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Polypore International (NYSE:PPO)

Q1 2013 Earnings Call

May 08, 2013 4:45 pm ET

Executives

Lynn K. Amos - Chief Financial Officer, Principal Accounting Officer, Secretary and Treasurer

Robert B. Toth - Chairman of The Board, Chief Executive Officer, President and Chairman of Executive Committee

Analysts

Brian Drab - William Blair & Company L.L.C., Research Division

Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division

Jeffrey D. Osborne - Stifel, Nicolaus & Co., Inc., Research Division

Christopher Kapsch - Topeka Capital Markets Inc., Research Division

Avinash Kant - D.A. Davidson & Co., Research Division

Brian K. Lee - Goldman Sachs Group Inc., Research Division

Steve McNeil

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Polypore International Inc. First Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Kelly Brosco [ph]. Please go ahead.

Unknown Executive

Thanks, Kate. And hello, everyone, and welcome to our call to discuss our first quarter 2013 financial results. Joining me on the call today are Bob Toth, our President and Chief Executive Officer; Lynn Amos, our Chief Financial Officer; Rob Whitsett, Vice President of Finance; and Paul Clegg, Director of Investor Relations. Our earnings release and the presentation containing supplemental financial information are both available on our website at polypore.net in the Investor Relations section. This call is being webcast and a replay will be available on our website.

I'd like to remind you that today's call may contain forward-looking statements under the meanings of Federal Securities Laws. Please review our disclosures regarding forward-looking statements contained in our earnings release and in our quarterly financial supplements. Forward-looking statements are subject to risks and uncertainties that could cause future results to differ materially from those we discussed. Please review our SEC filings for a full discussion of risk factors related to the company's performance. Polypore undertakes no obligation to update or revise any forward-looking statements for any reason. When discussing financial performance, we often use non-GAAP measures such as adjusted EPS and adjusted EBITDA. A reconciliation of these items to U.S. GAAP measures is available in our earnings release and in our presentation material, which can be found on our website in the Investor Relations section. With that, I'll now turn the call over to Lynn to go through the numbers.

Lynn K. Amos

Thanks, Cathy. As we reported this afternoon, in the first quarter, sales were $163.5 million. Adjusted EPS was $0.27. Segment operating income was $28.3 million and adjusted EBITDA was $42.5 million. CapEx was $6 million in the quarter, and we expect full year CapEx of approximately $50 million.

Regarding segment results. Beginning with the Transportation and Industrial segment. Sales in the quarter were 9% above the prior-year period and segment operating income margin was comparable at 23% of sales. Asia remains strong and we experienced the more typical lead-acid battery build season in North America and Europe.

In the Electronics and EDV segment, we said in February that the first quarter would be challenging, and it was. January and February were particularly weak in this segment as demand was very soft. Customers carefully managed their inventories in what was for many, the fourth quarter of their fiscal year, and progress on regaining consumer electronics business was slow. In EDV, we saw meaningful improvement in March, that's carried into April, as production levels of certain EDV facilities began to ramp up and as new vehicles are being introduced.

During the quarter, the electronics and EDV segment reported an operating loss, driven primarily by the sales volume decline. Additionally, we're carrying higher costs year-over-year associated with the capacity investments we have made, which we believe will provide an attractive return as the business grows.

Moving on to the Separations Media segment. Health care sales were up 7% on the quarter on higher volumes compared to the prior-year period, while Filtration sales were down 10% due to the economic impact on the microelectronics portion of that business. Segment operating income margin was very strong in the quarter at 34% of sales, primarily due to production timing and efficiencies. We think about operating income margins in the Separations Media segment on an annualized basis, as margins vary quarter-to-quarter based on production timing and sales mix. Overall, our annual operating income margin has been in the high 20% range over the past 3 years, and we see no significant change in that.

Switching gears now. As we've described, this is a year that the company is transitioning to a period of greater cash generation. And with that, we paid down $25 million of outstanding borrowings on the revolver on the quarter. Additionally, as you saw on our earnings release, we initiated a share repurchase -- we initiated share repurchases in the quarter. Through the end of the first quarter, we had purchased only 6,800 shares, leaving virtually all of our 4 million share authorization available. At this point, I'll turn the call over to Bob.

Robert B. Toth

Thanks, Lynn. We have a strong portfolio of businesses and our performance in lead-acid separators, Health Care and Filtration remains on track. In the lithium separator business, recent performance isn't where we want it to be or where we expect it to be going forward. As Lynn said, we're carrying costs associated with the capacity investments we've made, which will be very valuable as the market grows. After a very weak January and February, we saw improvement in March, which is carried into the second quarter. We believe the EDV supply chain inventory correction has largely played out. The recent ramp up of 2 new battery electric vehicle production facilities is continuing, and we're moving into peak automotive selling season. There have been several new vehicle launches, and with that, there has been an expansion of our lithium separator customer base for EDVs. Additionally, there have been continued development programs and product launches and large format applications within energy storage systems, which is also encouraging. And we see no change in automakers' embrace of, and investment in the electrification of vehicles.

