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Executives

Jeffrey A. Graves – President, CEO

Ian J. Harvie – VP, CFO

Analysts

Walter Nasdeo - Ardour Capital Investments

Bill Dezellem - Tieton Capital Management

John Franzreb - Sidoti & Co.

Josh Rosen - Credit Suisse First Boston

C&D Technologies Inc. (CHP) F3Q08 Earnings Call December 7, 2007 10:00 AM ET

Operator

Good morning...My name is Courtney and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter earnings call for C&D Technologies. 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. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. I would now like to turn the call over to Mr. Ian J. Harvie. Mr. Harvie you may begin your call.

Ian J. Harvie

Thank you Courtney...Let me start by remind 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, Inc. 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 Web site this call contains time sensitive information that is accurate only as of the date of this life webcast for this call on December 7th 2007. 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 Act Exchange Act of 1934.

During this call, words and expressions reflecting something other than historical fact are intended to indentify forward-looking statements but are not the exclusive means of identifying such statements. Factors that appear within any forward-looking statement or in a company’s Securities and Exchange Commission filing including without limitation the company’s annual report on form 10-K for the fiscal year ended January 31st 2007.

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. Before I turn over the call to Jeff let me discuss the presentation of our financial results. Results for the third quarter and all comparative financial information included herein reflect the presentation of the motive power division as a discontinued operation. This presentation is on the heels of the reclassification of the power electronics division as a discontinued operation last quarter and the subsequent completion of its divestiture. At this point, the standby power division represents 100% of our continuing operation. In addition, I wanted to remind you the last quarter we changed the company’s method of accounting for inventory from the last in first out method to the first in first out method. Our discussion of financial information today will take into account these changes. Now let me turn over the call to our President and Chief Executive Officer Dr. Jeffrey Graves.

Dr. Jeffrey Graves

Thanks Ian and thanks everyone for joining us today. The story of this quarter is the continued transformation of C&D Technologies and the simplification of our business model. During this quarter, we made progress on a number of key financial and strategic initiatives. On August 31, we completed the divestiture of our power electronics division generating net proceeds of approximately $80 million, which were used to pay down debt and bolster our cash reserves. In late October, we announced an agreement to sell certain assets of the motive power division to Crown Battery, which will result in our exit from this market during the fourth quarter of this year. We successfully worked with all of our customers who did not already have lead escalation clauses built into their contracts to correct this situation moving forward. Our pricing can now adapt to fluctuations in the commodity lead costs across the entire business. Also, we continued to execute upon our previously communicated cost reduction programs and estimate that against our fiscal 2008 target of $15 million we’ve realized approximately two million in savings through the end of the third quarter with a balance to flow in Q4. we remain confident that with the programs and actions in place our $30 million cumulative goal through fiscal ’09 will be achieved despite the loss of cost reduction opportunities associated with the motive power business. Most recently and over the last month, we also took further cost reduction actions to defray allocated SG&A costs or so called stranded costs that resulted from our recent divestiture initiatives. These actions will ensure that we do not burden our standby power business with undue overhead costs moving forward and should be substantially in effect by the end of Q1 fiscal ’09. From a new product standpoint, this quarter saw the introduction of the first wave of new standby power products resulting from the realignment of our R&D resources to focus on new battery development over a year ago.

These initial products alone should deliver over 40 to $50 million of incremental revenue annually within the next three years equating to nearly 15% of our current revenue base. More new products will be announced in the quarters ahead. Also in October having completed the required qualification efforts we were very proud to formally open, our new manufacturing facility in China. This, 300,000 square foot facility one of the most sophisticated battery plants in the world is equipped with state of the art environmental and production control systems and is ideally located to service the rapidly growing Asian markets. While our standby power business lost money during the quarter principally due to a combination of the time lags and the recovery of lead costs one time restructuring expenses and stranded cost allocations our revenue momentum remained very strong. And, with the continued flow through of our pricing and cost reduction efforts, we’re confident that C&D will return to profitability by early fiscal ’09.

Now I’d like to spend a few minutes further detailing the strategic changes in the company this year and their implications. The completion of the Power Electronics Division divestiture, which was closed early in the third quarter, brought a painful chapter in the company’s history to a conclusion. And, considering the turmoil in the electronics marketplace this year we were very pleased with the outcome. The cash generated from the sale of this business enabled us to completely pay down our line of credit balance over $40 million at the time and left us with cash on the balance sheet to be invested in our cost reduction initiatives and future growth opportunities for standby power. Once that transaction was closed we turned our attention to the motive power business which has been a significant loss maker for some time and one that quite frankly had its future scrutinized more than once during my tenure. Having announced last quarter our intent to explore strategic alternatives for the business we were able to secure a series of agreements to sell certain assets of this business to Crown Battery Manufacturing Company, which will culminate in our complete exit from this market during the upcoming fourth quarter. Seeing this motive power business was a one-time industry-leading provider of batteries for forklifts and other industrial applications and was known for reliability durability innovation and cost effectiveness. However, by the time I joined C&D as CEO in July of 2005 our motive market share had fallen to less than 8% and the division had not been profitable for many years. Given the manufacturing cost synergies that can exist between motive and standby power products, we worked hard to engineer a turnaround since that time but ultimately we decided that our customers would be better served if the business were in Crown’s hands yielding for them a combined business that has the scale needed to compete effectively in this marketplace.

