C&D Technologies, Inc. F2Q10 (Qtr End 07/31/09) Earnings Call Transcript

| About: C&D Technologies (CHP)

C&D Technologies, Inc. (CHP) F2Q10 Earnings Call September 8, 2009 10:00 AM ET

Executives

Ian J. Harvie – Senior Vice President and Chief Financial Officer

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

Analysts

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

John Franzreb - Sidoti & Company

Bill Dezellem - Tieton Capital Management

[Sean Lockman] for Walter Nasdeo - Ardour Capital Investments

[John Evans] – Edmunds White

Operator

Good morning. My name is [Janice] and I will be your conference operator today. At this time, I would like to welcome everyone to the C&D Technologies second quarter earnings release conference call. (Operator Instructions)

I would now like to turn the call over to Ian Harvie, Senior Vice President and Chief Financial Officer of C&D Technologies. Mr. Harvie, you may begin your conference.

Ian J. Harvie

Good morning everybody, and thank you Janice. 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, this call contains time sensitive information that is accurate only as of the date of this live webcast for this call on September 8, 2009.

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 other than historical facts 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 the company’s Securities and Exchange Commission filings including without limitation the company’s annual report on Form 10-K for the fiscal year ended January 31, 2009, 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.

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. C&D’s financial performance in the second quarter represented a solid, sequential improvement, consistent with our strategies and objectives as well as with the expectations we articulated in the last quarter. We’re especially pleased with our recovery in unit volume shipments, as this represents true fundamental growth and is indicative of the underlying growth of the business.

Unit volume in the second quarter was up 8% from Q1 and 1% from Q2 a year ago, signifying stabilization from the depths to which volume had dropped as a result of the global economic slowdown, and reflecting the traction we’re now gaining from new product introductions and our Asian growth platform. Our new unit volume growth, which has consistently exceeded industry growth in the markets we serve, is the best evidence of our customer’s confidence in the quality, reliability, dependability and innovative product technology that’s been a hallmark of C&D Technologies for over 100 years.

We’re also pleased with the progress we achieved in expanding our margins, an encouraging sign that our hard work and managing costs and improving efficiencies throughout our organization is achieving the desired result of improving the leverage in our business model. Margins as well as revenues are also benefiting from our success in introducing new products and expanding into new geographies. While we’re proud of this progress, it’s far from complete, and as we enter the second half of our fiscal year we would anticipate further margin gains through higher volumes, improved absorption in operational improvements and a richer customer and product mix.

It’s important to realize these accomplishments have occurred at a time when our underlying end markets, while stabilized, have not markedly improved relative to the conditions we observed at the end of the last fiscal year and into the first quarter. As we look at each of our core markets in North America, telecommunications has shown signs of a recovery in recent months and our new, TRUE Front Access telecom product range is gaining traction. Energy markets, comprised of power generation, power distribution and transmission, have remained stable over the summer as our customers await the impact of federal stimulus investments that promise to refresh infrastructure in the U.S. and drive increased use of renewable energy resources.

In the Uninterruptible Power Supply, or UPS market, while replacement activity is occurring, new build activity which spurred significant growth over the past few years and has traditionally been one of our largest markets remains weak, with few traces of any sustained pick up in capital spending, which is the key to renewed growth in this market segment. Our ability to grow revenue in North America while expanding our margins in the face of these end market conditions, reflects the value our customers see in the new products we’re now introducing and the continuing investment we have made in our business over the last few years. This positions us well as we ultimately emerge from the full effects of the recessionary environment in North America.

Looking at the other geographies we serve, demand in Europe and the Middle East has not shown any appreciable improvement since the beginning of the year. We expect this condition to continue in the foreseeable future.

In Asia, however, all of our key end markets have returned to growth as the major economies of China and India continue to recover, and these governments invest heavily in their nation’s infrastructure. We’re very excited about our Asian operations, where revenues in the second quarter more than doubled from the first quarter. Furthermore, next month we’ll be introducing an extensive new line of products primarily geared to the Chinese telecommunications industry, their largest and fastest growing market for stored energy, as well as the Asian UPS market. Never in the history of our company have we launched this number of new products in a similar period of time and we’re excited about the opportunities for growth that we now have, both with our global customers that operate in Asia as well as with an increasing local base that values C&D’s technology and reliability. We believe Asia holds great promise for the balance of this year and well into the future. More on this in a moment.

