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Executives

Carol Knies - Senior Director of Investor Relations

James R. Bolch - Chief Executive Officer, President and Director

Phillip A. Damaska - Chief Financial Officer and Executive Vice President

Nicholas J. Iuanow - Senior Vice President of Corporate Development and Corporate Treasurer

Analysts

Kelly A. Dougherty - Macquarie Research

Francesco Citro

Craig E. Irwin - Wedbush Securities Inc., Research Division

Kirk Ludtke - CRT Capital Group LLC, Research Division

Jeff Osborne - Stifel, Nicolaus & Co., Inc., Research Division

Kevin Cashman

Sean Britain

Trent Porter

Exide Technologies (XIDE) Q1 2013 Earnings Call August 3, 2012 9:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Exide Technologies Fiscal 2013 First Quarter Results Call. [Operator Instructions] Thank you.

I would now like to turn the conference over to Carol Knies, Senior Director, Investor Relations. You may begin your conference.

Carol Knies

Good morning, and thank you for joining us. You may view the slide presentation for today's discussion on our website at www.exide.com. The presentation is located on the Investor Relations homepage, under Events. On the call today is Jim Bolch, President and Chief Executive Officer; and Phil Damaska, Executive Vice President and Chief Financial Officer.

At this time, I'll review our Safe Harbor statement, then we will provide details of Exide's fiscal 2013 first quarter results as of June 30, 2012, followed by a question-and-answer period.

Listeners should be aware that certain statements on this call may constitute forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. As such, they involve known and unknown risks, uncertainties and other factors that may cause the actual or expected results of the company to be materially different from any results expressed or implied by such forward-looking statements. These factors are enumerated in further detail in the company's most recent Form 10-Q filed yesterday, August 2, 2012, with the United States Securities and Exchange Commission. Any statements made during this call are made as of today and the company undertakes no obligation to update any of these statements in the future.

At this time, I'll turn the call over to Jim Bolch, President and Chief Executive Officer.

James R. Bolch

Thank you, Carol.

Please turn to Slide 3 for review of our fiscal first quarter results. As we indicated in June, our first quarter was expected to be challenging in light of rising cost and availability of spent batteries. During the quarter, we've had success with many of our operational improvement initiatives, but these were unfortunately overshadowed by the negative factors of escalating input costs, the weaker euro and softer demand in certain markets. The new pricing we announced that went into effect for a large percentage of our North America customers had minimal impact on results in the first quarter due to timing. Excluding the negative impact of foreign currency translation and lead-related pricing, consolidated net sales were up about 3% compared to prior year period.

Operating income was $1.1 million compared to $13.6 million last year. The decrease was primarily due to higher commodity costs, principally the cost of spent batteries in the U.S. Excluding the tax valuation charge recorded in the U.S., fiscal 2013's first quarter net loss was $18.9 million or $0.25 per share compared to a net loss of $5.2 million or $0.07 per share in the prior year period. Phil will provide more details on the tax charge later during his commentary.

Please turn to Slide 4 for an update on our Transportation Americas business. We're on schedule with the closure of our Bristol, Tennessee, plant. As previously stated, this action is expected to improve operating earnings $20 million to $25 million beginning in the latter part of fiscal 2013. As we work to transition volume for Bristol, we have been successful in obtaining new pricing on a significant portion of our business with our OE customers. The new pricing includes a premium that reflects the rising core costs relative to LME. As part of this negotiation, we do expect to lose some unprofitable OE unit volume.

We also remain on track with the closure of our Frisco recycling operations and the sale of adjacent property. In October, the city is expected to fully fund an escrow account, at which time we will begin the process to wind down our operations. As we stated in June, the operations will cease before December 31, 2012. According to this time line, we expect to record a pretax gain of about $28 million as early as the second quarter. We expect to receive net proceeds of approximately $37 million when the transaction closes. With the Frisco closure, we will be exiting third-party lead sales.

As we discussed last quarter, we announced increased pricing to recoup investments to comply with new regulatory bid [ph] requirements in the U.S. This pricing is now fully in effect with most of our aftermarket customers.

I am very pleased to report that Exide is now the sole battery supplier to Pep Boys. You may recall that we previously supplied all Bosch-branded batteries to this customer. We have now been awarded the remainder of Pep Boys' business, supplying all automotive, marine, lawn and garden and heavy-duty batteries. This business is particularly attractive due to historically high core return rates. Our product shipments for this new incremental business began in early July.

As we turn to Slide 5. Our first quarter lead production was about 80,000 tons in the U.S. As indicated by the pie chart, 77% was used to satisfy internal demand. External lead sales decreased about 1,900 tons compared to the first quarter of fiscal 2012. During the quarter, the average cost of purchased spent batteries as a percent of LME increased to record levels. As you're aware, lead escalator pricing mechanics are tied to the price of lead as quoted on the London Metals Exchange. Lead on the LME is down quarter-over-quarter, but we're experiencing the opposite trend with core cost. We have been exploring and have had some success in moving to a blended LME and core charge pricing model that more accurately reflects our cost in this environment. The higher core cost negatively impacted third-party lead sales during the first quarter, which translated into little or no profits on these sales.

We remain focused on improving our collection of spent batteries in more economical levels. In fact, through our branch network, Motive Power spent battery collections for the first quarter was up approximately 43% from the same quarter last year. We have strong momentum as we continue to increase focus on core retrieval. Additionally, as we reduce our transformation OE volume and third-party lead sales, our captive core rate will be further improved due to the mix change.