Between the purchase price and liquidation of working capital associated with this business, we expect to generate cash proceeds of about 12 to $15 million from this transaction by the end of the first quarter of next fiscal year. Importantly we’ll also be eliminating a business that was generating losses and burdening our progress by nearly a million dollars per month. Let’s now take a moment to talk about what’s, been the largest challenge and frankly the limiting factor to visible progress and the results of our core standby business over the last two years the cost of lead. Lead spot prices on the London Metal Exchange have softened significantly or some would say corrected to around $1.20 per pound over the last few weeks down from an all time high of over $1.80 per pound set in October and an average LME price of $1.52 for the third quarter.

Rationale varies as to the drivers for this recent softening in prices but there seems to be no doubt that the speculative interest in this commodity has at least for now subsided and with the market confidence and the lead supply stability improving as we look to next year upward pressures on the commodity have certainly moderated. With this backdrop, for the first time in my tenure with C&D, we can hopefully, look forward to a less volatile commodity market and a potential decrease in lead costs from last quarter’s peak as we move forward. While a drop in lead prices will no doubt be helpful to our outlook and should positively improve our working capital needs this does not diminish our continued focus and attention to our ongoing lead management strategy. This program has and will continue to include a combination of actions to reduce the volatility impact of lead on our business. It includes optimizing our tolling efforts with our lead suppliers, establishing more efficient pricing mechanisms with our customers, and on a selective basis putting in place financial hedges on lead. As noted in our press release we now have 100% of our major customers covered by contracts with lead costs escalators.

So, we have a much greater capability to manage changes in lead costs than in the company’s prior history. As we have focused on our core business, we have made significant reallocations in our internal resources. A key part of this effort was directed toward reinvigorating our new product development efforts through a strong focus on key battery technologies. This focus was initiated in mid 2006 and we’re now beginning to see the fruits of these investments. Late in the quarter, we introduced the next generation of our msEndur two-volt battery manufactured in our Reynosa Mexico facility, which is targeted toward telecommunication, utility, and UPS end markets. This product offers outstanding performance and we believe a 30% greater life than the next best competitive offering in the market. Through recent innovations in our battery charger technology, we can now offer complete backup power systems to our customers providing not only enhanced performance and product life but also allowing them to remotely monitor and report on the health of their batteries at a level never before attained. This is particularly important in emergency service and other critical infrastructure end markets where reliability of the power system is of utmost importance. And finally, extending the system concept further for our UPS customers, we now offer full cabinet power solutions to these customers with custom configuration capabilities allowing the customer to receive a modular power solution that optimized performance and ease of installation.

Through these products and those to follow in the near future, we anticipate maintaining and further growing our market share in our core end markets. Beyond new lead acid products Q3 saw the move from laboratory testing to customer field trials of a new advanced technology battery system beyond lead acid which offers much higher powered entities and correspondingly significant longer run times to our customers. While we cannot comment further at this time, we’re excited about the prospects for these new technologies as they mature and enter our product portfolio. With that, let’s quickly look at the numbers for the quarter. For the third quarter, our consolidated net loss was 9.3 million or 36 cents per diluted share on consolidated revenues of $91.3 million. This compared to a net loss of $17.8 million or 70 cents per diluted share on a consolidated revenue base of $70.6 million in the prior year’s third quarter. Both period results include a number of one-time items associated with our restructuring efforts. Ian will provide more detail on these later in the call. Net loss from continuing operations, which at this point is simply our standby power business, was $7 million or 27 cents per diluted share during the quarter compared to $0.2 million or a penny per diluted share in the third quarter of fiscal ’07. Net loss from discontinued operations, which includes activity of both the motive power division and the power electronics division, was $2.3 million or nine cents per diluted share, compared to a net loss of $17.6 million or 69 cents per share in the third quarter of fiscal 2007. As I mentioned earlier the news was mixed from our standby power unit in the third quarter. The top line was very strong up 29% compared to last year and up 10% sequentially. This was driven by a combination of price and volume increases roughly a 50-50 split. As noted in the press release we’ve seen four consecutive quarters of increasing revenues as well as four consecutive quarters with a book to bill ratio of greater than one. We’re seeing strong demand due to Enterprise Data Center construction, which is expected to continue to be a demand driver in the years to come as well as fiber to the home initiatives and cable television. Telecom continued to be somewhat softer as it has been for most of the year. However, there’s reason to be more bullish for the near term when traditional telecom year-end buying forecasts and future demand strength expected from recent FCC legislation, which mandates computer, or communication carriers have more backup time on their networks in the event of a power failure. As we look forward while end markets are strong reflected in solid bookings and shipments given our focus on driving pricing and profitability top line growth is not a principle objective. With the impact of higher lead costs from the summer months rolling through the P&L lagged in time by our pricing recoveries standby power lost approximately $4.4 million on an operating basis. These results include one time items principally severance and plant closure costs of approximately $1.8 million.

