Polypore International Q1 2009 Earnings Call Transcript

May. 8.09 | About: Polypore International, (PPO)

Polypore International, Inc. (NYSE:PPO)

Q1 2009 Earnings Call

May 07, 2009 9:00 AM ET

Executives

Kathy Brosco - Director of Corporate Communications

Robert B. Toth - President and Chief Executive Officer

Lynn Amos - Chief Financial Officer, Treasurer and Secretary

Analysts

Kevin Maczka - BB&T Capital Markets

Brian Drab - William Blair & Company

Richard Eastman - Robert W. Baird & Co.

Christopher Butler - Sidoti and Company

Richard Baxter - Ardour Capital

Operator

Thank you for holding ladies and gentlemen. Welcome to the Polypore International Inc. First Quarter 2009 Conference Call on the 7th of May, 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 Kathy Brosco. Please go ahead.

Kathy Brosco

Thank you, Patrice. Hello and thanks everyone for joining us today, and welcome to our conference call to discuss Polypore's first quarter financial results. The results we discuss today can be found in our earnings announcement that was released yesterday afternoon and of course 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 on our Investor Relations website.

Before we begin, please remember some important considerations. This conference call and webcast might contain forward-looking statements within the meaning of Federal Securities laws. And 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 Thursday May 7th, 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, Vice President of Finance.

And at this point I'll turn the call over to Bob to start things off today.

Robert B. Toth

Thank you, Kathy. Good morning, good afternoon everyone. First quarter performance was consistent with the view we provided last quarter. Macroeconomic factors and customers reducing inventory to manage working capital, suppressed demand in both of our Energy Storage businesses and in portions of our industrial filtration business.

In March, however, we began to see improvement in lithium. Demand for our healthcare products in the quarter remained relatively unaffected by the broader economic environment. Overall we were profitable, we generated cash and we improved our liquidity position. And we accomplished those things even as a high percentage of our customers managed inventories to their fiscal year end which corresponded to the end of our first quarter.

I'm pleased with the resiliency and responsiveness I have seen in our organization in this challenging economy. Our people have done extremely well in managing discretionary spending as well as on working through the restructuring in our lead-acid separator business. I'd also like to point out that even as we continue to manage costs very prudently, we're marinating our investment in technology and development because we remain confident in the long-term growth prospects of the attractive markets we serve.

Global demand drivers associated with mobile power and purity remain intact, and we're very well positioned to capitalize on economic growth. Looking at the individual businesses now, in lead-acid batter separator business, we've recalibrated our operations for the lost customer contract we announced last year. We expect modest order level improvements from first quarter levels as many of our customers faced fiscal year end at the of March, which led to inventory depletion.

While the OEM lead-acid battery markets remain soft, recall that 80% of the transportation business is associated with replacement sales, and over time as OEM declines, replacement sales go up.

In lithium, we see continue progress and penetration in our key accounts. We also experienced an improvement in order patterns during March, which we see continuing into the early portion of second quarter. While we're pleased with that trend, this business can have natural sales variation quarter-to-quarter due to application growth, new product launches and our customers' production schedules.

In healthcare, our growth was offset by the negative impact from foreign exchange. As I mention earlier, demand in healthcare remains relatively unaffected by the economy, and this is due to the important functionality of our membranes and critical medical treatment processes.

We have the proven leading technology in our PUREMA synthetic membrane for hemodialysis and we see continued long-term market growth.

In filtration, recall that there is a sizable portion in this business associated with food, beverage and pharmaceutical manufacturing, which is not significantly impacted by the weak economy.

In addition to the negative impact of foreign exchange in the quarter, certain industrial portions of this business remain slow. It was starting to see some optimism regarding improvements and particular in microelectronics and in the industrial side for later in 2009. A new application development here continues at a very good pace.

At this point, I'll turn it over to Lynn to cover the financials and then I'll provide some closing comments before we have question and answers.

Lynn Amos

Thanks Bob. As we reported yesterday, sales declined 25% to $108.9 million in the first quarter from $145.3 million a year ago. Excluding the negative impact of the euro to dollar exchange rate, sales decreased 19%.

On an absolute basis, this FX impact accounts for about $9 million of the year-on-year decline. The balance of the revenue decline was split fairly evenly between the impact of the economy, which included the inventory contraction we discussed last quarter and the impact of the lost customer within the automotive lead-acid business.

Adjusted net income was $4 million or $0.09 per diluted share, compared with adjusted net income in the prior year, up 10.9 million or $0.27 per diluted share. As a remainder, 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 quarter was down approximately 3.5 percentage points compared with the year ago.

Adjusted EBITDA for the quarter, which is the key financial measure in our credit agreement, was 32.1 million, compared with 45.4 million for the same period last year. Fort the trailing 12 months, adjusted EBITDA was 162.9 million. I refer you to the reconciliation of net income to adjusted EBITDA and earnings release.

Turning to interest expense, for the first quarter it was 14.1 million, net of interest income. This was down approximately $2 million, compared with the year ago due to lower interest rates on our term loans plus the benefit of lower FX rates on our euro denominated debt.

Our tax rate for the quarter was approximately 25%. At this point, I'll move on to the segment results.

