Exide Technologies F4Q08 (Qtr End 3/31/08) Earnings Call Transcript

| About: Exide Technologies (XIDEQ)

Exide Technologies (XIDE) F4Q08 Earnings Call June 9, 2008 11:00 AM ET

Executives

Gordon A. Ulsh - President, Chief Executive Officer, Director

Barbara Hatcher - Executive Vice President, General Counsel

Edward J. O'Leary - Chief Operating Officer

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

Analysts

Derek Linger - Jefferies & Company

Craig Irwin - Merriman Curhan Ford & Co.  

John Irish - Ore Hill Partners

Darren Kimble - Weiss

Oliver Corlit - Price Rich & Company

Cheryl Van Winkle - Independents United

Stan Manoukian - Lobodis Partners

Operator

Good morning and welcome to the Exide Technologies fourth quarter 2008 fiscal year earnings conference call. My name is Ashley and I will be your conference operator today. Exide's earnings release can be found on the company’s website at www.exide.com. Additionally, presentation materials for today’s earnings conference can be accessed on the company’s website by clicking on the investor relations tab and choosing presentations and webcasts on the right side of the screen. (Operator Instructions) I would now like to introduce Gordon Ulsh, President and Chief Executive Officer of Exide Technologies. Mr. Ulsh, you may begin your conference.

Gordon A. Ulsh

Thanks, Ashley and good morning to all of you. Thank you for joining us for the Exide fiscal 2008 fourth quarter and year-end conference call and webcast. Anyone who would like to see the visual presentation may do so by going to the investor relations link at www.exide.com.

I am joined today by Exide's Executive Vice President and Chief Operator Officer, E. J. O'Leary; our Executive Vice President and Chief Financial Officer, Phil Damaska; our Vice President and Corporate Treasurer, Nick Iuanow; and Exide's Executive Vice President and General Counsel, Barbara Hatcher. Barbara will now review our Safe Harbor statement, after which we will provide details of Exide's fourth quarter and full year results, followed by a question-and-answer period. Barbara.

Barbara Hatcher

Thank you, Gordon. Before discussing our fourth quarter and year-end fiscal 2008 results, we need to remind listeners 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-K filed today with the United States Securities and Exchange Commission. In addition, any statements made during this call are made as of today and the company undertakes no obligation to update any of these statements in the future.

Gordon, back to you.

Gordon A. Ulsh

Thank you, Barbara. Exide ended its 2008 fiscal year with positive net income for the second consecutive quarter. In fact, nearly every financial metric in the ’08 fourth quarter is pointing up. And the impact of Exide's last two quarters had a positive influence on our full year results.

For the fiscal 2008 fourth quarter, net income was $63.3 million, or $0.80 per fully diluted share, versus last year’s fourth quarter loss of $21.6 million, or $0.36 per share. For the full year, we produced net income of $32.1 million, or $0.46 per fully diluted share versus a loss of $105.9 million, or $2.37 per share in ’07.

Combined net sales increased 28% for the fiscal 2008 fourth quarter and 26% for the year versus the comparable prior year periods. Excluding the effects of foreign exchange, sales increased approximately 18% both for the fourth quarter and the full year.

Adjusted EBITDA increased 82% for the quarter and 54% for the full year. Most significantly, free cash flow for the fiscal 2008 fourth quarter was $81 million and operating cash flow for the year came in slightly above break-even. And as you will see, each of our divisions contributed to our strong fourth quarter results.

Turning to page four, you’ll see that Transportation Americas continued strong unit volume growth and higher margins throughout the ’08 fiscal year. We reached a new supply agreement with Toyota to begin supplying up to a quarter of a million starting batteries per year for their vehicles produced in Canada. Other new agreements include Pep Boys and Club Car, and our Bristol, Tennessee plant also received a new supply qualification for the BMW dealer network.

Industrial energy Americas had a good year and a strong fourth quarter, driven by their network power customers who are continuing to increase their back-up capabilities. Motor power experienced somewhat lower unit volumes during the year.

Transportation Europe and the rest of the world experienced higher net sales, margins and adjusted EBITDA despite a mild winter. Recently we received full confirmation to ship Exide AGM batteries for the BMW series five vehicles.

Industrial energy Europe and the rest of the world increased net sales on somewhat lower volumes with margins reducing slightly due to the lag between lead cost increases and the effective date of price adjustments. This appears close to working its way out and the division has a strong order book going into fiscal ’09.

I might mention that our Asia-Pacific unit has been reorganized. It is now headquartered and nearly full staffed in Shanghai. We believe that location will give Exide greater access to the rapidly emerging Asia markets.

We are pleased but not surprised by the positive financial results for the quarter and the year. We believe our results reflect what happens when a well thought out strategy is executed by a highly experienced management team and a group of highly motivated employees around the world.

As you know by now, our strategy has been to first empower our employees to help us improve efficiency and productivity primarily through take charge, to establish a pricing structure that recognizes the value of our products and services in light of the escalating costs of lead and other commodities used in our manufacturing and distribution processes, to increase liquidity and to relate -- realign our operations and to strengthen our management team.

During the 2008 fiscal year, and particularly in the fourth quarter, these elements of our strategy coalesced to return Exide to profitability and more importantly to position the company for a very exciting ’09 fiscal year.

Turning to page six, as reflected you may be aware of several management changes that we made throughout the year and this continued in the fourth quarter and recently as well. In February, we announced that Fran [Corbri], who served Exide well as Executive Vice President and Chief Financial Officer for the past two years, would retire, and this had been the plan since Fran joined us. Our Senior Vice President and Corporate Controller, Phil Damaska, was then appointed to the position of Executive Vice President and CFO effective on April 1st ’08. Phil has been with Exide since 2005 and brings more than 30 years experience to this position and you’ll be hearing from him later in this call.

We also promoted Lou Martinez to Vice President and Corporate Controller, as well as Chief Accounting Officer. Lou has served as the Assistant Corporate Controller since joining us in May ’05.

Recognizing the important of information technology in our business, we made another significant management change just recently. In April, we promoted Dr. Erach Balsara to Vice President and Chief Information Officer. He is responsible for all of Exide's information technologies worldwide and for the implementation of the company’s IT strategy and he reports directly to me.

