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Executives

Gordon Ulsh - President & Chief Executive Officer

Phil Damaska - Executive Vice President & Chief Financial Officer

Edward J. O’Leary - Executive Vice President & Chief Operating Officer

Barbara Hatcher - Executive Vice President & General Counsel

Carol Kines - Senior Director Investor Relations

Analysts

Kathryn O’Connor - Deutsche Bank

Akshay Madhavan - Redwood Capital

Derrick Winger - Jefferies & Co.

Sean Lockman - Ardor Capital

Dileep Warrier - Thomas Weisel

Oliver Corlett - R.W. Pressprich & Co.

Robert Gosh - Mac Capital

Exide Technologies (XIDE) F1Q10 Earnings Call August 7, 2009 9:00 AM ET

Operator

Good morning, and welcome to the Exide Technologies fiscal 2010 first quarter results conference call and webcast. My name is Laurie, and I’ll be your conference operator today.

Presentation materials for today’s conference call can be found on the company’s website at www.exide.com by selecting Investor Relations on the left, and then by selecting presentations and webcast on the left side of the screen. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session.

As a reminder, this conference is being recorded today August 7, 2009. I would now like to introduce Carole Knies, Senior Director, Investor Relations for Exide Technologies.

Carole Knies

Good morning, and thank you for joining us. On the call today is Exide’s President and Chief Executive Office, Gordon Ulsh; Executive Vice President and Chief Operating Officer, E.J. O’Leary; Executive Vice President and Chief Financial Officer, Phil Damaska; also joining us our Executive Vice President and General Counsel, Barbara Hatcher; and Vice-President and Treasurer, Nick Iuanow.

At this time I would like to review our Safe Harbor Statement after which we will provide details of Exide’s first quarter results, followed by a question-and-answer period. Listeners should be aware that certain statements on this call may constitute forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995.

As such, they involve known and unknown risks, uncertainties and other factors that may cause 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-Q filed yesterday August 6, 2009, 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.

At this time I would like to turn the call over to Gordon Ulsh, Exide President and Chief Executive officer.

Gordon Ulsh

Thanks Carol, and good morning to everyone. Before I begin the discussion of our first quarter, I want to say how pleased and excited we are to be receiving approximately $34 million from the Department of Energy appropriate in the American Reinvestment and Recovery Act of 2009.

Our total investment including the DOE grab will be approximately $70 million for investment in Absorbed Glass Mat or AGM batteries, manufactory with the advanced carbon technology for Start/Stop, Micro Hybrid and [No Idle] vehicle applications.

We believe that the investment will put in place production capacity of approximately 1.5 million batteries, and create as many as 320 manufacturing jobs principally at our operations of Bristol, Tennessee and Columbus, Georgia.

Our AGM products both with and without carbon enhanced negative electrodes are fully production ready, and can meet existing customer and market demands. Additionally, the AGM battery with advanced carbon technology improves fuel efficiency and the dependency on imported all our supplies.

This grant by the DOE is a testament to our focus on superior quality product development that will support the administration’s goal to improve our nation’s fuel economy while reducing the effect of green house gases. Thanks of course to the DOE for your support of our proposal, and thanking the team at Exide who planed and prepared the application.

Turning to slide four, the results of our first fiscal quarter indicate the continued difficult economic conditions, experienced in the latter half of fiscal 2009. However, we are beginning to experience traction in some of our markets that imply stability.

Global net sales when compared to the prior year first quarter were down 39%. Unit volumes for all product types were 28% lower and lower average lead prices quarter-over-quarter accounted for 9% of the reduction in our global mid sales. Average lead prices were 35% lower this quarter when compared to the first quarter of fiscal ‘09.

Gross margins continued to improve, compared to the prior year period indicated a positive effects of our capital and restructuring investments which continue to improve efficiencies and lower operating costs. We finalized our plan to close our transportation manufacturing facility Auxerre France during the quarter, and have completed the plan to close our industrial energy manufacturing facility in Oberhalton UK.

Turning to slide five, you will recall that we invested approximately $63 million in restructuring in fiscal ‘09, addressing both legacy capacity issues and demand softness in the current market of which $44 million was recorded in the quarter ended March 31, ‘09. We invested an additional $36 million in the first quarter of this year.

The first quarter charge is principally related to the plant closure of our UK facility and the incremental severance cost related to cost to finalize the closure of our transpiration facility in France. The UK industrial energy production is being absorbed by our Lauterberg and Budingen Germany facilities. The closure of Auxerre resulted in improved operating leverage of our transportation segment with production capacity being absorbed by our four remaining facilities in Europe.

As you can see from the slide, the actions taken and to be taken would substantially reduce headcount by addressing legacy production capacity in Europe this year. We expect to begin recognizing the benefits of late fiscal ‘09 and fiscal 2010 first quarter restructuring investments in the second quarter of this year with acceleration of the second half of this fiscal year.

These cost savings benefits in combination with capital investments in our facilities lead us to expect that even with current headwinds that we will produce significant quarter improvement over the first quarter in adjusted EBITDA in the second quarter, and that the third and fourth quarters of fiscal 2010 will improve on prior year performance.