On a year over year basis, we estimate that higher lead costs net of recoveries from tolling and pricing were a little over $10 million. On a run rate basis, we expect to recoup much of these unrecovered lead costs through pricing recapture in the fourth quarter and into the first quarter of fiscal 2009. I would note however the fourth quarter results will be burdened by higher lead costs as cost of goods sold is charged with the lead run up experienced in the September October time period.

In addition, approximately $900,000 of corporate divisional SG&A costs that were allocated to P&D and motive divisions in the past had to be reallocated to standby power during the quarter. Over the last month, we’ve taken further cost reduction actions to defray these reallocated or so-called stranded costs. On a positive note, we’ve been saying for some time now that our cost reduction programs will eliminate $30 million of costs by the end of fiscal ’09. We’re well on our way toward meeting this goal. In Q3, we eliminated another $4 million of costs bringing the year to date savings from our sourcing design and operational improvement programs to approximately $10 million.

We anticipate achieving our fiscal ’08 objective of $15 million savings despite the loss of cost reduction benefits from programs originally targeted toward motive power. In conclusion, it was an eventful quarter but now that much of the hefty heavy lifting of strategic change is behind us, we’ll exit the quarter with the foundation laid for growth and a return to top line profit or return to top profitability early in fiscal 2009. We now have an improved balance sheet simpler business model solid top line momentum supported by a strong new product pipeline and ongoing yields coming from our restructuring and cost reduction programs. Let me now turn the call over to Ian to discuss the financial results in further detail, Ian.

Ian J. Harvie

Thanks, Jeff I’ll take a few minutes to go through the results in a little more detail. Net sales from continuing operations for the third quarter were 91.3 million an increase of 29.3% compared to 70.6 million in the same period last year. For the quarter, the company recorded a consolidated net loss of 9.3 million or 36 cents per diluted share compared to a net loss of 17.8 million or 70 cents per diluted share in last year’s third quarter. Net loss from consumer operations was seven million or 27 cents per diluted share for the quarter compared to 0.2 million or one cent, diluted share in the third quarter of fiscal 2007. Operating loss from continuing operations for the third quarter was 4.4 million compared to operating income of 2.7 million in the comparable prior year three.

One time items or special charges included in continuing operations in this year’s quarterly results were 425,000 of severance costs related to SG&A reductions and 1.4 million of restructuring costs associated with the closure of Conyers and move to Loyola.

There were no one-time items or special charges of significance in last year’s third quarter. Net loss from discontinued operations, which this quarter comprises, activity at the motive power division and power electronics for the month of August was 2.3 million or nine cents per diluted share compared to a net loss of 17.6 million or 69 cents per diluted share in the third quarter of fiscal 2007. One time items and special charges included in discontinued operations in the quarter were a gain on the sale of the power electronics division of 3.9 million offset by impairment severance and related charges arising from the motive power divestiture and exit plan of approximately 4.2 million.

Prior year results for discontinued operations included goodwill impairment charges of some 13.9 million. Gross margins from continuing operations was, 6.4% in the third quarter versus 16% in last year’s third quarter. As we noted on our last call we expected margins to be challenged this quarter from higher lead costs as higher value inventories ran through cost of goods sold. as during the recent softening in lead continues there are minimum stabilizers we looked at significant margin improvement over the next several quarters as our pricing mechanisms catch up to the escalation in lead costs we saw in the July October timeframe. That said key poor results will, continue to be burdened by the run up in lead we experienced in September and October. As Jeff mentioned we estimate that higher lead costs net of tolling and pricing recoveries negatively impacted, my margins by a little over 10 million in the quarter. This impact was partially offset by contribution from higher sales volumes and benefits from our non-lead sourcing design and operational cost reduction programs.

As a point of reference average LME prices for lead averaged at a dollar 52 per pound this quarter 61 cents per pound in the third quarter of last year $1.15 per pound in our second quarter and 85 cents per pound in Q1.

Taking lead hedges tolling and [inaudible] counting into effect it should be mentioned that our blended cost of lead in the quarter result in these low LME levels. Interest expense from continuing operations was 1.9 million for the quarter down from 2.6 million in last year’s third quarter and 2.1 million in the second quarter. The reduction is attributable to last year’s convert refinancing lower levels of debt outstanding and a higher year interest earning cash balances, which in turn is the function of the power electronics divestiture proceeds...