Beginning with Energy Storage, sales were down 29% from the same period last year. Excluding the negative impact of FX, sales decreased 25%. Segment operating income was 13% of sales, compared with 23% in the prior year. This is a high operating leverage business; revenue driven decline in margin was tampered by our cost saving efforts, namely the benefits of the restructuring and reduced discretionary spending.

Specifically in the lead-acid battery separator business, first quarter sales declined 30% over the prior year, due primarily to the loss of the customer contact I mentioned, weak economic environment, customers reducing inventory to manage their working capital and the negative impact of the euro to dollar exchange rate.

In the lithium battery separator business, sales were up 26% in the quarter due to the macro -- current macro economic environment as well as the customers' action to reduce inventory that I just mentioned, which occurred primarily in January and February.

Moving on to Separations Media, for the first quarter, segment sales were down 15% from the prior year. Excluding the negative impact of FX, sales decreased by 5%. In healthcare, growth was offset by the negative impact of the euro to dollar change rate resulting in an 8% sales decline.

Within filtration and specialty, sales declined 27% primarily due to the current macro economic environment and 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 improved to 28% of sales, compared with 17% in the prior year period. This was primarily due to the timing and efficiency of production runs, improved yields and decreased energy costs in this segment.

Switching to cash flow and liquidity. As of year-end we had approximately 170 million in liquidity consisting of cash on hand and revolver availability. We improved that liquidity position to approximately 184 million at quarter end, demonstrating the point we have made before that we have a good cash generating businesses, generating over $13 million even in the midst of a difficult economic environment.

Maintaining a solid liquidity position, we'll continue to be a top priority going forward. For those investors not familiar with our debt structure, I will repeat some things we have historically noted. For instance, the term loans under our credit agreement do no have any financial maintenance covenants. If we have announced 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 quarter end we were well under that level at 1.94 times and we had over 96 million of cash on hand. We also have no material maturities of debt until 2012.

In summary, while we would have preferred a better economic environment in the first quarter, we had strong cash generation and enhanced our liquidity position. We are encouraged by the sequential improvement in the quarter and the recent improvement in the order patterns.

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

Robert B. Toth

Thanks Lynn. Performance in the quarter reflected the challenging macro-economic environment as well as the relative dynamics of our business portfolio. To frame that 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.

But we're encouraged by the trend in order patterns late in the quarter and carrying into second quarter. We continue to operate in an uncertain global economy. Given that we're hopeful we're not in a position to predict that the improvement marks a broader and sustainable recovery. However, we are well positioned to successfully weather the current economic challenges and capitalize on any future macro economic improvements as a result of our solid liquidity, our cash generating capability and our large recurring revenue base.

Additionally, I want to reemphasize the importance of our core capabilities in microporous membranes and how that plays out in the long-term strength of our business portfolio. Specifically, these capabilities are front and center in solving the ever growing needs our world faces in terms of mobile power and in terms of purity.

Our lithium separator business is a prime example where you see development continuing at a strong pace, especially in hybrid electric vehicles and electric vehicles as well as other large format applications and things like power tools and lawn and garden. Despite the current state of the economy, investment and commitment into these applications continues to accelerate.

Our core capabilities also come together in the filtration business, which has an attractive growth profile and a more stabilized economy. Keep in mind that we provide a critical enabling technology that helps customers reduce production costs and drive improvements and efficiencies, yields and productivity. And you have healthcare, which is right on our capability to power rally (ph) and relatively unaffected by the economy.

We have a leading position in blood oxygenation and a technology leading product in our PUREMA synthetic hemodialysis membrane where we see consistent growth opportunities.

And finally, we have the lead-acid battery separator business, which remains a very solid cash generating business for us. Even with the challenges we face in terms of the restructuring and the FTC issue, we continue to see the Asian market growing, and we're strategically very well positioned there.

To summarize, while the current economic environment is not ideal, our core capabilities in microporous membranes help ensure a promising future for our business. Growing and sustainable demand for mobile power and for purity as it relates to high performance filtration will continue to fuel our long-term growth.

We're pleased with our ability to be profitable and to generate cash in a challenging economy. We have a solid liquidity position, and as we've stated, we'll continue to manage appropriately and with discipline, so as not to compromise that.

At this point, we'll be happy to take your questions. Patrice?

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) The first question comes from Kevin Maczka. Please go ahead.

Kevin Maczka - BB&T Capital Markets

Hey guys. Good morning.

Robert Toth

Good morning Kevin.

Lynn Amos

Good morning.

Kevin Maczka - BB&T Capital Markets

I guess, Lynn, my first question on Separations Media margin is up so much in the quarter despite the double digit revenue decline. I think you mentioned the timing of production runs, better yields, lower energy costs. Is any of that sustainable, not sustainable? I mean, I don't think you've produced margins that high ever before possibly. So can you just talk about your outlook there?

Lynn Amos

Sure. Kevin I think your point is correct, that's a very strong quarter on our Separations Media business. And if you recall last year we said in this business that, we would normally expect our operating income margin in this business to be from the high teens to the low to mid 20s. Clearly we had a strong quarter but we also continue to expect to move that range up and push that range up over time. The things that really drove the quarter, as you mentioned were things like timing of production schedules, we had some large lines that we run at certain times a year and those lay in very well during the current quarter.