These facts, especially combined with the order patterns we experienced during March and April, suggest that lithium separator sales will improve over the course of the year and we remain confident in the significant growth potential of this business. We've made substantial investments to support the step change growth opportunity in EDVs and the developing applications such as energy storage systems. These high content applications provide significant upside volumes with even modest levels of market penetration, and sales volume clearly gives us significant operating leverage.

While consumer electronics is an important market for us and we expect to regain our position in this application over time, EDV is the primary driver of our growth. We have the preferred technology. We see that with our broadened customer base and with the continued customer interest in working with us on future product launches. We're well-positioned with the leading battery makers, and we have capacity which enables us to be highly responsive to demand and perhaps uniquely so as growth occurs.

So there are 3 primary takeaways regarding the quarter. First, 3 of our businesses, which represent about 75% of our company, continue to deliver solid performance. Second, the first quarter was tough for lithium separators, but the business began to turn upward March and that trend is continuing. And third, we continue to generate significant free cash flow and we'll use that to appropriately pay down debt and make share repurchases that deliver value to our shareholders. At this point, Kate, let's go ahead and open up the call for questions. Thanks.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Brian Drab with William Blair.

Brian Drab - William Blair & Company L.L.C., Research Division

Can you talk a little bit about the breakdown between EDV and lithium in the quarter?

Robert B. Toth

We're not going to get into being too granular in the quarter because of order patterns and the timing of when things land and things like that. I think the best way to think about it is, we've said it's about half and half. And if that dynamic changes, we'll certainly tell you over time, make no mistake, right? EDV is going to be bigger. And what happened in Q1 was more a function of the specifics and the dynamics in Q1 than it was indicative of anything longer term. So it'd be a real mistake to try to isolate and draw a lot of conclusions on specific Q1 numbers.

Brian Drab - William Blair & Company L.L.C., Research Division

Okay. Can you comment at all on, I guess, which segment, I guess you answered this, but which segment declined more sequentially? I guess if it's still 50/50, you're going to say the decline was kind of split 50/50?

Robert B. Toth

I'm really not going to go too granular on this, like I said. I think that take away is, it's about 50-50. In any given quarter, these could be 55-45, something like that. You wouldn't see a dramatic change from the 50-50. Longer term, make no mistake, EDV is to going be the bigger piece of that.

Brian Drab - William Blair & Company L.L.C., Research Division

Okay. Then, regarding the inventory issues in the EDV channel. Are you seeing that as more of an issue as 1 customer versus another, or is that -- has that lately been across-the-board, across your customer base in EDV market?

Robert B. Toth

No, I think it was isolated to 2 very specific situations we talked about, right? One happened to be a plug-in hybrid in North America, where there was a large ramp up in anticipation of sales at the end of 2011 through 2012. And for a variety of very specific reasons, which we can walk through, the initial projections didn't occur, so they had to work that through. And then the separate issue was 2 new battery electric vehicles facilities, battery plants and production facilities were starting up, 1 in the U.S. and 1 in the U.K.. And in -- the 1 in Japan, that happened to be their fourth fiscal quarter and they were scaling that back. And so those were -- it's dangerous to kind of call that an inventory issue, right? Those were very specific dynamics that we isolated and we talked about that, as I just said I think have played through.

Lynn K. Amos

Yes, particularly as they transition production out of the Japanese plants into the other facilities.

Operator

.

Our next question comes from the line of Richard Easton with Robert W Baird.

Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division

Yes. Just 2 questions. Can you just speak for a minute to the EBIT in the lead acid business. Can you just maybe speak to a little bit of the impact of the Camel, the second production line at Camel -- or Camel, the impact there? Is it a measurable absorption issue?

Robert B. Toth

No. I mean there's -- we have talked about growth investments across Asia, right? We've added some capacity in Thailand, we're adding some capacity in Asia, but we've also added resources on Asia, on the ground, resources to sell and technical resources, so all of that's going on. One other dynamic that occurred in lead acid margin, because you would expect to see some operating leverage as we had very similar operating margin this year, around 23% compared to last year. Had we not experienced some impact from foreign exchange in our cost of producing certain countries, that would've gone up a little bit.

Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division

Okay. Was there any FX impact on total sales in the quarter?