Turning to cash flow from the balance sheet consolidated cash flow from operating activities for the nine months, ended October 31, 2007 was a use of 33.1 million compared to 13.1 million for the same period in fiscal 2007. Net cash used in continuing operations was 31.8 million and 18.1 million for the nine months ended October 31, 2007 and October 31, 2006 respectively. The use of cash in the current year’s fiscal year is principally driven by the higher cost of lead, which contributed, to both operational performance and a higher inventory investment. Partially offset by higher accounts payable balances. In addition accounts receivables at October 31, 2007 were up significantly a result of both pricing, which is principally [inaudible] and robust volume growth. Capital spending for continuing operations year to date was seven million compared to 15.4 million last year with that number heavily influenced by last year’s China investments. We forecast total cap x for the year of approximately 11 to 12 million. Debt net around amortized finance costs at the end of the third quarter was 129.6 million down from 149.2 million at year-end after application of proceeds from the sale of power electronics to resolve our outstanding and funding of the operations. Cash balances at October 31, 2007 were 31.6 million. In addition, we have nearly 46 million of under or over availability at this time. With proceeds from the sale of inventory to Crown and collection of trade receivables from the motive power, business which were not included in the asset sales still to occur we will benefit from working capital reduction and a generation of cash proceeds from the exit of the motive power business over the next two quarters. In addition, the recent softening in the price of lead compared to the third quarter should also serve to reduce our working capital needs however, that will take a quarter or so to fully roll through. With that, we’ll now open up the call for the questions. Operator, please compile the Q&A queue.

Question-and-Answer Session

Operator

At this time, I would like to remind everyone if you would like to ask any questions please press star and the number one on your telephone keypad. And, our first question comes from Walter Nasdeo.

Dr. Jeffrey Graves

Good morning Walter...

Walter Nasdeo - Ardour Capital Investments

Hey good morning guys how y’all doing...

Dr. Jeffrey Graves

Good.

Ian J. Harvie

Good thanks.

Walter Nasdeo - Ardour Capital Investments

Good hey listen I’m real, happy to see that you’ve been able to streamline things back down to the core again. I haven’t, my question kind of circles around the reason previous management got involved in power electronics was that they felt lead acid battery the lead acid battery business wasn't a real growth business into the future and wanted to kind of diversify out a little bit. And, obviously that didn’t turn out the way it was originally planned. However, can you give me some feel for how you plan to grow the business now that you're back to your core fundamentals? and what you see things or how do you see things developing over the next few years after all of the charges and whatnot and everything gets cleaned up how you see it developing out into the relative near term.

Dr. Jeffrey Graves

Sure Walter I think the demand for reliable backup power is larger and more important than ever. Certainly we see a refreshed build out if you will in North America where we, we’re the largest player in the standby power business. Virtually all of our end markets are very strong. And, you would say over the long period it kind of, grows with GDP certainly in the short term meaning this year next year and as far as we can see with tangible visibility, the end markets look very strong in supporting greater than certainly much greater than GDP growth. And, I would say that’s true for certainly true for UPS.

We estimate that will be true for telecommunications and the utility reinvestments. They’re very vigorous and growing right now. So we like the look of our end markets in North America. When you extend that vision to the international markets the vision’s even brighter. I the, with our new plant in China we have great access to the Asian growth. And as you know GDP growth in Asia’s been over 11% so even if you pick that number and say that our opportunities are going to mirror GDP it’s a huge opportunity for us and we’re growing vigorously in Europe where we have a very small presence today. So and in the Middle East...I would say the Middle East is an excellent area for us right now with the oil and gas revenues from the oil and gas business in that part of the world leading to both oil and gas investment and the build out of infrastructure in the Middle East. So, from a growth perspective we certainly have more than adequate opportunities for great growth. In terms of the value of diversification, I mean I really can’t go back to the original logic of that. I would tell you when I certainly when I arrived to C&D the two businesses that C&D were in were much, much different businesses and we’ve chosen to focus on our core business where we hold a very strong position. So I like that concept building from your core strength where you have some key attributes that are very important to your customers particularly when the markets are robust and growing it’s it allows, you to really get very good at your operational execution which is what we’re focused on. Second part of your question Walter remind, me again what else you wanted to chat about.

Walter Nasdeo - Ardour Capital Investments

Well I think you basically, touched on both of it. but is, it possible for you to expand a little bit on some of the other chemistries you’re developing now to go along with your lead acid.

Dr. Jeffrey Graves

Well I when we started this reinvestment R&D activities a year and a half ago I didn’t know what to expect from our growth potential within the lead acid business. But I've been extremely pleasantly surprised with the extensions we can make on our lead acid product lines. We think there’s miles and miles to go there, there’s a lot of improvement and we’ve begun to look at system solutions for customers as I mentioned doing things in a cabinet format where you can ship modular solutions to your customers is great. we’ve got some fantastic charging systems that we can marry up with our batteries now our lead acid batteries to wring even more performance out of them and to allow customers to have diagnostics to probe the battery health over time. So, the, I would tell you the future around lead acid batteries is excellent they’re certainly a low cost solution to our customers that will be as far as the eye can see. Beyond that, there are certainly niche markets and growing niche markets where alternative chemistries seem to be attractive.

We’ve been probing some of those. I'm not going to talk a great deal about that today but we’re we are taking some trial new technology batteries out of the laboratory where we’ve been testing them for over a year into the fields to put them through the ringer with some selected customers and we’re very happy with the initial feedback on those.