As the slide indicates, the expected annualized saving from our restructuring investments is estimated at approximately $98 million. Also, as you recall from previous conference calls, we embarked on an aggressive capital spending campaign during fiscal ‘09 spending just shy of a $109 million. The focus of much of that spending was on cost production through automation and improved process capabilities.

You will note we slowed the pace of such investments in our recently completed quarter as we awaited the decision from the DOE. Now, that we know our proposal has been granted we will move forward with our investment of approximately $36 million added to the DOE grant.

We’ve have been working closely with the State of Georgia for an economic financial support package and also expect to receive up to $6.3 million of potential benefits from investment in our Columbus, Georgia facility. We remain focused on maintaining an appropriate level of liquidity to fund our restructuring investments, and as we have we will move cautiously to approve incremental capital spending during the remainder of the fiscal year.

I would like to introduce E.J. Leary Exide’s Executive Vice-President and Chief Operating Officer who will provide an overview of our segments for the quarter. After E.J.’s discussion, Phil Damaska will provide a financial review and we will open the call for questions. E.J.

Edward J. O’Leary

Thanks Gordon, and good morning. I would like to begin with an update on the technology front. As previously communicated, we remain committed to our technology reinvestment strategy, as we believe it represents a key cornerstone for our future.

Global research development and engineering organization is working on a number of new and innovative material components and product technologies for implementation in the next two to five years. These include advanced lead acid, lead acid carbon alternatives for hybrid electric vehicles, lithium chemistries for emerging renewable energy along with large energy storage applications.

We are on plan with our recruitment of engineers and scientists for our two product development centers, one in Milton, Georgia, and one in Budingen, Germany, along with our advanced research and development center here in Milton. This recruitment includes recognized leaders from the battery industry as well as PhD qualified scientists from carbon, polymer, metals and ceramic disciplines. Our investment in these new laboratories is proceeding in Germany with an expected completion date in October and in Georgia with an expected completion date in January 2010.

We are pleased with the progress made in the commercialization of our Onyx lithium power products formally know as Mountain Power pointed at telecommunications and solar applications. In addition, we continue to move forward with a series of promising technology developmental projects, most notably with Nano-Terra Inc., Axiom Power and with Savanna River National Laboratory in concert with academic research from the University of Idaho.

As Gordon communicated in his opening your remarks, we are very pleased with the DOE grant received, and the great economic support from the States of Tennessee and Georgia. This is great recognition of the company’s engineering and manufacturing talent in providing leading edge products and solutions for today and in the future. Also in the near future we plan to participate in projects relating to Smart Grid applications, with US funding under the stimulus package.

If you turn to slide nine, I would now like to walk you through our four reporting segments. Transportation America’s net sales for fiscal 2010 first quarter decreased 25% when compared to the same period last year, primarily due to lower volumes in both aftermarket and OE channels.

The volume decline is related to the previous in-house loss in two large aftermarket customers in the forward OE business, which is included in the prior year first quarter results.

As discussed in an earlier call, in a highly competitive environment coupled with today’s economic realities dislocation of business is expected. However, we believe we are well positioned to reclaim profitable volume and have positioned the operations to take advantage of the market recovery when it occurs.

As discussed in June, we have reduced headcount by approximately 750 positions in Transportation Americas during the first quarter to align operations with the softness in demand, and expect the benefits of restructuring to begin for the second fiscal quarter.

First quarter results were somewhat impacted by mix, we experienced a wet spring, which [Inaudible] sales of seasonal batteries such as marine and power sports, comparatively speaking, the summer got off to a cool start with the delayed ramp up of the better automotive mix traditionally experienced in the latter part of our first quarter.

We had additional and new business to report as we continued to expand and develop our relationship with Robert Bosch. We have added battery types and volumes and are growing in North and South America in conjunction with our Bosch relationship. As well, we continue to add traditional Exide aftermarket accounts across our network in the US, Canada and Mexico.

Our Transportation Europe and rest of world segments has had its challenges, during large parts of the downturn in OE builds. However, we are beginning to see signs of traction in the aftermarket channels and stabilization of the OEs. In addition, we’ve finalized the execution of the Auxerre, France facility closure and coupled with other restructuring events we expect operational leverage to improve segment results beginning in the second quarter.

Net sales for the segment declined 47% versus the comparable period last year. Lower unit volume accounted for 20% in the year-over-year decline. The balance, a result of reduced lead pricing and foreign currency translation. The OE commercial vehicle markets had been the most severely hit in the economic conditions in Europe.

JD Power and Associates forecast a 50% decline in the OE commercial vehicle market in calendar 2009 with possible growth not expected until calendar 2011. The light vehicle market is getting a small boost to sales for small, lower cost autos due to the scrap incentives and progress in many European countries. While the scrapping program vary somewhat by country, it generally provides a cash incentive to replace cars nine years of age or older with more fuel-efficient autos.

These incentives expired at the end of calendar year and JD Power’s estimates the new car builds for calendar 2009 of approximately 16.8 million units versus 21 million in calendar 2008. The estimates for calendar 2010, is somewhat lower at 16.5 million units primarily due to the expiration of the scrapping programs.