Lynn K. Amos

Rick, it wasn't much at the sales line. That the -- the foreign exchange impact that we experienced in lead acid, I don't want it give you the wrong impression. This wasn't a big number. It was a pretty small number, but we would have comped modestly positive on operating income on -- in lead acid, had we not experienced some exchange rate movement between producing in some currencies and selling in other strengths. And so we produce some in Thailand and we shipped to India. And we could get a difference in currency from the baht to the rupee. But again, these are pretty small numbers. And I'm just saying we are only slightly -- was roughly the same margin this year to last year. We would have been a little bit higher and you would've started to see some of the operating leverage. Because I think the operating income level that we're at in lead acid is fairly reflective of our business today, and as we get the sites up in Asia, you will see us trend back and we shipped more of our production to where we sell from. We source it from where we sell from. You will see us -- that will be a bias towards positive margin expansion.

Robert B. Toth

Yes, and then really, just to close the loop very specifically on your Camel question, there isn't any 1 item that's adding a bunch of cost to Asia. And we've uniformly kind of added cost of their across, crash and bury [ph] China and sales and technical resources.

Lynn K. Amos

Yes, if you're asking is Camel is operating okay know, the answer is yes.

Robert B. Toth

Absolutely.

Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division

Well, I was just -- basically, I was just kind of looking at the margin on the lead acid side of the business. I just -- again looking for leverage, but I presume it's just sales mix, I guess.

Robert B. Toth

Sales mix, some of that FX impact and some of the cost, because we're still shipping a lot in Asia.

Lynn K. Amos

Relative to Q4, our sales were down a little bit, relative to Q4. Margin was pretty comparable. I think we has our -- had we not had the FX impact, margin would have been slightly ahead of where we were in Q4.

Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then Bob, can I just ask you, referencing your comments about the EDV business. It was a bit risky to say inventories are that at optimal levels. But can I just ask you, when you talk about that business improving as the year unfolds, we're going to be improving, obviously, off the first quarter, presumably not year-over-year. And do you feel that, that given the trend line and this inventory dynamic, by the time we get to the fourth quarter, is it just a general feeling of yours that we can see the EDV's piece of this business up, meaningfully?

Robert B. Toth

Rick, I'm not going to -- let me answer that a lot differently than kind of how you framed me to answer that. This is -- I'll tell you, this is not, any longer to me, at all, a question of if EDV is happening, right? It's fair to go of when and how will car sales be. That is a fair set of questions. But I think you have to -- yes, I think we all have to just deal with facts. And you know me, I'm a pretty fact-based guy, right? The facts are, there are more and more development programs going on. No one's kind of given this up, right? In fact, we're seeing people accelerate some things from a development perspective. You're seeing 2 new big investments ramp up, right? One in Smyrna, Tennessee. New battery plant, new production facility. You're seeing another big one ramp up in the U.K. Those are -- we're right on the front end of those. And that's also a battery plant and a production plant. You're seeing, now, that particular vehicle have 3 full production facilities available for it. You've seen an announcement of the U.S. battery plant restarting. You've probably seen commercials and advertisements, there are new hybrids out like the Volkswagen. There are Renaults out, in Europe, that range from hybrids to full plug-ins. There are Volvos out, Fiats out, Fords out, BMWs out, Nissans out, Porsches out, Hondas out, Infinitis out, Kia, Hyundai, the new Cadillac announced for later this year, a couple of supercars like the Ferrari and the Porsche 918 Spyder, and there's rumors that they're working on a Bugatti. There's new leasing deals offered, new pricing deals offered, new marketing strategies being introduced, the hybrids are selling exceptionally well. And we're just moving into the selling season. So what I can't tell you is how those cars will sell, which is your ultimate question. But I can tell you, there's a lot of positive signs that things are moving forward. Again, fine to ask when will you sell and how well will they sell? But it's not a question of if they're going to come to market.

Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then just a last question. And I appreciate you'll be limited as to what you can say. But we kind of track Polypore's file suit against 2 competitors in the lithium marketplace in the most recent SK. And the language in the filing has to do with ceramic coating in the membrane. So I'm going to presume that, that would be EDV end market. And is the -- was the catalyst to file the claims lost share, or was it product coming to market?

Robert B. Toth

Well, I think, first of all in your question there's an assumption that's not accurate. Ordinarily, the correct part about that is, it is related to ceramic coating. And we have tremendous intellectual property on ceramic coatings, and we'll continue to protect our rights in that regard. So that's really the answer. And people go -- we often get the question, you didn't ask this, "Why now?" Well, the answer is, now it's starting to get to be vogue to talk about, right? It wasn't when we first filed the patent. We're on the front end of it, which is why we had the patent or patents. So I wouldn't conclude that it's a particular -- I wouldn't conclude that it's particularly EDV.