Let me first review a few of the financial highlights for the quarter before handing the call over to Ian to review those results in more detail. For the second quarter, we reported a net loss of $5.6 million or $0.21 per fully diluted share on revenues of $82.4 million. Compared to the first quarter, results in the second quarter reflect a significant sequential improvement on the top line, as well as on the bottom line where the loss was nearly cut in half relative to the first quarter. For the second quarter, volumes were up 8% and revenues were up 11.9% from the first quarter, while volumes were up 1% from the year ago period. Revenues compared to the year ago period were down due to the influence of lower commodity costs.

Gross margins in the quarter improved a healthy 500 basis points on a sequential basis. We expect this trend in sequential better margin performance to continue as we realize the benefits of ongoing volume improvements, a richer mix of products sold and other operational and efficiency improvements.

As the credit crunch persists, we remain extremely sensitive to strengthening our financial position. This quarter we generated $1.9 million of cash from operations, up from breakeven results last quarter. We’re vigilantly managing our inventory and receivable levels, although these needs are to be balanced with our growth opportunities, especially internationally.

From a new product standpoint, we’re now beginning to reap the benefits of our heightened R&D focus on stationary energy storage. Both the msEndur II, our two-volt green battery system targeted at wireless communications and data center applications, and our recently launched TRUE Front Access 12-volt battery system, targeted specifically at outdoor communications networks that are essential to meeting the growing bandwidth needs for wireless devices such as Apple’s iPhone and other similar data-intensive portable devices that are increasingly straining the network infrastructure in the U.S. and abroad, are the culmination of these R&D efforts.

We’re pleased with the success they enjoyed in the market this quarter. In addition to penetrating existing markets, these new products are expanding our addressable horizontal markets and providing opportunities in new geographies that significantly enhance our total available market for the company. These designs are now fully implemented in our U.S. and Mexican operations, and they form the basis for many of the new products we will be launching in Asia in the coming months.

These products are being supported by aggressive marketing and sales efforts, offering our customers the highest power, the longest life in the industry, as well as their smaller footprint versus competing products. Our new products have been engineered to meet the increasingly complex challenges in a variety of energy storage applications, including markets in which we did not previously have a presence.

Looking to Asia, under the leadership of our new Asian general manager, momentum in our China operation is building. Over the next several months we plan to introduce an extensive new line of energy storage products targeting China’s large and growing telecommunications market, an industry in which the Chinese government is planning to invest over $40 billion, with the initial contracts already being issued for wireless 3G network expansion. While our plant in Shanghai has primarily been manufacturing UPS products in the past, we have the capacity to add manufacturing for a broad range of telecom products and the equipment to do so is now being installed.

We’ve also got an expanded UPS product offering plan that we will shortly be rolling out, targeting the specific needs of data center customers in Asia, where expansion has continued through the downturn in the world economy. I’ll be in China later this month for the official announcement of our new Asian product launches, but we’re already making preparations to take orders and manufacture these products beginning in October. With the size of the opportunity we now have ahead of us in Asia and the availability of new product designs manufactured in our state-of-the-art facility in Shanghai, we expect to see a more meaningful contribution from China beginning this quarter and accelerating from there.

Much like many other industries in the U.S., while we don’t count on it we’re mindful of the incremental market growth opportunities that may be available as an outcome of the U.S. government’s stimulus programs related to infrastructure investment. As the pace of these funds are less predictable than our historic markets, we await inclusion of their benefits in this commentary until it actually occurs. That said, we’re investing significantly in R&D to support growth markets such as renewable energy, smart grid and other advanced energy storage technologies for improving the efficiency of the electrical system in the U.S., all of which represent fertile new markets with truly exciting prospects for rapid growth in our business. With over 100 years of industry leadership upon which to draw, and an outstanding existing customer base in the utility market, you can be assured that C&D will be at the table as important decisions regarding the future of energy storage technology are debated.