If you now turn to Slide 6 for comments on our Transportation Europe and Rest of World business. During the quarter, we saw the growth rate moderate for start-stop batteries as the new car build has softened somewhat across much of Europe. In my opinion, this is related to the slowing of the economies and not about the adoption of new technology. We remain on track with the increase of our micro-hybrid battery capacity in Poland, Spain and Italy.

As we discussed in June, certain European markets continue to be highly price competitive through the first quarter and negatively impacted margins. We remain committed to protecting our market share and continue to develop cost reductions to mitigate these pricing actions. We recorded a $3.4 million mark-to-market loss on lead forward contracts during the quarter. The benefits of these forward purchases will be realized in the second and third fiscal quarters as we secure the lead.

Slide 7 provides an overview of our industrial businesses. Our global industrial business continues to have healthy year-over-year backlog, and as you might expect, some markets are stronger than others. In the U.S. market, our backlog increased roughly 30% versus prior year quarter, driven in large part by demand for our new tubular products. In Europe and Rest of World, the backlog is up approximately 16% in spite of a sluggish economy across much of Europe. Military contracts in Industrial Energy Europe and Rest of World are up almost 300% over the prior year first quarter. These profitable multiyear contracts are primarily submarine reserve power batteries.

We secured price increases in the industrial Americas Motive Power channels to help offset the increased cost of regulatory compliance. These increases are now broadly in place and will help mitigate the impact of increased core costs for the rest of the year.

And now Phil will provide a financial update for the quarter. Phil?

Phillip A. Damaska

Thanks, Jim. And good day. Please turn to Slide 8.

Net sales in the quarter increased about 3%, excluding the negative impact of foreign currency translation and lower lead-related pricing. Transportation Europe and Rest of World enjoyed higher aftermarket sales while both Transportation segments realized higher OE unit shipments. Excluding the unfavorable impact of foreign currency translation, first quarter gross profit was lower than the comparable prior year period by approximately $17 million. Of this, approximately $15 million is the result of continued high core cost, coupled with lower LME-based pricing driven by an average 23% reduction in lead prices. Operating income declined versus the prior year period, primarily the result of higher core costs, lower aftermarket mix in the Americas and much lower profits on third-party lead sales.

Given the decline in profitability in the Americas business, the evaluation of our U.S. deferred tax asset resulted in the establishment of a valuation allowance of approximately $88 million. This noncash charge does not necessarily impact the ultimate utilization of the associated net operating losses. As we execute our strategy of cost reduction in Transportation and growth in Industrial Energy, we are confident in our ability to return the Americas business to sustained profitability and allow us to ultimately utilize this long-life tax assets.

Now if you turn to Slide 9, I'll review the results of our segments for the quarter. Industrial Energy Americas net sales, excluding lead-related price, was flat in the current quarter, as compared to the prior year first quarter. Gross margins decreased principally due to higher lead input costs and production start-up cost related to our flat plate AGM products in our Columbus, Georgia, facility. Industrial Energy Europe and Rest of World reported an approximate 6% increase in net sales, excluding lower lead-related pricing and unfavorable currency translation. This business saw an increase in Network Power and military sales in the current year quarter. Our Asia-Pacific business saw a marked improvement in orders and shipments. These factors, coupled with further SG&A cost reductions, resulted in an improvement in operating results.

Transportation Americas net sales, excluding unfavorable lead-related pricing, were about flat compared to the prior year first quarter. Both gross margin and operating margin were down, as compared to the prior year period, primarily due to lower aftermarket unit sales and continued higher cost of cores combined with much-lower LME-based pricing. Third-party lead sales accounted for about $5 million of the reduced gross profit in the current quarter. Although price increases began to benefit the results, it was minimal in the quarter. As we move into the second fiscal quarter, aftermarket pricing of about 4% should be realized along with some OE-related price adjustments.

Transportation Europe and Rest of World net sales, excluding foreign currency translation and lead-related pricing, increased about 3% in the fiscal '13 first quarter versus the prior year period. Gross profit and operating income were down primarily due to unfavorable carryover pricing in the aftermarket channel as well as a $3.4 million mark-to-market loss on lead forward contracts.

Now if you turn to Slide 8 -- 10, I'll provide an update on our liquidity position. At June 30, 2012, we had total liquidity of $288 million versus $286 million at June 30, 2011. The current year includes $130 million in cash and approximately $153 million under the revolving credit facility. As is typically the case, to meet seasonal demands, we added inventory in the period albeit at a lower rate than in the prior year comparable quarter. We used $21 million of free cash flow in the first quarter compared to a use of $31 million in the prior year. The second fiscal quarter has us continuing to build inventory in advance of the Transportation selling season. This, coupled with higher capital spending as compared with the prior year second quarter, is expected to result in a first half cash burn similar to last year. As is typical, we expect to be free cash flow positive in the second half of the year.

Slide 11 provides a picture of comparative working capital components. The reduction in working capital days outstanding from 63 to 53 was a result of ongoing improvements in inventory management. Days on hand of inventory declined to 77 days in the current year versus 86 days in the prior year comparable period as we added $20 million less in inventory in the current year quarter. Working capital management particularly in inventory will be a continuing focus as we balance cash flow generation against ongoing investment needs of our various businesses.

And with that, I'll turn the call back over to Jim.

James R. Bolch

Thanks, Phil.

Our fiscal 2013 first quarter was challenging, as we indicated in June. Phil and I have highlighted the negative impact of higher core costs and decreased core availability at a time when LME is declining. This is an unprecedented combination of market dynamics that has created significant margin compression in the Americas business. It is difficult to predict when these costs will return to more historical levels, but we're taking aggressive action to mitigate its effects, including pricing, reduction of OE sales, exiting third-party sales and, of course, driving improved core return rates.