Operator

.

Our next question comes from the line of Jeff Osborne with Stifel.

Jeffrey D. Osborne - Stifel, Nicolaus & Co., Inc., Research Division

Just 2 questions, Bob. You mentioned on the consumer side, it sounds like you're off to a slower start than you -- can you anticipated or articulated at the Analyst Day last year. I was just wondering if you can expand upon that, in terms of getting requalified for some of the lost share that you had, had over the past 18 months or so. And then the second question is just, how do we think about the lead market seasonally heading into the summer months, but also given one of the financial challenges that one of your key customers is having?

Robert B. Toth

What I think on consumer, I'd just reframe it a little differently. I think Lynn described the progress as slow, but we'll continue to make progress. The problem is, as we'd -- no different, really than we talked about last quarter, which is look, we got into some things last year that didn't sell so well, the consumer electronics tide has gone down, and it's just tougher getting big wins in that kind of a environment, right? So that's what it -- that's how I see that. And I think the point I tried to make in the answer I don't want it to be misconstrued is, look, at end of the day, consumer electronics market's going to be nice, right? We've been in it since the formation of the industry, we'll earn business back. But we didn't build our capacity for consumer electronics, right? It is going to be an important market to us over time, and a nice market, but at end of the day, electric drive vehicles and the large format cells that'll come in the next wave of energy storage systems are the kind of things that will make a really big difference. So I just wanted to put that in some context. On the lead acid side, the 1 customer you're referring to, they've been a long-term customer. We certainly value the relationship we have with them, and wish them the best through a challenging time period. I think, at the end of the day, the world needs those batteries produced, right? And hopefully they get through this all just perfect, but we think those plants will operate one way or the other.

Operator

Our next question comes from the line of Chris Kapsch with Topeka Capital Market.

Christopher Kapsch - Topeka Capital Markets Inc., Research Division

A couple of follow-ups. One is the -- I know you don't want to get all that granular in terms of the decline, the disappointment in the consumer versus EDV. Can you just talk qualitatively which of those businesses disappointed you, more relative to your internal expectations during the quarter, and why?

Robert B. Toth

Well, I'd reframe that, right? I'm not about to try to put a sugarcoat on it. It was a disappointing quarter that way, right? It wasn't a good quarter, and we don't expect the performance to remain the way it was. I'd go back to almost the things we talked about in the last call. We've been very specific about the dynamics impacting the business, so that's way to think about it. In both the last call, the last Q&A and I think here, and we said, in the fourth quarter, right, that consumer electronics, the tide was down. The overall market was weak, we didn't see that changing. We talked about the fact that some vehicle plants got accelerated and moved up, but they were just starting up. So it's kind of good news that they were just starting up, but bad news that they were just starting up, because they weren't going to be that impactful. And we talked about the fact that we were seeing Chinese customers for the first time, literally since '05, maybe '06, plan to take holiday shutdowns, the new year time period is a holiday shutdown. And we said that first quarter is the fourth fiscal quarter for most of our customers in that particular business. So it's -- I don't know how you rank all that, but it's -- those are the facts that impacted the quarter. So we weren't surprised by any of those facts. I mean frankly, I think things have played out pretty much like we described it. And I also went out of my way back then to say look, I don't know, we've got big customers that place big orders. And I think very specifically in 1 case I said, look, I don't know whether the orders will come in March, April or May, right? But because we'll see, and expect to see a weak January and February.

Christopher Kapsch - Topeka Capital Markets Inc., Research Division

Right. If -- just looking at the balance sheet, looking at your inventory position sequentially versus the end of 2012, it's in -- considering the relatively dramatic sequential decline in revenues, at least in lithium ion, the inventories don't really reflect the bloated growth in your finished inventories are with. And so I'm wondering, did you, during the quarter to respond to this weakness, did you have to curtail some of your production, which might also then depress the margin performance in the quarter? Curtail production --

Robert B. Toth

We plan our production accordingly. And I think Lynn, you can jump in. You had talked a little bit about inventory.

Lynn K. Amos

We mentioned -- I think I've mentioned for a while, our inventory, right size inventory for our business is probably somewhere in the mid-1 teens. Our inventory actually ticked up a little bit from year end to the end of the first quarter, but that was primarily in the Separations Media business and had we talked about our production -- our production plans, our plan production schedule on, in the prepared remarks part of this call. So we really kept our inventories about the same level as they were in the other businesses in lead acid and in lithium. And so to your point, I mean, if you're keeping your inventories level and you're selling less, your production has to be down. So yes, we're managing our cost because we're not -- we don't -- you don't stockpile a bunch of stuff and hope it sells. So we tend to build our inventory to very specific customer plans and orders.