Before passing the call over to Ian, I also want to welcome David S. Gee to the C&D Board of Directors. Mr. Gee has an extensive background in the U.S. utility industry, having served most recently as Vice President of Strategy for AES Corporation, one of the world’s largest power companies, in addition to his prior experience with McKinsey and Company, where he focused on the global oil and gas industry. Dave’s experience will prove invaluable in strengthening our strategic position as a leading supplier of energy storage to the North American energy sector, especially with exciting possibilities developing around next generation and grid scale energy storage applications.

Between our traditional end markets and the new end markets that have opened up as a result of our new product offerings in both North America and China, we have an increasing and diversified number of markets that support our second half revenue objectives. And with the various efficiency and cost initiatives of the last several years, and some leverage from an increase in total and especially new product revenues, we have a clear path to improving our margins and cash flow even in the stagnant, macroeconomic environment that we continue to find ourselves in in North America. These factors should enable us to achieve our previously stated goal of returning to profitability in the second half of this fiscal year.

We appreciate the patience and support of our shareholders, the loyalty of our customers and the hard work of many of our employees who are central to our success.

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 second quarter were $82.4 million, up 11.9% sequentially from the first quarter, but down from $92.5 million in the second quarter of last year. The bulk of the sequential revenue increase was attributable to volume growth, which increased roughly 8%. In addition, we would also note that revenues from both new products and our China operation increased significantly relative to the first quarter.

For the second quarter, the company reported a net loss of $5.6 million or $0.21 per diluted share. Of the total loss for the quarter roughly $1.3 million pretax or $0.05 per diluted share can be attributed to non-cash interest charges arising from rules governing the accounting for our convertible notes and non-cash tax accruals despite the net loss. Compared to the first quarter our financial performance improved by approximately $4.2 million or $0.16 per share. In essence, the loss in the second quarter was about half the loss of the first quarter. Base on the improvements in trends from the second quarter, we remain confident we’re on pace to achieve profitability in the second half of this fiscal year. In the second quarter of last year, we reported a net loss of $1.4 million or $0.06 per diluted share.

Gross margins for the second quarter were 12.1%, up almost 500 basis points on a sequential basis from 7.3% in the first quarter. Relative to the first quarter, margins benefited from sales volume growth, a richer product mix and lower lead hedging losses. While lead volatility can still impact our business, we are more confident than ever the refinement of our lead management procurement strategies, pricing actions and hedging activities over the last few years have greatly reduced the risk that we face in commodity management.

The cornerstone of all of these programs today is to lock in margins at the time of order acceptance. Nevertheless, we must and will respond to lead volatility through our pricing actions quickly. This approach is evidenced by the implementation of two price increases for our non-contractual business over the last month alone, combined an 8% increase and another planned shortly, as we aggressively look to offset the recent run up in lead with LME prices having increased from $0.50 per pound at the beginning of the fiscal year to $0.84 at the end of Q2 and over $1.10 per pound this morning. In the second quarter year ago, gross margins were 14.5%, a period which benefited primarily from lower tolling costs for lead.

EBITDA in the second quarter was $1.4 million, a sequential improvement of nearly $4 million from negative EBITDA of $2.4 million in the first quarter. For the quarter, cash flow from operating activities was $1.9 million, up from a breakeven performance in the first quarter. It should be noted that the operating improvement this quarter was substantially greater when we consider that some $3.6 million cash interest on our convertible notes was paid during the second quarter.

Selling, general, administrative and technology expenses in the quarter were $11.9 million, slightly down from $12.1 million in the second quarter last year, but up somewhat from $11.1 million in the first quarter. The sequential cost increase is consistent with the volume and revenue increase and is comprised primarily of incremental variable selling costs and some added warranty expense.

Interest expense was $2.9 for the quarter, essentially unchanged from the first quarter. Interest expense is being influenced by new accounting rules affecting our convertible securities, with approximately $775,000 of second quarter interest expense reflecting a non-cash imputed interest accrual. Despite the loss, during the quarter we recorded approximately $1.1 million tax expense, much of which is non-cash compared to an income tax benefit of nearly $122,000 in the second quarter last year. As with the first quarter, taxes in the current quarter were front end phase so we did not expect to have to accrue any further tax liability this year.

Moving to cash flow and liquidity, we continue to work on strengthening our financial condition. As mentioned earlier, cash flow from operations was $1.9 million in the quarter, benefiting from ongoing working capital improvements.