In May of this year, we announced the addition of Carol Knies as Senior Director, Investor Relations, reporting to CFO Phil Damaska. And Carol is responsible for the company’s global investor and shareholder relations.

Finally, joining us this month is Dr. Paul Cheeseman, as Vice President Global Research and Engineering, and he’ll be reporting to Executive Vice President and Chief Operating Officer E.J. O’Leary. Paul will be responsible for Exide's worldwide lead, research, engineering and development strategy.

Turning to page seven, during fiscal 2008 the Take Charge initiative, which is a key part of our overall plan, continued to contribute greatly to our steadily improving results. Nearly everywhere it has been implemented we have seen greater efficiency in our manufacturing and distribution processes, improved productivity, increased throughput and a reduction in scrap rates. Today Take Charge is operating in all of our manufacturing plants in the Americas and in the manufacturing facilities of Industrial Energy Europe.

In the fiscal ’08 fourth quarter, the program was expanded into our recycling centers in Spain and Portugal and we are continuing to roll it out in our transportation Europe manufacturing divisions.

Thanks to the suggestions from employees, teams, and individuals, our Take Charge initiative has generated hundreds of operational improvements, including better preventative maintenance, enhanced real-time data reporting, faster changeovers at start-ups, a reduction in cycle times, and higher service rates to our customers.

Beyond the initiative’s immediate benefits, we’ve been able to use the resulting wealth of information that comes directly from the manufacturing floor to develop a comprehensive capital plan to address in-house bottlenecks, secure additional cost productions, and build incremental production headroom.

Our new pricing structure also played an important part in Exide's return to profitability. As a large number of contracts and agreements came up for renewal in the fourth quarter, we were able to include terms and escalators that more accurately reflect today’s manufacturing economics. We also continued to refine our customer portfolio during the fourth quarter and sharpened our focus on the more profitable accounts.

While we may have lost a little volume in the process, we believe that it’s a fair trade-off for the positive bottom line results that we’ve experienced. Fourth quarter improvement was particularly evident in industrial energy Europe, where the division had been negatively impacted throughout the year by an inherent lag between lead cost increases and escalators. Our price adjustments gained some ground against lead costs in the fourth quarter as the price of that commodity began to stabilize.

While lead costs have stabilized for the time being, the costs of other materials such as fuel, plastic, and the price we paid for spent batteries continued to rise during the fourth quarter. The economics of these increases are also being addressed but have not yet fully been offset by pricing.

As reflected on page nine during fiscal 2008, we also made significant strides regarding process improvement throughout our global enterprise. We developed a global procurement organization to leverage our global buying power, standardizing our direct and indirect spending and negotiating more favorable accounts payable terms that are more in line with our improving financial performance. We shortened our order to cash cycle and significantly reduced day sales outstanding.

We’ve upgraded our business intelligence system with tools that can provide a much more timely assessment of the volumes of data within the company regarding pricing, margins, inventory levels by part number and location and customer accounts, among other things.

Also, as previously mentioned, we are currently developing a centralized R&D and engineering organization to address the global need for more sophisticated battery products. As I said, we are excited to announce the appointment of Dr. Paul Cheeseman, Vice President Global Research and Engineering. Paul brings over 25 years of technical and operation experience and leadership to this role, including integration of global engineering disciplines, most recently has served as senior vice president R&D for quality for Spectrum Brands. Paul holds a PHD in Chemistry from the University of Nottingham in the United Kingdom.

In that regard, our stronger liquidity position, along with greater financial flexibility provide us with the opportunity to increase investment in our business. As I mentioned, Exide generated $81 million in free cash flow in the ’08 fourth quarter.

As we’ve noted in the past, the company looks to fund higher annual levels of capital projects and investments in new technologies as our financial performance allows. The company currently intends to increase CapEx spending in ’09 to approximately $100 million. The increased level of capital spending will allow us to continue to comply with local and national environmental health and safety regulatory requirements, as well as aggressively attack our battery manufacturing cost structure.

We plan to increase our engineering staff by nearly 50% during fiscal ’09 and standardize our approach to new product development, particularly in regard to advanced alternative energy applications.

Currently our battery products are recognized as being among the best in the world. China Mobile recently chose the Exide Sun and Shine batter to power cell phone towers at the 6,500 meter level of Mount Everest for the running of the Olympic Torch. In fact, they turned down offers for free batteries in lieu of our batteries, which I might add they paid for, because they knew the Sun and Shine battery was tough enough to withstand the rigors of long-term operation in low oxygen and sub-zero conditions. We want to make sure that reputation as the best continues by getting ahead of the curve of new batter products that are the best storage solutions for advanced energy applications in the future.

Our investment will focus on standardization of process, design, components and work processes while expanding the business fit with alternative energy sources, such as wind, solar, and nuclear.

So on page 11 we reflect the financial ’08 -- fiscal 2008 was a good year. We returned to profitability and we set the table for growth opportunities. Our divisions are all making positive strides and our management team and employees are energized. Suffice it to say we are looking forward optimistically to the year ahead.

Now our Executive Vice President and Chief Financial Officer, Phil Damaska, will provide you with additional financial details of our fiscal ’08 fourth quarter and fiscal year-end results. Phil.

Phillip A. Damaska

Thanks, Gordon and good morning, ladies and gentlemen. It’s certainly a pleasure to be with you today. Before I begin, let me remind you that Exide uses adjusted EBITDA as the key measure of its operational and financial performance, as we continue to believe it provides a more useful measure for Exide at the present time than does net income.

We define adjusted EBITDA as earnings before interest, taxes, depreciation, amortization, and restructuring charges. Our adjusted EBITDA definition also adjusts reported earnings for the effect of non-currency -- non-cash currency remeasurement gains or losses, the non-cash gain or loss from revaluation of the company’s [warrants] liability, as well as impairment charges, gains or losses on asset sales, and the debt extinguishment charge incurred in our fiscal 2008 first quarter.

I would refer you to the press release issued earlier today and the tables at the end of this presentation for our reconciliation of adjusted EBITDA and EBIT to net income or loss as reported under generally accepted accounting principals, and for our breakdown of net sales and adjusted EBITDA by segment.