We continue to be committed to our turnaround plan announced last November for our Americas Transportation business. We're on track with the Bristol and Frisco projects, and we're seeing good results from our Lean Six Sigma and VAVE initiatives. I'm very excited to expand our business with Pep Boys and we are actively pursuing other select opportunities.

Finally, we are pleased the backlog in all of our industrial businesses continues to be strong in spite of the many economic uncertainties. I believe that this reflects the value that our customers assign to the products and services that we provide. We continue to focus on several important initiatives to -- and drive improved profitability in this industrial business, particularly in Europe.

Thank you for your time and interest today. And we'll now open the call for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Kelly Dougherty of Macquarie.

Kelly A. Dougherty - Macquarie Research

Just wanted to get some more color on the core costs. Just wondering if you started to see any kind of abatement at this point yet, or maybe when you think that might happen. Obviously, there's a few smelters coming on, so do you think that should help relieve things? And then if you could also talk to us about your captive core recovery, maybe where you are now and then, when you add Pep Boys, how much you think that could bring you incrementally.

James R. Bolch

Okay, Kelly, I'll try to walk through your series of questions here. And again just to highlight, this -- it should be obvious. And we talked last quarter about this continuing increase in core costs especially versus LME. You might recall there was an industry-provided chart that showed that compression. What we saw in this quarter was actually a continued acceleration of that core cost increase. I would say at this point in time that the core costs have stabilized. If you think about then, what are we doing to deal with it? There is obviously what we believe will be forces that will push the prices back down. The fundamental reason is still the supply-and-demand issue. Coming off a weak winter, there's less cores coming back into the system at a time when you're going into peak production rates to prepare for the winter to come. So obviously, over the long term, that situation should stabilize. We've seen year-after-year steady increases in the aftermarket volume build. It's just trying to get the timing issues that can also be difficult to predict. If you now talk about what we're doing to counteract it in spite of just what the market itself is doing, the most important one that we've talked about time and again is our core collection efforts. We continue to see improvements there, whether it's in contract changes; whether it's in incentives that we're offering our team; flexible payment terms to buyers; as well as some other creative solutions. I can't also underscore this mix change too much. You mentioned Pep Boys. Certainly, that will be nice volume coming in with high core return rates. But also we have some customers who, by definition, do not have cores coming back, specifically the automotive OEs and third-party lead sales. We mentioned, with the closure of Frisco, we'll be getting out of the third-party lead sales business so that improves the mix. With our recent negotiations with the OEs, we did secure pricing on a significant portion of that volume, but some portion of that volume will be going away. So I think, in summary, going forward, what we'll see is better captive core rates both as a function of our internal efforts but also the portfolio changes. Then on top of that, I think our belief is that we'll see these core prices moderate and begin to go back more towards historic levels, although a bit difficult to predict at this time.

Kelly A. Dougherty - Macquarie Research

Great. And just to follow up quickly on that, with the new dynamics, I guess, on the lead recycling business, do you think that the slim margins drives out the smaller, least-efficient producers and then that should help with the supply-demand balance? Is that how you're thinking about in addition to more batteries coming back as hopefully this summer has kind of depleted what we've got now?

James R. Bolch

So Kelly, I assume, by your question, you mean that Exide lead-recycling producers?

Kelly A. Dougherty - Macquarie Research

Yes.

James R. Bolch

Well, there's obviously new capacity coming on the market in North America as several new large smelters will be coming online this year. Like in any situation, probably the most efficient ones will be the ones that will do the best in the long term. In terms of the core pricing, though, I think a good way to think about it is, perhaps in this ramp-up period, this transition period where you have new capacity coming online, there'll be increased demand in that ramp phase. But once it gets past the ramp phase, we'll actually be back to a steady-state condition then. So the -- in total, this whole supply and demand really won't change. So I think that either maybe some pressure on core prices right now because of this transition, but once you get through that transition, I think that issue will go away.

Kelly A. Dougherty - Macquarie Research

Great. I just have one more quick follow-up then on inventory. Obviously, last winter caused its own problems, but then the heat this summer should hopefully help as we go into this winter. So you have to ramp-up production to be able to meet demand, but do you have to do that on your balance sheet? Or do your customers kind of realize we're going to have some catch-up from last winter in this summer and then maybe they're starting to order a bit more? Or is that really falling on the producers to hold that inventory at this point?

Phillip A. Damaska

That historically has been on the producer's balance sheet, continues to be the case. I mean, certainly, the market in the U.S., which is dominated to a great degree by large retail resellers, they have a lot of market power and they basically force the issue in terms of either consigned inventory in some cases or extremely long terms. So we haven't seen any change in that -- in those market dynamics. And to be perfectly frank with you, Kelly, I don't expect them as we move through this year into next.

Operator

Your next question comes from William Bremer of Maxim Group.

Francesco Citro

This is Francesco Citro for Bill Bremer. On the Industrial Energy segment, I was wondering if you can give me an idea of what is the pricing in the backlog and also how that compares to your competitors.

James R. Bolch

Francesco, well, I break it between the Americas business and the European business. As we stated, the pricing in industrial, we went out with pricing last quarter to help offset some of these increased regulatory costs around the environmental cost. That was about 4% in that business, as we stated. That cost will be rolling into the Americas business going forward, most notably in the Motive Power segment. On the European side, we haven't seen the same kind of broad price increases, although we have had select price increases in certain markets particularly in Motive Power aftermarket.