We also had very strong yields, and we continue to increase our yields across our new -- in our health care business, health care business was a big contributor to the margin this quarter. And we saw some benefit from decreased energy costs. Now we'd hope to see some of that continue but we don't control all that.

Kevin Maczka - BB&T Capital Markets

Now as you look at the Energy Storage side, is there an opportunity there with things you're doing internally to significantly improve yields, just like you did here on the Separations Media side and the timing of production runs? Is there a similar benefit that could be gained at some point later in the year on the other side of the business?

Robert Toth

I think about that just a little differently, the answer is of course. We are pretty merciless in driving forward asset effectiveness because that could capacity and cost improvement in effect for free, right?

So we'll continue to drive for that in the lithium business and in the lead-acid business. I think what you see there is a different dynamic of course. So with the high operating leverage we have in that business and the volume falling, the way I kind of think about, it is the organization and I mentioned that in my talking point. The organization did a great job of responding, and I think, kind of lowering the tide of costs, so I think we are very well positioned for when that business improves in terms of the operating leverage on it.

Kevin Maczka - BB&T Capital Markets

Okay and just on the SG&A line, if I could ask one more there. It looks like it's down 3% year-over-year on the 19% revenue decline. I am just wondering with the discretionary cost cutting, you're doing the restructurings, you're doing -- can you just give a little bit of a sense there on where you see that trending? Should that continue to decline sequentially from here with the cost cutting you're doing?

Lynn Amos

Go ahead, do you want to say something?

Robert Toth

The first quarter what you had was, don't forget the, you've got the full year or the full impact of the acquisitions that you didn't have last year. And I mention in the script and then I'll hand it back to Lynn. And that we're maintaining our investments to drive growth. We are being very, very conscious of costs. But we're also maintaining our investments to drive things like hybrid electric vehicles and electric vehicles.

Lynn Amos

Yeah, I would also piggyback that. Again I think we have a very efficient cost structure and of course we always focus on improving that. And the expected improvement that you would -- from our 2008 restructuring in the lead-acid business and from our focus on controlling all the discretionary spending that Bob talked about was largely offset in the quarter by the FTC expenses as well as the considerable SG&A we picked up from the acquisitions that weren't fully backed into quarter of last year. Other than that as Bob said, we're maintaining our investments that are going to drive growth in this business going forward.

Kevin Maczka - BB&T Capital Markets

Okay, guys. Thanks. I'll hop back in line.

Robert Toth

Thanks, Kevin.

Operator

The next question comes from Brian Drab. Please go ahead.

Brian Drab - William Blair & Company

Good morning.

Robert Toth

Good morning, Brian.

Brian Drab - William Blair & Company

Just start with the lithium market in general. There are many different industry forecasts, seems right now for 2009 and I know people are going to have a tough time. You didn't give any type of forecast for any market but seem -- expectations for lithium batteries in general to be down anywhere from 5% to 20% this year. Can you give us a feel for what assumptions you're operating under?

Lynn Amos

Well, we haven't provided guidance in that sense. But what we -- I can tell you what we saw and I can also tell you their projections out there that would suggest there could be some growth. So you could find all over the map, because certain things don't always get captured in some of those statistic we see.

Having said that, what we saw and I think I mentioned last quarter, the front end of last quarter was very strong, right? And then suddenly at the end of the year, the world kind of ended, consumers went on strike. And so our customers and the whole supply chain there went from running very, very hard to the world stopping and that continued through January, largely continued through February and we saw a material improvement in March. And we're very pleased with that.

But I got to tell you, I don't have any unique crystal ball that tells me whether or not that's going be sustained going forward. We did say that we're seeing it continue through to the current time period. And so at this point in time while we're encouraged looking forward, I think it will be dependent on the global economy to some extent. The key take-way though is and I think I did mention this as well on my last call after touring Asia in the fourth quarter. All of our customers are very optimistic about the industry. Everyone views whatever short-term phenomena that's taking place, is just that at the short term situation. You could see continued application proliferation. You see continued growth and penetration of a large format cells and lawn and garden and things like that and HEV is starting to become very real.

Brian Drab - William Blair & Company

Okay and then one more question, just kind of follow up on the HEV topic. Have you seen with lower oil prices and slowing economy, any impact on the timing of the major HEV programs?

Robert Toth

None. In fact, it's almost quite the contrary because I think when this all got started, it was obviously many years ago right? The front end development, front end engineering and automotive takes a series of years. And so oil wasn't at the high prices. It was at through the peak, it probably was not too dissimilar from where it was today, without a chart in front of me I would guess with that. But I think that's probably about right.

Now what's happened since then though, are all positive factors on top of that. On top of that now you've got mileage standards that are being pushed through in many regions of the world but especially in the United States and about the only way to meet them is with some form of electrification of the vehicle. In Europe you have got CO2 standards and emissions that are getting to be a bigger and beiger issue. Again, if you believe that just fundamentally diesel was going to solve that problem, mileage, oil prices originally, that doesn't so much work now from a CO2 perspective.