Moving to page 13, and as Gordon highlight earlier, Exide completed a strong fourth quarter during which all of our divisions contributed to our year-over-year performance improvement and it was a good year as well, one that saw the company return to profitability built upon a solid foundation.

For our fiscal 2008 fourth quarter, net sales rose to slightly above $1 billion from $807 million as we reported in Q4 2007, a 28% increase. A weaker dollar accounted for approximately $81 million of the sales increase. Adjusted EBITDA for the 2008 fourth quarter nearly doubled to $80 million from $44 million in the 2007 quarter. EBIT increased to $64.5 million in the 2008 fourth quarter compared to $4.5 million in the prior year period.

Our net income for the fiscal 2008 fourth quarter was $63.3 million, or $0.80 per diluted share, compared with a net loss in prior year’s fourth quarter of $21.6 million, or $0.36 per share. The increase was due primarily to continued operational improvements and cost reductions, price increases, a tax benefit in the U.S. and favorable foreign currency exchange rates.

For the full year, fiscal 2008 net sales were $3.7 billion versus $2.9 billion for fiscal 2007. Approximately $228 million of the increase was due to foreign exchange -- foreign currency exchange rates which when excluded still amounts to an 18% increase in combined net sales.

Adjusted EBITDA for fiscal 2008 increased to $244 million from $159 million in fiscal 2007, a 54% increase. EBIT for the 2008 fiscal year was a positive $129 million compared with a negative $10 million in the prior fiscal year and the net -- the company produced net income in fiscal 2008 of $32 million compared with a net loss of $106 million for fiscal 2007.

I would now like to focus your attention to slide 14, which provides a summarized version of a reconciliation of net income to EBIT and adjusted EBITDA for the 2008 fourth quarter and full year respectively.

Focusing initially on the fourth quarter, I would direct your attention to the tax benefit amounting to $20 million and note that this includes a $25 million benefit which results from the reversal of a valuation allowance against net deferred tax assets in the U.S.

The second item of note in the fourth quarter is labeled currency remeasurement gain. Here you will note we have reported unrealized foreign currency gains of $22.6 million on a pretax basis.

Now, moving to the fiscal 2008 column, the following are noteworthy: first, a full-year tax provision of $10.9 million includes the previously described $25 million benefit reported in the fourth quarter, as well as a $16.7 million charge reported in our fiscal second quarter as a result of a reduction in our German deferred tax assets due to legislated tax reductions.

Secondly, and similar to the fourth quarter, our full year results were favorably impacted by $40.8 million of unrealized currency remeasurement gains and finally, the full year results include a $21.3 million pretax loss from early extinguishment of debt relating to our fiscal first quarter refinancing of our senior secured bank credit facility.

While these significant items impact both the fourth quarter and full year results, improvement of our core results clearly reflect the progress we are achieving from the execution of our business strategies, as previously highlighted by Gordon.

I would now like to focus on the results of our reportable segments, starting with Transportation Americas, where net sales for the 2008 fourth quarter increased 22% to $310 million compared with $254 million in the same period last year. The increase reflects higher selling prices and a positive mix, as cold weather across the nation continued to drive demand for transportation batteries as opposed to smaller, lower priced lawn and garden applications. This, coupled with higher productivity and reduced expenses, resulting principally from our Take Charge initiative, increased adjusted EBITDA to $32 million versus $25.4 million for the fiscal ’07 fourth quarter.

Net sales for fiscal 2008 increased to $1.1 billion from $930 million in the previous fiscal year and adjusted EBITDA for 2008 was $115 million versus $82 million in 2007, a 41% increase for the year.

Moving to page 16 and transportation in Europe and rest of world, we saw sales increase to $326 million in the fourth quarter versus $226 million in the comparable prior year period. The increase was primarily the result of our pricing adjustments aided by favorable foreign exchange rates.

Adjusted EBITDA in the fiscal 2008 fourth quarter rose 151% to $23.4 million versus $9.4 million in the fiscal ’07 fourth quarter. For the full year fiscal 2008, transportation in Europe and the rest of the world’s net sales increased to $1.2 billion from $832 million in 2007, an approximately 50% increase.

Excluding the impact of foreign exchange, net sales still increased by 25% due to pricing which more than offset softer volume as we exited less profitable accounts.

Adjusted EBITDA for fiscal 2008 enjoyed a 121% increase to $66.5 million from $30 million in the previous fiscal year.

I’ll direct your attention to slide 17 and you’ll note that our industrial energy Americas business enjoyed net sales of $79 million in our 2008 fourth quarter versus $70.8 million in the prior year quarter. While the motor power business continued to be soft, network power sales grew due to strong spending in the telecom industry.

Adjusted EBITDA rose 66% to $12.1 million in the 2008 fourth quarter from $7.3 million in the ’07 fourth quarter.

For the year, industrial energy Americas posted a 50% improvement in adjusted EBITDA to just over $50 million from the $33.5 million in the prior year.

Net sales were $302 million for fiscal 2008 compared to $271 million for all of 2007. The full year sales increase was principally price driven while the higher profitability is a result of continued productivity improvements, cost control, and pricing recovery.

For the fiscal 2008 fourth quarter, net sales for industrial energy Europe and the rest of the world grew to $315 million compared with $256 million for the comparable period last year. Pricing and favorable foreign currency exchange were the primary contributors to the increase.

Pricing adjustments, many of which were not implemented until late in the fiscal year, began to have a positive impact in the fourth quarter. This, along with moderating let costs drove adjusted EBITDA for the quarter to $25.4 million, compared with $15.8 million in the fourth quarter of 2007.

More encouraging is the fact that the division’s adjusted EBITDA in the 2008 fourth quarter was higher than the previous nine months of fiscal 2008 combined. This is another indication that our pricing methodology has gained traction.

For fiscal 2008, net sales for industrial energy Europe and rest of world increased to $1.1 billion from $907 million in the prior year. Adjusted EBITDA in fiscal 2008 was slightly less than $51 million compared with $57 million in fiscal 2007. The decrease was due primarily to the lag between lead cost increases and the effective dates of our pricing adjustments.