Francesco Citro

And at what capacity utilization are you running your facilities both in America and Europe and Rest of the World?

Phillip A. Damaska

Well, again, this is the build season particularly in our Transportation segment. So other than the Bristol situation in the Americas, our Transportation facilities are running full out. They're 95%-plus capacity utilization and we'll continue that through the summer months, with the exception of some facilities in Europe which are down for the August vacation or holiday period. In the Industrial Energy Europe business, we have seen nice improvement in utilization. You might recall in the second half of fiscal 2012, we were running nominally at 80% or so capacity utilization. Those facilities are now approaching, if not, slightly better than 90% utilization. And clearly, with the market demands and the growth in our backlog in the industrial Americas business, which Jim indicated was 30% increase in backlog, our 3 industrial plants in the Americas are running near capacity.

Francesco Citro

That helps. And then last one, if I can squeeze it in. You took a tax allowance this quarter just related to the United States. So I was wondering, are you performing or you plan on performing the same kind of evaluation on deferred tax also in the other regions?

Phillip A. Damaska

That's something that we do on a quarterly basis. And the only 2 other regions of the world are tax jurisdictions where we have sizable deferred tax assets are in Germany and in France. And if you recall, in the third quarter of last year, we actually reversed our valuation allowance against deferred tax assets in France as that legal entity has turned profitable and continues to be. So we continue to evaluate those other 2 major deferred tax assets on a quarterly basis and at this point in time have no expectation that we're going to have to record any additional valuation allowances for the foreseeable future.

Operator

Your next question comes from Craig Irwin of Wedbush.

Craig E. Irwin - Wedbush Securities Inc., Research Division

Phil, Jim and Carol, congratulations on the Pep Boys win. This is the first retail customer of this size that I've seen Exide win in many, many years, so -- I know that's taking a lot of effort over the past couple of years. First question I wanted to ask, the $15 million impact that you laid out for us, can you walk us through how you would calculate that to share it with your investors?

Phillip A. Damaska

Sure -- can we tell that? Yes, let me give that a crack and Jim can certainly weigh in as he sees fit. Obviously, it's due to one major factor and that's the cost of cores and its relationship to the price of lead as quoted on the LME. As we look in our business, I would divide it into 3 separate and distinct components. One is recycling related and it has to do with third-party lead sales. The tonnage we sold was about the same first quarter this year versus first quarter of last year, but core costs were up about 4% period-over-period and LME was down about 23%. So as we indicated in our comments, Craig, that compressed profitability in recycling by order of magnitude, $5 million. The other 2 pieces, and it's about $8 million in Transportation Americas and about $2 million in our Industrial Energy Americas business, is principally the result of higher core input costs. Now as you look at those 3 distinct pieces, as we look to shut down the Frisco facility and exit third-party lead sales business, that will take care of itself. We won't have enough lead produced to serve third-party lead sales business and that in of itself would hopefully bring down core costs as we're not chasing lead to make that lead for sale. The other 2 pieces, the battery business. Everything else remained the same. The pricing that we've put in place, roughly 4% on average in Transportation aftermarket and about 4% in the Motive Power portion of our industrial business, should compensate to a great degree that cost increase. And therefore, as one might expect, this unsustainable relationship of scrap lead to LME lead, if it comes back more in line with historic levels or at least sustainable levels, we should see margin expansion going forward because the pricing is there and the costs should come down.

Craig E. Irwin - Wedbush Securities Inc., Research Division

Great. So one of the things I was hoping you might be able to address regarding that $15 million increase is that, within that, there's going to be a good amount of heterogeneity as far as the different areas, the channel, where you procure your junk for recycling, particularly captive recovery being one of the most cost-effective areas moving all the way out to maybe buying or bidding open market from some of the core brokers or even visiting car crushers on a collection run. Can you share with us the, maybe, order of magnitude of diversity in the core collection costs that you're facing and whether or not there was a particular area of the core collection side that contributed to the $15 million drag and whether or not there are other areas in the channel that are actually seeing significant improvement?

James R. Bolch

So Craig, let me take a shot at that one. And again, I'll just highlight where Phil finished as a starting point. The $15 million between third party and also the margin compression in industrial and Transportation, that will be counteracted by third party going away and pricing that will cover the industrial and Transportation segment. We now think, going forward in the structure of supply streams that you described, that's really all the work that we've been doing to improve the cost. So that $15 million is made up obviously of a combination of the portfolio which is customers that don't return any cores like OEs and third party to the -- let's call them, the prime customers which are ones that contractually return very near 100% of the cores, and those are obviously going to be the cheapest ones. We're not prepared to announce publicly what the percent is in each category, but you can certainly imagine that this portfolio change is going to have some pretty significant benefits by bringing in a customer like Pep Boys, as well as OEM third-party lead sales going up. Over and above that are all the activities that we've been taking to improve captive core returns within our traditional base. So the portfolio change, the core return actions as well as if we see the market for those ones we have to go out and buy ,moderate, which we expect it would just by the laws of supply and demand, all those would be margin expansion opportunities on top of getting back to evenness, as Phil described from the pricing standpoint.

Craig E. Irwin - Wedbush Securities Inc., Research Division

Great. So I know you look at things on a blended basis, but if we were to maybe just assume that the most expensive cores you procure were matched with your third-party lead sales, the third-party lead sales would actually be unprofitable in the June quarter. Is that a fair assumption?

Phillip A. Damaska

I think what we said is that we had little to no profit at all on the lead sales that we had in the first quarter.

