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Executives

Kathy Brosco – Director of Corporate Communications

Bob Toth – President, CEO and Director

Lynn Amos – CFO, Treasurer and Secretary

Analysts

Jeff Zekauskas – JP Morgan

Kevin Maczka – BB&T Capital Markets

Brian Drab – William Blair

Christopher Butler – Sidoti & Company

Michael Levine [ph]

Richard Eastman – Robert W. Baird

Richard Baxter – Ardour Capital Investments

Ben Santinelli [ph]

Craig Irwin – Merriman Curhan Ford

Polypore International, Inc. (PPO) Q4 2008 Earnings Call Transcript February 26, 2009 9:00 AM ET

Operator

Ladies and gentlemen, welcome to the Polypore International fourth quarter 2008 conference call on the 26th of February 2009. Throughout today’s presentation all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator instructions) I will now hand the conference over to Ms. Kathy Brosco. Please go ahead, madam.

Kathy Brosco

Thank you, Danny. Hello and thank you, everyone, for joining us. Welcome to our conference call to discuss our fourth quarter financial result. As always, the results we discuss today can be found in our earnings announcement that was released yesterday afternoon and furnished on Form 8-K with the SEC. A copy of the release is also available on our website at polypore.net in the Investor Relations section. In conjunction with the release, we also issued supplemental financial information yesterday, which we filed as an 8-K, and also posted that on our Investor Relations website as well.

And before we begin, as always, I want to remind you that this conference call and webcast might contain forward-looking statements within the meanings of Federal Securities laws. We intend these forward-looking statements to be covered by the Safe Harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are subject to risks, uncertainties and assumptions made by management about Polypore and the industry and environment in which we operate. These forward-looking statements are not guarantees of future performance and may differ materially from actual events or results because they involve estimates, assumptions and uncertainties.

We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made, which is today, Thursday, February 26, 2009. Polypore undertakes no obligation to update or revise any forward-looking statements whether as a result of new information, future events, or otherwise. You are also directed to consider the risks, uncertainties and other factors discussed in documents filed by us with the SEC, including those matters summarized under the caption Item 1A, Risk Factors in our most recent 10-K filing with the SEC.

Today, we have Bob Toth, President and Chief Executive Officer; Lynn Amos, Chief Financial Officer; and Rob Witzit [ph], Vice President of Finance. And at this point, I’ll turn the call over to Bob.

Bob Toth

Thanks, Kathy. Thanks, everyone, for joining us today. Performance in the quarter was in line with our guidance and expectations. Long-term demand drivers of our markets remained solid. During the year we made a lot of progress in our key strategic priorities, namely in new application development, and increasing our presence in the high-growth region of Asia.

We also continue to improve our capital structure throughout 2008 resulting in a solid liquidity position, which is even more important in today’s environment. Late in the quarter, and not unique to us, we faced challenging macroeconomic dynamics. Recall that portions of our lead-acid, lithium and specialty filtration businesses are sensitive to that, while healthcare is not. Frame it at a higher level, roughly two-thirds of our business portfolio, while not completely immune to the economy, has a higher recurring revenue nature. The other one-third of our portfolio is more affected by economic factors. I’ll come back to this subject in more detail after Lynn’s remarks.

Regarding business performance in the quarter, in the lead-acid batter separator business, we continued to strategically strengthen our presence in Asia. We began production in our latest capacity expansion in Thailand, which came on line ahead of budget and on time. We made good progress in our investment in India. During the quarter, we implemented our restructuring plan as anticipated, and we announced the signing of a new union contract at our Owensboro, Kentucky facility that extends out into 2012.

In the lithium battery separator business, performance was consistent with the solid performance we saw throughout the year. As you would expect, we saw a slowdown in order patterns during the back half of the quarter. However, we continue to be pleased with the expected long-term growth in the industry, the progress we are making at our facility in Korea, and the ongoing application development, especially in the area of hybrid electric vehicles.

Turning now to healthcare, recall first that we are comping to a very strong fourth quarter last year, which included greater than $5 million of discontinued cellulosic sales, a more favorable exchange rate, and strong sales and operating performance. Adjusting for foreign exchange in cellulosics, performance in the fourth quarter of ’08 was comparable to last year.

In the filtration business, excluding foreign exchange, we experienced modest growth in the quarter. Growth occurred in applications that aren’t as economically sensitive, such as pharma and food, which was offset to some extent by applications such as microelectronics, which are more sensitive to the economy.

At this point, I’ll turn it over to Lynn to share more detail around the financial results and then I’ll address the outlook for 2009.

Lynn Amos

Thanks Bob. As we reported yesterday, sales increased $1 million in the fourth quarter to $145.6 million. When you net out the negative impact of the euro to dollar exchange rate, sales increased 4%. Adjusted net income was $9.9 million or $0.22 per diluted share compared with adjusted net income in the prior year of $10.9 million or $0.27 per diluted share. As a reminder, our earnings include approximately $0.08 of non-cash amortization expense on a quarterly basis.

Looking more specifically at the performance drivers, adjusted operating income margin for the fourth quarter was down approximately 300 basis points compared to last year. And I’ll speak to this in a moment. Adjusted EBITDA for the quarter, which is a key financial measure in our credit agreement, was $41.9 million compared with $44.2 million for the same period last year.