So you've got to have electrification of vehicles. You got the emotional need to become independent from Middle East oil and that's -- and we see that around the world. You see places like Asia, where there is continued improvement in standard of living and that will drive more vehicles on the road. They see that as a solution -- electrification of vehicles as a solution.

And on top of all that, you have got government involvement now in terms of restructuring our car companies and pushing for renewable energy and those things start to go hand-in-hand. So there is not a single reason driving it. There are a lot of reasons driving it. And I think that's why you see all the announcements you see on these things.

Brian Drab - William Blair & Company

Great thank you.

Operator

The next question comes from Richard Eastman, please go ahead.

Richard Eastman - Robert W. Baird & Co.

Yes, good morning Bob and Lynn.

Robert Toth

Hi Rick

Lynn Amos

Good morning Rick.

Richard Eastman - Robert W. Baird & Co.

Could you just Lynn or Bob, could just address maybe the inventory reductions, perhaps on the lead acid side of the business? Any month-to-month change there in terms of interest. I am thinking the supply chain isn't that full of inventory and what's the potential if that business comes back quickly just to refill inventories?

Robert Toth

That one is a little harder, Rick, it's an interesting one. I think you've got -- what you know about the supply chain? You know that generally speaking -- precise, but generally speaking a battery when produced and going an inventory has about a six months life before there is some cost and re-handling it. And so you want to avoid that.

So you kind of say okay, there's got to be a something less than kind of six months inventory out there on average. And then you had customers generally running hard moving into a slower economy, so they had raw materials and those raw materials included things like separator.

And you do have a fair amount of inventory at the consumer level in lead-acid, because when your battery fails if you walk into pick store, if you walk into a store they don't have the battery, you don't wait, you go to the next store, and so they don't want to miss those instantaneous purchases. So, there is a fair amount of inventory but generally speaking, it's kind of no more than six months and then obviously some raw materials.

Now, having said that it's a little tougher to see because you've also got the split of replacement and OEM there, you've got OEM down, and you've got different dynamics in industrial. I think what we can say is we believe we've seen the bottom in lead-acid. And as I mentioned, we expect to see some modest order level improvement. I don't want to get out of over my ascidia (ph) because the other thing to remember is we're in the slow period for battery production, right? This is naturally a seasonal business and we're in the seasonal low right now. So, so little though to discern precisely what's going on in inventory, to be candid.

Richard Eastman - Robert W. Baird & Co.

Okay, okay. But again a comfort level that if we're not at the bottom, didn't hit the bottom we're bumping along the bottom maybe seasonally as well, is that fair to say --

Robert Toth

Yeah, exactly. I think it's fair to say that our view would be we've bottomed and then the question is what and when will be the upturn?

Richard Eastman - Robert W. Baird & Co.

Okay. And then Bob have you made any progress of note, perhaps on the market share side within healthcare products in particular the PUREMA, anything there that may be generate some growth over the next 12 months, by...

Robert Toth

That's hard to say, Rick. I don't want to kind of give a specific healthcare projection out over the future 12 months. I think if you go back to what we've said, we went from developing and commercializing PUREMA to having with PUREMA and hemodialysis kind of three growth characteristics, right? One was associated with penetration of the world leading technology, one was associated with just fundamentally displacing our cellulosic product line and then phase out. And one generally associated with the market growth.

And as I said all along going forward, the one we're prepared to kind of hang our ahead is we expect to see the continued market growth, and the other two would have less impact over time. We've got a great product. We've done a great job of getting into the market. But going forward I don't see any immediate huge step change if that's what you're asking?

Richard Eastman - Robert W. Baird & Co.

That's what I'm asking.

Robert Toth

Keep in mind on healthcare, you got blood oxygenation too, right? Blood oxygenation is a slower grower but very stable and nice business and those two make up over 90% of that business.

Richard Eastman - Robert W. Baird & Co.

Okay, and then a question for Lynn. On the operating margin within the Separations Media business, we talked about the increase there and some of the stated reasons. Was there any measurable benefit from currency? I mean given that our costs are disproportionately weighted towards Europe, I think for that business and we have sales elsewhere. Was there a disproportionate benefit from currency in the margin there?

Lynn Amos

No, not on margin. No, it was just -- the impact of the euro to dollar was negative on revenue. And so from a dollar perspective it had a negative impact but no meaningful impact on margin.

Richard Eastman - Robert W. Baird & Co.

Okay and then just a last question here. In terms of the gross margin, when I look on a corporate rollup, the gross margin was up about 180 basis points. And just walk me through that real quickly. We had -- what raw material costs, energy costs were down?

Robert Toth

I think several things, I'll let Lynn answer more specifically if he'd like. The way I look at that at a higher level is -- the increase was really driven by improved yields across our businesses, some production timing, and in Separations Media, lower energy and particularly into some extent in that business raw materials. And then obviously as I mentioned, we reduced the tide of costs if you will. We aggressively got after the discretionary expenses and we will keep them well. Lynn?

Lynn Amos

Sure, if you refer to the supplemental schedules that are on our website, you will see that the gross margin percentage in the Energy Storage business was down about 4 to 5%. And that margin decline was directly attributable to the revenue shortfall, the operating leverage that we've discussed. Within the Separations Media business the margin was very strong, all of the factors Bob mentioned.