Strong fundamental manufacturing productivity improvements realized through implementation of Take Charge initiatives were somewhat masked by the lag between lead costs and pricing adjustments mentioned earlier.

Moving to page 19, you’ll note that unallocated corporate expenses for the fourth quarter of fiscal 2008 were $12.7 million, a decrease from $14 million in the comparable 2007 period. For the full year, unallocated corporate expenses decreased from $44 million in fiscal ’07 to $38 million in fiscal ’08. The decrease was due primarily to lower professional fees.

Net interest expense was $21.2 million and $85.5 million for fiscal 2008 fourth quarter and year respectively, compared with $22.3 million and $90 million in the comparable periods for fiscal 2007. The decrease reflects lower interest rates under our new senior secured credit agreement, somewhat offset by higher borrowings to fund incremental working capital, resulting principally from higher lead costs.

At March 31, 2008, our total debt was $716 million, as compared with just $685 million at March 31, 2007. The $31 million increase was principally due to the effect of higher lead prices on working capital.

At March 31, 2008, the company had cash and cash equivalents of approximately $91 million and availability under the bank revolving loan facility of $136 million. Capital expenditures during fiscal 2008 were $57 million compared with $52 million in fiscal 2007. Restructuring costs decreased in fiscal 2008 to just over $10.5 million and primarily related to severance and ongoing costs associated with previous plant closures. This compares with $24.5 million spent in 2007.

Free cash flow, as we mentioned earlier in fiscal 2008’s fourth quarter, was $81 million, and operating cash flow for the full year was slightly positive. And I’ll remind you that we define free cash flow as cash from operating activities less cash used for investing activities, both as measured in accordance with generally accepted accounting principles.

In terms of lead prices, which is detailed on page 21, you’ll note that fiscal 2008 the price of lead on the London Metals Exchange reached a high of $3,975 per metric ton. However, the price on the LME began to moderate in the third quarter and actually fell somewhat in the fourth quarter. These fluctuations in price yielded an average lead price for fiscal 2008 of $2,856 per metric ton compared with $1,426 per metric ton for the prior year period, a 100% increase.

Lead as quoted on the LME closed last Friday at $1,935 per metric ton. As we reported to you last quarter, and as Gordon comment earlier, the cost of spent batteries, which we purchased to supplement our internal spent battery collection efforts, has risen nearly 87% compared with last year. This too is being addressed in our pricing strategy.

Exide has continued to improve its day sales outstanding of accounts receivable. DSO declined again in the fourth quarter by 2.5 days as compared with the prior year comparable period.

Now before we take your questions, I believe Gordon has a few additional comments. Gordon.

Gordon A. Ulsh

Thanks, Phil. Fiscal 2008 was a good year, both operationally and financially for Exide. We passed several milestones; most notably, we became profitable and produced net income for the last two quarters and for the full year.

From an operational perspective, we continued to drive productivity and cost reduction through Take Charge. We executed a pricing methodology throughout the business to compensate for escalating costs with industrial energy Europe gaining traction in the fourth quarter, and we continue to cull our customer base with focus on those more profitable relations.

Financially, in addition to driving improved earnings, fiscal 2008 saw us refinancing our senior secured credit facility and completing our second successful rights offering. We believe these actions among others have established a solid foundation on which to build as we move into fiscal 2009.

Now we’ll be happy to take your questions. Ashley.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Derek [Linger] with Jefferies & Company.

Derek Linger - Jefferies & Company

Could you just touch on the outlook for future lead and other cost increases that you were talking about and your ability to pass those costs on to customers and how quickly you can affect those?

Gordon A. Ulsh

Well obviously none of us have been very successful in forecasting the price going forward of lead. We believe that there’s probably a period of stability. At the same time, we would offer that we generally see some seasonality, if you will, or that is traditionally as the volumes go up as we ship back to the winter period, we have traditionally seen some increases in that cost, and I would only ask you to just look at our record in terms of being able to manage that cost into the marketplace in response to your question, Derek, about our ability to do so.

Obviously the industry has been responsive -- not always and as quickly as the shareholder might like but we believe we’ve been pretty responsive in terms of getting those adjustments into the market.

Derek Linger - Jefferies & Company

But the cost on the energy increase this year probably more so than any other period in the past are going to hurt and I’m wondering how quickly you can pass those along.

Gordon A. Ulsh

Well, we certainly are being aggressive as we calculate how that flows through into our cost of goods. We have been in every market working to recover and we are also sensitive to the fact that in many cases, our customers face that extremely high energy in the case of fuel for their delivers and their operations costs, but we think we are being quite responsive and responsible in how we take those costs to market.

Derek Linger - Jefferies & Company

Thank you.

Operator

Our next question comes from Craig Irwin with Merriman.

Craig Irwin - Merriman Curhan Ford & Co.  

Good morning, everyone. Congratulations on a solid quarter. My first question, you talked a couple different occasions about the success you are seeing from your account rationalization. I was hoping you might be able to frame out for us really sort of how much is left to go and maybe whether or not we could see something towards -- tapering towards the end of this by the end of the fiscal year?

Gordon A. Ulsh

Well certainly we have -- if you think about picking low-hanging fruit, we think we’ve been pretty aggressive in identifying where our customers’ business model doesn’t fit most closely with ours and we have repeatedly said in the past in the case of the transportation market small distributors that more appropriately should be buying from larger distributors.

In the case of our motive and industrial businesses, we have continued to be successful in rationalizing those higher volume and higher margin customers that recognize the value of our goods and services.

In terms of where we are in the continuum, I would say we are well past midpoint, Craig, but we are always working at how we adjust what that relationship is. Clearly there’s some room to run yet in terms of making sure that we are more closely aligned with the right customers and growing our volume with those large participants.

Craig Irwin - Merriman Curhan Ford & Co.  

Okay, excellent. And then in your prepared remarks, you mentioned that you had 4% unit growth in transportation Americas, but I was hoping you would have a unit growth number or a unit growth mix number for the consolidated company. Is that something you have, Phil?

Edward J. O'Leary

I can comment on that.