As I mentioned a moment ago, we are beginning to see traction in our European aftermarket, in fact unit volume in June was up 20% compared to June of 2008. We are experiencing strong growing OE demand for Start/Stop and regenerative breaking applications and have a good market position with our AGM in mild hybrid floated products.

In concert with this in our Romano, Italy facility, we are moving forward in the phase two of dedicating an additional capital investment of $10 million, which will double our transportation to AGM capacity in Europe.

Turning to slide 11, our industrial energy America segment continues to be impacted by the economy as shown in the reduction of the unit volume and its impact on our sales for the quarter. Closely related to GEP and the movement of goods industrial market statistics for the International Truck Association or ITA, indicates an approximately 40% decline in North America OEM Electric Lift truck orders through June of 2009.

Since the beginning of the year, we have seen the downstream market extend operating leases, bids for new forklifts have been pushed out along with the recognition of reduced utilization of exiting equipment. The good news here is that the auto flow has been relatively stable, at least the last several months, which suggest that we may have found the bottom. Coupled with this we believe downstream inventories have been squeezed.

In our Kansas City plants we are 90% complete with the $7 million capital project to build the Exide Tubular HP product, previously components were sourced from our operations in Europe. With domestic production and based on the potential market we believe we will see a significant return.

In the network power channel, which is aligned with capital spending in telecom data, utility, cable and the UPS markets, the industry has been extremely conservative. However, the April through June period has been able to be stable at levels we experienced in March 2009 quarter.

Although we believe that suggests the build up of demand, it remains unclear when the end users will begin normal buying trends. We continue to survey our customers both motive and network for the pulse on our market, and a general consensus is that the market is stabilizing, meaning no further significant decline in sales this calendar, but they also do not expect a significant recovery until some time in calendar 2010.

Much like industrial Americas, the results of industrial energy Europe and the rest of world, continue to be impacted by the current economic realities. Net sales for the first quarter reflect 36% lower unit volume, as compared to the prior year period. Majority of the shortfall being in the motor power segment with the OE volume downturn is similar to what we experience in North America or where the OE channel in Europe is more dominant.

Network power is on more stable footing, but yet highly dependent on our customer’s capital spending programs. A promising note is the increased level of activity in alternative energy opportunities, an area where we are well positioned with our Sonnenschein product line.

Specific to Asia Pacific, we are seeing a significant uptick in coding, in telecom, utility and railway, from a customer perspective our customer Areva NP, a joint venture between France’s Areva and Germany’s Siemens, has awarded Industrial Energy Europe the top Areva supplier for 2008. Areva is a world leading nuclear technology company and is also engaged in renewable energy.

The award is based on 25 different criteria ranging from product quality, preparedness and innovation in areas of security and safety standards as well as environmental protection.

From an operations perspective, in addition to addressing the legacy capacity issues with the restructuring activity in Oberhalton England, the division has been methodically level loaded the remaining plants with a series of counter measures of eliminating temporary workforce taking advantage of government sponsored chart work weeks, extending shut downs and selectively taking days of the manufacturing schedule.

Also recent order intake in both motive and network power has increased; we believe it’s too early to suggest the markets are beginning to rebound; however, we are beginning to see stability.

During the first quarter we have continued our restructuring focus and has made much progress in our European operations. These were important actions necessary to position the company to operate more competitively in the future. We believe that all market channels are stabilizing and while we cannot predict when our markets will return to historic growth levels, we are confident that we will be a stronger competitor when that growth returns.

I would now like to turn the call over to Phil Damaska. Phil.

Phil Damaska

Thanks E.J, and good morning to all. Before I begin, let me remind you that 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 debt net income.

We define adjusted EBITDA as earnings before interest, taxes, depreciation, amortization and restructuring charges. Our adjusted EBITDA definition also adjusts reported earnings for the effective non-cash, currency, re-measurement, gains or losses, the non-cash gain or loss from reevaluation of the company’s loans liability as well as impairment charges and gains or losses on asset sales.

We also provide a summary to our calculation of adjusted net income and adjusted earnings per share in our press release to exclude the impact of non-operating items impacting our financial statements with the intend of providing information more comparable to those of some major competitors and peer companies.

Please refer to the press release and the tables at the end of this presentation for our reconciliation of adjusted EBITDA, EBIT and adjusted net income to net income or loss reported under Generally Accepted Accounting Principles. For a breakdown of sales and adjusted EBITDA by segment and for a summary of our adjusted EPS and free cash flow calculation.

Let me now direct your attention to Slide 15. As previously mentioned, our fiscal 2010 first quarter net sales decreased 39% to $593 million from the comparable 2009 period. Principally as a result of 28% lower unit volume and lead related pricing reductions which reduced sales by approximately 9%.

As mentioned by both Gordon and E.J, unit volumes were lower in virtually all channels, but again we believe the bottom has been reached. Although margin dollars are down on lower volume, gross profit as a percent of net sales for the quarter improved to 18% from 17.4% in the fiscal 2009 first quarter, the result of continuing cost reduction initiatives, which will position us for stronger returns when the markets rebound.