James R. Bolch

And that accounted for about $5 million of the $15 million that we stated.

Phillip A. Damaska

Right.

Operator

Your next question comes from Kirk Ludtke of CRT Capital Group.

Kirk Ludtke - CRT Capital Group LLC, Research Division

I just wanted to follow up on the core question. I guess I was -- I thought that one of the reasons that core prices were going up was that cores are being exported and therefore leaving the U.S. system, which for a long time sounds like it was somewhat of a closed loop. And so I would think that a stronger dollar would cause that to become less and less -- U.S. cores become less and less competitive in the marketplace. And I'm -- and is that -- is any of that consistent with what you're thinking or...

James R. Bolch

So Kirk, let me see if I can just sort of paint the picture for you. You mentioned U.S., but I’d ask you to think more about North America. The majority of the cores that leave the U.S. borders go to Mexico, but those by and large are reimported back into the U.S. as finished batteries so they stay within the battery ecosystem, if you would. And likewise, into Canada, it's similar, but to a smaller degree to Mexico. Really, the ones that you see leave the system are in 2 flavors. One is cores that could be exported to Asia. The data we have say that's a very small percent, 1% or 2% going to either China or Korea. The other ones would be batteries that are exported in total. For example, some of our industrial batteries are exported from the U.S. to the Asia markets. But likewise, you can imagine there are other batteries imported into the U.S. typically in the smaller kind of products like emergency lighting and that kind of stuff. So couldn't exactly tell you what the exact balance is, but our belief is that lead going out of the North American market is actually a fairly small impact.

Kirk Ludtke - CRT Capital Group LLC, Research Division

Okay. So is it -- are they going -- are the prices continuing to go up or just because your -- the retailers are recognizing that there's a higher bid in the market?

James R. Bolch

No, that's not the case. At least, I would state that that's not the case. Typically, the retailers have some sort of contractual relationship. As an example, with our new -- our new contract we just talked about. Part of that contract specifies a core return rate, which is typically pretty high. And it's in their best interest to actually -- because that can get their best pricing by returning the cores back, and it sort of takes the volatility of lead out for them. It's maybe the smaller end users and sellers, the specialized distributors and jobbers and the like. The macro issue, we still believe, is again a weak winter. A weak winter in terms that it was warm meant less battery sales. Less battery sales says there's less cores coming back at a time when you need more than ever because you're building for the new season. So it's that cyclical dip, if you would, that has created that. And then maybe on top of that, some extra effect from the new smelters coming online as they're in that ramp-up phase, but I believe that would go away once it hits steady state.

Kirk Ludtke - CRT Capital Group LLC, Research Division

Okay. Do you think that the new smelting capacity would -- will have operating costs that are materially below the existing base such that they can just afford to pay more for cores?

James R. Bolch

I don't think that would be a significant impact.

Kirk Ludtke - CRT Capital Group LLC, Research Division

That's not it? Okay. And I was wondering, I'm just trying to build a bridge here, is there -- can you quantify any of the -- there's been some new business, some price increases. Then you also mentioned some OE revenues going away. Can -- is that -- can you put a -- any -- the consolidated numbers on any of those?

Phillip A. Damaska

Kirk, let me give you a little bit of color on that. So we've talked about a 4% on average price increase that seems to be sticking nicely in the Transportation aftermarket in the Americas market. And we talked about a 4%, roughly, price increase in the Motive Power portion of our industrial Americas business. And Jim highlighted some pricing mechanics changes that we negotiated with the OEs as we look to finalize the move of their product from Bristol to the other 2 transportation facilities in the U.S. Adding those 3 together, we're looking at pricing on a quarterly basis of $8 million to $10 million.

Kirk Ludtke - CRT Capital Group LLC, Research Division

Oh, really? Wow. That's a lot.

Phillip A. Damaska

So it will probably be a little bit less than the second quarter because the volumes are lower, but as you move into the third and fourth quarter in the season, you would expect it to, over the 3 quarters, average about $8 million to $10 million.

Kirk Ludtke - CRT Capital Group LLC, Research Division

Oh, for the 3 quarters combined?

Phillip A. Damaska

$8 million to $10 million a quarter.

Kirk Ludtke - CRT Capital Group LLC, Research Division

A quarter?

Phillip A. Damaska

A quarter.

Kirk Ludtke - CRT Capital Group LLC, Research Division

Wow. Okay. And then the new business?

Phillip A. Damaska

The customer specifically requested that we not comment on the volumes, so I'm not able to give you that.

Kirk Ludtke - CRT Capital Group LLC, Research Division

Okay. And then the OE revenues going away, is there are any kind of perspective you can give?

Phillip A. Damaska

As you might recall, the OE portion of our Americas business is 10% or less and we've lost less than 1/3 of that, I think.

Kirk Ludtke - CRT Capital Group LLC, Research Division

Okay, great. And then with respect to your cash flow guidance, are you just funding the pension on a quarterly basis?

Phillip A. Damaska

Yes.

Kirk Ludtke - CRT Capital Group LLC, Research Division

So that's in there. And then where do you think the pension funding goes with the new legislation down the road?

Phillip A. Damaska

That's a good question and I honestly don't have an answer for you. Obviously, we'll take note of that and come back in the second quarter call and give you some more information on that.

Operator

Your next question comes from Jeff Osborne of Stifel, Nicolaus.

Jeff Osborne - Stifel, Nicolaus & Co., Inc., Research Division

I was wondering if you could touch on the Network Power business. It seemed quite strong in the European market and a little bit softer than we were expecting in the U.S. I just didn't know if you could talk about some of the puts and takes there.