For the year, adjusted EBITDA was up 13% to $175.7 million from $155.2 million in the prior year. I’ll refer you to the reconciliation of net income to adjusted EBITDA in the earnings release. During the quarter, we implemented the restructuring plan we announced in October. As you saw in the release, the plan is on target and costs remain within the range we anticipated.

Turning to interest expense, for the fourth quarter, it was $14.1 million, net of interest income. This was down approximately $3 million compared with last year due to lower interest rates on our term loans plus the benefit of lower FX rates on our euro denominated debt. Our reported full year tax rate was negative due to the pretax laws we incurred from the fourth quarter restructuring charge. Adjusting for one-time items, our tax rate would have been approximately 28%.

At this point, I’ll move on to the fourth quarter segment results. Beginning with Energy Storage, sales grew 8% over the same period last year. Net of the negative impact of the euro to dollar exchange rate, sales increased 11%. Segment operating income was 19% of sales compared to 22% in the prior year. The decline in operating margins was largely due to the impact of the acquisitions of Microporous and Yurie-Wide early in 2008, as well as from raw material and energy cost escalation we experienced throughout the year.

Specifically, in the lead-acid battery separator business, fourth quarter sales increased 7% over the prior year, due primarily to the Microporous acquisition, which was offset by the negative impact of the euro to dollar exchange rate. In the lithium battery separator business, sales grew 15% in the quarter and 16% on an LTM basis, which outpaced market growth rate and reflects solid execution on our business priorities.

Moving on to Separations Media, for the fourth quarter, segment sales were down 17% from the prior year. However, excluding the sales of cellulosics, which we discontinued in 2007 and the negative impact of FX, sales increased by 1%. Within healthcare, net of cellulosics, fourth quarter sales declined 8% due to foreign exchange and customer mix. Within the filtration and specialty business, fourth quarter sales declined 2%, as the ongoing demand for our high performance membranes in a growing number of filtration applications was offset by the negative impact of the euro to dollar exchange rate.

The impact of foreign exchange on both Separations Media businesses generally was split proportional to sales within the segment. Segment operating income declined to 19% of sales compared to 22% in the prior year period, primarily due to production timing and customer mix. For the full year, Separations Media operating margins are over 270 basis points higher than 2007.

Let me switch now from the segment discussion to cash flow and liquidity. Because of the significance of these items had substantially increased over the past few months, given the difficult global economy. I touched on it – on the subject as it relates to Polypore last quarter, but it bears repeating. We have taken a number of actions over the past 12 to 24 months to improve our capital structure.

As you may recall, in mid-2007 we refinanced our senior debt and revolving credit facilities in a covenant-like transaction. As of the end of fiscal 2008, we have approximately $170 million in liquidity between cash on the balance sheet and revolver availability. We have a solid liquidity position today and we continue to be very prudent in our actions to maintain that into the future. Additionally, our business continues to generate positive cash flow.

In regards to our debt structure, the term loans under our credit agreement did not have any financial maintenance covenants. If we have amounts outstanding under our $90 million revolver, we are subject to a net senior leverage covenant that requires our ratio of net senior debt to LTM adjusted EBITDA to remain below three times. As of year-end, we were well under that level at 1.82 times and we had over $80 million of cash on hand. We have no material maturities of debt until 2012.

In summary, we remain disciplined regarding the best use of our cash, which today is biased towards preserving our solid liquidity position. While there continue to be growth investments available to us, we are proceeding very cautiously with those discussions in light of the state of the economy.

Now I’ll turn it back over to Bob for some comments before the Q&A.

Bob Toth

Thanks, Lynn. Obviously, we are operating in a very uncertain global economy, and we don’t have any unique insight into the timing of the macroeconomic recovery. I do want to take some time and share with you how we view our businesses and markets in the coming year. I said it earlier and Lynn provided good context, we have a very good liquidity position, and we are managing appropriately and with discipline so as not to compromise that.

I should also point out, those of you familiar with us know, we have a fairly high percentage of our customers with fiscal year-ends at the end of our first quarter 2009. This applies to roughly 50% to 60% of our customer base in the lead-acid separator business and approximately half in the lithium separator business. Given the state and uncertainty of the economy and considering how companies often manage their year-end balance sheets, we will see an impact from this on orders early in the year. And with that, we expect to be managing through a difficult first half of 2009, especially in the first quarter.

Now let’s talk about the businesses. In the lead-acid separator business, we would expect 2009 to be down year-over-year as we re-calibrate for the last customer contract we announced last quarter, and certainly, the slower economy impact, the industrial portion of this business, as well as OEM batteries for new vehicle production. Outside of these factors, however, we see no change in the fundamental demand drivers in this market, especially in Asia.

Recall 80% of transportation business is associated with replacement sales, which in any short period of time can be somewhat impacted by the economy. However, by nature of the fact that the product ultimately fails or the battery dies, replacement sales recover. Additionally, in the case of an extended OEM decline, replacement sales will increase over time to make up for that.

Overall, market growth is expected to continue at above GDP on a worldwide basis, especially in Asia where we’ve strategically positioned ourselves very well. That region has the highest growth potential due to the naturally higher GDP rates and also due to the continuing conversion to higher performing batteries, which require our type of separators.