The decline in adjusted EBITDA is essentially all about volume, and the result of lower fixed cost coverage as we reduce production. As we move into the second quarter, we begin to realize the benefits of the difficult actions we have taken, and I will note we expect the first quarter to be our low adjusted EBITDA point and we expect to report higher EBITDA in the second half of fiscal year when compared to the third and fourth quarters of fiscal 2009.

We generated free cash flow during the current year quarter of $40 million compared with $45 million in the prior year period. Although I would point out that the prior year included proceeds from the sale of our previously closed facility in the amount of $16 million. Lastly, we invested $15 million in capital projects designed principally to do increased automation, which as Gordon mentioned, is at a consciously reduced rate of spent.

Moving to Slide 16, the increase of our net loss in the first quarter is impacted by our continued restructuring activities. The first quarter combined restructuring and asset impairment charge of $39 million after tax has allowed us to better align our productive capacity and fixed cost structure.

As volumes ultimately return to more normalized levels, our fixed cost leverage will improve. Our US GAAP tax provision continues to create noise in our financials, the result of increasing tax evaluation allowances in tax jurisdictions undergoing structural changes in an effort to turn the businesses around. This will continue to evolve through our fiscal 2010, and I believe it’s important to note our cash taxes in the current fiscal year are expected to amount to approximately $25 million.

We continue to strengthen our liquidity positions during the fiscal 2010 first quarter as net cash provided by operating activities was $57 million compared to $40 million in the prior year period, primarily driven by improved working capital performance.

Approximately, $19 million of the current period operating cash flow was the result of factoring selected European accounts receivable, and although we did not require this funding, we believe it’s important to keep these facilities active and to ensure their continued availability.

We had total liquidity at June 30th, 2009 of approximately $314 million, compared to approximately $297 million of total liquidity at March 31st, 2009. Our net debt declined in excess of 7% during the quarter to $545 million and I will remind you that we have no near term debt maturities and no financial maintenance covenants.

With that said, I believe Gordon has a few closing remarks and then we would be happy to take your questions. Gordon.

Gordon Ulsh

Thank you Phil. As indicated during this call, we expect to begin realizing incremental benefit from the capital and restructuring investments made in 2009 and during the first quarter of this fiscal year. The efficiency improvements and cost reduction actions are designed to lower our manufacturing costs as well as appropriately aligned capacity in our facilities.

With that said, we expect to report significant sequential improved adjusted EBITDA in the second quarter and that adjusted EBITDA in the third and fourth quarters in fiscal 2010 will improve over the corresponding third and fourth quarters of fiscal ‘09.

This of course assumes no further significant contractions of global economy at a rational pricing environment. The Institute of Supply management’s monthly index on manufacturing activity has improved seven straight months, showing this sector is contracting less and less.

The factory sector is particularly important because activity there often leads to broader economy. The ISM reported a rise at a time when [Melli] policy makers and private sector economists see an end in the recession coming into view, even though few expect to see robust rebound follow.

The government released probably its first estimate for gross domestic product in the second quarter, indicating the economy contracted at about 1% annual rate, April through June. This contraction is actually positive when you consider that GDP shrank by 6.3% in the fourth quarter of ‘08 and 5.5% in the first quarter of ‘09.

This data suggests the recession, while it has not ended, has eased. We are encouraged by the fact that our market channels appear to be stabilized and that many customers share this view. As E.J. stated earlier we don’t know exactly when our markets will return at historic growth levels, however, we believe we are better positioned globally when that time occurs.

We thank you for joining our call today and now we would be happy to entertain any questions you may have. Laurie.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Kathryn O’Connor - Deutsche Bank.

Kathryn O’Connor - Deutsche Bank

I just wanted to take a look at slide five maybe. I guess, did you guys take up the cost savings that you were expecting from 70 last quarter to 98 this quarter?

Phil Damaska

I would also point out Kathryn, this is Phil by the way, that we’ve identified that there are going to be further restructuring activities as we move through the remainder of 2010, although I will note that they are going to be at a lower level than we experienced in the first quarter. So, the $98 million takes into account, activities already implemented as well as those that we’ve got on the drawing board.

Kathryn O’Connor - Deutsche Bank

So may be taking that from where we were at the end of last quarter, can you just tell us how much more cash that we are going to spend to get that extra $28 million worth of savings then?

Phil Damaska

I don’t think its very good to quantify the incremental impact of future activities, we certainly have a sense of what they are going to be, but since we haven’t dusted them off, and obviously you have to go through a lot of works council discussions, we are not prepared to talk about what that’s going to be.

Gordon Ulsh

But, I think I’d add a little bit more. You saw the amount of money that we spent in the first quarter. I think it’s our general view Kathryn that the rate that we see in the balance of the year will be below that that we saw in the first quarter.

Kathryn O’Connor – Deutsche Bank

Okay. I guess if I take that in the context of the paybacks you guys normally look for, do you think that these incremental savings are going to be sort of in more like a one year payback time period or maybe closer to a two year payback?

Gordon Ulsh

I would say closer to your first number, on average. Knowing that there are differences by country and activity, but I would say closer to your first number again.

Kathryn O’Connor – Deutsche Bank

Okay. Thank you very much for the volume numbers by each of your segments, those are helpful. I was hoping though maybe if you could get a little bit more detail in terms of on the transportation side, is there anyway you could give us the volume breakout, OE versus aftermarket, and then on the industrial side is there any way you can give us the breakout on volume motive versus reserve?