James R. Bolch

Yes, I'll give that one a shot. I think where I would start with is -- as we've said in prior calls, Network Power has still not returned back to the peak prerecession, you know, so back to the, say, 2008 levels. We have seen it pick up a bit, and actually, it's been in -- both in North America and in Europe but still nowhere near the levels that we've seen before. We still believe, from talking to customers, that there's still pent-up demand out there, obviously. That's a capital buy for most of these customers, if you imagine, it’s going into applications like telecom and data centers and the like, and they are being very careful with their new funds. But we've actually seen fairly solid demand. If you look at -- and we don't break it out by segment, but if you look at backlogs, which is certainly a good indicator of future viability, in the U.S. up 30% versus prior year and in Europe up 16% versus prior year, certainly feels a little more comfortable right now in this time -- in these uncomfortable economic times.

Phillip A. Damaska

Let me just add to that as well. The Network Power business in Europe and Rest of World benefits from the military or submarine sales that we talked about in our commentary. So that's a nice blip that is outside the, call it, backup power normal business that caused the increase in Europe to be as nice as it is, as compared to the last quarter.

Jeff Osborne - Stifel, Nicolaus & Co., Inc., Research Division

Got you. And then just 2 other areas of focus. On the European and Rest of World Transportation OEM side, I think that was up 4% or 5%, just given new car sales and registrations have been pretty soft, what's your expectation there going off -- going forward?

Phillip A. Damaska

Well, I think we're continuing to see some softness in what I'll call the non-luxury car segment. It looks like the BMWs and Mercedes of the world continue to see pretty robust production, with a lot of their products being exported to markets like China. As you look at the mainstream mass producers, call it VW and Peugeot and Renault, they're certainly seeing reductions in sales and continue to cut back production. What we're seeing to offset that, though, is this continued conversion to micro-hybrid technology. So although the flooded battery market continues to see some of the effects of lower production, we're somewhat compensating for that in our top line with higher average selling price products for MHF and AGM batteries.

Jeff Osborne - Stifel, Nicolaus & Co., Inc., Research Division

On the European side, would you say you're exposed to the higher end or the more mainstream vehicles if you just had to look at your mix?

Phillip A. Damaska

Well, I mean, clearly, we have -- because most of the market is driven by the mainstream, we're not immune from that.

Jeff Osborne - Stifel, Nicolaus & Co., Inc., Research Division

I understand.

Phillip A. Damaska

But clearly, our MHF product continues to accelerate its growth, so even -- these mainstream producers, as they introduce start-stop vehicles, are buying up more higher-end batteries and we're picking up share as a result of that.

Jeff Osborne - Stifel, Nicolaus & Co., Inc., Research Division

Got you. And then just lastly, any comments on the Motive side both U.S. and Europe? Europe was pretty soft. Does that get better or worse, going forward?

James R. Bolch

Well, traditionally, Motive Power has been tied to industrial activity, which would tell you that -- to be maybe a bit concerned. But a couple of things I would say maybe to offset that: One is we believe that there were some fundamental changes since -- against, since the downturn in '08 in which producers got a lot -- I should say, our customers got a lot leaner. They took spares out of the system; they took extra forklifts out of the system and the like, so there's not that buffer there. So we believe, even if there was a significant drop in industrial activity, it wouldn't translate like it did in '08. More to the point, though, in the Americas, if we look at the ITA statistics which is our forward-looking indicator, first quarter shipments were up 6% and orders were up 11% over prior year, which again bodes well for the future. And then lastly, similar story that Phil indicated with the micro-hybrid products in Europe and Transportation, especially in the Americas, we're seeing continued growth in our premium products and the new tubular products both with new customers and with existing customers upgrading to premium products.

Operator

Your next question comes from Kevin Cashman of Assurant.

Kevin Cashman

Actually, my question's on -- just wonder if you could kind of walk me through cash for the year and what CapEx looks like through the rest of the year and how flexible working capital swings would be kind of given the situation in Europe. I noticed in the Q, you guys break out how much of your receivables and inventory are Europe, Rest of World. I wonder, do you break that down further in terms of what's Europe, what's Rest of World? And I'm just kind of wondering if you can walk me through a bit.

Phillip A. Damaska

We haven't historically broken out Rest of World from the European business. And we don't do that because of the relative size of Asia to Europe, which should give you some indication that it's not an overly large piece of our business. In terms of CapEx, you see in the Q that we spent about $24 million in the first quarter. We indicated in the last call that we expected capital spending for this year to be in the same range it's been for the last few years, around $100 million, so the expectation is that we would spend roughly $75 million, plus or minus, in the remaining 3 quarters. But I indicated also in my commentary that the timing of that flow is more front-end loaded this year and we expect to spend, as we did in the first quarter, more in the second quarter than we spent in the second quarter of last year.

Kevin Cashman

Okay. So then given that and – would you expect to see then, I guess, slightly free cash flow -- slight free cash flow shortfall on the full year. Or do you think working capital will wind up swinging back to cover any shortfall or…

Phillip A. Damaska

There are, obviously, a lot of moving parts. Higher core costs result in higher cash disbursements for lead input. On the other side, we've got lower LME, which is the basis for purchasing or securing lead input in Europe. So a lot of moving pieces. As we indicated a quarter ago, we expect cash flow for the year plus or minus to be around breakeven, as it's been for the last couple of years.

Operator

Your next question comes from Sean Britain of Bayside Capital.

Sean Britain

A quick follow-up question on cash. How much of your cash is in North America at the end of the first quarter?