Richard Eastman - Robert W. Baird & Co.

Okay.

Lynn Amos

As I've mentioned earlier, some of them are -- lower energy costs that we got in Separations Media. I'd love to see that continue, don't control that and some was beneficial from just a timing and scheduling production. But we are in fact getting better yields out of our healthcare business particularly, while we continue to drive efficiencies now that we've got that business to scale.

Richard Eastman - Robert W. Baird & Co.

Okay, all right very good. Thank you.

Robert Toth

Thank you.

Operator

The next question comes from Michael Levine. Please go ahead.

Unidentified Analyst

Good morning.

Robert Toth

Good morning.

Unidentified Analyst

The question, a couple of questions. In healthcare, you talked about growth and based on your response to previous question, assuming you are just counting on kind of market growth for that not better than market growth, specifically PUREMA?

Robert Toth

Well, as a practice, I am not a big believer in promising better than market growth going forward. So what I try to be is very fact based. And what you've got is, you've two dynamics largely driving our healthcare business, right? You've got in two businesses within the new products, within that hemodialysis and blood oxygenation for on pump open heart procedures.

And those two account for over 90% of that business and the growth characteristics are pretty transparent in those two. In hemodialysis, you've got a patient population growth

of 6%. So you've got generally speaking worldwide growth of 6% or better per year. And in blood oxygenation, it's a slower grower but very stable, it's been growing at 1 to 2% a year, generally speaking. Although there are some signs that could increase some, I'm not betting on that yet because it of course the increase would be associated with alternative treatment methodology slowing their growth like expense and things like that. So that's the dynamic within that business.

Unidentified Analyst

Okay. The production timing that you talk about in that business, so you benefited from this quarter. Does any of that get reversed or is that just a one time kind of permanent thing or will it come back in a negative way in the future?

Robert Toth

No, I wouldn't necessarily expect it to come back in a negative way. Some of it is as Lynn said, now that we're approaching capacity with PUREMA, we're driving yields and efficiency and productivity, just generally speaking the broad category of asset effectiveness and efficiency. And so we're continuing to try to drive improvements in that business that way and the team is just doing a magnificent job with that. So obviously I would like to think that that is sustainable although in any given quarter, you do have, you might schedule down time or running harder to spend on your maintenance schedule. The other side of the business, in filtration, we tend to run things more in campaign, doesn't come back to haunt you. It's just when you really run, really hard relative to when you don't. So it's a little bit of that.

Unidentified Analyst

Okay. And New Orient (ph), I know you have finishing operation in China. Do you have any finishing in the U.S?

Robert Toth

Sure.

Unidentified Analyst

You do. Okay. And...

Robert Toth

Yes, in U.S. and China and ultimately we will in Korea.

Unidentified Analyst

Does anybody produce the finished membrane in the U.S. and if not, do you have any advantage with the thought of some of the battery manufacturing that are going to be putting in?

Robert Toth

Well, we are -- the question is there, we are the only material U.S. supplier in lithium-ion separators. And because of that we'd like to think that if funds are available we'd be well positioned for it. So we are having those conversations and assessing that opportunity and certainly trying to stay in front and center in that regard.

Unidentified Analyst

Okay good. Just lastly in what asset the effects that showed through on the revenue this quarter, from a volume perspective, it's more of an Asia or North America? Is there any differentiation there on volumes?

Robert Toth

In terms of regional growth you mean?

Unidentified Analyst

Well in terms of de-stocking or whatever. Did you see a volume change in one region more than another?

Robert Toth

Well I think the take-away is -- first of all, everyone in the world has kind of had the same reaction of not wanting to have liquid cash turned into illiquid inventory. So there's been a keen focus on that around the world. And as I mentioned, last call we have about 60% of our customer base and that business has a fiscal year-end at the end of March or early April. So needless to say you've have got people watching their year-end balance sheet. So you have got bad natural dynamic going on at a time when the business is largely at its seasonal low as well. So people don't have a lot of incentive to take cash and stick it in the inventory, right?

Having said that, we did see some differences in growth in the region -- regions we saw very good growth continued in Asia. Certainly muted to some extent I'm sure by the economy. But you saw the primary impact of the economy in Europe and in North America.

Unidentified Analyst

Okay all right. That's it from me. Thanks very much.

Robert Toth

Thank you.

Operator

The next question comes from Christopher Butler, please go ahead.

Christopher Butler - Sidoti and Company

Hi, good morning guys.

Robert Toth

Good morning.

Lynn Amos

Good morning.

Christopher Butler - Sidoti and Company

I apologize, I missed the very front end of the call. So if I'm rehashing something, I apologize. But could you give us an idea of where aftermarket demand for the lead-acid batteries is right now, if we kind of ignore the de-stocking from your customers. Has that shown any improvement at this point?

Robert Toth

I think it depends on who you want to believe. Because when we talk about that in lithium, there are lot of different projections out there -- not precise data and I tend to like to rely on precise data. So I can tell you what our view is based on what we've heard. Replacement sales and transportation are probably flat to kind of down a little. I don't think anyone has a great handle on it. Replacement sales and industrial, you could argue there is a preventative maintenance aspects to that but people can just delay spending for a while. So I think that's probably been impacted more significantly.