Edward J. O’Leary

Kathryn, this is E.J., let me maybe address your question on the transportation side. As you noticed in our chart we talked about a 30% reduction in unit sales. When you go to the sort of the industry data that’s out there, and we don’t have the numbers for June, but we have them for April and May. The aftermarket was down in April 4.2%, OEM was down about 34% and the total was down about 9.4%.

In May, the aftermarket was down 5.4%, OEM was down 39.3% and the total was down about 10.9%. The NAPA and the CSK loss out of that 30% was probably 13% and 14%, the four piece that we mentioned was approximately 5% and the balance of that was really the market that we saw, and we haven’t really broken down the balance of the industrial to the second part of your question.

Kathryn O’Connor – Deutsche Bank

Okay. That’s very helpful, so I guess you are saying if you kind of add up the 5% and then 13% to 14% kind of that’s what happened to the industry, you can roughly get to the number that you were down in terms of volume.

Gordon Ulsh

Correct, that’s correct,

Edward J. O’Leary

And then when you look at our industrial chart that was on Gordon’s presentation, the motive for the entire company is about 52% and that’s where I sort of highlighted the impact of what’s happening with the lift truck markets. Although we’ve had shortfall in the network power and we do see that being stable at this point in time and certainly there is an uptick on quotes or request for information.

Gordon Ulsh

In the package that you have, there is a breakout showing in transportation, how much of it’s domestic and international, and breaking it out on a percentage basis the aftermarket OEM for both the industrial and transportation.

Kathryn O’Connor – Deutsche Bank

Then just maybe a follow-up and I will let somebody else ask a question to the couple of the data points you put out. So, just back to the Transportation Americas number that 30% volume impact and then the breakout of Ford and CSK NAPA, so for CSK NAPA how many more quarters should we expect to see that 13% to 14% still running through, next two quarters, next three quarters, how many more quarters do we have to go through numbers?

Gordon Ulsh

On account basis you are going to have a couple more quarters with the NAPA and CSK and in fact you will have the same for Ford business, I think that was in our third quarter. So it’s going to continue for the next three quarters.

But we will walk you through that as we have done in this call as to sort of the cap on the current quarter versus the prior period.

Kathryn O’Connor – Deutsche Bank

So you think it’s definitely not just two quarters, it’s going to be three quarters.

Phil Damaska

Certainly we enjoyed the bulk of the NAPA business Kathryn in the full year of 2009, the CSK business began to space out in the fourth quarter of last year and as E.J. pointed out the Ford business was substantially gone midway through the third quarter.

Kathryn O’Connor – Deutsche Bank

Okay. So maybe it’s like a two and half quarter kind of thing.

Phil Damaska

Nice summary.

Kathryn O’Connor - Deutsche Bank

Okay, and then just the number you threw out for the industrial decline, you said the company on the industrial motive side was down on a total basis, volume wise 52%, is that what you were saying?

Edward J. O’Leary

No, that’s basically a split between motive power and network power for the industrial energy segment. Motive power represents 52%, network power represents…

Kathryn O’Connor – Deutsche Bank

Oh right, of course yes, okay, but you don’t have the breakout, sorry, go ahead.

Edward J. O’Leary

That’s on slide 18, but the data point that I used the industrial statistics that came out from the ITA talked about the 40% reduction through the month of June on a year-to-date basis.

Kathryn O’Connor – Deutsche Bank

But that’s just for North America, right?

Edward J. O’Leary

They are very similar number over in Europe, as I said before, Europe is more dominant on the OE side than it is in North America, but very similar to decline number.

Operator

Your next question comes from Akshay Madhavan - Redwood Capital.

Akshay Madhavan - Redwood Capital

The first question was really to do with detrimental margins, is there anyway you can give us a sense on how to think about detrimental or hopefully incremental margins when we go into the last nine months of this year by segment?

Gordon Ulsh

No, we don’t breakout margins by segment, and have not forecasted across the business any sort of degradation in margins, but we don’t do that by segment.

Phil Damaska

I think it’s safe to say that, should volume stabilize and should we see the normal seasonal uptick in the transportation business, we’ve clearly got a lower fixed cost base and therefore should see improving margins as we leverage the fixed cost better.

Akshay Madhavan - Redwood Capital.

I guess what I am really trying to understand is if we assume lead price would stay stable at these levels, how to think about the impact of the lead pricing on the North American business?

Gordon Ulsh

We have said broadly over the last few quarters that with the exception of some time lag we don’t look to lead to either inflate nor deflate our margins as we demonstrate a recovery and commitment to recover those variations in the market place. So in transportation where with OE we have got escalators, we have got pretty aggressive or consistent pricing disciplines in the aftermarket, you can see some time lag but we would not expect to see or credit lead pricing movement with margin gain or loss.

Akshay Madhavan - Redwood Capital.

To be clear I meant on the lead recycling portion of your process as opposed to just the OE and aftermarket portion.

Gordon Ulsh

Sure, we have not gone into margin and/or pricing methodologies on the recycling side of the business.