And we’ll continue monitoring those improving those over time so I'm not going to elaborate on the new technologies today the new chemistries today but they're certainly we’re pleased with the progress and we’ll factor those into our portfolio going forward.

Walter Nasdeo - Ardour Capital Investments

Outstanding well listen I appreciate it and have a great holiday guys.

Dr. Jeffrey Graves

Thank you Walter you too...

Walter Nasdeo - Ardour Capital Investments

Thank you.

Ian J. Harvie

Thanks.

Operator

And, our next question comes from Bill Dezellem.

Dr. Jeffrey Graves

Good morning, Bill...

Bill Dezellem - Tieton Capital Management

Morning we’ve got a couple of questions first of all relative to the customers that were on the fixed price that you have now moved to the lead escalation clause did you lose any of those customers as you went through that process.

Dr. Jeffrey Graves

Well no I would tell you the vast majority we were able to maintain...I think we've had relationships Bill with these guys, for in some cases well over, 50 years as a hundred year old business in our core end markets of standby power and being the largest supplier that we’ve got some great relationships. and those are certainly challenged at times when your costs are going up fast and you’ve got to change the way you work with customers so clearly stressful period. I’m very pleased to say we lost virtually no customers in that transition. They’ve been very willing to work with us. It’s obviously painful because they have customers they have to explain these changes to and figure out how to pass on their pricing to. and that’s a difficult supply chain to work through so nobody likes it, it’s very unpleasant but our relationships have carried us through and we’ve got all of our contracts that we’re selling on now on an adjustable price format...

Bill Dezellem - Tieton Capital Management

Great and then secondarily what was the cost reduction number that you had previously associated with the motive business that is now no longer part of the 30 million.

Dr. Jeffrey Graves

Bill I would have told you last quarter when we said we were looking at options for that business that put at risk probably $5 million of our cost reduction plan. And, that was a concern to us. We doubled up again on looking for opportunities in standby power we; we’re going to realize those opportunities. And, within the Q4 time period, here this year so that’s why we’re holding to our $15 million target this year that we’ll deliver. we’ve delivered ten as of the end of Q3 we’ll do 15 as we’ve been saying all year by the end of Q4 and we’ll do an incremental 15 next year so we had at risk probably five million of that and we will fully recover that.

Bill Dezellem - Tieton Capital Management

And, was that five million roughly evenly split 2½ million this year 2½ million next year...So, you’ve made it up equivalently or was it skewed one year or another...

Dr. Jeffrey Graves

It was probably fairly, evenly spread Bill and most of them it may have I don't have the numbers in front of me but intuitively I would guess it probably was fairly evenly, spread. And, we've offset it now.

Bill Dezellem - Tieton Capital Management

I think that’s right sir. great and congratulations by the way and then lastly for now would you please discuss your lithium battery initiative as the Milwaukee I think it’s Milwaukee Sentinel reported and how that may or may not relate to the new battery technologies that you have briefly referenced but not discussed here on this call.

Dr. Jeffrey Graves

You’ve done your homework there Bill. that’s a good find yeah we’re very pleased to be getting some support we certainly we’ve had a long and very successful history in the city of Milwaukee the folks have really encouraged us to try to continue growing the operation and invest in batteries that’ll move into that plant in the future. We've gone down that path with some of our development work. we’re receiving some external support as well it looks like and we’re very pleased to be targeting that city and that location for some of our next generation products so I'm not going to elaborate much on it today. That work is targeted toward lithium large format lithium ion batteries, and if everything proceeds as planned, we’ll have a larger presence in Milwaukee looking forward to manufacturing expanded product line.

Bill Dezellem - Tieton Capital Management

Not to put you up against a wall or in a box here but if we understand correctly that the new battery technologies that you're looking at would include lithium but are not exclusive to lithium...

Dr. Jeffrey Graves

Right we want to be in a position Bill in our core markets to supply backup power needs to our customers. And, those needs are going to evolve over time. We announced a deal last year a partnership arrangement where we were looking at fuel cells for example for providing backup power primarily in that case for telecommunications. We continue to explore that to partner, with folks out there on some of the emerging technology to bring it to our customer base when we do that we’ll be able to measure the performance and the cost of those solutions. I would tell you today lead acid batteries continue to be an outstanding solution for most applications in the end markets. But, we want to be there when niches develop we want to be there for as our customer needs evolve and have those products as well and as they make economic sense for our customers, we want to be able to provide them. So we’re exploring obviously not only lithium batteries as you pointed out but fuel cells from last year we continue to push that and we’ll continue any other technologies that our customers want to move into from an energy storage perspective.

Bill Dezellem - Tieton Capital Management

Great...Thank you...

Dr. Jeffrey Graves

Thanks Bill.

Operator

And, at this time, there are no further questions.

Dr. Jeffrey Graves

Okay Courtney let’s give it just a couple of minutes in case folks would like to ask and otherwise I’ve got, a wrap-up statement that I’ll make as well okay.