Gordon A. Ulsh

E.J. O’Leary, Craig.

Edward J. O'Leary

When we take a look at the unit growth, and again keep in mind this is a combination between units. We’ve also got a service component as well as charges that are in the mix. It’s not quite an exact science because of the sort of diversity of the units that are in there but we take a look at all-in on the units for transportation, as well as the industrial sector, for last year we were probably off somewhere in the neighborhood of maybe 1% in our unit sales, something that we’re not totally displeased with, knowing that we’ve sort of moved to a lot of different accounts in the marketplace but that’s the number as it stands right now.

Craig Irwin - Merriman Curhan Ford & Co.  

Okay, and in the fourth quarter?

Edward J. O'Leary

I don’t have that number in front of me, I’m sorry.

Craig Irwin - Merriman Curhan Ford & Co.  

Okay, and then my next question I had was I was hoping you could talk a little bit about your pricing philosophy around lead volatility. Some of your competitors or lesser competitors out there are really talking about how the lead volatility, they are expecting that to help drive significant margin increases over the next couple of years. I understand your focus is much more on the operational side. Can you talk a little bit about your philosophical approach to the customer and how you approached this from a long-term standpoint?

Gordon A. Ulsh

Well, first we need to continue to make the customer aware of the value that we see not only in the battery but in the service that we provide to go with it. We certainly want to regularly and quickly recover the escalating costs that are out there and we go to great ends to explain that to the customer, and I think our customer base broadly is as educated today about the cost of the components in our business as ever before.

While we certainly want to have margin expansion in every phase of the business there are obviously issues to deal with, long-term contracts that we have in place, certainly vagaries of the markets with long lead telecom projects that limit our ability to do that on sort of a real-time basis. But we too want to see margin growth in the base business, but we can’t bank totally on the fact of driving that from the customer to account or grow for the increasing costs that we have on the components. But clearly there’s room to run on the margin standpoint, Craig.

Craig Irwin - Merriman Curhan Ford & Co.  

Great, great, and then I noticed you bumped your CapEx or -- not that you had any formal guidance before but you said that you are going to do $100 million this year. It was ahead of my number. I was looking for about $70 million. Now, that’s pretty substantial, I guess, if we take a look at the 24% hurdle rate. Is there an opportunity to possibly go higher if the cash flow opportunity presents itself?

Gordon A. Ulsh

Well, the way we look at our CapEx is consistent with the way we’ve talked about it in the past. Typically 30% to 35% of that CapEx number is required really to meet the necessary EH&S safety improvements in our business and do maintenance from the basic productivity standpoint. We have said repeatedly that we have further opportunity to put newer, more current technology in the way of automation and process improvements in place and that as conditions allowed, we would do that. So this is consistent with what we’ve said in the past about increasing the investment in the business.

We are not targeting $100 million as a reflection of the limit of the cash flow. We bear in mind that we need management bandwidth to be able to install these and get, as you point out, a pretty high return on that investment.

But if we see other opportunities in unique locations that give us the ability to take that up, clearly our cash flow would allow it and the management is in no way reluctant to take such steps.

Craig Irwin - Merriman Curhan Ford & Co.  

Excellent. And my last question, if I may, I understand you had a strategic review internally that you were sort of looking at longer term plans, what you would like to accomplish over the next several years. Are there any early conclusions from that that you’d be able to share with us today?

Gordon A. Ulsh

I think that I would only tell you we do that review as anybody, any business does when faced with the opportunities and the challenges of working around the world. Secondly that as we’ve said, we certainly see some holes in our footprint in Eastern Europe, potentially in South America. And as you know, we’ve taken very public steps to increase our representation in the fastest growing parts of Asia. And while we have not announced anything in those steps, one might conclude that clearly those were areas to grow. And the last point would say that around us, other opportunities have grown in the alternative energy field. We certainly understand the growth in wind generated energy, believe strong that the market will require in time offline storage, and that both wind and solar provide the opportunities to help offset some of the rapidly increasing energy costs that we are facing as a country.

So while we will do regular reviews of sort of the long-term strategy, we don’t have anything beyond what we’ve been saying publicly to announce.

Craig Irwin - Merriman Curhan Ford & Co.  

Great. Thank you. Congratulations again on a totally solid quarter and clearly confirming the turnaround.

Operator

Our next question comes from John Irish with Ore Hill Partners.

John Irish - Ore Hill Partners

Good morning. I guess let me just focus on lead prices for a little bit here. They’ve come down pretty hard the last two or three months and I wondered if this might be the time where you could, in conjunction with some of your major customers, hedge some of your risk forward in terms of making a major buy at a much lower price. Does that make sense?

Gordon A. Ulsh

It does when you look at all of the commodities, particularly when in Europe we are a little more exposed because in industrial Europe, we don’t have recycling capability. We do to a nominal degree in transportation Europe and certainly our recycling business provides us some natural head in Transportation Americas. We are reviewing all of our commodities. Certainly lead is at a more stable piece and it might provide us the opportunity, particularly with the increased cash. We’ve not made that commitment yet but we are well aware of the options.

John Irish - Ore Hill Partners

Okay, so looking where it is now, Gordon, you look at -- it’s now under $2,000 a metric ton. I mean, as you price forward, you’ve kind of accelerated your escalators but in a downward pricing environment, how does that affect your pricing? Do you -- would that actually hurt you if you are going to roll out higher cost inventory, which you have now?

Gordon A. Ulsh

Well, in the case of our escalators, you know that at the minimum, they trail one month behind, so even in an escalating market, one would think that we’ve got margin even as the lead comes down in fixed contracts. In the core [inaudible], the adjustment downward in a declining market would trail the reduction in price, so we would have higher priced lead in a downward market.

So we’ve got cushion as that declines. We’re well aware and we look hard at the options to put an escalator in place and hedging contract in place and at this time have chosen not to do so, not for any reason other than we are just not fully aware of have concluded where the market might stand. There are other commodities that I would tell you we have put various forms of hedges in place and I would mention natural gas and some control on diesel fuel as they affect us but we have not chosen at this time to pursue hedging on lead.

