible debt at this time?

Ian J. Harvie

We looked at all options in terms of our capital structure and how we utilize that liquidity. We have some restrictions under our credit agreement in terms of what we could repurchase, in terms of either the convertible notes or the common stock. So if we wanted to do anything significant, we’d have to work with our banks to do that. That being said, our focus today, James, is very much focused on driving cash flow and continuing to build a liquidity war chest to drive our operations. And that’s sort of the number one focus.

James Shantel – Unidentified Firm

And it seems like given the fact that the lead situation is moving in your favor, you might actually have a competitive advantage relative to some others out there with some higher cost infrastructure that are more tied to earning on lead. So probably check that box and it seems as if some of the new products on the lead adjusted basis, are we still expecting something along the lines of 15 to $20 million in sales contribution next year? That sounds conservative, but –

Ian J. Harvie

Yes. I mean, clearly when we’ve talked about and we put our four aces all there in the second quarter in relation to expected contribution over a period of time from the msEndur product and also from the Front Access product. And those numbers are over a three year time period in the $50 million plus range. And that’s what we talked about. Clearly I think in terms of clearly softness in the telecom market may change the timing and the phasing of how some of that incremental contribution rolls through.

But if we were going to get to that $50 million over the three years, you’re probably not far off on your expectation.

Operator

Your next question comes from [Bill Gotellio].

Bill Gotellio

First of all, relative to the Front Access product, the True Front Access, you said you began actually selling that product in the month of October. I realize it is early but we’re a couple months into it now. Would you share your initial responses that you’re hearing from customers, please, in terms of pros and cons?

Dr. Jeffrey A. Graves

Yes. We’re thrilled, Bill. It absolutely is hitting or beating any performance target we had and we set the targets higher than anything on the market. So in terms of power density it’s a fairly standard footprint that our customers want, but in terms of power density in that footprint it’s the highest in the market. In terms of the life of the product, it’ll be the best in the market. And it should be a very robust product meaning it can survive very well in outdoor cabinets that aren’t climate controlled or obviously inside climate controlled central offices very nicely.

So we’re thrilled with the product. It’s coming in at our target cost and as we look at pricing the product, the market we believe we can price it from a value standpoint of where it’ll be meaningful to our customers and reflect the value of the product they’re getting and certainly hit our margin objectives. So I absolutely cannot be happier. We’ve spent the capital, the equipment’s going in, it’s coming in right on schedule at or under the project costs that we had targeted internally as well, so absolutely nothing negative to say.

Feedback from customers has been very positive. It is a fairly long qualification process with the telecom customers so you’ve got a – which is great, once you’re qualified and in it’s nice barriers to have against other folks moving into the market quickly but you’ve got to get through them. You’ve got to wade through them, do the testing, and get that finished. So we did push ourselves to get some early product built and shipped to get through qualification and fit tests and things with customers. That’s going extremely well and we remain on track to enter mass production at the end of this fiscal year.

Bill Gotellio

Jeff, when you mentioned a fairly long qualification process, would you please quantify that? How many months or weeks is that?

Dr. Jeffrey A. Graves

Yes. It was spanned between, you know it started a couple of months ago and it’ll span to the middle part of January, which is January is the last month of our fiscal year. So right as we bring the equipment on and it’s running at full speed, qualifications will be completed with our major customers. That will really drive the volume, Bill, and we’ll begin selling that product. So while there still is a ramp up phase it’s more in the procurement side of things than the qualification side. So that’s – it can be a three to six month process, so you need to get the product out there early and get through testing.

Bill Gotellio

To make sure that we understand correctly, the qualification process gets reaches conclusion about the time shortly after the time that your manufacturing facility in Milwaukee is ready to actually produce the product at full bore.

Dr. Jeffrey A. Graves

Yes. You’ve got it, Bill, you’ve got it. Spot on. So we’ve lined both those milestones up very close in the middle of January. So what we’ve said is first month of the fiscal year, February, we should be in mass production selling that product and all indications right now is it’s going to be a real winner.

Bill Gotellio

And you had mentioned each of your individual and markets, the UPS and utility, was pretty strong. The cable business, which you is a subcomponent of telecom but broken out separately, actually resurged in the quarter. And if memory serves me, the only area that you said was soft or that you hesitated at all about was the telecom market.

[Audio Impairment – 10 seconds]

Dr. Jeffrey A. Graves

Yes. Wireless and wire line, Bill.

Bill Gotellio

That’s wireless and wire line both?

Dr. Jeffrey A. Graves

Yes, I would say both.