Operator

Okay and we do have a question from John Franzreb.

Dr. Jeffrey Graves

John Franzreb. John welcome.

John Franzreb - Sidoti & Co.

First question you’ve referenced $4 million in cost savings that you achieved in the Q3. Could you kind of, review it with us on what you’ve done to get that, four million bucks?

Dr. Jeffrey Graves

Well a lot of the early on cost savings and I would say up through Q3 were sourcing related activities. And it’s the traditional combination it’s the traditional kinds of mix John where you're looking at consolidating your supply chain obviously negotiating better deals with your suppliers where you can and trying to change the way you buy things and the types of materials you buy looking for materials that are obviously lower cost and more competitive in the marketplace. So I would tell you up through the end of Q3 we certainly according to our plan and that’s the way it played out a lot, of the savings were sourcing related savings. and as you get into Q3 and we move into Q4 and beyond we’ve got design related savings and operational savings from our plants that are becoming more and more on stream so you’ll see that happening over time as well which so the balance may shift we expect ongoing savings from sourcing. But, certainly, a lot of that was easier to attain early on the design and operational improvements really come to play late this year and looking into next year but are substantial obviously.

Ian J. Harvie

The only thing I’d add to that John in Q4 you'll begin to see the benefits from the closure of our Conyers facility, which was completed in the third quarter and a move the production into our Loyola in Pennsylvania...

John Franzreb - Sidoti & Co.

Okay and how much of your product is sourced today versus a year ago for reference.

Dr. Jeffrey Graves

It’s the in terms of overall percentage. It’s the in terms of volume percentage John I would tell you it’s the same. Obviously the costs percentage is way up because of lead and also plastics and copper and other things that go into batteries. But in terms of the amount of material we buy the percentage the volume percentage that we buy that really hasn’t changed except there’s a volume element we’ve grown our total volume in the business the percentage mix hasn’t really changed about materials we’re not outsourcing more activity we’re driving better deals with our suppliers in terms of pricing. And obviously on the lead front, we’re moving towards some tolling arrangements where we can if we can purchase tolled lead where it’s available and in our product designs and implement that.

John Franzreb - Sidoti & Co.

Okay now as lead falls with the surcharge in estimates is it safe to assume that the revenues will come down but you're going to hit certain target gross margins that you’ve put out there is that the way we should kind of be thinking of the revenue line going forward in a dropping lead environment.

Dr. Jeffrey Graves

Well certainly you’ll have. I mean as for our contracts that are pegged to changes in the LME you’ll have a downward pressure on revenues... As LME goes down obviously the margin improvement is a very nice thing that accompanies that. So that’s a good thing from a profitability standpoint in terms of the net effect on the top line with the launch of new products certainly that helps the top line. We’re continuing to grow into areas where we haven’t had product before or where we have improved product we’re looking for share growth through the new product investments in certain but so that’ll be a positive it’ll be netted against the declining prices over a long period of time. And, if LME were to continue to fall so and where LME goes, nobody really knows so obviously there’s offsets, there.

John Franzreb - Sidoti & Co.

Okay. Could you just remind me what’s the turnover of your lead inventory.

Ian J. Harvie

Our turnover inventory John you could look at which includes finished goods, raw and where you’re looking at days on hand I’ll call it of 70 days. So, it’s a little over two months.

John Franzreb - Sidoti & Co.

Two months okay. And one last question you’ve referenced before that telecom’s been kind of weak certainly it’s been spotty for your competitors as the lead environment improves can you talk a little bit about the competitive landscape in telecom and what you're seeing now.

Dr. Jeffrey Graves

Well I think that the softness in the in demand John has been in large part I believe due to the M&A activity that was going on in the telecom providers. They had inventories to rationalize. And they were basically spending their money on realizing some of the cost synergies between these emerging of these companies in that end market. So I think the softness was driven by that I don't believe the softness was driven as a temporary measure because lead went up so I don’t expect the fact that lead’s falling off now in the short term I don’t expect to see a giant spike in telecommunications driven because of lead pricing. I do think over time that the robustness of the telecom network in North America and concerns about that following the hurricane Katrina issue last year and some of the new FCC regulations that should add to the in demand for products like ours that provide backup power to telecom. so in terms of overall in demand I would look for things like that to drive a higher demand going forward and the conclusion of this large scale M&A activity in telecom. so those are the things I think that’ll drive an improving demand going forward not necessarily lead coming down because again our I don't think there’s that much sensitivity to the in demand based on lead prices across all of the battery companies.

John Franzreb - Sidoti & Co.

And, your competitors are being rational about pricing still right.

Dr. Jeffrey Graves

Yeah we’ve I tell you with the spike up John in the summer time to and in the fall to the dollar 80 level, I think you drove a lot of discipline in the entire industry to try to look for ways to work with customers to recover those costs. So I think the industry in total has become much more disciplined and looks much harder at its pricing mechanisms to try to recover lead costs and I think our customers are doing the same with their customers so it’s a much healthier environment going forward I think for everyone.