Now to lithium, the lithium separator business is linked more closely to the global economy because consumer electronics, things like handsets, laptops, et cetera, are today’s primary application base. I should point out, separator demand or use is more closely tied to overall global volume growth in applications as opposed to product mix within applications. Meaning, separator content within a particular device is similar irrespective of whether that is a high-end fully featured model or a more basic lower cost model.

In handsets, for example, we are far more interested in the global volume growth than in the type of phone. And while we are seeing the immediate impact of the current economic environment on consumer spending, our customers, the lithium battery manufacturers, continue to plan for the long-term growth driven by the ongoing and growing global need for mobile power.

Specific to hybrid electric vehicles, we see continued strong development in this area, while the price of oil is one factor, keep in mind that this development started a number of years ago, and it wasn’t necessarily influenced by the surge in oil prices witnessed over the past 12 months. Additionally, we now see increasing influence due to mandated vehicle mileage requirements, the pressure to reduce CO2 emissions especially in Europe, and the need for becoming independent from foreign sources of oil.

As we’ve said in the past, we are excited about the prospects here. And to the best of our knowledge, we are involved in every major development program. And as we’ve stated before, we expect HEV or hybrid electric vehicles to have a meaningful impact sometime post 2010.

In healthcare, demand is relatively unaffected by the economy. This is due to the important functionality of our synthetic membranes and critical medical treatment processes. We have proven leading technology here and continue to see nice growth dynamics.

In filtration, there is a very stable portion of this business associated with food and biopharma and pharmaceutical manufacturing. There is also an economically sensitive portion of this business tied primarily to microelectronics applications. While we don’t know exactly how things will play out, given the uncertainty in the economy and the unknown timeline for economic recovery, we are very disciplined and we are keenly focused on prudently managing our business through the cycle. This includes things like managing headcount, reducing discretionary spending, things like travel, and applying a more intense level of scrutiny to all capital spending.

We remain confident in the long-term prospects of our business. We have a comfortable liquidity position, and our businesses generate cash. Additionally, we have strong leadership in place. Our people are focused on the right priorities. And the fundamental growth characteristics of our markets remain positive and unchanged.

On that note, I’d like to open up the call for questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions) And the first question comes from Kevin Maczka. Please go ahead with your question, sir.

Bob Toth

We can’t hear him.

Operator

He seems to have cancelled his question. And the next question comes from Jeff Zekauskas.

Jeff Zekauskas – JP Morgan

Hi, good morning. How are you?

Bob Toth

Hi, Jeff, how are you doing?

Jeff Zekauskas – JP Morgan

Good. I guess just a few housekeeping questions to begin. What were your inventories and receivables in the quarter? And given that you’ve got various plant closings coming up, what’s your depreciation and amortization for next year – for 2009?

Bob Toth

Give us a second while we look that up.

Jeff Zekauskas – JP Morgan

Maybe while you – I'm sorry, go ahead.

Lynn Amos

Inventory was about $70 million and receivables were about $100 million.

Jeff Zekauskas – JP Morgan

Okay. And for next year, what’s your D&A – for ’09?

Lynn Amos

We haven’t given specific guidance for next year. But if you think about our – we did close a plant, as you’re aware of, but we also built some plants this year. So I wouldn’t generally expect significant changes.

Jeff Zekauskas – JP Morgan

Okay, great. And in terms of the – I was hoping that you might talk about the magnitudes of the pressures you are seeing in electronics. I mean, obviously circuit production has sort of fallen maybe 50% or 60% in the first quarter – or in January. And so order of magnitude, do you expect lithium battery demand to be down – I don’t know, 20%, something like that, and probably a corresponding amount for lead-acid batteries as different parts of the inventory chain contract, is that sort of the order of magnitude that we’re looking at in the first quarter?

Bob Toth

You know, I hate to get too specific here on quarterly numbers because you can have a whole bunch of things going on. But I think we only try to qualitatively answer your question, Jeff, and directionally. Not a shadow of a doubt, and again, not unique to us. Late in the quarter we saw pretty quick precipitous drop in order patterns. Right? That was probably a December phenomenon. We saw a very good front-end of the quarter and then things slowed down pretty significantly at the end. And as we expect, we see Q1 being challenging. We saw the decline in fourth quarter that’s carrying into first quarter. And I cited that in lead-acid we’ve got over half of our customer base that has a fiscal year-end at the end of first quarter.

In lithium, it’s about half. And some portions of our businesses as well have a fiscal year-end at the end of first quarter. So, that said, we’ve got a great liquidity position, as we pointed out. We are very fortunate in that regard. We’ve got a meaningful base of recurring revenue that is in the 60% to 70% range. At any point in time, of course, you could have some impact on that if there is some supply chain management taking place down stream. And while we can’t predict the duration of the downturn here, all the demand drivers, the long-term demand drivers in our business are very positive.

So, to your question, we’ve tried to dig into analysis on projections. And I think you could find about any projection you wanted to believe out there today on things like lithium batteries and lead-acid batteries for that matter. And it really all starts with devices, and you can various predictions on devices. In things like handsets you’re finding forecasts ranging from down kind of double digits to flat, even modestly up in single digits. In laptops, the same kind of thing. So I think the difficulty here is really trying to predict how much of what we are experiencing or experienced late in the year and into first quarter is anomalous and how much of it is really a sustainable downturn.