Phillip A. Damaska

Let me ask Nick Iuanow to answer that.

Nicholas J. Iuanow

It's -- the majority of the $130 million resides in North America.

Operator

Your next question comes from Trent Porter of Guggenheim Securities.

Trent Porter

Just you took care of me for the most part, but I figured I'd ask you about Pep Boys. I know that -- I checked the -- JCI's K and they list Pep Boys under power solutions as a customer so I think it's okay to say that you took Pep Boys from JCI. And I'm just wondering if you can give any more qualitative color as to how you did that and how big Pep Boys is in the grand scheme of things and if it's possible to -- I -- to quantify, away from obviously the benefit of bringing in the spent cores, how big this could be for you.

James R. Bolch

So I'll take a shot at that one again. Phil has indicated earlier this customer has asked us not to disclose volumes.

Trent Porter

Oh, no, I'm sorry. Okay.

James R. Bolch

But that's okay. I mean, I suspect, with a little bit of research, you could probably get pretty close. It is a significant customer for us. This is exactly the type of customer that we have been interested in landing over the last couple of years since I've been with the company. Ultimately, the decision criteria, I guess you'd have to ask Pep Boys, but I can certainly tell you the selling story. In the selling story, we believe we have a very strong quality story. We've gone out through independent testing agencies and tested our products versus other competitors' products in the market. We've done a lot of work over the last couple of years to improve that quality. We have gotten very good reception from customers on a broad front about improvements in our quality. I think, certainly, any customer, certainly somebody the size of Pep Boys is very interested in that component not only for the satisfaction of their customers but ultimately warranty the cost. And we've also believed that the terms that we took the contract under make sense for us. It's a good -- again, good contract, nice volumes. And certainly, getting cores back is -- in this environment is a wonderful bonus as well.

Trent Porter

Okay. And then just quickly, your Transportation U.S. aftermarket, I figure it can -- still looks -- I mean, it's a lot better than it has been in -- but it looks -- it still looks a little weak relative to the BCI. And so maybe the 2-pronged question. JCI commented on their last call that POS cores that they're seeing through their retailers was down, I think, 8% to 9% in May and June. So 2-pronged question: What do you suppose accounts for your softness relative to the BCI continued? Is it still that the small mom-and-pop solution have lost some share, for whatever reason, to the large national ones? And secondly, it looks like we're shaping up to have an extraordinarily good December quarter if winter cooperates. But given the low POS, do you expect -- is there an inventory issue building in the retail channel?

James R. Bolch

Okay, let me take those one at a time. First, in regards to Exide performance versus BCI. The BCI aftermarket for our first quarter was actually up a couple of percent. We were down about 3% in total. The majority of that had to do with attrition from the price increases that we put into the market. And obviously, that was with some of the smaller customers who were more price sensitive and maybe quicker to switch. I wouldn't point to any large secular changes and movement into different channels at this point. I don't -- we don't see a lot of that going on. In terms of inventory stocking in the channels, at least with our customers, we haven't seen really unusual activity at this point. We have -- we would say we're probably at sort of normal inventory levels that we would expect for this time of the year. Obviously, we're now building in preparation for the season. The customers will now start to do their weather-guessing and figure out how much they need for the year and they're starting to stock as well. But I don't think -- maybe to your bigger questions, any big shifts in the market channels, I would say no, and any unusual changes in inventory, no to that as well.

Trent Porter

Okay, great. And then the -- I -- forgive me, I think you may have answered this, but it's -- so you've got the ramp up for the new smelters and the mild winter lack of spent cores causing a -- your spent core costs -- the spent core shortage. One, so assuming this is a good winter and that we get past the ramp-up, do you think that -- the decline in core costs, do you think we -- given that the LME is down, do you think we return to a normal spread versus the LME? Or do you think that we've still got -- because that the LME is down, we still got price compression once we get past all this?

James R. Bolch

Well, I guess the way I would answer that, and we've talked about it a bit before, is we believe, one, that the market factors will tend to drive core costs back down as supply and demand become more developed. Certainly, we're doing a lot of things on our side to play even without that, that will improve our captive core return rate and the like. Will it return to historical levels? It's pretty hard to predict that. The -- what we have learned is that the quoted LME doesn't always reflect actually the value that you can buy of even primary lead at -- much less a secondary lead. And so we're adapting the business to deal with those times when those 2 are not correlated.

Operator

Your next question comes from Michael Guarnieri of Nomura.

James R. Bolch

Michael?

Unknown Analyst

Mike is actually away at the moment, but he'll be right back.

Operator

Okay. Your next question comes from Swaraj Chowdhury of Dalton Investment.

James R. Bolch

Swaraj? Hello?

Operator

He may have stepped away. Your next question comes from Craig Irwin of Wedbush.

Craig E. Irwin - Wedbush Securities Inc., Research Division

Just a follow-up question. So now that you've won a major retail customer in the North American market, as I look at the top 10 guys, a couple of them traded hands over the last decade but some of them, I understand, actually do have bids where they're potentially looking to reprice what they're doing with their existing supplier or to potentially move, so that's obviously the opportunity for Exide. Can you frame out for us roughly the approximate number of large retail customers you may be having active discussions with where they could potentially be customers in the next year if everything works in your direction?

James R. Bolch

I think the simple answer is no, Craig. Not to be cynical about it. I will tell you we've had active discussions with pretty much all of the majors over the last couple of years certainly since I've been here, again, with the selling story we described earlier in the call certainly around quality and that we've got a good reception there. I don't want to make predictions on where it will go, but certainly, we are being open -- finding open doors where we go to go talk to these customers.