John Franzreb - Sidoti & Co.

Great thanks a lot Jeff.

Dr. Jeffrey Graves

Thanks John.

Ian J. Harvie

Thanks John.

Operator

Your next question comes from Josh Rosen.

Dr. Jeffrey Graves

Good morning, Josh...

Josh Rosen - Credit Suisse First Boston

Hey how are you guys.

Dr. Jeffrey Graves

Good.

Josh Rosen - Credit Suisse First Boston

Congratulations on getting all these initiatives in place and behind you guys and very nice results.

Dr. Jeffrey Graves

Thanks Josh.

Josh Rosen - Credit Suisse First Boston

Just a quick more theoretical question...If we now look at the company as just essentially standby power and look back historically at those results and take away movements in lead over a long period of time now that you have the pass-through’s, in place and consider the cost reduction opportunity and the unit growth. And, demand in new products is there has anything changed that we should not think about historical margins as some sort of opportunity or long-term goal.

Dr. Jeffrey Graves

I think you're spot on. I think the idea of getting back to historical kind of margin performance is exactly our objective.

Josh Rosen - Credit Suisse First Boston

Okay.

Dr. Jeffrey Graves

To get there obviously we had to have the pricing mechanisms to recover lead costs.

Josh Rosen - Credit Suisse First Boston

Yeah.

Dr. Jeffrey Graves

But, that was a short-term factor that we needed to have it was painful negotiations with customers all that to work through but we did that. In terms of overall margin, performance, then you get, back to our cost reduction programs and that 30 million of cost reduction is really meant to get us back to that kind of performance level when you take lead out of the equation.

Josh Rosen - Credit Suisse First Boston

yeah so but nothing in those nothing structurally or competitively besides lead or that hasn’t that you're not able to make up in the cost reduction opportunities there hasn’t been anything that’s changed that can't let you get back to those north of 10% operating margins.

Dr. Jeffrey Graves

That’s the way we view it Josh that’s right...

Josh Rosen - Credit Suisse First Boston

Okay. And, are you seeing any demand or interest at this point in time, due to the new wireless regulation or are people just sort of sitting on their hands as things play out in the courts.

Dr. Jeffrey Graves

no I think it’s I think it has the potential to be a large effect out there I you look at the wireless companies particularly that have grown in recent years and they’re targeting backup times of roughly half of where the FCC would like them to be. those companies particularly are I think going to be under increasing pressure to expand their backup power times and the way most of them do that is through larger quantities of batteries industrial batteries so it’s I think it’s certainly a real opportunity for us and others in the industry. And, I think there’ll be a big a large amount of pressure on them to do that over the next couple of years so I think that’s a very good thing from our business standpoint.

Josh Rosen - Credit Suisse First Boston

And, I imagine then the current spectrum options over the long term will also be a positive in that area particularly if there’s absolute new entrants going into the area.

Dr. Jeffrey Graves

Yes absolutely and you look at the growth in wireless broadband communication it’s and in all of our personal lives it’s, enormous so the amount of data these companies are having, to carry or have an opportunity to carry. and the longer backup power times I think bode very well for that industry and that’s why Josh I'm particularly pleased with our new two volt battery offering out of Reynosa Mexico we focused on that starting back in mid ’06. we already had a great product that we had lost about a year prior we took further action in improvements on that and that product just hit the marketplace at the very end of Q3 really ramping into Q4 here so I think from a wireless telecom position and that we do sell that product to other markets too. But, wireless telecom particularly I'm extremely happy and we happen to have it in one of our lowest cost manufacturing plants and locations.

Josh Rosen - Credit Suisse First Boston

Well it actually sounds like the areas that you can see growth over the next several years if you think of the factors that are driving down lead prices and think about just an overall global slow down these are areas that seem like they have pretty strong tailwinds despite some sort of global pullback overall.

Dr. Jeffrey Graves

Yes, I would tell you our end markets and I’ve gotten this, question a lot lately our end markets are relatively less impacted with the slow down in the economy today than most end markets. and that bodes well so you get kind of the scaring away of some I think some of the speculators in the lead market because of the softening economy and you have our in demand staying strong so that’s why if you hear an upbeat tone in the voice that all adds up nicely for us I think.

Josh Rosen - Credit Suisse First Boston

Yeah it’s unique in some cases we’ve seen no pullback in commodity costs and in the company’s core business but it’s a result that’s sort of double edged the end market is pulling back as well but that’s not the case for you guys.

Dr. Jeffrey Graves

Right and largely so Josh I believe.

Josh Rosen - Credit Suisse First Boston

Okay great thanks guys I’ll talk to you soon.

Dr. Jeffrey Graves

Thanks very much.

Josh Rosen - Credit Suisse First Boston

Bye-bye...

Operator

Your next question comes from Bill Dezellem.

Dr. Jeffrey Graves

Hi, Bill.