Jeff Zekauskas – JP Morgan

I guess lastly, where does Microporous stand in terms of the FTC discussions?

Bob Toth

Not really a lot new there, Jeff. The process is a lengthy one. We’ve got – the only, I guess, if you want to call it, change is the hearing date got moved out to May. I think it was April last time we (inaudible) and we stand by our position. We continue to defend our position.

Jeff Zekauskas – JP Morgan

Okay, good. Thank you very much.

Bob Toth

Thank you.

Operator

Thank you. And the next question comes from Kevin Maczka. Please go ahead with your question, sir.

Kevin Maczka – BB&T Capital Markets

Good morning. Can you hear me this time?

Bob Toth

Get your first question bettered out, Kevin.

Kevin Maczka – BB&T Capital Markets

Yes. I don’t think the issue was on my end, but I could be wrong. But – Bob, I guess the first question on margins down 300 basis points in the quarter, I’m trying to get some sense – and I know you aren’t giving guidance, but I’m trying to get some sense of if that’s what we should expect for ’09 as well, at least directionally. And in the quarter you cited things that impacted margins, like acquisitions and raw materials and energy and mix and timing. And it’s – obviously, raw materially and energy are coming down, but some of those other items, is there anything there that would be a net negative or positive going forward, at least different than what it was in Q4?

Bob Toth

Yes, let me try to give you a little more color. If you look at Energy Storage margins in the quarter, they were off about 3%. I think that’s pretty consistent with what we saw through the year. I don’t have the numbers right at my fingertips. But the primary delta there, over half of the delta was probably associated with the acquisitions. There was some impact from raw material and energy escalation that we experienced throughout the year. Keep in mind that while some commodities have come off their peak, we do buy a number of specialties and we’ve been aggressive at pushing those increases off as long as we can. But we’ve seen some margin impact from that and of course trying to recover that.

So I think Energy Storage, if you kind of look at that, you can assume that we are continuing to drive the acquisitions, the line [ph] startups and trying to improve it, again, given some stable order patterns. Separations Media, I think what you’ve got there, again, you are off a couple percent in the quarter. I think it’s dangerous to look at any one quarter and try to extrapolate with precision. I think the more relevant look is perhaps a full year where you saw a pretty consistent $0.03 to $0.06 margin improvement throughout the year.

And recall also that we said Q4, we had some timing differences. Last year in Q3, we took an extended shutdown to get some efficiencies out of our PUREMA units and put in place a production efficiency investment. And so fourth quarter, we kind of ran door-to-door. We crammed in very strong production last year – '07, sorry. And this year, we had some downtime and some differences in customer mix and grades and things like that. So I think it would be better served kind of looking at Separations Media saying, okay, so last year I think we cited may have been toward the higher end of the performance range and then this year you probably saw some dips down to 16-ish or so percent that probably are at the lower end of the range. I think that kind of frames your performance given – perhaps except for seasonality, given some steady-state business, that kind of gives you a nice range.

Kevin Maczka – BB&T Capital Markets

Okay, great. Bob, on the healthcare business, down 23%, I think it’s understandable when you strip out the cellulosics, that was more like flat. But in prior quarters when that business was growing at a much more rapid rate, you were comping against the cellulosic loss as well. So, can you just help us understand was there anything else going on there? Was there any market share loss, customer loss, anything else that – because again, that’s not a GDP-sensitive business?

Bob Toth

No, no, but you have – no, no – none of those things took place to the best of our knowledge. In fact, we are pleased with that business. I think again it’s the same front-end of the answer. I mean, you’ve got to be careful taking one quarter and extrapolating it. We saw nice growth throughout the year. We’ve seen tremendous receptivity of PUREMA in the marketplace. We are continuing to drive production efficiencies to get higher levels of asset effectiveness from that unit. You’ve got blood oxygenation, which can go in timing elements around orders and campaigns based on higher – your customer’s run production and things like that. So it’s purely a timing phenomenon. And that’s, of course, perhaps why we tempered some of the growth in earlier quarters to not get out over our skis that way as well.

Lynn Amos

And I think I would just point out as well, this is Lynn, that the fourth quarter, as Bob mentioned of last year, was – that was really everything, all the stars lining up and we just had a really strong fourth quarter last year. So we had a tough comp this year.

Kevin Maczka – BB&T Capital Markets

Got it. And Lynn, how much was the FX impact on the top and bottom line in Q4 and for the full year? I may have missed that, but can you just remind us what that was?

Lynn Amos

Sure.

Bob Toth

Yes, Q4 was anomalously – well, he is looking up the precise number. Q4 was anomalously off. Right? We saw a negative FX impact. But for the year we were up. Do you have the numbers in front of you?

Lynn Amos

I do. For the full year, the impact on revenues was just over $20 million. And it was a couple cents at the EPS line. So if we think that was couple cents positive, so – and revenue would impact us positive on the full year. If you look at the quarter, the revenue impact was about $6 million negative and then had a negligible impact at the EPS. Just say, you know, as you kind of walk down the P&L, we get the revenue impact, but by the time you translate to EBITDA, it’s substantially less. And with the big proportion of our debt structured in the euro, you typically get an offsetting impact, almost a negligible impact at EPS level.