Akshay Madhavan - Redwood Capital.

Okay, understood, thank you. With regards to your, just two more questions if you don’t mind. With regards to the restructuring investments for the remainder of year, can you at least give us a sense, I know you said probably run rate is lower than the first quarter, but can you give us a sense of a cumulative amount that you might be looking to spend over the next nine months?

Gordon Ulsh

Well, the way I answered the question is that for the next nine months we would expect restructuring to be below in aggregate of what you saw in the first quarter.

Akshay Madhavan - Redwood Capital.

A follow-up to the restructuring question, which is can you give us a rough sense of how the annualized restructuring benefits breakdown between labor and other operational savings starting in 2011 when you have the full impact close to a $100 million?

Phil Damaska

Most of the cost we have incurred are severance related, and that suggest that there is a lot of labor coming out of the equation, and as you are well aware, as you close factories and we have announced the closure of two, the fixed cost related to those factories go away, and given same levels of volume or improved volume you then leverage the exiting fixed cost of the facilities that remains.

Akshay Madhavan - Redwood Capital.

Yes, I was just hoping you can give me sort of an order of magnitude sort of 70% labor and 30% other, that sort of a good sort of.

Gordon Ulsh

Well, the labor in our cost of goods is variable, and to the extend that we don’t produce product we generally take labor out of the factory and as close as possible to a direct relationship. So, in our cost base today we have had a series of short work weeks, etcetera. Closures, which for the most part takes that labor out, so it’s a far higher percentage on the overhead side of the equation than labor.

Akshay Madhavan - Redwood Capital

That’s helpful. On CapEx, is there sort of a number we should think about for full year, obviously we know the portion that we will get spend to on DOE and maintenances, is there a number above and beyond that we should think about in sort of aggregating total CapEx for the year?

Phil Damaska

Well, I think what I would suggest to you is that, the DOE grant which was right to get obviously, and we have to match that, it’s going to be over a couple of year period of time, so that $36 million that Gordon mentioned isn’t going to be spend all in 2010. We have talked about capital in the $90 to $100 million range for fiscal ‘010, and I don’t think we change that range at this point in time.

Akshay Madhavan - Redwood Capital

Great, thank you. My last question which is, with regards to RC availability, can you just refresh us on exactly how that’s calculated, because I believe it’s a $200 million facility, and at last glance there was about $56 million letters of credit, so, can you explain how the availability is further constrained above and beyond that please?

Edward J. O’Leary

Yes, I mean that’s obviously collateral based, and it’s principally based on receivables and evaluation on inventory, we heavily weighted towards those assets in the US but also includes assets on the UK and Australia, and obviously as we constrained or reduced our working capital that puts a constraint on the collateral that underlies the amount that we can draw down in a facility.

So, now we have seen a bit of a drop, as the season takes hold and inventories build and then receivables take hold as we sell, we would expect the collateral will increase again.

Akshay Madhavan - Redwood Capital

Its borrowing base driven as it pushes to permitted secure debt driven?

Phil Damaska

Correct.

Operator

Your next questions from Derrick Winger - Jefferies & Co.

Derrick Winger - Jefferies & Co.

Good morning, just clarifications. What is the availability on the lines of credit and I thought I just heard $56 million of letters of credit we have taken, and then any restrictions on buying back debt and lastly, yes, just on the restructuring, I though that restructuring cost are going to be more like $10 million to $15 million in the first quarter, so is there kind of a contemplated level for fiscal year ‘010 on restructuring cost?

Phil Damaska

Let me see if I can get those in order, the availability under revolver is a $110 million based on the collateral that’s available today and that’s just closed in the queue. Second question was; are we allowed to buy back debt?

No. The third question, you are right, as we spoke to you in June we had anticipated restructuring charge of $15 million range as I recall that was principally related to at that point unplanned closure of our overall UK facility. As Gordon had mentioned clearly, a final negotiation with respect to the Auxerre, France closure ultimately cost us more severance than we had assumed when we recorded that reserve initially.

Those two components Auxerre finalization and overall with the principle drivers of the first quarter charge as well as severance cost around the temporary idling of Baton Rouge and the layoff in Bristol were the other two major pieces of that.

Gordon Ulsh

We haven’t contemplated those pieces over the increase in Auxerre at the time of the last $15 million reference?

Derrick Winger - Jefferies & Co.

No range for overall restructuring in fiscal year 2010 and then what would the letters of credit drawn against facility?

Gordon Ulsh

First on the overall restructuring we said from the $36 million that we charge for in the first quarter, we expect that the balance of the remaining three quarters of the year will be below the first quarter low.

Derrick Winger - Jefferies & Co.

Right, and letters of credit drawn?

Edward J. O’Leary

The letters of credit drawn were $57 million. The longest availability of $110 if you combine those two that’s the total now available under the facility which Phil had mentioned earlier is driven based off accounts receivable and inventory, it’s an AVL facility.

Operator

Your next question comes from [Sean Lockman] - Ardor Capital.

Sean Lockman - Ardor Capital

This is Sean Lockman for Walter. Just a quick question, I know that you guys are coming up to have to negotiated contract with supplied few separators, I believe at the end of this year, I just wonder where that, where you guys fit on that, or if you are looking to sort of diversify your supplier base for that part of your material?