Christopher Kapsch - Topeka Capital Markets Inc., Research Division

Well that's what I'm getting at, to the extent that you shut down some of those bays, did -- that would penalize your gross margin on a sequential basis, I assume, right?

Lynn K. Amos

Certainly.

Robert B. Toth

Yes.

Christopher Kapsch - Topeka Capital Markets Inc., Research Division

Okay, yes. All right, I just want to understand the dynamics there. And then the -- just following up on the enthusiasm about the proliferation of EDVs more generally, and then you specifically talk about a couple of launches that are kicking in. I'm just wondering like, how many of these that you're referring to are plug-ins or all electric vehicles versus, say, something of the "hybrid variety" or mild hybrid?

Robert B. Toth

There is a -- as we've always -- I don't think we seeing a different pattern than we've ever described, expecting to see, which is you'll see far more hybrids than plug-ins than full battery electric vehicles. I think -- there are certainly a few of these are plug-ins, right? The Cadillac is, I believe, 1 of the Renaults is, you've got of course, the one in the U.S. that everybody knows about, and we're seeing some development on several fronts in plug-ins. I think as you look out over the next few years, we'll see more plug-ins than what people might expect right now. We're seeing a lot of development in plug-ins. And certainly, though, I would stand by, hybrids will be the most, then plug-ins and then battery electric vehicles for a while, and then you'll then see battery electric vehicles start to pick up.

Lynn K. Amos

I would also just point out that we talked about for a while seeing the vehicles coming to market and these are just things we've been working on for years, and it's coming true, it's coming out. And I think we mentioned that we've got some customers that we've been working with for a while that are now broadening our customer base here. So I mean, these are positive trends, and we're seeing -- we saw an uptick in our business in March that continued into the second quarter, so I think we've seen a nice turn there.

Christopher Kapsch - Topeka Capital Markets Inc., Research Division

Okay. And then just one last one. It was -- there any notable trends in pricing for lithium ion separator either sequentially or year-over-year, however you want to speak to it?

Robert B. Toth

I think, well, we call it out, right? You'll see it in our Q. I think it was a little over a couple of million dollar impact between price and mix. About half of that was related to price in the quarter. I would like to highlight one thing though, the, that price decline in the quarter was associated with anticipated volume, but the volume didn't yet materialize. So to address that, at the beginning of the second quarter or by the second quarter, we increased that price accordingly.

Christopher Kapsch - Topeka Capital Markets Inc., Research Division

Okay. What was the other half of the piece? It's just --

Lynn K. Amos

Yes, we typically report product mix, price mix, price and mix together, and it was a couple of million dollars. As Bob said, about half of that was price, and it was associated with volume that didn't materialize, and since then we've raised that price.

Operator

Our next question comes from the line of the Avinash Kant with DA Davidson.

Avinash Kant - D.A. Davidson & Co., Research Division

If you could talk a little bit about the status on the FTC litigation, with respect to micropores, where do you stand right now?

Robert B. Toth

Well, it hasn't materially changed since last quarter. We are still in the kind of final step of the appeal process, but the process of looking at the options for the assets is proceeding fine and kind of accordingly. We're not in any rush since we're still, of course, in that appeal process. So we really don't have anything new to report in that regard.

Avinash Kant - D.A. Davidson & Co., Research Division

What kind of in expenses are you accruing as a litigation cost on a quarterly basis at this point?

Robert B. Toth

No, that's very small.

Lynn K. Amos

Yes, minimal.

Robert B. Toth

I don't even know.

Lynn K. Amos

It was $100,000. $100,000 last quarter.

Avinash Kant - D.A. Davidson & Co., Research Division

Okay. And also in the past, you talked a little bit about the 2 key electric EDVs, actually, that have been making up a significant portion of your quarterly revenues. You had kind of told at 1 point that they made up 1/3 of your EDV revenues. Has that percentage changed significantly lately?

Robert B. Toth

I don't think we've ever carved out the percent that I recall, but they're meaningful, right? Because their high content vehicles. And so the answer is going to kind of be it's -- it's going to be a function of how they sell. Last time around was, we know how many of the U.S. plug-ins they sold last year, and if they sell about that same number this year, we'll probably sell more separator because of what we've described around the corrections through the supply chain. And there's pretty good statistics on what they sold out of the battery electric vehicle, and you got 2 new plants starting up, and we're just getting into the selling season with some very new model offerings, mind you, that they haven't had, in terms of option line and pricing. So it'd be very interesting to see how they sell.