Kevin Maczka – BB&T Capital Markets

Okay. And then just finally, if I could, last quarter the big customer loss was such a hot topic. And without maybe naming any names or giving an specific color, can you just talk kind of qualitatively if things like that are more likely to happen now just given what’s going on in the macro or anything else you’re seeing in your end markets or businesses, or if you are still comfortable that in terms of share loss or customer loss that you’re not expecting any material changes?

Bob Toth

You know, Kevin, I don’t think you can take that and view that as an indicator of anything – any kind of a trend personally. That was a strategic procurement decision on their part, and that’s I think just very factually what it was. So, we are very committed to our customers. We continue to look for ways to work with them and serve them on a long-term basis. And I really can’t predict that somebody might be thinking about doing something like that two or three years from now. I think from a use of capital perspective, those things might be tougher decisions today. Right? I mean, we are very good at what we do, and it’s really got to be a strategic decision on the customer’s part.

Kevin Maczka – BB&T Capital Markets

Got it. Thanks for the time, guys.

Bob Toth

Thank you.

Lynn Amos

Thank you.

Operator

And the next question comes from Brian Drab. Please go ahead with your question, sir.

Brian Drab – William Blair

Good morning.

Bob Toth

Good morning, Brian.

Brian Drab – William Blair

Can you remind us how this conversion to the higher technology membranes in lead-acid is playing out and how long that is going to play out for?

Bob Toth

There is no precise answer, but the way to think about that you’ve got – of course, the developed economies, Europe, Western Europe and the US are pretty much fully converted in the lead-acid space. And that’s all we are talking about. It’s primarily lead-acid here. In Asia, you probably got about somewhere around 65% to 70% of the market that’s converted. It’s tough number to get (inaudible) precisely because what you have there are smaller battery producers that are using a leaf-type separator battery that lasts [ph] us long converting to more automated facilities larger producers there that require our type of separator. So you’ve probably got somewhere in the 65%, 70% of the market converted. You probably have a tail here running out anywhere from two to five years perhaps, three to five years, something like that still, of that conversion taking place on top of GDP.

Brian Drab – William Blair

Okay. And sticking with the lead-acid business, can you give us at least a rough feel for the relative performance of the 80% – roughly 80% of that segment that’s tied to the auto industry and the other 20% that’s industrial and how those performed in the fourth quarter specifically?

Bob Toth

Well, you’ve got to dissect those down each further, of course, as you well know. On the industrial, first let’s look at it, that is about 20% of the total. It’s probably very difficult number to get precisely, probably half replacement, half OEM, something like that. And you’ve got an impact across the line there. Keep in mind that I think some of our customers have even cited it, you’ve got some companies that are putting off preventative maintenance, which in the case of a battery you could do for a while, but you can’t do it too long, right, because the battery ultimately fails and you’ve got replace it. So it’s only a short period of time that you can do that. So there is some impact across the industrial business uniformly.

On the transportation business, it is auto-related, but keep in mind, 80% of that is far more tied to the 800 million to 900 million vehicles that are already on the road, not to the 50 million or 60 million that are being produced each year. So you’ve got kind of an 80/20 split within transportation. And again, same thing, you can have some temporary impact on replacement and you can have people taking inventories and converting it to cash and things like that. Right? But ultimately if you’re a discretionary purchaser of a battery, you can only put that off until the battery dies.

So the replacement in any short burst or short period of time can be impacted, but generally recovers pretty quickly. OEM, when OEM goes down, if OEM – of course it goes down instantly potentially. Over time, your replacement sales will make up for that. And that’s really a pretty intuitive concept of – if you don’t buy a new car, you probably at some point buying a battery for your old car. But the OEM decline can be instant and the replacement sales pick up over some period of time with the lag there. So you can see immediate impact across the board. You can’t really see a sustainable impact in the replacement side of things.

Brian Drab – William Blair

Okay. So if I could, just one question for Lynn regarding the debt on your balance sheet. First of all, you’re using a swap right now to lock in. Are you planning on using that type of strategy going forward? I know the swap expires here soon. And also are you planning to pay down some debt here over the next several quarters?

Lynn Amos

In regards to swap, we have $250 million of the debt fixed under an interest rate swap. $50 million of that expires in the middle of 2009 and $200 million goes all the way through 2009. I guess, we will continue to evaluate what the right strategy is on whether to fix it or not. In today’s environment we’re actually saving more money on the portion that’s unhedged. But it’s predicting where the interest rates are going to go that’s not our core competency, but we will continue to evaluate what the right strategy is for us to manage our risk. In terms of the use of our cash to pay down debt, right now, I would say our bias is towards maintaining our liquidity position. And the senior debt that we have on the balance sheet is low interest rate LIBOR plus 200 basis points. And with the absence of quality credit markets to tap into the future, giving up that liquidity, it’s tough to envision right now.

Brian Drab – William Blair

Okay. Thank you very much.

Bob Toth

Thank you.

Operator

Thank you. And the next question comes from Christopher Butler. Please go ahead with your question, sir.

Christopher Butler – Sidoti & Company

Hi, good morning, guys.