[Audio Impairment – 8 seconds]


Both were

[Audio Impairment – 7 seconds]

relatively soft in the quarter and you know that’s where you read about, you know, cutbacks or push in capital spend, things like that. So it’s not something that they can live without forever but it’s something that they could push quarter by quarter and you certainly kind of see that happening around

[Audio Impairment – 43 seconds]

Bill Gotellio

And the True Front Access product addresses wireless or wireless and wire line?

Dr. Jeffrey A. Graves

It goes in both, Bill. It goes in both.

Bill Gotellio

And given the comments that you have mentioned about how

[Audio Impairment – 22 seconds]

well the qualification process appears to be going at this point, how much enthusiasm should we bring with those comments to potentially a resurgence of your telecom business? Maybe not necessarily the telecom industry, but your business because of market share gains.

Dr. Jeffrey A. Graves

Well, I’ll give you the positive and the negative. The positive is we’ve had a gap in our product line that this product fills, so it’s all kind of upside for us. At the same time, the telecom market has been soft. So the total quantities they’re buying are probably down. It’s been a hole for us meaning very low volume, so obviously that means there’s upside for us going forward. What are the puts and takes on that? You know, in a specific quarter or two, Bill, I don’t know. I’m still excited that we’re going to keep the line pretty full and have it running in Q1.

And I would have told you a quarter ago I thought it’d be running at capacity, I don’t know if that’ll happen or not, but we should see some nice upside from this product contribution. And hopefully it won’t be offset with anything else be

[Audio Impairment – 30 seconds]

Quarter by quarter things will push around because of CapEx spend by our customers and things like that, so we just can’t give you a number on what to expect.

Bill Gotellio

One additional question and completely unrelated, the $0.01 per share cost that hit in the quarter for the bank amendment what was that amendment that you purchased this quarter?

Ian J. Harvie

Yes, I think I covered it earlier, Bill, but we did an amendment back in August that basically gave us some additional flexibility in a number of areas. Just very briefly again, we got the ability to incur additional indebtedness in China.

Unidentified Analyst

How do capacity utilizations company wide – can you just give us a sense on how you’re running right now?

Ian J. Harvie

Yes. I mean, we don’t give specifics on pipeline capacity. I think what I’d be able to say, John, is clearly that and we’ve talked about it before the China plant as Jeff mentioned, that 30 to 40% type number and there were no supply line [effects] that’s fully in capacity there. So clearly we have no definitive plans to do anything different, but clearly we look at our manufacturing footprint continuously and in terms of, you know, can clearly flex so called where we make different products in different [quotes] in time, given to where we see the flexibility in that structure.

But I think just overall clearly as volume adjusts, you need to adjust and be ready to adjust your cost structure as best you can.

Unidentified Analyst

Can you talk a little bit about the competitive landscape and what the pricing environment is with the competitors? Talk about the rationalization that’s going on, I mean really the rationale for pricing or not that’s going on out there in the marketplace.

Dr. Jeffrey A. Graves

John, I think the whole industry is very sensitive to the fluctuation on the lead costs. And I think you’ve seen over the last year to year and a half a lot more discipline enter the industry. We’re trying to recover commodity costs and I’d say that discipline continues. With lead coming down, there’s – it’s inevitable the pricing rolls off some. But folks are being pretty disciplined in trying to recover the other cost increases and manage the business well. So I think it’s still a fairly disciplined environment out there.

Operator

Your last question comes from James Shantel.

James Shantel

Just a quick follow-up on your book-to-bill given the underlying precipitous decline in lead, we’ve actually seen some very nice underlying unit growth. Am I interpreting that metric correctly?

Ian J. Harvie

You are correct, James, that in a period of falling lead prices, the one-to-one book-to-bill would actually suggest from a falling perspective that it’s better than a one-to-one.

Operator

There are no further questions. Dr. Jeffrey Graves, you may proceed with your closing remarks.

Dr. Jeffrey A. Graves

Thanks operator. In closing I’d like to thank once again our shareholders, our customers and our employees for their support, their hard work and encouragement as we continue our effort trajectory. While the world is changing very quickly, the demand for our products continues to be resilient, driven by the infrastructure needs in North America and the developing nations of the world.

While many economies are certainly under pressure these days, the need for energy storage in each of our end markets and around the world remains very clear and fundamental to the future. We’re committed to meet this need globally and in doing so, be the recognized leader in energy storage technology worldwide. To support this vision, we’re investing in the necessary core technologies, capabilities and infrastructure that we need while driving for improvements in our operating performance that will allow us to sustain these investments over the long term.

With our demonstrated progress over the last three quarters, we remain more confident than ever of our success. As we approach the holiday season, on behalf of the employees of C&D Technologies worldwide we want to wish everyone a peaceful, joyous and prosperous New Year. We’ll look forward to updating you on our progress in Q4 and our exciting plans for the coming year. Thank you and have a great day.

Operator

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

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