At the end of the day unless there is some fundamental change in the demand driver for replacement sales, though replacement sales will come back right. It's just kind of an inventory depletion. And you can put off buying a battery for a while, it's a discretionary but when your battery dies you have to go to well either walk or take public transportation, right?

So, generally speaking you can see short-term impact in replacement sales but unless something fundamentally changes in what drives the demand you will see that come back. So we think it was down a bit. But it's little difficult to predict to where it will go from here. Lynn, do you want build anything on that?

Lynn Amos

No, I think that's right. We didn't see that long-term being down.

Christopher Butler - Sidoti and Company

Now following up on that, correct me if I'm wrong but on the transportation side, there is a bit of a hit last year because of the high gas prices kind of trimming the consumers pocket books a little bit. So, as we move into this recessionary 2009, are we seeing any of the benefit of having last a little bit of time or is that still kind of looking to the future for a solid rebound?

Robert Toth

Are you equating that to mileage driven the economy?

Christopher Butler - Sidoti and Company

No, well I guess what I'm doing is -- remember last year we heard about gas prices being up and that being a solid drain on the retail pocket book and purchases of -- many things kind of going out the window as a result. This year we have the recession to worry about and just wondering as far as maintenance spending goes, how far can a consumer push maintenance spending off, if we do have two years in a row where they're not necessarily inclined to make a car battery purchases if at all possible?

Robert Toth

Well, not long, in fact it's hard to answer your question because like I said you've got in let's pick transportation batteries. If your battery dies you've got two choices, buy a new battery or walk or find some other way to get there. So, most transportation battery purchases aren't particularly discretionary. There might be you might decide to wait a quarter or two but you're just waiting until it dies, so you're gambling on it, right? Once your battery once you hear your car not start properly, it's just time until it goes and when it goes it's classic engineering term its catastrophic failure, right? It's gone, and you need a new battery. So you don't have a lot of time there, you could say maybe a quarter, maybe two quarters but that would be the most.

On the industrial side, you've got some flexibility there but it's about the same dynamic. If you've got, let's just say you got preventative maintenance scheduled on your forklift and your warehouse for first quarter, you might say; you know what let's push out to the second quarter. But you don't say let's push it out a year because second quarter if it dies and something doesn't get shipped, somebody in management probably won't be happy about that, right? So you can gamble a bit by pushing it out but, you can't go on, it's not going to buy a new forklift battery for two years. You just can't make that fundamental decision.

Christopher Butler - Sidoti and Company

Shifting gears little bit to the balance sheet with plastic costs coming down here over -- the last six months or so. Inventory levels are up, are we looking at sort of a short term impact from the restructuring effort and then just trying to get things squared away or what's the explanation for that?

Robert Toth

Couple of different questions there. First on inventory, we are very-very conscious of working capital, we've had some build, probably under half of the inventory build was a function of just kind of optimizing production within a slower order pattern rate, and about half was or more was very-very conscious strategic inventory build. So inventories are -- I think our people are all over inventories. Lynn you want to say anything there?

Lynn Amos

I would just comment that your point about the cost of plastics being down, I don't think you can jump to that conclusion because we buy, at least not in our case because we buy very specialty grade polymers that are already expensive, that we did a nice job deferring increases for a while. And but when they go up slowly, go down slow and so we don't play with a lot of raw materials that are just revolvable --

And when you give within our raw materials, well raw material is about a third of our cost of sales. When you get down to things that are really driven by the cost of a bill of oil, it's a number that's substantially lower than that.

Christopher Butler - Sidoti and Company

All right. So just to be clear you are not seeing a significant difference in your resin cost here in that the second quarter than you did say last summer?

Robert Toth

No, I mean most of the vast majority of what we buy are specialty products. But don't just have the commodity swings to them.

Christopher Butler - Sidoti and Company

I appreciate the clarification. Thank you for your time.

Robert Toth

Thank you.

Operator

The next question comes from Gregory Moscow. Please go ahead.

Unidentified Analyst

Yes, thank you. I may have missed a little but just talk to me about the inventory in lithium. Did you say that you still like the lithium inventories have -- for kind of reached the bottom of the customers?

Robert Toth

Oh, yes. I kind a joked about it, I think on the last call, but we saw moment of silence began in December that kind of carried through January and the early part of February. And we're pleased with what we saw in March and through today.

Unidentified Analyst

So the 26% reduction then was basically just lower demand?

Robert Toth

Yeah, yeah.

Unidentified Analyst

Okay.

Robert Toth

Yeah, we're already framing at the way you framed your question, Greg kind of inventory depletion on the front end of the quarter, right?

Unidentified Analyst

Okay, fine. All right. And then with regard to lead-acid. Did you say that I mean it's down I guess 30% but if we back out FX and if we back out that customer that you lost, roughly what was it on a real core basis?

Robert Toth

Before I quickly answer, let me make sure I got that. So if you take out FX and you take out the customer, you down kind of a high single digits Lynn, if ...