Inventories were unchanged from January 31 levels despite inventory builds in Asia supporting growth and new product introductions as well as increases driven by the recent run up in lead prices.

Operational improvements achieved during the quarter are better reflected or presented in days inventory on hand, which was 79 days at the end of the second quarter versus 81 days at the beginning of the year. Similarly, accounts receivable focus in management has seen days sales outstanding performance improve to 52 days at the end of the second quarter from 54 days at the beginning of the year.

Capital spending for the quarter was $3 million, down from $4.9 million last year and $4.8 million in the first quarter. We would now forecast full year fiscal 2010 capital expenditures in the $15 to $17 million range, with the balance of the year activity supporting both growth and operational improvement activities.

Long term debt, net of unamortized finance costs at the end of the quarter was $112 million, up $4.3 million from the end of the year primarily from additional borrowings in China to finance our expansion plans there and the effect of accretion of our converts under new accounting rules. Borrowings under our revolver at the end of the quarter were $1.9 million, down from $3.2 million at April 30, 2009, reflecting the improved operating cash flow performance described this quarter. Cash was a little under $3 million, down slightly from the year end, and as just mentioned we had about $1.9 million drawn on our revolving credit facility, leaving over $35 million in revolver availability as of July 31, 2009.

Our relationships with our banks and note holders remains strong, and we are in compliance with all applicable covenants. Our bank line is good until December, 2010, while the convertible notes have no principal payment obligations until the earliest of November, 2011 and December, 2012, respectively.

With that, we’ll now open up the call for questions. Thank you operator.

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.

I wanted to drill into the profitability target for the second half of the year in a little more detail. One, do you think you could start to get there in Q3 or is that more of a target for just to hit that at some point in Q4? And sort of as a second part of that question, do you expect that the recent run up in lead could help given you likely have some lower cost inventory certainly given you know $1.10, $1.11 where lead is trading today?

Dr. Jeffrey A. Graves

Well, the pace at which we get there, Mike, is strictly determined by volume and mix. So you know we’ve obviously got our model and expectations going forward and you know we’re confident in hitting the objective in the second half. The exact timing will be seen based on those variables. You know, lead run up certainly with our hedging strategy we’ve got all of our backlog covered and any large projects going out are covered at lock-in margins. We have to be aggressive in passing on pricing in terms of new “activity” because it’s potentially an impact on the business. So for the half of our business that’s not under contract we need to go out and get that pricing.

The part that is under contract, the only real risk there is any time lags in recovery. It’s a very smooth working mechanisms with everybody that operates under contract for that half of our business, and the flow through happens automatically. So there’s again a small risk on timing. You know, you could argue it either way. Maybe there’s some upside on part of it, there’s some downside on others that we price every day but fundamentally you know we’ve got our risk covered from hedging of orders we’ve taken, and big projects outstanding and future business is just depending on managing the quoting period and the pricing we go to market at.

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

Perhaps I missed it, did you comment at all on what the bookings were in the quarter or the book to bill?

Dr. Jeffrey A. Graves

We didn’t comment, but bookings were up. Book to bill was greater than one for the quarter and so we came into Q3 with a higher backlog than we came into Q2 with.

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

Was China breakeven on an operating business, the Asian sector?

Ian J. Harvie

Yes. It ended up the quarter slightly positive. For the quarter as a whole, it represented a slight loss and that’s represented if you like by grossing up the minority interest line on the financials. But clearly we expect with further [building] improvements and sort of some of the start up issues associated with some of these new product introductions and investment in the selling and infrastructure piece that China will be profitable stand alone in the second half.

Operator

Your next question comes from John Franzreb - Sidoti & Company.

John Franzreb - Sidoti & Company

Jeff, I wanted to talk about your comments in the press release about the potential add new capacity for the front access business. Where would you be doing that? What’s giving you those kinds of thoughts? If you could just talk a little bit about that.