Bob Toth

Good morning.

Christopher Butler – Sidoti & Company

First question, you had mentioned that there was a significant drop at the end of the fourth quarter. Now that we’re two quarters into the first quarter because you didn’t mention it, could we assume that we haven’t seen that that has rebounded in any way at this point?

Bob Toth

Well, two months into the quarter. We’re not seeing a dramatic change. Right? We did say that at the end of the year we saw the drop-off in orders and that’s continued into first quarter. I’m reluctant to be too precise on anything here, because even in our – you know, in our lithium business, for instance, even our good customers have four weeks or so headlights on things at best. So you can see pretty significant shifts there pretty quickly. But the takeaway and what I want to be clear about is, sure, we do expect the challenging first half and first quarter, in particular, especially given the dynamic of the proportion of customers that have fiscal year-ends at the end of first quarter.

Christopher Butler – Sidoti & Company

And looking at lead-acid here, help me understand the replacement portion of this. If we assume that there is a significant number of cars that are in North America and Europe, as we exit winter, it seemed to me from experience that it’s a lot easier for a consumer to drag a half-dead battery through the summer months than it is in winter months. Could we be looking at a drop in demand from consumer spending over the summer, something of that nature?

Bob Toth

I got to tell you I really don’t think there are great statistics on that. And that’s actually a kind of a dangerous premise to make. The fact of the matter is the heat is what causes the battery to be destroyed and it just happens to fail when big charge [ph] pulled from it when it’s cold. So I wouldn’t try to reach too many conclusions from that. I think more likely what you have is, you know, everybody in the world has tried to take any solid good they can and convert it into cash. Right? So I think you can see some management of that that can have an impact. And I think you can see consumers go, well, I’m going to try to jumpstart it one more time, but (inaudible) marginal returns, you can’t keep doing that. Right? So the question is, is that a month, is it two months, is it three months? I don’t really know. To be honest with you, I’m not sure there is a precise science on that. It’s not a year. If you have a bad battery, you limp along for a pretty short period of time before you just replace it.

Christopher Butler – Sidoti & Company

And looking at the lithium side, part of the story for lithium has always been expansion of lithium batteries into new products. Considering the difficult economy, are you seeing a slowdown in conversions of that nature? Is that something that you might expect here for at least a short time period?

Bob Toth

No, I think you have an interesting dynamic at work here. Right? There is no slowdown in the application development. In fact, we’re very encouraged by that. Slowdown has been in the devices that are going out the door, and there’s just not a lot of transparency to us in that supply chain or inventory chain because we’re a couple steps removed. But – you know, let me use hybrid electric vehicles as an example. There is no slowdown there whatsoever. In fact, arguably the pace has picked up in terms of development because people aren’t wanting to get behind. And it is because that’s the one space that consumers want. Governments are starting to mandate the regulations and things like that. So the development activity is definitely keeping pace. As consumers, we just fundamentally want to be more mobile and we want things to go with us. That’s not changing. What is changing is you’ve got a consumers’ strike. I mean, people just stopped spending late in the fourth quarter and again we have no unique insight or better knowledge there as to when people will start spending.

Christopher Butler – Sidoti & Company

And just quickly, what would you guide us as far as tax rate for 2009?

Bob Toth

Lynn, do you want to jump on that?

Lynn Amos

Sure. We haven’t provided specific guidance on tax rate. In terms of the components of our tax rate, it’s – nothing has really changed here. We have the tax rate in the mid-20s and accelerating over time is what we’ve been saying. We are 28% for this year. It’s going to depend a bit on the components and the jurisdictional mix of income next year. In terms of cash taxes though, which is really where it comes down to on what goes out the door, we are looking somewhere in the neighborhood, $10 million.

Christopher Butler – Sidoti & Company

I appreciate your time.

Bob Toth

Thank you.

Operator

Thank you. And the next question comes from Michael Levine [ph]. Please go ahead with your question, sir.

Michael Levine

Good morning.

Bob Toth

Good morning.

Michael Levine

Through a couple of announcements on the worth [ph] of lithium-ion HEV batteries during the quarter, after those announcements, I mean do you feel the same about you marked position? Has it improved, weakened, or fairly consistent with your view of how you’re going to be a supplier?

Bob Toth

Well, of course, there aren’t any lithium batteries out there really (inaudible) vehicle. So our position hasn’t changed. But the real answer around development is we’re very encouraged by the development across the industry. I think the announcements you saw, really the meaningfulness of the announcements you saw are validation of the electrification of vehicles that’s taking place. Right? Ford announced the plug-in. They hadn’t announced the plug-in to date. And so we are delighted with that. And so what you see there is the continuing trend that we’ve seen in development becoming more explicit to the general public or to consumers. And you see consumers wanting that. So we’re very pleased with our development effort and our involvement.

But having said that, as we’ve said all along, the real materiality here is probably post 2010. You will see the vehicles start to come out this year and in the next year. And certainly all the majors have been pretty explicit about their initial launch plans. They haven’t announced much past the first vehicle yet. And you probably won’t see that until the first vehicles are out there. And then you will see some additional announcements or plans start to unfold. So we are very – we are delighted with the progress there. Like I said, nothing has really materially changed. If anything, it’s perhaps accelerated a bit.