Phillip A. Damaska

And let me just add to that because I think it's important to be extremely clear. We are taking a plant out of the Transportation footprint. We're going to be down to Salina and Manchester, which between the 2 of them they have a limited amount of capacity. Our intent is not to try to aggressively grow that business until we've returned it to appropriate levels of profitability. Now that doesn't say we wouldn't take some new volume in if it was more profitable than existing volume and just change the portfolio. But let's be clear. Our view is to cost-reduce and profit-enhance the Transportation business and focus on growing the industrial business.

James R. Bolch

In the Americas.

Phillip A. Damaska

In the Americas.

Craig E. Irwin - Wedbush Securities Inc., Research Division

Excellent. And then another follow-up. Just really another housekeeping question is -- over the past few quarters, you discussed a level of price competition in the industrials business. Given the nice units, actually, you had in industrial Rest of World and, I guess, decent units for industrial North America, it sort of suggests that the sort of alarmist views out there on demand might be completely wrong. But can you update us on whether or not the macro environment is impacting pricing and your ability to get price when lead goes up and down?

James R. Bolch

Well, in terms of Europe and Rest of the World, I think you characterized it. Demand has been pretty solid there in spite of some of the economic uncertainties in Europe as we've -- and we have seen the order backlog increase as well. Most of those contracts, if not all, have lead escalators built into them. That equation still works pretty well in Europe today as our input costs tend to be pretty well correlated to the LME. We talked a little bit about the mark-to-market on some of the lead forward. That was really -- that's just a timing issue, it's not a discontinuity. We haven't seen any major pricing shifts in that market today. And as I stated earlier in the call, we have taken the opportunity to -- what we thought was appropriate to correct some pricing in aftermarket Motive Power in which we actually have seen a few price increases.

Craig E. Irwin - Wedbush Securities Inc., Research Division

Okay. And then on Transportation Rest of World, can you comment a little bit about the pricing that you're seeing there? Obviously, it looks like you may be taking a little bit of share in that market, particularly given the weak OEM and your mix away from the OEM, but how do you see pricing playing out in that business as far as natural price? I'm not talking escalators.

James R. Bolch

On this one, Craig, I think I'd go back to our discussion in really third and fourth quarter of last year. We saw some very aggressive pricing in those markets as a key competitor was looking to increase share. We dug in and refused to give way and we've protected our share in those markets. Since that point in time, we've seen pricing really stabilize. I guess I would say stabilize is the best way to think about it at this point. And I don't think there's been any major shifts in share. And have won some nice customers. We mentioned on the last call we won a major customer in the U.K. with Roadassist. And we'll continue to pursue good, steady aftermarket customers like that.

Phillip A. Damaska

So I would just add to that, Craig. So the pricing was aggressive in the second half of last year. Part of that was driven by the lack of a winter and inventory positions that people were trying to unload. We haven't seen any further deterioration. There's been some talk of increases, albeit fairly minimal increases in certain markets. The pricing that I mentioned impacting the first quarter in that segment was clearly the carryover impact from those pricing actions in the second half of last year. So it's -- it looks like it's stabilized, and we'll see how it goes as we move forward.

Craig E. Irwin - Wedbush Securities Inc., Research Division

Great. And I apologize, last question, if I may. Your discussion about the volume of cores recovered and the absence of your discussion of the weather and the follow-through as far as comebacks after the weak winter that we saw is distinctly different than some of the other discussion out there. I was wondering if this is something different about your recovery channel or if you saw this as potentially less material. Obviously, it wasn't something that was in the BCI numbers, but then we don't get BCI quality numbers on comebacks. So can you maybe share what Exide's thinking is about the impact on the winter as far as comebacks in the first half of your fiscal year?

James R. Bolch

So Craig, we -- just to reiterate what I've said earlier, I do believe a fundamental issue for the price -- the price increase of cores in the market is the supply-demand relationship, and probably the largest contributor to that is the weak winter, now running into the high-production season. So in that regard, I think that might be similar to prevailing views in the industry, let's say. As we go forward, 2 things will happen. Clearly, we'll get past the high-production season so the -- our input demand will go down. And then as we hopefully get into a more normal winter pattern, we'll see more sales and consequently more cores coming back and that balance should shift. So I think just the natural supply-and-demand should tend to drive core prices down, on top of all the other issues that we talked about and the actions that we're taking over and above that.

Craig E. Irwin - Wedbush Securities Inc., Research Division

Okay. Just so that I'm completely clear, so you would weigh the winter production season length, the weak winter production season length, more heavily than the impact of the what, 3, 4, major smelter starts that we have going on in North America. Is that fair?

Phillip A. Damaska

I think you can't ignore the fact that the other big player that talked about the phenomena doesn't have an industrial business, which we have, so we're also securing spent batteries. Some are captive. We're putting more focus on that part of our captive collection, but it's clearly one that continues to be less than Transportation, so -- and that's not impacted by the weather, Craig. So we have, I think, one additional item in the equation that, that particular competitor of ours does not have and that's the industrial's captive versus having to purchase to supply the demand.

Craig E. Irwin - Wedbush Securities Inc., Research Division

Congratulations again on Pep Boys. It's 1.6 million units, in case people are curious.

James R. Bolch

That -- we're going to cut the callers off -- the questions off at this point in time. I'd like to express our appreciation for the interest shown in Exide. And we look forward to talking to you in early November. Thanks very much.

Operator

Thank you. This concludes today's conference. You may now disconnect.

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