Dr. Jeffrey A. Graves

Well, the reception in the marketplace, John, has been very positive. You know with virtually every customer we’ve gone to, obviously there’s that qualification period you have to work your way through which, you know, we’ve been plowing away at for the last year. We are fully qualified or near fully qualified with all of our customer base and the reception’s been very high. It’s the longest life, highest powered NC product in that application and it’s in the piece of the market that seems to be the hottest right now which is the outdoor telecom infrastructure for supporting these wireless device expansions. So I think we would perceive the end market strength as being the highest in that sector, in that piece of the telecom business. And that product is being very well received by our customers. So as we reflect that forward, we say we’d better have enough capacity to meet their needs.

So we’re looking at options right now and you know undoubtedly we’ll be doing something there as we move through the second half of the year. You know, where we do it and how we do it we’re assessing right now among our various plants. We’ve certainly got the manufacturing footprint to do it, it’s just where do we want to ramp the volume up.

John Franzreb - Sidoti & Company

So that hasn’t been decided yet.

Dr. Jeffrey A. Graves

Right.

John Franzreb - Sidoti & Company

Could you just give me a sense of what the revenues were for the quarter by geography?

Ian J. Harvie

I’d say our traditional percentage there, John, is sort of you know I’ll call 85%, 15% and it was consistent with that sort of historical perspective. A little bit higher, you know more like the 17% in the quarter given the growth in Asia. But offsetting a little bit with that is sort of weaknesses a year ago in Europe.

John Franzreb - Sidoti & Company

You mentioned the two price increases in the quarter. I think you said you’re contemplating another one. That was on the non-contractual business which I think you said is half of it. Have you seen any kind of response from the competition to those price increases? Are they following suit or are you leading the way or can you just talk a little bit about the pricing environment?

Dr. Jeffrey A. Graves

The industry, John, you know is certainly much more disciplined than when I got here four years ago and I think having lived through the run up of lead to $1.80 a year back, you know everybody is very sensitive to the need to pass lead costs through. You know every new wave is a challenge and these price increases are very recent out there. I would tell you those two price increases are in the last four or five weeks. So I’m optimistic. You know again last week we had a very strong bookings week. If you look at it kind of week-to-week you say it looks like they’re being accepted okay, which means competitive pressures are allowing that to happen, but clearly we have a challenge ahead of us because as Ian pointed out in his commentary you know lead this morning was at $1.11. So it’s not a question if we’re raising prices going forward, it’s a matter of when and we’re measuring it in days or weeks not months. So we’ll be out there again with another one and we just have to. We need to pass lead on and I think our customers trust us that when lead rolls back down, we’ll also take it back in.

Operator

Your next question comes from Bill Dezellem - Tieton Capital Management.

Bill Dezellem - Tieton Capital Management

First of all, the new products revenue that’s being generated is that actually new revenue to C&D or is there a fair amount of cannibalization of existing revenues that’s taking place? And then an entirely different question, gross margin improvement was nice sequentially versus the year ago, though, was down over 2 percentage points. And to help us understand today versus one year ago, would you walk us through the primary factors for that gross margin being lower? And presumably part of it is that sales are $10 million lower, but if there are other major components we’d be interested in that perspective, please.

Dr. Jeffrey A. Graves

In terms of the new products, Bill, and cannibalization, the first half of your question, we have a couple of new product families that are out there. And I would tell you probably half of the new products are replacements of older products that are upgrading them. And when we upgrade a product, we get a higher product performance. We generally get a smaller footprint, at least equivalent or a smaller footprint of what we could offer so customers have an option of retrofitting older product that they’re taking out of the field. And we generally have been smarter in the design in terms of the material costs in the battery. So we can offer higher performance, longer life and lower product cost that hopefully we can retain it as extra margin in the business.

So I would say just nominally half of the products we’ve launched in the last year, year-and-a-half have been replacement products which you would expect to cannibalize the business over time. But importantly the other half, and particularly this TRUE Front Access product line that we launched for telecom and now UPS, the telecom offering is a gap that we had in our product offering. We did not participate in that market and in that piece of the market, and it is the most I would guess the most active piece today of that market. So that is truly incremental revenue to us, which is why we’re very excited about it. So nominally half-and-half, and on the half that’s additional it’s filling some key product gaps with our existing customer base, so again the nice part of that is we don’t have to add a lot of sales infrastructure to support it or virtually any.