Lynn K. Amos

But your premise is, of new cars coming to the market is certainly true. You're seeing that with some vehicles in Europe, and Bob rattled off a whole handful of vehicles just a minutes ago.

Avinash Kant - D.A. Davidson & Co., Research Division

Okay. And could you talk a little bit about your utilization rate, either on the EDV side or overall lithium-ion side?

Robert B. Toth

I'm sorry, what rate?

Avinash Kant - D.A. Davidson & Co., Research Division

Utilization rate, capacity utilization.

Robert B. Toth

Well, yes and no. I mean, we've given the numbers of -- if you go through what we've said our investments were, right? Up until the last $105 million of announced capital, so forget that, right? We said there's -- the last $105 million of announced capital, which is substantial capacity. Up until then, we said we had the ability to get to about a $400 million annualized revenue run rate of lithium. So you can do a revenue run rate of capacity pretty easily, although you don't know what the last $105 million is worth, which is pretty meaningful. Which I think, to your question, right, that highlights what a tremendous position we're in, as this takes off and how quickly we can capitalize on it. And it also highlights why I said, I think uniquely so, customers have now seen or the entire market place has now seen our products be successful. You don't have to take our word for it anymore, right? You don't have to take our word for it, but our product works very, very well in these applications. You've seen it demonstrated, and you've seen it demonstrated in major producers who even use wet process product and small consumer electronic cells. And people see the capacity we have in place. So they don't have to -- they don't have to trust us we'll invest, and they don't have to trust us we might someday, hopefully maybe even come close to making a product like ours. We make a product like ours, and we make all the grades and we've got service and we demonstrated and we've got the capacity. And we're seeing that as a pretty interesting competitive dynamic right now.

Avinash Kant - D.A. Davidson & Co., Research Division

So the $105 million that you've talked about, you've not invested any of that or have you invested part of that?

Robert B. Toth

No, no, no. That -- we went through that last call, too. We said, out of all the expansions we've announced, of that $105 million, which we've held off on finishing, that equipment's in place. We have it. We'd probably need to spend another, give or take, $8 million to $15 million, probably a max of $20 million to get all that operational. So it's virtually all in place, but not operational.

Lynn K. Amos

So see if anything, I can add. We have in place, ready to go, arguably, we have to put some -- bring some staffing back, but I mean, that, we have $400 million of revenue capacity installed and ready to go. We have another $105 million of capital that we've spent. And of that $105 million, we probably spent $85 million, $90 million...

Robert B. Toth

$85 million, $90 million.

Lynn K. Amos

$85 million or $90 million of that, we had to spend about $20 million more to have that finished. And that would give us incremental capacity before the -- above the $400 million revenue run rate. We've just not disclosed how much that additional $105 million would bring.

Robert B. Toth

Yes, that last $105 million recall, didn't have a lot of building cost. And it had some building outfit in it, but it was a lot more equipment than building.

Operator

Our next question comes from the line of Brian Lee with Goldman Sachs.

Brian K. Lee - Goldman Sachs Group Inc., Research Division

I actually had 2. First, on the consumer electronic side. I'm wondering, as you look to regain share in that segment, can you give us a sense for the current cycle for CE qualifications, just where you are in that process and what the expected lead times are from application win to production, and then shippable revenue?

Robert B. Toth

Well, Brian, they're really -- it's really all different, right? We talk about it like it's a cycle, but it's a cycle from, for every device, from a phone to a laptop to a tablet to a faucet on and off battery, right? I mean, it's a cycle for all these things, there's a constant churn. So that it's not like there's a season, right, or a predictable cycle. It's kind of happening all the time. And the difficulty that we're describing now is, you're entering that to get approvals and getting them, but the devices have to sell and we had some success last year, in particular in second quarter, we saw some pickup in some business, but those things just didn't sell so well. And the overall consumer electronics cycle or market is kind of down. And so, like I said, we'll earn our way back in. It's not binary, it's not will you be in or won't you be in. We'll earn our way back in, but the market's got to pick up a bit for you to see that in our results, and we've got to get in some hot selling devices, of which we miss some of those, frankly, when we miss the window of opportunity. But again the take away I want to leave people with is, that's not what is -- what's going to fill up to capacity, right? I mean what you're talking about there is, we'll pick up a few million dollars over time a quarter, but what will fill up our capacity is something like EDV and ESS.

Brian K. Lee - Goldman Sachs Group Inc., Research Division

Okay. Fair enough. And then on Filtration and Specialty, that seems to be growing a little less than your longer-term targets you specified in the past. How should we be thinking about what drives the recovery in that segment? And then, are there specific end markets you're focused on to drive that incremental growth?