Lynn Amos

Yeah, mid double digit.

Robert Toth

Mid?

Unidentified Analyst

So, it's order magnitude 15% kind of.

Robert Toth

That's the right direction.

Unidentified Analyst

Okay. But that obviously would be a significant portion of that would be the inventory that you discussed there.

Lynn Amos

Yeah. And I also carved out acquisitions out of that, so if you wanted to give us credit for the acquisitions Bob number is real close, because we had acquisition growth from last year.

Unidentified Analyst

Right, that's right, yeah exactly. Then with regard to the healthcare down 8% that includes foreign exchange et cetera. So overall with healthcare kind of flat and filtration was the negative in the separations?

Robert Toth

No, we always say you can split the FX pretty proportionally between those two businesses and then in Separations Media the FX impact was something over $4-ish million as I recall. So when you do that math, you would see that healthcare actually grew and it was completely offset by FX.

Unidentified Analyst

Okay. So also actually healthcare actually was up a bit.

Robert Toth

Right. Yeah low to mid single digit.

Unidentified Analyst

Okay. Good. And then with regard to filtration, food beverage, pharma that's a big part of it and yet it was down overall in total. And on a real, I guess that minus 27% included FX. Was industrial the real biggest part of the weakness there, were any of segments actually up?

Robert Toth

Well, if you look at the food, pharma that side was all fine, right? You might have some inventory management there just but nothing material. The microelectronics and the industrial applications were definitely down and impacted. So I've never really said that what exact spilt those two are but you can assume that pretty material portion of the business that was off quite a bit and the other part it was fine.

Unidentified Analyst

And then if I just sort of step back a minute here and just look at the whole picture last quarter versus this quarter, I sense what you're telling us just on a general got level basis, is that you feel overall as if the outlook or your feelings about the business is pretty much across the board is better than it was in the first in the fourth quarter conference call?

Robert Toth

Oh, yeah, yeah. If you kind of go at the end of last year, we ended on our bad note and end of this quarter is more encouraging. But I want to be careful to say we don't have a crystal ball. And so much of it's going to be tied to -- at the end of the day people kind of at least purchasing at the level they are purchasing at on a go forward basis.

Unidentified Analyst

Okay. Finally, then the -- anything more on the legal with the DOJ?

Robert Toth

FTC.

Unidentified Analyst

FTC, sorry.

Robert Toth

That is a -- the hearing is scheduled to begin May 12, so I think we've been very transparent about that and have that in all our filings. The only thing I'd point out is I do get questions. So in case anyone is asking about timing, there's no rigid timing here. It could take weeks to couple months and hopefully by fall we'll have some clarity on that.

Unidentified Analyst

Okay. Thank you very much.

Robert Toth

Thank you.

Operator

The next question comes from Richard Baxter. Please go ahead.

Richard Baxter - Ardour Capital

Hi, thank you. Just I guess a follow-up question on the stimulus bill for the support of the lead-acid battery or component manufacturing. How are you looking at that, I guess directly for yourselves for any kind of export -- expansion or like how do you see that affecting you in direct versus some of your customers, and grow that way?

Robert Toth

Well, the indirect way is outstanding, right? It's one of the drivers of electrification of vehicles and the fact that, it's part of the pressure on the U.S. car companies. They're going to need to find ways to rely more on that. And so that's driving a lot of development, that's I think one of the factors I said it earlier about the acceleration of development in HEV and EV. Directly, we're one of the world's three major lithium ion suppliers and the only one that happens to be located in the United States. And in that sense, we think we're well positioned that if grant money is available that we'd certainly be at the right place in line for that. So we are assessing that opportunity as well.

Richard Baxter - Ardour Capital

Thank you.

Robert Toth

Thank you.

Operator

We have a follow-up question from Kevin Maczka. Please go ahead.

Kevin Maczka - BB&T Capital Markets

Bob, a quick question on pricing, it's typically been resilient but these aren't typical times obviously. So with such sever volume declines, is pricing still holding up? Is that still the case as it historically has been?

Robert Toth

I think there is always pressure, you are right. There is never not pressure on price. I think in this current environment it gives people an opportunity to press harder. If you having said that if you -- I would generally say it's largely holding up. We see continued pressure in the lead-acid space, and we see in sight of the last quarter margin compression because of cost being up a bit. But generally speaking I don't know that we see a substantial change in any other business on the dynamics there.

Kevin Maczka - BB&T Capital Markets

Okay, thank you.

Robert Toth

Thank you.

Operator

We have a follow-up question from Mr. Richard Eastman, please go ahead.

Richard Eastman - Robert W. Baird & Co.

I want to circle back, not trying to cut the lead-acid business too tightly and my math kind of put me in the same place as Lynn's minus 15% if you pull out microporous' kind of incremental contribution. Do you internally track sell-through in the aftermarket versus sell-in? Are you comfortable that and again the side from the JCI business that there's been no shift in market share at all?

Robert Toth

Yeah, I mean we try to track that, that's not It's not precise data on what you just cited and it's a frustration of ours because you love to have those exact numbers.

Richard Eastman - Robert W. Baird & Co.

Okay.