John Irish - Ore Hill Partners

Okay, and how about your major customers? Have you actually talked to them about it? Because it seems to me that the volatility of lead has gotten very high seasonally, right? I mean, in the winter months when you have peak demand, it seems to run way up and then as the winter season with batteries is running down, it comes way off. Why not smooth some of that out and --

Gordon A. Ulsh

We have offered those opportunities with large customers as recently in the last 30 days where I’ve participated with some of our division executives in discussion and all I can say is that to date together we’ve not chosen that option.

John Irish - Ore Hill Partners

Okay, well let me shift over to volumes for a second.

Gordon A. Ulsh

John, let Phil add a little color on the -- if you will.

Phillip A. Damaska

In terms of your comment or concern about releasing higher costs out of inventory into the market against decelerating prices, we’ve set up the escalators and therefore de-escalators in a sense that would allow monthly but recognizing there’s always a month to transition, so we are effectively changing prices under those contracts that have monthly escalators in about a two-month period of time, which basically matches the number of days inventory we have. So essentially, the escalator mechanics that are monthly are pretty well matched to the inventory that’s being released off our balance sheet into cost of goods sold, so I think we’re pretty pleased with how that has set itself up. Obviously as Gordon mentioned and we talked in the past, we still have a bit of business in our industrial energy Europe segment that is on quarterly lags and obviously those change -- the pricing changes under those contracts take about four months, which in a de-escalating price environment would provide us a little bit of benefit in the short-term.

John Irish - Ore Hill Partners

Okay, and Phil, on that point in terms of just the working capital, if prices were to stay down here at this type of level, you should be looking at a freeing up of a considerable amount of working capital, no? And I’m thinking on the order of $75 million to $100 million.

Phillip A. Damaska

Well I mean clearly the driver of the free cash flow of $81 million in the fourth quarter was the balance sheet to a great extent. As lead came off from a high in the middle of the third quarter to a relative low point, given that in the fourth quarter clearly the balance sheet generated -- helped us generate some of that free cash flow.

John Irish - Ore Hill Partners

But won’t that accelerate through this quarter as well, with it coming down to below $2,000?

Phillip A. Damaska

Clearly, yes.

Gordon A. Ulsh

You would expect a continuation of that trend if everything else is stable and only the lead comes down, certainly.

Phillip A. Damaska

But remember, as this is a seasonal business, particularly from a transportation perspective, we tend to build units in the first fiscal quarter to prepare for the selling season that begins in the late second quarter, so lead will come down, impacting inventory favorably. Units will likely increase as we prepare for the selling season.

Gordon A. Ulsh

And one more point, John, if I may on your question about the margin side of it -- while we expect that in cases the selling cost may come down as a direct relationship to the lead, there are also other commodities which are driving those selling prices up -- energy, lead, or energy, diesel fuel, et cetera. And where we are contractually obligated to reduce the actual cost in line with the experienced cost, we don’t anticipate that that’s going to be synonymous with margin compression.

John Irish - Ore Hill Partners

Okay, I understand. In terms of volumes, the softness that you saw in a number of your end markets, would you say that your percent declines in terms of volumes, is that with the market or because of a more aggressive pricing strategy you’ve lost some share? How would you kind of describe that?

Gordon A. Ulsh

As you know, it’s a little bit like squeezing the balloon in terms of trying to understand where that is but we believe that we’ve not had significant market decline -- market share decline in any markets. In many cases, our total softening has been less than what some of particularly the motive customers have seen in their business. As we mentioned that we probably have backed away from a little share in industrial -- in transportation Europe, and that’s been clearly based on the profitability of certain customer channels. But we would not suggest that we’ve had any market share erosion in any channel.

John Irish - Ore Hill Partners

Okay, and then the last question, Gordon, on some of the alternative energy markets that you’ve mentioned. I assume you’ve done some kind of preliminary work on how big those markets could get for storage capacity. Can you maybe talk about what the opportunity is in terms of dollars over the longer period of time?

Gordon A. Ulsh

I’d rather not sort of display what we feel about total markets. We already do in some of those markets some substantial business in -- we already have a number of our -- both automotive and industrial batteries that are used in solar collectors. We have already a number of batteries that are going out to be fitted to some local wind generated turbines, and we believe that that, by the way, can grow pretty significantly.

The exploration of the long-term off-grid storage capability for wind is just sort of an unknown entity right now. There are not significant applications but as the wind generation continues to grow in line with eco and economic forces, we believe that we’ll clearly get to the point where we need offline storage capability, we ought to be prepared for that.

You’ll hear more in future calls about how we intend to go out and capture and grow with that market.

John Irish - Ore Hill Partners

Okay but right now, Gordon, you’re supplying some of those wind farms, the preferred storage capacity there is lead acid and those wind farms?

Gordon A. Ulsh

We’re not out in any large wind farms. There are in Asia and in Australia some significant solar capture and storage in batteries. We’re beginning to see in Southeast Asia some very limited in terms of individual wind turbines, more like you might see at a house or a farm or a ranch, where some individuals capture that in small storage batteries. But I don’t mean to imply that today we have any installations with large wind turbine farms.

But as we’ve said, we believe that’s out there in the future.

John Irish - Ore Hill Partners

Okay, very good. Thank you.

Operator

(Operator Instructions) Our next question comes from Darren Kimble with [Weiss].

Darren Kimble - Weiss

I was just wondering if you could share with us how much lead was tolled and how much was sold on the open market in the quarter?

Gordon A. Ulsh

What we have reported in the past is first of all in the combined entities, less than 10% of our total volume. We’ve also had a little bit of downtime in our New Zealand operation, so I would say that in total it went down and outside sale probably is in excess of tolling. We’ve been ratcheting down the tolling certainly during the period of higher sale on the market but I would say in total it went down and the greater portion is outside sales.

Darren Kimble - Weiss

I just -- I think historically you’ve said that you typically do 10% of each and I know that due to a variety of factors, including the Vernon overhaul, I think last quarter you were like 5% and 6% respectively, so are you saying it’s still down in that mid-single-digit number rather than an historic 10%?

Gordon A. Ulsh

Yes, that would be the ratio and as you can imagine, we’re not trying to grow the tolling business.