Bill Dezellem - Tieton Capital Management

good morning again a couple of follow ups here did we hear you correctly in response to one of the last questions that the FCC eight hour backup mandate that that would really compare to about four hours of what the companies had been targeting up to this point.

Dr. Jeffrey Graves

Yeah and I would tell you Bill that’s my opinion and there’s not a lot of data out there on how broadly that’s applicable but I would just tell you very subjectively that some of the smaller wireless telecom guys. and the newer entries in the field certainly designed to they were certainly mindful of their capital investment and they were careful about how much time they put in these regulations will seemingly have an impact on those folks on the longer backup power times. Some of the larger more established companies I think are probably better positioned but I believe they’re all off doing studies now to find out what their exposure or commitment needs to be for the future.

Bill Dezellem - Tieton Capital Management

Great and then the severance and plant to closure costs you had mentioned I believe in the opening remarks where those fell in the P&L and I simply missed them what was the answer to that.

Ian J. Harvie

The closure costs for Conyers during cost of goods sold Bill and the severance costs are principally in SG&A.

Bill Dezellem - Tieton Capital Management

And, the dollar amount for each again please.

Ian J. Harvie

The closure costs were a million four and this is in continuing operations a million four and 425,000 severance there are also I’ll call it costs associated with the motive power exit and divestiture in the discontinued operations line in which there’s roughly a million dollars of severance. And, some related impairment charges associated with the non, I’ll call it non-cash impairment charges associated with the divestiture of the fixed assets and inventory.

Bill Dezellem - Tieton Capital Management

Okay so to make sure that we understand this I’m feeling like I’ve been double counting here. We had the Conyers closure at 1.4 million and that was in cost of goods sold we had the SG&A severance costs of 400,000 but in addition to that there was another million of severance that was also in SG&A...So a total of 1.4 million there, also...

Ian J. Harvie

No I’ll just go through that again for you Bill. The severance and the impairment charges given that we’d sort of [inaudible] the discontinued operations account presentation those charges are actually in the discontinued operations line. The SG&A line that you see on the face of the financials now just relates and reflects continuing operations for the standby power business.

Bill Dezellem - Tieton Capital Management

Okay perfect that’s that makes a lot more sense thank you and then finally the new products that you had referenced in your opening remarks not that you have announced but that you have that are coming what’s the revenue potential for those. I think you mentioned the ones that you have launched is 40 to 50 million over on an annualized basis say three years from now as your best guess how do the new products not yet launched compare to that.

Dr. Jeffrey Graves

Well Bill I probably shouldn’t toss out numbers I what I will do is as we launch them we’ll talk about what we believe the market potential is over a period of time and where we’re going to go if for things in the pipeline. I just think it gets to be too much blue sky to start hanging numbers on them and talking about potential because quite honestly it changes over time I mean and you may get displacement of a certain product all of that and we’ll try to net it all out. And, as we, launch products, talk about what we think the potential is but not before.

Bill Dezellem - Tieton Capital Management

Would it be okay just on a qualitative basis for us to think that whatever the absolute number turns out to be that it’s noteworthy but as you said things come and go?

Dr. Jeffrey Graves

Yeah absolutely I, and the question, will be it always is when you launch a new product does it cannibalize some of the existing market. When you're the largest in what you do, you need to work out and advertise net numbers where if it’s going to consume some of the stuff you're already selling that you net it out for people. so they understand what the real impact is when we talk about a 40 to $50 million increment from the new products that we’re just launching that is incremental that is that nets out anything it’s displacing it’s incremental to what we do today.

And, I think in fairness to all of our shareholders we need to do that math and talk about net effects on the business so yeah I tell you they're substantial but we have to make sure we net out what it may displace that we could resell today for you as we launch them. Okay.

Ian J. Harvie

I only have one sort of final comment to add to that Bill and that’s clearly our focus here is driving the company back to profitability and clearly driving our pricing recovery needs around lead and [inaudible] imported but it’s not our principle objective.

Dr. Jeffrey Graves

But, we’re very happy Bill to talk about gaining share by the launch of new products and new technologies not trying to be the price leader in our markets and gaining share that way.

Bill Dezellem - Tieton Capital Management

Okay. Thank you both.

Dr. Jeffrey Graves

You're welcome Bill.

Ian J. Harvie

Thanks Bill.

Operator

If there was a question, please press star and the number one.

Dr. Jeffrey Graves

Okay Courtney with that let me just wrap up here then thanks everyone for joining us today we know the shareholders are anxious to see C&D Technologies return to profitability it’s the highest priority for me and for the management team we have struggled over the last years through a host of issues. Both internal and external...We believe the difficult actions we’ve taken over the last two years the most important of which were discussed today position the company to return to profitability in the near term and bring exciting growth opportunities for the future. The result will be significant value creation for our shareholders in the years to come. On behalf of the entire C&D management team, I wish you all a safe and happy holiday season. Look forward to discussing our progress with you again in the New Year. Thank you and have a great day.

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Source: C&D Technologies F3Q08 (Qtr End 10/31/07) Earnings Call Transcript
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