Robert B. Toth

Yes, good question. The very easy way to think about the Filtration piece of it is, and this is an oversimplification, but it frames it pretty well. About half of that is very stable, high recurring revenue type business that has a nice growth rate, right? Pharma, bio pharma, food or beverage type stuff, wine. Those kinds of things. Water applications. So about half of it is very stable that way. The other half is largely tied to microelectronics in some way, whether that be chip production or flat-panel display or things like that. And that's the part that's impacted the most right now from an economic perspective. Now there are data that are beginning to emerge that suggests chip production is -- and sales are picking up. And that's a good early indicator for us because we're more linked to capital spending in those kind of facilities than we are just to the absolute number of chips produced, but there's obviously a correlation between chips produced and when capital spending starts. So we're finally seeing some positive signs on that turning, but that's the side of the business that's getting hit right now.

Operator

Our next question comes from the line of Steve McNeil with Jennison.

Steve McNeil

I was wondering if you could just put a little meat on the bones here, when you use the term meaningful improvement in March and it's carried into April. We're just hoping you could quantify that little bit more for us.

Robert B. Toth

Yes. Steve, unfortunately, no. I mean, at end of the day, I used the term when the world ended back in whatever that was, late '08 and '09, I used the term, we had a moment of silence for a couple of months, and that's what about we saw in January and February. We didn't have high expectations for those months and orders were very slow. We saw a nice pick up in March, and the point we're really trying to make is, it's carried into the second quarter.

Steve McNeil

So you have no revenue in January and March, and you had $20 million in -- I'm sorry, January, February?

Robert B. Toth

We're not at all. And that's what I mean is, I'm not really going to answer it, because we're not going to get into the month-by-month, blow-by-blow, week by week orders in this business. And there's just too many variables, and they're are big orders.

Steve McNeil

No, I understand. I'm just trying to get a sense for the level of the inflection here, which is, it seems to be the key.

Robert B. Toth

Yes, I mean we're managing for long-term here. I mean that, there is no doubt about it. The message really is, we described, I think, pretty specifically the things that hit or impacted first quarter. And first quarter was explainable and understandable. It doesn't mean it was a good quarter, right? Or it doesn't make it any better, but it was explainable and understandable. And those dynamics are changing as we're moving forward, and we started to see that in March and April.

Steve McNeil

Okay, great. And then just to clarify your comment on lithium improving over the course of the year. That comment, essentially, the way I understand it, just to make sure we're on the same page is, you expect revenues to be higher each quarter as we work our way through the year?

Robert B. Toth

No. I didn't say that. I just said, we expect lithium to improve over the course of the year. And certainly, it's going to be a function of what car sales are, right? And that's what I referenced earlier, because we're not in a business of predicting car sales. A lot of good signs, a lot of positive signs. But at end of the day, what will drive the improvement is the car sales.

Steve McNeil

But if it's improving over the course of the year, it would improve sequentially as we work our way through the year, right?

Robert B. Toth

I'm not going to get into the kind of quarter-to-quarter or month-to-month, Steve. I'm just not going to go there. Because I mean, look, we've talked about this before. All kidding aside, we can put an order on the boat today, right, and it may, or, today's not a good example, we'll choose the end of a quarter. We can put an order on a boat, at the end of May, and it may land June 28 or it may land July 7, right? Huge difference in the quarter, it means nothing. It just means that the boat landed.

Steve McNeil

Because of the numbers are so small right now.

Robert B. Toth

What's that?

Steve McNeil

The numbers are so small right now that anything makes a difference on the dollar.

Robert B. Toth

Yes, that's fine, but we said, look, the first quarter was the first quarter, and that's not what we expect going forward.

Steve McNeil

Okay. So and I presume you're not going to share your thoughts on incremental margins in the business either, once revenues [indiscernible].

Robert B. Toth

Well, we can draw some conclusions. I think we've been pretty transparent on that. We get asked all the time, and we've never denied it. People go, well, contribution margin must be north of 50%. Well it must be, right? You saw in '11 us move up from 40%-some operating income margin to 47.2% operating income margin in the third quarter of '11, but who keeps track of that? And now you've seen last quarter profitable and -- or fourth quarter in that sales rate and this quarter, not so much so, right? So this is our -- people generally conclude that this is our highest operating leverage business, meaning it's got the lowest variable cost. Meaning it's got the highest percentage of fixed cost on a percentage basis as well. And that's what you saw transition from fourth quarter to first quarter, right?

Steve McNeil

Sure. That's helpful. And then, just lastly on the share buyback. I'm just wondering with how much alacrity you'll be doing that? Or if this is sort of a ratable thing over the course of the year?