Darren Kimble - Weiss

Okay, and I just had one other question on pricing. I mean, your pricing was up 18% for the quarter and for the year. I know that you had some catch-up in the March quarter. I mean, can you give us kind of any color on what the June quarter might look like from a pricing standpoint?

Gordon A. Ulsh

Well, we don’t give any sort of guidance on where we are going with pricing but I would like Phil Damaska to clarify that price increase that you mentioned.

Phillip A. Damaska

You indicated there was 18% pricing increase. I think what we indicated was that our sales were up excluding foreign exchange by 18% quarter over quarter and year-to-date periods. Obviously as we detailed in the call, as well as the earnings release, we clearly had unit volume increase in the Transportation Americas business and had slight volume reductions in the other businesses, so I wouldn’t conclude that our pricing was up 18% year over year. That was obviously a calculation based on total net sales.

Darren Kimble - Weiss

Okay. But June should -- we should start seeing smaller comparisons, no?

Gordon A. Ulsh

In terms of the pricing increment by itself?

Darren Kimble - Weiss

Yeah. I mean, just from a modeling standpoint.

Gordon A. Ulsh

That’s probably a fair statement, if you’ve seen kind of where lead is, and it will be somewhat offset by the increases that we’ve seen in other energy costs associated with our delivery business. That’s probably a fair observation, although we consistently work on margin enhancement.

Darren Kimble - Weiss

Thanks, guys.

Operator

Our next question comes from Oliver [Corlit] with [Price Rich] & Company.

Oliver Corlit - Price Rich & Company

I just had a couple of housekeeping questions, if you can answer them; the core battery or spent battery price on a year to year basis in the fourth quarter, can you say what the change was there?

Edward J. O'Leary

I’m going to take a guess at this. Your question is in the fourth quarter, what’s happened to core prices?

Oliver Corlit - Price Rich & Company

Yeah, I mean, you gave a number for the year as a whole but not for the fourth quarter, both for -- actually for spent battery and for your average cost of lead, if you have that as well.

Gordon A. Ulsh

Well, the third to fourth quarter change was lower than we had seen earlier in the year. As the lead cost abated, I would tell you that there was not a lot quarter to quarter increase, third quarter to fourth quarter. And I would tell you that of late, we think -- this is sort of past the fourth quarter period -- we’ve begun to see some abatement in that pricing and on the full year average cost of lead, I don’t believe we’ve ever disclosed that.

Oliver Corlit - Price Rich & Company

I think you have that in the K but I didn’t see -- I was trying to get a fourth quarter number.

Gordon A. Ulsh

We’ll go back and refresh that.

Oliver Corlit - Price Rich & Company

Okay. And as far as the unit volumes go, you’re not breaking out unit volumes by division, I take it?

Gordon A. Ulsh

No, we don’t. Particularly as we’ve said in the past in the case of industrial, while it’s nice to sort of look at the numbers, they really are very hard to compare because of the huge variation in the size and the application of the battery, so particularly on industrial we don’t do much with that number.

Oliver Corlit - Price Rich & Company

Right. Okay, thanks. And finally, you’d mentioned a couple of calls ago that the FCC was implementing a new rule with the cell companies in North America with the U.S. about back-up power in their central and remote sites. Can you give us any kind of an update on what’s going on there? I know there is some kind of a challenge going on from the telcos. Are you seeing anything in your business and what’s happening on the legal front there?

Gordon A. Ulsh

Well, I would tell you that many of the companies have begun to do A, some replacement of other technologies. Some of you have seen some notes where some provider had some issue with cabinet based batteries and had been out to make some improvements in that. We continue to see investment in technology but I wouldn’t tell you we’ve seen any big swell that those of us in the industry might have seen in line with those increased standards and back-up. We’ve not seen a huge up-tick in that volume yet, Oliver.

Oliver Corlit - Price Rich & Company

Do you have any idea, I mean, if that rule does end up being implemented, what the market opportunity is and what your share of that market might be?

Gordon A. Ulsh

Well, it both depends on what the restriction turns out to be and the timeframe, so I don’t know over time and I don’t think we’ve put together a total market implication.

Oliver Corlit - Price Rich & Company

Okay. Well, thank you. That’s all I have.

Operator

Our next question comes from Eva Young with [Independents United].

Cheryl Van Winkle - Independents United

Actually, it’s Cheryl [Van Winkle]. Basically I just wanted to -- I didn’t hear you mention on the -- in terms of your cost reduction program how much you viewed that as being the benefit in the quarter and how much benefit you got from that in the year.

Gordon A. Ulsh

We traditionally don’t respond by answering in terms of how much incremental dollars showed in the quarter. What we have been saying is that on an annual basis, our cost reduction has gotten to a certain level. We said in the last quarter that we were around a $60 million run-rate on improvements annualized. We are a little bit north of that today and we continue to see improvement. Although in the case of other areas, we’ve gotten some early improvements. That might not be easy to keep up that pace of growth but it’s an exciting tool for us around the world. So we are probably running between -- we are running between $60 million and $70 million of annualized improvement, Eva.

Cheryl Van Winkle - Independents United

It’s Cheryl. Okay, so as of the quarter that you just reported, you were at sort of the $60 million to $70 million run-rate?

Gordon A. Ulsh

That’s an annual run-rate, yes.

Cheryl Van Winkle - Independents United

Right, right. And do you have any target for next year in terms of that?

Gordon A. Ulsh

The way we have presented this in the media is that we are a company that operates on continuous improvement and while I’ve said to you that the ongoing run-rate is going to be tough to get another $60 million to $70 million of new improvement, we believe that we have a target that is certainly north -- we have the capability that is certainly north of that $60 million to $70 million but we’ve not put any guidance out there.

Cheryl Van Winkle - Independents United

Okay, that’s fine.

Gordon A. Ulsh

And I’m sorry, it’s Cheryl, right?

Cheryl Van Winkle - Independents United

Yeah.

Gordon A. Ulsh

Okay. The call came in and I was given a note that Eva was on, so I apologize for that.

Cheryl Van Winkle - Independents United

Okay. Thank you.

Operator

Our next question comes from Stan [Manoukian] with [Lobodis] Partners.