Michael Levine

Okay. I realize it’s a long-term application. And just sequentially on the lithium-ion, is there – I know there is a little bit of lumpiness, but sequentially the revenues are down quite a bit. Is that just really typical market lumpiness?

Bob Toth

I wouldn’t read anything into a quarter-to-quarter look at lithium, whether it’s year-on-year or sequential, you can have order patterns, timing of production, and all kinds of things that impact that.

Michael Levine

Okay, all right.

Bob Toth

And of course, keep in mind I didn’t say that – you know, late in December we saw a pretty significant drop-off. It was first – almost two quarters within a quarter in lithium. So –

Michael Levine

Okay. And I realize last quarter you announced the loss of a lead-acid customer. And I think that would start to come off at the end of the year. But did you see – I mean, that they have maybe slowed down orders to you at the end of the year? Would that have any effect on your lead-acid sales or did it?

Bob Toth

You could probably assume that. It’s – certainly when you have a customer facing out and an economic slowdown at the same time, we probably had an impact, yes.

Michael Levine

Okay, okay. And then – in healthcare, I appreciate your comments that it’s a healthy market, and I guess even that’s probably a little bit lumpy. But typically – I thought the third quarter was slow and fourth quarter was usually a bit of a pickup. And I know you had the FX thing going on. But it wasn’t a slower quarter than maybe expected or normal?

Bob Toth

I don’t know how you really calibrate that. It’s kind of a subjective interpretation from my view. What I do is a little bit like I’ve talked about with lithium before. You didn’t [ph] lose any customers and they didn’t lose any share in the marketplace. And if not, you’re dealing with a timing phenomenon. And I really think in healthcare we described it that way and we really think that’s what it is. You’ve got customers that run, and blood oxygenation, for instance, in campaign, so you can have timing differences there. If they run a campaign in one quarter one year and a different quarter the next or move production around, and you’ve got production differences on our part, third quarter to fourth quarter, and inventory differences and things like that. So I wouldn’t try to read too much into that. I think you have to look at it over a longer period of time.

Michael Levine

Okay. All right. And then the last question is, can you tell us what the short-term portion of that was for the quarter?

Bob Toth

Yes, I don’t – Lynn, do you have that? Give us one second.

Michael Levine

Okay. And that’s it for me after that.

Lynn Amos

It’s about $5 million.

Michael Levine

Okay, thanks.

Lynn Amos

$5.2 million.

Bob Toth

$5.2 million. Okay.

Michael Levine

Okay, thank you.

Operator

Thank you. And the next question comes from Richard Eastman. Please go ahead with your question, sir.

Richard Eastman – Robert W. Baird

Yes. Hi, Bob, Lynn.

Bob Toth

Hi, Rick.

Richard Eastman – Robert W. Baird

Could you just talk – when I do the equity envelope math here on the lead-acid side of the business, it looks like maybe local currency organic growth was maybe plus 1% in the quarter. Can you just give us a sense of how price and volume maybe the quarter in lead-acid?

Bob Toth

Yes, I think the – I think the really easy answer, Rick, is core volumes were down just a touch. A little bit of noise obviously when you’ve got acquisitions in there and we’ve moved production around facilities to facilities. So it’s a little tough to say what was my proportion, what is your core business, but I think the way we internally look at our core business that was down probably low-single digits on volume.

Richard Eastman – Robert W. Baird

Okay. And how much of the lead-acid business is outside the US?

Bob Toth

Well, the general rule of thumb is about 40/40/20 with the 20 growing faster. Meaning, about 40% of that worldwide business is in the Americas, about 40% in Europe, and about 20% in Asia. And Asia, of course, is growing at a faster rate than the other regions.

Richard Eastman – Robert W. Baird

All right. And we bumped into – I think you had press released earlier at least kind of in trade publications a price hike on the Daramic side, kind of January 2nd. And it was a meaningful number. How would you expect that to hold up in the marketplace? Has there been any initial pushback or –?

Bob Toth

Yes, there always is. I mean, fact of the matter is we’ve been pretty explicit about it. And I think, Rick, you even asked about it in the last couple of calls. We’ve seen some margin pressure from raw materials and energy in that business. And while we’ve been as aggressive as we possibly can beyond offsetting those internally and with our suppliers, the fact of the matter is we need some price to get caught back up there. And it’s a challenging environment, no doubt about it. When people have the situation of the current economic downturn, pushing price doesn’t tend to get you many popularity contest wins.

Richard Eastman – Robert W. Baird

Okay. And does that tend to roll in? Are there contractual commitments there? And then, does that roll in through a year [ph]?

Bob Toth

It varies because you’ve got different grades, different customers, different contracts, all kinds of different things. So it’s not magical at a single point in time, although we try – we are trying to get it as promptly as we can because we of course needed to offset some of the margin erosion.

Richard Eastman – Robert W. Baird

Okay. And then just a last question. This new contract announcement at Owensboro, what did we accomplish there? We went through the strike. We’ve downsized that. We had a contract in place that ran through ’10. This extends it out to ’12. Why do we need to go back and redo that?

Bob Toth

The contract that was – that you referred to as in place was really them and us agreeing to just an extension of the old contract. And so this is a new contract that’s multi-year, runs out through 2012.