Gordon Ulsh

That’s a good point, obviously we don’t want to comment a lot about supplier negotiation, but it’s certainly a large component of our battery cost.

We certainly are reviewing all of the options we have with regard to other suppliers, you are right, the contract expires at the end of the year, we are very comfortable that we will have contracts in place with the level of supply that we need through the future. So we are comfortable at the process of that, obviously we would like to get it concluded sooner rather than later.

Sean Lockman - Ardor Capital

Great, thanks. One more question, I was just wondering, are more sort of general, top down level, I mean in terms of your gross margins, going forward, if you sort of carry through restructuring and realize some savings, is there a level of gross margin that we should be looking for just for the business as a whole that are achievable, that you guys foresee in the coming quarters?

Gordon Ulsh

I don’t think we’ve clarified any sort of end game in terms of margins. Obviously, as we get the business settled after this restructuring is going to provide us we think an improved level, but I think it’s premature for us to go out and sort of set a target right now, if we would choose to do so, I think it’s a little bit premature.

Sean Lockman - Ardor Capital

Okay, thanks. One quick question. If we come back to the lead pricing and cost, we’ve seen that lead costs have been rising over the last month or so, and just wondering, if and when you guys might sort of anticipate price increases for your products that might be coming as a result of those cost rising?

Edward J. O’Leary

Sean, this is E.J Leary. You are right, we have seen an increase, if you go back to the first quarter I think the average for metal unit ton was approximately $1150 and for the second quarter of the calendar year, it’s closer to $1500.

As we’ve expressed on previous calls, over the last 24 months, we’ve done what I consider to be a real good job making sure that we’ve got the mechanisms in place with pricing escalators.

So, as we see a one month trailing or in some cases, we’ve got quarterly escalators, we capture those, we price it back into the upcoming quarter, with the accounts little bit different on the aftermarket side, or if we see that pressure obviously we come out with a new price and include any other economics that may be occurring at that point in time.

So, we feel good about the pricing mechanisms, pricing itself I think is somewhat stable at this point in time, it’s a little bit shaky four or five months ago, but it seems to be a little bit stable at this point in time.

Gordon Ulsh

But if you would expect to see lead at this level or increasing, then I would think we probably look for some upper price measure in the market as manufacturers look to recover that.

Operator

Your next question comes from Dileep Warrier - Thomas Weisel.

Dileep Warrier - Thomas Weisel

Actually, it’s nice to see the boost-on on EBITDA outlook. I was just wondering on the demand side, what gives you the confidence if things have bottomed out. Are you seeing that in auto trends in the quarter update?

Gordon Ulsh

Remember that the, to use your words, bullish term in terms of the EBITDA, is not based on substantial outlook of increased order demand either in industrial or transportation in any part of the globe. Now, having said that, Asia continues to be an expansion area, you have seen the strong GDP, you’ve seen strong factory demand over there, we would expect that to continue, but that’s been sort of consistent in our outlook.

So, it’s not based on volume recovery, this is really the result of the fact that the work that we’ve been doing vis-à-vis restructuring, the work that we’ve been doing with all sorts of plans that approve our lean manufacturing performance, improve our first time yield in our factories, and get our capacity utilization more in line with the market, this is a reflection of what we think is the result of all that work. Other than what you would have seen in terms of seasonal variation etc, we do not anticipate in that tone, we do not anticipate bullish growth.

As E.J, and I have both said, we are beginning to think that based on coding activity and order trends with the industrial side, has sort of reached the bottom which we are bumping along, I think you’ve heard that or seen that in other earnings reports, but nobody is forecasting any great recovery, and I would say the same as that in the automotive sector.

Dileep Warrier - Thomas Weisel

Yes, that makes sense, and then, this may seem a little irrelevant in the grant scheme of things, but the $34 million grant that came through on the cost share, is all the $34 million from your end or does Axiom Power also come up with the contribution?

Gordon Ulsh

In the technical piece of that, that $34 million is our grant and as you said, it is matching and is resetting our text, when we go through that negotiation establish a timeframe and sort of the rules for investments and recoveries, that money from the government, then we will know sort of the short term impact on how that lands, but that’s the funding that was included for our facilities in that application.

Operator

(Operator Instructions) Your next question comes from Oliver Corlett – R.W. Pressprich & Co.

Oliver Corlett – R.W. Pressprich & Co.

Gordon, in the press release you’ve mentioned, your EBITDA forecast is sort of contingent on there being rational pricing in the markets going forward. I just want to lead into that, that you’ve seen from the irrational pricing there or could you say a little bit about the pricing, and I see you are talking about the aftermarket mostly.

Gordon Ulsh

Well, I was talking about the after markets yes, or anything going on in terms of maybe even, telecom with the coding activity going on, and no, I would tell you that broadly we haven’t seen evidence of any sort of irrational. It’s just sort of a footnote Oliver, that if the economy tacked a bit more and folks got irrational or more aggressive, I just wanted to point out that was one of our assumptions, but no it’s not a signal we’ve seen anything untoward that regard.

Oliver Corlett – R.W. Pressprich & Co.