Robert B. Toth

No, we're not going to disclose forward plans, right. I think Lynn's point was a good one, which was, it was kind of pocket change, first quarter.

Lynn K. Amos

We got a lot of dry powder.

Robert B. Toth

We got a lot of dry powder. I mean, we're heavily incented, and should be, right, to maximize shareholder value and that's what we're interested in.

Operator

And we have time for one last question from the line of Jeffrey Zekauskas from JPMorgan.

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

So maybe I'll try that line of questioning just one last time. When you say your orders are strong, do you mean they're up year-over-year or presumably down year-over-year?

Robert B. Toth

Yes, we're just not going to go there. I mean the point is, that certain things impacted first quarter that didn't impact it equally month-to-month, they improved over the course of the quarter, and that's carried in the second quarter. I think the year -- if you go back and I don't have it in front of me, but I bet if I -- if we pulled up the transcript from the last call, things have largely played out like we've kind of described, right? I think even into somebody's question, last quarter, I said, look, I can't predict whether it is going to be March, April or May that it comes back. And it kind of came back in March.

Lynn K. Amos

Yes, I mean, we've seen this movie a bit before, too. Unfortunately, in -- when the world ended in '08, we talked about having a moment of silence in January and February and then the business started coming back in March, and we progressed nicely from there. We talked in this call that January and February were pretty bad, and we saw a certain noticeable or meaningful improvement from March and into the second quarter. I think that we wouldn't be saying that if we didn't see it.

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

Do you expect your EDV volume to be up or down this year?

Robert B. Toth

Well, that's going to be a function of car sales, right? I think what we're seeing is a distinct proliferation of new vehicles. We're seeing a distinct proliferation of models within those vehicles, like the new Leaf that's significantly different option package, much lower cost. We're seeing different leasing deals, different pricing deals and we're seeing new battery plants and production plant startup. But what we don't control one iota of this, whether or not they sell.

Lynn K. Amos

And we also don't see an inventory correction that like, what we lived through the course of 2012 and into early '13.

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

Okay. And then lastly, do you believe that meaningful separator capacity has been added to the industry, or do think it hasn't? And do you think that the addition of capacity will weigh on prices or do think that it will not weigh on prices?

Robert B. Toth

Well, those are binary questions, right? And I don't think anything is very binary. I think of everything on a continuum. It's kind of like saying is it a competitive market or not.

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

It sounds like a binary, if you don't mind?

Robert B. Toth

What I'm getting at is what? There's always claims on capacity. Like I said, I can go back to the first year I started here and you can find claims of new capacity being 2x, 3x what the industry was consuming. So there's always been substantial overcapacity. The question is, are they capable suppliers, do they have any credibility, do they really actually make any of the grades, do they really actually even make a product that works, or did they just make a claim? It's real easy to make claims. People make claims all the time. We saw a big U.S. company that you probably know make a few claims about 4 or 5 years ago, and you can't find them in the market. So claims are cheap. Now fact of the matter is, when the market's soft, think of that continuum, more competitive to less competitive. When the market's soft, it's more competitive, right? Because everybody's trying to find a home for stuff. It doesn't mean it's remarkably more competitive. This is a technical cell, right? If it was -- and when things are tight, like we've seen before, it's a lot less competitive in terms of pricing. So -- but let's qualify that, right? We can have product free today, and walk around the streets and hand it out. If you're not approved, it doesn't do you any good, it's just land fill cost, right? So this is a market that does not have substantial demand elasticity in the short term, it just doesn't. You have to be qualified in, you have to be proven, you have to be demonstrated. Price doesn't get you that. Having a product that works gets you that, then you got to be in the price kind of zip code. So at the end of that day, there's always a competitive dynamic, in every business I've ever been in, and there should be, but let's qualify that, right? This is not a commodity, this is a specialty product that has to be qualified in, and in the short-term, there's not a lot of demand elasticity. Now there is more wet capacity, right? So there is -- you could argue that, that's probably a little more competitive than the consumer electronics market, because SK's probably a little more credible than they were. I mean, I think I mentioned to you before that they've been at it for 10 or 12 years. So they've got some capacity in the marketplace, but it's not a pure supply demand market. Anybody that thinks it is, is -- they just don't understand it.

Operator

That does conclude the question-and-answer session. I would now like to turn the call back over to the Mr. Bob Toth for closing remarks.

Robert B. Toth

Thank you, Kate. And thanks, everyone, very much. We appreciate it. We appreciate your support. We appreciate your interest in Polypore, and we certainly look forward to reporting progress following the second quarter. Thank you very much.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.

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