In terms of gross margin performance year-over-year, the major difference from last year would be in the usage of [tolled] lead, when lead started its’ run up last year we had an initiative to maximize our use of tolled lead as it ran up. And that piece is lower this year than it was last year, so that piece of our gross margin performance is gone. And obviously to your point volumes have been a challenge in maintaining the right product mix. So looking forward, we certainly expect some help on the volume side as markets stabilize and begin to recover. And certainly in the products where we had a gap, that should be growth in volume and we should from that sale of the new products have a richer product mix going forward.

Bill Dezellem - Tieton Capital Management

And as a follow up, what is the viewpoint on the virgin versus tolled lead today, now that prices have increased from where they were when we were having a conference call last quarter?

Dr. Jeffrey A. Graves

Well, we had some extensive discussions on the same call over the last couple of quarters because clearly you know we had driven real hard to use tolled lead as much as possible when lead went very high. When we enter into supply agreements with suppliers for tolled lead, that can come back to haunt you when lead runs down very quickly as we saw when it came down off that $1.80 peak and bottomed out around $0.40 a pound, we actually went upside down in some of our lead contracts where tolled lead was actually more expensive than primary lead. And it took us a while to work our way out of those contracts. I would tell you today we’re very nimble in being able to move between primary and secondary lead, which in secondary lead you can buy as tolled lead. We have the flexibility to move between those. We’re always constrained in timing by supply agreements that we have with suppliers, so we probably lean a little bit more heavily now on buying lead at LME than buying told lead. We still do retain purchasing of told lead because it gives us some cost advantage over the long term and in general conditions like today.

Ian J. Harvie

I think the only thing I’d add to that, Bill, would clearly you know we’ve put in place parameters now that protect us much more on the downside so that we don’t have the situation we dealt with in Q4 and Q1 where our told lead costs were higher than LME. Our pricing on the majority of our contractual provisions is LME-based. So I think maybe there’s some opportunity lost in terms of tolling benefits when lead is high, but we think it’s far more important to have the protection on the downside and you know so the spread that we benefited from in the second quarter last year has now gone. You know the improvement in terms of getting back to profitability here in the second half as Jeff had said is much more driven by growing product mix and our ongoing cost reduction and efficiency programs in the plants.

Dr. Jeffrey A. Graves

Bill, very simply, we really want to drive our margin performance off of how we design and manufacture batteries, not what’s happening to the lead commodity. So as long as our pricing mechanisms match up with the cost of lead we’re buying and you know if we save a little bit through the purchase of a little bit of tolled lead, that’s fine. But we want to protect ourselves on the downside and make sure that we don’t pass along issues to shareholders where we’re getting hurt with lead.

Operator

Your next question comes from [Sean Lockman] for Walter Nasdeo – Ardour Capital Investments.

[Sean Lockman] for Walter Nasdeo - Ardour Capital Investments

Just one follow up to the lead pricing. Can you guys tell us in terms of between toll and LME lead, I mean how that breaks down as far as how you’re acquiring? I mean how much of it on a percentage basis are you relying on toll lead right now?

Dr. Jeffrey A. Graves

We generally haven’t given out specific percentages, Sean. I would tell you we try to stay fairly fluid on that day-to-day depending on what the price of toll lead is versus the price of LME lead. Obviously we want to buy the lowest cost lead we can buy, so we try to shift it around a bit you know day-to-day, week-to-week, within the supply agreements that we have. So if I gave you a number today it would change tomorrow anyway. I would just tell you that you know we are buying some tolled lead. It is obviously at this LME price cheaper than LME lead and that percentage will continue to change. We’ll drive it to the lowest toll cost that we can every day within our supply agreements.

[Sean Lockman] for Walter Nasdeo - Ardour Capital Investments

And also I was just sort of looking ahead, you know it looks like you know as you talk about it volume is picking up. Can you give us any sense of what we should look for you know going forward in terms of order trends and so forth?

Dr. Jeffrey A. Graves

You mean expectations, Sean, in terms of our ordering trends?

[Sean Lockman] for Walter Nasdeo - Ardour Capital Investments

Yes.