Because I did notice that, particularly in Transportation North America, your cash gross margin was as low as it’s been for quite a while, whereas you’ve seen some recovery in some of the other markets. In the rest of the world and you’ve actually had a bit of a bounce back in the margin there versus the March quarter at least. Can you say, what’s underlining that exactly?

Gordon Ulsh

Well, we’ve seen some restructuring and realignment of capacity in the aftermarket in Europe, and we expect that part of our improvement on a go forward basis is going to be the flow for result of realigning our manufacturing into Salina and Manchester where we’ve got them at real high capacity utilization. We expect to see that flow further in North America.

Oliver Corlett – R.W. Pressprich & Co.

In the industrial rest of the world, you have said in the presentation that you are still benefiting from relatively long legs in that business. I know in the past you’ve said you were focusing on reducing those legs a little bit, have you abandoned that idea or is that what’s going on there?

Gordon Ulsh

We’ve not abandoned it, in fact most and I’ll let E.J. add a little bit color on it, but in some of the lift truck we are still on quarterly kind of lags with the very much of other business has been moved into shortened, one month at a time, timeframe in terms of the adjustment of lead, we do still have some longer periods on the industry. Do you want to add to that comment E.J?

Edward J. O’Leary

Yes, Oliver, historically we’ve been a sort of a quarterly, in fact what we’ve seen in the last several quarters is that a lot of the OEs has actually requested and we’ve worked with them to go to a monthly, and it helps them to control their pricing a little bit better and certainly helps us at our end, and so that side of it’s been tightened up, it’s not a 100%, but it’s the majority that we’ve moved more to up to a quarterly in Europe, this gives me more to a monthly in Europe and we are still somewhat at a quarterly here domestically in the US, but then it has been nicely tightened up, and again, support from the OEs as well.

Oliver Corlett – R.W. Pressprich & Co.

I guess, finally on the restructuring charges, can you give an idea of what the cash impact is going to be quarter by quarter going out or, how much is upfront generally and how much is deferred?

Phil Damaska

Oliver, this is Phil Damaska. The fourth quarter charge, as Gordon reminded you folks, was about $44 million. Most of that was cash related severance, most of that was related to the Auxerre facility. It’s a long drawn out process to close facilities in Europe as you are probably aware.

The closure of Auxerre and [Oberhalton] are nearing completion in terms of negotiation, likely people would put on garden leave and then severed after the final individual negotiations are done with respect to severance. So we would expect the Auxerre and Oberhalton to be funded the late second quarter, early third quarter.

Oliver Corlett – R.W. Pressprich & Co.

Okay, and the charges that are coming in upcoming quarters, would they tend to be mostly cash?

Edward J. O’Leary

It will also be mostly cash, yes.

Gordon Ulsh

It will continue to mostly be in that category of severance people related cost, which make them a pretty early up in terms of the time from charges to expense.

Oliver Corlett – R.W. Pressprich & Co.

Right, and just one final question. On the receivables facility that you used in the quarter, I think you have said in the past, you were sort of happy not to be doing that because it was somewhat expensive, is there some reason why you would go back to doing that?

Edward J. O’Leary

It’s not really overly expensive; in fact it’s pretty cost effective from an interest perspective, but as we went through last year incurring any interest, when we didn’t need the money it didn’t seem to make economic sense.

Now, clearly those are renewable on an annual basis, and it’s nice to have that available liquidity. So we made a decision during the quarter that we should keep them somewhat active such that the banks don’t consider them to possibly eliminate as we re-up the facility. So there are obviously the cost albeit, not an overly dramatic cost to keep them in place. We were just down in liquidity and that’s why we took some money down.

Operator

Your final question comes from [Robert Gosh - Mac Capital]

Robert Gosh - Mac Capital

Just a follow-up. On the last call, with respect to the funding of the restructuring charges, you took a nice charge this quarter, but you came in and just looking at the table and your queue you came in with I think $37.8 million of previous charges, which now look like they haven’t been funded either, and this is on page 16, and I am just wondering when we can expect those to be funded?

Phil Damaska

As I just said a few minutes ago, you have to wait until you finalize the formal negotiations with the works councils in these countries in Europe and as we said, we are nearing the completion of that process in both the France situation as well as the UK situation.

Once those final negotiations are complete the funding will start, and again, we expect to have most of the funding under both transportation in France facility and the UK industrial energy facility funded late second quarter, early third quarter.

Robert Gosh - Mac Capital

Okay, my apologies, I thought you were talking about just the new charge taken.

Phil Damaska

That was both.

Operator

At this time there are no further questions, I will now return the call to management for any final remarks.

Gordon Ulsh

Thanks Laurie. Well, I certainly want to say thanks to all of you who have participated in the call. We know it has been a challenging period in the sort of historic times, we think and we are proud of the management team for working our way through and the way that we have positioned the company to be stronger coming out of the other side. So once again thanks for joining the call. With that I think Laurie we could disconnect.

Operator

Thank you. That does conclude today’s Exide Technologies fiscal 2010 first quarter results conference call and webcast. You may now disconnect.

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Source: Exide Technologies F1Q10 (Qtr End 06/30/09) Earnings Call Transcript
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