Richard Eastman – Robert W. Baird

Okay. And we obviously keep volume at that plant and we keep it operating? Okay.

Bob Toth

Yes, we scale that back, of course. Yes.

Richard Eastman – Robert W. Baird

Okay, thank you.

Bob Toth

Thank you.

Operator

Thank you. And the next question comes from Richard Baxter. Please go ahead with your question, sir.

Richard Baxter – Ardour Capital Investments

Great, thank you. A question on Yurie-Wide, can you give us an update on its integration and the outlook for ’09 and ’10?

Bob Toth

Well, yes, we can. And we don’t give specific details on site-by-site. It’s – keep in mind, in lithium we of course have the core facility here in Charlotte. We’ve expanded with a new facility in Charlotte. And that’s (inaudible) our lithium separator facility in Korea. So we referred to it – now it’s Southern Korea. The development is – we're very pleased with it. It gives us the entire product portfolio now for the market. We are the only supplier in the world that can say that. We’ve seen tremendous receptivity from customers. Recall, if you go back to when we acquired it, though, we said that it would – basically it was a new facility that required some investment and technology commitment on our part to kind of scale up and get into the marketplace and that you’d see it turning accretive in the back half of ’09. And so we haven’t varied from that belief today.

Richard Baxter – Ardour Capital Investments

Thank you.

Bob Toth

Thank you.

Operator

Thank you. And the next question comes from Ben Santinelli [ph]. Please go ahead with your question, sir.

Ben Santinelli

Hi. I was wondering if you guys could maybe quantify a little bit the economic downturn that you experienced late in the quarter, like something on the magnitude there.

Bob Toth

Well, that’s difficult to do in any kind of way that that’s on a meaningful macro-ed up quantification. I think the real salient point is, in healthcare, it’s not impacted by the economy materially in any way. In lead-acid, you can have an impact, like we said on the replacement, but OEM and industrial are certainly feeling some sensitivity. In filtration, you’ve got a number of applications there that are not sensitivity to the economy, food, pharma. It’s – probably under a third or a third or so is sensitive to the economy. And in lithium, it’s – today the vast majority of it is consumer electronics with some portion of it being poly tools and of course that’s going to be impacted by the economy. So it’s really a business-by-business look, but we haven’t tried to get into – it's just not a very productive exercise for us to try to get into detailing out a month’s orders or something like that. (inaudible) there, yes.

Ben Santinelli

I understood. On the lead-acid side, I think you guys said earlier that you plan to be down year-over-year for ’09. Is that excluding or including the loss of the JCI business?

Bob Toth

That’s just taking the straight math, the full year of ’08 to the full year of ’09. So it’s – we lost that piece of business. So we wouldn’t certainly expect world growth to offset some of that. But world growth this year is a tough thing to predict.

Ben Santinelli

Yes. All right. And lastly, I think just on the filtration side, what percent of that business is kind of the food, pharma versus the microelectronics and other more economically sensitive products?

Bob Toth

There are just myriad applications there. So I think the easier way to frame it is kind of in reverse, which is – you know, that’s about 10% of our portfolio of our company. And probably a third or so of that is pretty explicitly tied to microelectronics. Some portion of the other two-thirds could be economically sensitive, but it falls more into that category of – you might be able to put it off for a quarter, but soon or later you need to replace it.

Ben Santinelli

Great. Thank you. That’s it.

Bob Toth

Thank you.

Operator

Thank you. And the next question comes from Craig Irwin. Please go ahead with your question, sir.

Craig Irwin – Merriman Curhan Ford

Thank you for taking my question. I understand from talking to a number of people in the hybrid and plug-in electric vehicle battery market that Xian Zhang [ph] has been bringing around the K-2011 [ph] separator. Some of the people have been saying that they have not been able to get hold of the separator, that there was limited availability. Can you update us on really the feedback that you’re getting about this product and whether or not there is availability of this separator in the market?

Bob Toth

No, but I’d like to understand your sources. We don’t get –

Craig Irwin – Merriman Curhan Ford

I obviously talked to a number of people in the customer side.

Bob Toth

Yes. We don’t get into specific product discussion, certainly not technical discussion. The fact of the matter is we usually sign up to not talk about those things. Customers are very guarded with the development of everything from new electronics to power tools to lawn and garden and certainly in HEV. So we’re not at liberty to have any of those technical discussions.

Craig Irwin – Merriman Curhan Ford

Okay, okay. Excellent. And then the other question that I had is really just a housekeeping question. Do you have the number for the cellulosics revenue shift in the fourth quarter of 2007?

Bob Toth

Yes, by quarter, cellulosics last year was about $18 million and change by quarter. Lynn’s got to look.

Lynn Amos

Yes, fourth quarter of last year was $5.3 million.

Craig Irwin – Merriman Curhan Ford

Okay, excellent. Thank you very much.

Bob Toth

Thanks.

Operator

(Operator instructions) There appears to be no further questions. Please continue with any other points you wish to raise.

Bob Toth

Great. Thanks, Danny. I’d just like to thank everyone for their support. We greatly appreciate it. Thank you very much.

Operator

This concludes the conference call for today. Thank you for your participation. You may now disconnect.

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