Stan Manoukian - Lobodis Partners

Good morning. Congratulations on the great quarter. I have a couple of questions about first about capital expenditures. Clearly you mentioned that 30% to 35% of your CapEx should be allocated to maintenance CapEx. Now usually historically you’ve been spending anywhere from $55 million to $60 million annually, and now you are planning to spend significantly more. So in light of these changes, what percentage of new CapEx will be maintenance and discretionary?

And the second part of the question is I can imagine I should allocate your maintenance CapEx based on proportionate to the amount of depreciation among the different sectors, and you are planning to increase, make some increases in discretionary CapEx. Which particular areas of business do you plan to do this?

Gordon A. Ulsh

Good question and let me clarify. In the past I think we’ve been talking about $30 million to $35 million of the CapEx being aimed at that, and so that’s kind of a constant. And at this higher rate, it will be 30% to 35% as well in the -- at the lower years it’s been around 150% of it. So the point -- we don’t worry about tracking sort of CapEx to depreciation. We are worried about it -- we are focused on improving the productivity and the technology of the product. Broadly I would tell you that you will see some increased automation in our business to further install proven technology for loading, unloading, things like that. Secondly to increase the consistency and the lower cost in materials -- think about some of our plates for grids where we accomplished both a lower [inaudible] cost and improving of first-time capability and the lowering of the weight in the transportation battery.

We have some industrial new products and you will see some of that CapEx obviously be new technology as we work to develop the applications for increased wind and solar applications as well.

Stan Manoukian - Lobodis Partners

Understood. Now, about the timing of these capital expenditures improvements, is it something that you have recently identified in terms of opportunities? Or it has something to do with aforementioned release of working capital and more liquidity that you anticipate in light of declining lead prices? Can you elaborate on this timing?

Gordon A. Ulsh

Well, it’s a good question. It’s both a result of reducing working capital because of lead. More over, it’s an improved -- it’s a reflection of improving our cash flow as a result of a higher days payable outstanding, which provide additional capital, shorter -- reducing days sales outstanding. Both of those have helped us offset the increase in lead, and further improving our efficiency in our distribution network. Those are all keys to providing cash.

I think the other important point is that we’ve identified many of these opportunities in prior periods, last year and earlier, and have been willing to turn this cash into investment as we go along. The $100 million roughly, in that -- not a demand for us to go spend $100 million but this increase is the approval level that we expect during this year and some are short as little as six months before they begin to provide returns, and some which have longer term payouts and get approved later in the year will obviously help us in 2010 as well.

Stan Manoukian - Lobodis Partners

Now strategically, you’ve always focused on manufacturing or re-manufacturing batteries in one part of the world and sort of focusing on using lead, buying lead at a spot price in other areas. Would you be willing to invest more since you have room under capital expenditures sort of to -- would you plan to invest more in smelters, you know, in parts of the world where you do not have re-manufacturing capacity?

Gordon A. Ulsh

Certainly in areas such as Asia and some parts of Eastern Europe where the new battery demand is just beginning to grow, our review of manufacturing capabilities will necessarily include the availability of the raw material. Asia, for example, has been quite slow in embracing and installing sort of current technology recycling operations and that will be part of our review as we look to minimize the cost of raw material into our battery manufacturing.

Stan Manoukian - Lobodis Partners

And I know it’s a little bit of an unfair question, but how would you characterize your capacity utilization across different sectors this year to the one last year? Has it improved or has it stayed at the same level?

Gordon A. Ulsh

I would broadly say that our capacity utilization in North America is pretty high. We are pretty satisfied with that. We might be looking, as I said in the prepared remarks, at the opportunity to break some bottlenecks and improve our utilization. You might see some footprint realignment to get the most capacity out of -- and the fit of both battery manufacturing and formation. In Europe where we said that in the automation -- in the transportation side where we have said that we have shed some volume, we have two strategies. One is to look at regrowing that profitable volume to more fully utilize the capacity in place but that would be a bit lower installed capacity in transportation, lower utilization than we see in North America.

Our industrial battery businesses, we’re pretty comfortable with the capacity utilization in those facilities. In fact, during the peak periods in FY08, we saw some pretty high demands and need for overtime, et cetera. So I wouldn’t expect that you are going to see near-term any substantial move other than driving the revenue by facility.

Stan Manoukian - Lobodis Partners

Okay. Thank you very much.

Operator

We do have time for one follow-up question from the line of Craig Irwin with Merriman.

Craig Irwin - Merriman Curhan Ford & Co.  

Gordon, I was just hoping you could maybe give us a little color on what your new financial flexibility means for the company. You know, looking at your balance sheet and having covered companies that were bankruptcy exits in the past, I know there’s usually an opportunity to go from some pretty stringent payables terms to getting much more commercial open market terms. Is there any such opportunity for Exide or is there anything else that maybe is an opportunity on the balance sheet from that standpoint?

Gordon A. Ulsh

Well, I mentioned that earlier on part of our improvement is in fact getting improved terms from some of our suppliers, most notably in Europe and most notably the lead supply base, which has had us on pretty short terms. I would say that in every segment, we’ve seen improvements. In fact, in the last fiscal year we moved, and I believe we were public that we’d moved the base of our business to 60 days from payable terms, and that was significant improvement. And we are seeing similar support by our suppliers in Europe.

We haven’t quoted any sort of new availability but we believe that there’s opportunity and we will continue to press that. But we’ve been pleased and we believe that it has been sensible in line with the improved financial performance.

Craig Irwin - Merriman Curhan Ford & Co.  

Great, and if I can just check this with you, just sort of my back of the matchbook analysis, you know, I’m guessing that you buy roughly $700 million a year in lead in Europe. Is that approximately accurate?

Gordon A. Ulsh

I don’t have that number in front of me but clearly we buy more in Europe than any other area.

Craig Irwin - Merriman Curhan Ford & Co.  

Okay, excellent. Thank you very much.

Gordon A. Ulsh

Thank you. Ashley, I think that concludes our call. Again, I want to thank all of the participants and all of you who have interest in Exide Technologies and with that, Ashley, I believe you can conclude the call.

Operator

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

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