Robert Toth

And we certainly are continuing to try to improve our accuracy in that but to date we lost the major customer. You've got some supply chain dynamics there, 5% of customers with their fiscal year ends at the end of the quarter. And frankly a seasonally low period where people just don't have any incentives to put anything in inventory. So I think you have seen production, you have seen purchases all the way through back to production down, it's kind of like the Harvard case study of the beer distributorship. And so we don't see any other unusual dynamics in that regard.

Richard Eastman - Robert W. Baird & Co.

Okay all right. That's fine. Thank you

Robert Toth

Yeah, thanks.

Operator

The next question comes from Jay Garrett. Please go ahead.

Unidentified Analyst

Hi thanks. Just a quick question regarding your cash build, wondering if change, and also given the fact that your bonds are trading at a discount. One, if you have the ability to use that cash to buy back the bonds in the open market, and two, have you guys thought about doing that as the way of de-leveraging and what seems to be a good return on investment?

Lynn Amos

Well, the first question is, do we have the ability within certain limits and baskets that are mandated by our credit agreement we do have some ability. And in terms of how we look at it, I think we're always looking at the best use of our cash. But we have been, but we clearly, pretty clearly stated that right now our focus is on maintaining and preserving our liquidity.

Unidentified Analyst

Okay. And I have also noticed that you guys have previously given guidance.

Robert Toth

Right.

Unidentified Analyst

But you haven't at this point, can you just at least talk about maybe even sequential guidance going forward or?

Robert Toth

Well, we try to be very transparent and we try to provide some qualitative commentary about where we are at and how our businesses are performing given the quarter-to-quarter dynamics in the economy. So at this point, as I said earlier we don't have any better crystal ball than anybody. I think the guidance I've seen when people have given it the feedback is usually range from its too optimistic to its pessimistic. So we don't have a reason to believe it. So, and fact of the matter is what we've tried to do is be very transparent about the dynamics in our business. You've got a lead-acid business that we think has bottomed, and the supply chain, we think it's been depleted. Hopefully we'll see improvements in the order patterns from there. But again, we don't have complete transparency onto that. But we like we're at right now that to the earlier question from Greg, we are right now as opposed to December.

In lithium, we saw a distinct improvement in March, which we said we're continuing to see through today largely linked to consumer spending going forward. And of course, you've got continued development in HEV and lawn and garden and things like that. Healthcare, really not impacted by the economy. We had growth, it was offset by foreign exchange and industrial and specialty filtration albeit at a fairly small portion of our business. You've got a portion of it that's very solid, and then you've got a portion of it that's tied to microelectronics and industrial applications, which were very slow in the quarter. But customers are starting to say the right things about, as you look to the back half of the year.

Fundamentally, all of our businesses have the same long-term demand drivers. And I've said time and time again, we don't try to manage our business quarter-to-quarter, we certainly try to have the best performance we can every quarter. At the end of the day you've got tremendous demand drivers in all those business. And then you've got step change opportunities that out there like HEV and EV, that really are post 2010 and 2011. But they're getting to be real, right? You will start to see the lithium hybrids soon and all of the dynamics in fact of anything are accelerating that.

Unidentified Analyst

Okay. Thanks. That's very helpful. Good luck.

Robert Toth

Thank you.

Operator

The next question comes from Jordan Hollander. Please go ahead.

Unidentified Analyst

Hi, how are you guys? Just had question, CapEx, it's pretty low level in the first quarter. Just wanted to get a sense if you guys have a target for the year and just what normal maintenance level is, as you guys putting capacity, larger (ph) expect that number to come down. Just wanted to get a sense of maintenance CapEx?

Lynn Amos

Sure. CapEx historically, I mean we have talked about maintenance CapEx being a number for us in the 15 to 20 million range, just kind of to maintain our facilities and keep them in good working order and handle kind of minor required capital projects. That's kind of the maintenance level, everything and anything right now over and beyond those are under -- well frankly all of our CapEx is under very tight scrutiny as you would expect in this type of economy. And projects beyond that are going to be justified on a individual basis over those numbers.

Q1 numbers at 2.6 million that we had is a little lower than that number divided by the average but typically we would spend a little more capital in Q3 which is our seasonally slow -- our seasonal period where we normally have more downtime and that's where we'd do more of our capital spending.

Unidentified Analyst

Okay, great thanks. Just one other question in terms of loss -- customer lost at fourth. Have you guys seen any other customers going that vertically integrated route or pretty quiet in that front with the pullback in CapEx spending across the board?

Lynn Amos

No we haven't seen any others pursue that at this point in time. What we said back then was the biggest battery producer in the world elected do that. On the product continuum we have and frankly kind of the easiest product to do that, not that it's a slam dunken (ph) even did that in the way where they kind of largely align with the competitor.

Unidentified Analyst

Okay great, thanks a lot guys.

Robert Toth

Thank you.

Operator

(Operator Instructions) There are no further questions at this time. So please continue.

Robert Toth

Great, thank you Patrice. Just like to thank everyone for their support. Like to encourage you to go out and spur the economy and we look forward to reporting our progress next quarter. Thanks.

Operator

This concludes today's conference call. Thank you for participating.

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