Dr. Jeffrey A. Graves

Well you know everybody wants to extrapolate from current conditions. You know telecom has been a good story. You know all arrows tend to seem to align on telecom being a positive story right now for the remainder of the year. You read articles a lot about the increased network strain out there from these very high performance wireless devices like the iPhone, and people are announcing new models every day from competing phone companies that basically use a lot of network bandwidth. So that’s all good for us. Anything that uses up the network bandwidth is a good thing for our business because it requires more back-up power. So telecom looks like it’s a good story for the remainder of the year as far as we can tell right now.

The UPS industry looks very flat and that’s probably good news over what’s been happening. It’s very much down from its peak of last year and it probably declined a little bit further in the second quarter, and it’s probably coming into kind of a flattish zone at very low levels right now. And that’s back-up power for data centers and very simply that’s due to the constraints in the capital market. People just aren’t investing in big data centers right now ostensibly. So it’s a little bit better story in Asia than in North America and Europe, but by and large that industry is pretty dead in the water and looks to stay there for the rest of the year. The only bright spot is the replacement business has strengthened through Q2 and we would expect that to continue along because basically data centers don’t want to run the risk of their power being down.

The energy sector has been interesting because it plateaued over the summer period here. We had expected that to continue to rise. Our best guess is that the utilities are waiting to see what the effect of new regulations and the stimulus money are going to do to them. That’s our best guess because financially they’re fairly healthy businesses, they have a lot of investments due in their own infrastructure and there’s an increased drive for renewables. So all of that would point towards increased spending, what we’re actually seeing are things are pretty flat out there so our guess is everybody’s holding their breath, waiting to see what the government’s actually going to do. And you know the timing of that. So I think directionally that’s again probably a positive story for the second half of the year as we would model it, but the timing is the key thing there. How quickly will things loosen up as we head toward the winter time?

And I would guess Asia’s going to continue to grow. All indications in China and India and the other countries tend to follow those two benchmark countries are that things are positive. You know their telecom field is very, very hot right now and again growing because their government’s are spending a lot on infrastructure. Their energy sector is growing. They have increasing energy needs obviously and their UPS data center needs are growing because these domestic companies over there are continuing to put in data centers as are financial institutions in that part of the world. So you know I think all of our end markets, our traditional end markets over there is a positive story right now which is why we really tend to focus a lot on our China plants and the growth possibilities there.

[Sean Lockman] for Walter Nasdeo - Ardour Capital Investments

And one final question, gross margins up on volume and so forth during this quarter and made some nice progress. Should we continue to sort of look at that as an improving story or how is it shaping out so far?

Ian J. Harvie

Yes. No, absolutely. In terms of where we’ve clearly indicated and support our projections for return to profitability in the second half, you know given where SG&A and R&D levels are, that profitability objective you know is going to support gross margins in the 16 to 17% range. So clearly that’s the trajectory that we see here over the balance of the year.

[Sean Lockman] for Walter Nasdeo - Ardour Capital Investments

16 to 17% for the year or?

Ian J. Harvie

For the quarters, the individual quarters 16 to 17%. But hopefully we’ll see some upside on that if the economy does rebound more than the sort of stable conditions that Jeff referred to.

[Sean Lockman] for Walter Nasdeo - Ardour Capital Investments

Just one final question if you can just kind of walk me through this. For your lead contracts where you’re locked in, what is typically the lag between when you can pass on that price to what you’re paying and so forth for the stuff you have under contract?

Ian J. Harvie

They vary, I’ll call it from a 30 day reset to a 90 day reset and they probably average out at about a 60 day reset. So that’s clearly, Sean, where short term volatility is something we have to manage aggressively in terms of those lead arrangements. But that lags till probably about 60 days. Clearly on the non-contractual piece as we referred to we’re out in the marketplace now driving price increases as we speak.

Operator

Your next question comes from [John Evans] – Edmunds White.

[John Evans] – Edmunds White

Can you talk just a little bit I guess you know one of the things that seems to have your stock so cheaply valued is kind of your debt structure. And you’ve done a nice job on working capital and generating cash this quarter. You have room under your revolver. But can you give us some kind of insights just into potentially refinancing those converts that are put able to you? Because they’re going to be current not too long from now. I’m just curious to understand that.

Ian J. Harvie

As you know, John, we have two converts out there. The first put maturity on the first one is November, 2011. That’s on the $52.5 million and that has a strike price of in the 480 range. And the second one is December, 2012, $75 million and that has a strike in the 860 range. You know clearly we look every day in terms of what the capital structure of the company should be, if there are opportunities to do something with those converts in advance of those dates we’d consider it. But we don’t have any firm plans to [inaudible]. We also think that we need to be opportunistic in the marketplace in terms of looking at them.

Similarly at the same point in time given our projections that you know the first convert particularly we think there’s every chance that that could be in the money by the time we get to that point in time. But we look at it continuously with our advisors and with the board, but we don’t have any firm plans that we could refer to on this call today.

[John Evans] – Edmunds White

So you have $35 million under your revolver. Under your revolver are you allowed to buy them back in the open market? Because they’re trading at a big discount and it seems like that would create you know positive EVA for the company and should be pretty beneficial to the shareholders.

Ian J. Harvie

Yes, there’s some restrictions currently under the credit facility, depending on what our excess availability is on a trailing 30-day basis. And that restriction replied to both the purchase of common stock or the converts to an annual number of $2.5 million. But clearly something again that if there was an opportunity above that, it’s something we would consider and work with the banks on getting the appropriate approvals.

[John Evans] – Edmunds White

So if I think about you know if you hit kind of the projections you’ve talked about, you should be able to have plenty in the basket to potentially buy some of those back if they’re attractive and benefit shareholders. Right?

Ian J. Harvie

I think we’d explore all options there in terms of the capital structure and what may support the valuation to our shareholder base.

Operator

Your next question comes from John Franzreb - Sidoti & Company.

John Franzreb - Sidoti & Company

Ian, you put the gross margin target at 16 to 17% in the call it the second half of the year. Are you still maintaining exiting the year at that 20% margin or has something changed that will make that strike a little bit tougher?

Ian J. Harvie

I think the mix in terms of a lot of the growth sort of through the first half and into the second half is out of Asia, John, and I would say overall the gross margins in the Asian business tend to be a little bit lower than we sort of see in the North American business. That being said, I’ll call it the SG&A investment similarly is lower in the Asian business so from an operating income perspective you know we look at both sort of translating to seamless sort of profitability levels. But I think that mix issue geography you know could drag those margins down a point or two from our targets. And I guess you know inherently, even at the 17% level you know given the I’ll call it volume projections and the balance of the cost structure, that would support profitability. Nothing’s changed in terms of our I’ll call it view in terms of where the business needs to be targeted which is the 20% plus range, but I think at this point in time conservatively we think we can get to profitability at the 16 to 17% level.

John Franzreb - Sidoti & Company

And another comment you said was there’ll be no I think you said no new tax liability this year.

Ian J. Harvie

Yes. So the full year tax expense to date of the roughly $2.2 million, that pretty much covers us. So there would be no tax expense, regardless of our performance at any material level in the second half.

John Franzreb - Sidoti & Company

So if you were to make $800,000 the first quarter plus the other $5 or something like that, you’re going to be going back to say a number absent those kinds of figures?

Ian J. Harvie

In fact, John, I would say that what’s been recorded as tax expense through the first half absent any material change in sort of I’ll call it the mix of our business internationally would reflect our sort of full year estimated tax expense of that $2.2 million. That combines both non-cash FAS 109 charges as well as I’ll call it expected cash tax expense for our foreign operations.

Operator

At this time there are no further questions. I will now turn the call back over to Dr. Graves for any closing remarks.

Dr. Jeffrey A. Graves

Thanks, Janice. Well, once again thank you for your participation this morning. We hope we’ve been able to provide you a better appreciation of our progress and accomplishments over the first half of this year and with continued focus and execution we remain confident in our ability to achieve our profitability goal in the second half of this year. Longer term, we believe the plans we’ve implemented to penetrate new adjacent vertical markets and expand into new geographies will create opportunities to sustain growth, while efforts to improve our customer and product mix should enable us to translate this growth into value for our shareholders.

As a management team, we’re excited that C&D Technologies is at the forefront of the global energy storage industry, an industry that is increasingly vital to economies around the world. We look forward to updating you again next quarter on our continued progress. Thank you again, and have a great day.

Operator

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

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