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Executives

Kathy Brosco

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

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

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

JinMing Liu - Ardour Capital Investments, LLC, Research Division

Christopher Kapsch - Topeka Capital Markets Inc., Research Division

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

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

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

Polypore International (PPO) Q3 2013 Earnings Call November 4, 2013 4:45 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Polypore International, Inc. Third Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Kathy Brosco. You may begin.

Kathy Brosco

Thank you, Latoya, and hello, everyone, and welcome to our call to discuss our third 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, our 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, as always, 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 meaning of federal securities laws. Please review our disclosures regarding forward-looking statements contained in our earnings release and in our quarterly financial supplement. 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 our presentation material, which can be found on our website in the Investor Relations section.

With that, I'll turn the call over to Lynn to go through the numbers.

Lynn K. Amos

Thanks, Kathy. As we reported this afternoon, results from continuing operations in the third quarter were as follows: sales were $152 million, adjusted EPS was $0.18, segment operating income was $19.7 million and adjusted EBITDA was $32.8 million.

CapEx was $6.2 million in the quarter, with full year CapEx on track for approximately $30 million, as we continue to prudently manage capital spending. During the quarter, EPS was favorably impacted by approximately $0.04 due to the completion of a tax audit.

Regarding segment results, beginning with the Transportation and Industrial segment, sales and segment operating income margin in the quarter were similar to the prior year period at $76.4 million and 21% of sales.

In the Electronics and EDV segment, sales in the quarter were $27.8 million, down year-over-year on lower consumer electronics volume. The decline in sales volume drove the lower operating income margin. EDV volumes were down sequentially due to ongoing customer supply discussions. While this dynamic of supply discussions is impacting results in the short term, there are positive growth signals in the EDV as development momentum continues. We are working with several customers to formalize partnerships which highlight the value we bring.

In the Separations Media segment, sales were up 16% from the prior year period, with growth in volumes in both the healthcare and filtration businesses, as well as the favorable currency effect. Segment operating income margin was 20% of sales compared with 24% a year ago, which is consistent with our commentary in May, where we noted we were planning a slightly longer preventative maintenance shutdown this year. Remember that our third quarter is typically our lowest quarter from an operating income margin perspective due to the seasonal shutdowns and European holidays.

The annual operating income margin for Separations Media has been on the high-20% range over the past several years, and we still expect similar performance for the full year 2013.

We continue to generate substantial cash during the quarter and we paid down $58 million of debt. At quarter's end, we had no borrowings under our revolver and additionally, we expect to close on the Microporous transaction in the fourth quarter.

Combined, our cash position, the net proceeds from the sale of Microporous, our free cash flow generation and our revolver capacity provide us with meaningful flexibility and a variety of options to drive shareholder value going forward.

At this point, I'll turn the call over to Bob.

Robert B. Toth

Thanks, Lynn. Our company is in a solid financial position. Third quarter demonstrates our continued ability to generate cash, as well as deliver solid performance on our Transportation and Industrial and Separations Media segments, which represent the majority of the company. We understand that our lithium performance is disappointing right now. At the same time, we continue to have a strong value proposition and we're actively addressing issues in this business, which we believe will yield favorable results.

In consumer electronics, we recognize that it's taking longer to recover business than we had anticipated. We're taking several actions to address this. We're working on new projects and development opportunities. We've been approved into several even recently. And while consumer sales in those end-market devices have fallen short of expectations, we're moving in the right direction and working with the right customers.

Additionally, there's a growing second-tier market that's emerged over the last several years, which we haven't addressed to date. These applications are less demanding technically than the global OEM requirements and the value proposition is different. We're selectively exploring opportunities here where it makes economic sense for us and defining the right strategy to go after that business. The turn won't be instantaneous because even in these less demanding applications, there's still a qualification period.

We've also made changes in our field organization, which we believe will make us more focused and effective. And we're working to create customer partnerships related to our intellectual property around coding, which we believe has significant value as interest in this process grows.

Now let's talk about EDVs. Clearly, third quarter performance isn't where we wanted it to be. However, EDV remains a step-change growth opportunity over the longer term and we're encouraged by several factors.

First, we're delivering excellent manufacturing performance in our facilities, which will allow us to capitalize on the market growth as it occurs. We have the invested capital and the upside capacity already in place to serve this large application space. That is a competitive advantage.

Second, there are positive growth signals that EDV adoption is happening. Our sales in the segment are a step removed but ultimately a function of car sales, which are trending positive, both near-term sales, as well as the number of planned vehicle introductions. And while it's difficult to predict car sales in the short term, here's what we know. We're qualified on the largest number of EDVs in the industry, well over 50. We know we have the demonstrated field-proven products. We also have the proven capacity that's already built and available, a low-cost competitive position, technical advantages and world-class quality and world-class manufacturing. We know that we have patent-protected ceramic coating technology in which both interest and usage are growing. We also know that we're working to formalize partnerships with current and next-generation battery makers, which we believe is a further sign that we have the right products and technology for the market going forward.

In summary, I'd like to be clear about a few things. We noted that we're having supply discussions and that is impacting short-term results. We realize that there will be a lot of questions on that topic, which we're not going to be in a position to discuss at this point in time. As for rumors and speculation in the market, we won't address that. We're required to disclose material information promptly and we will do so. While we won't discuss specific customer situations, be assured that if there's a definitive change impacting a significant relationship, we would disclose that. We offer substantial value and will make decisions in the long-term interest of our shareholders. We believe that our discipline to make the right decisions today in the face of short-term dynamics will position our company well to benefit from the industry growth, not only in 2014, but for years to come.

Latoya, at this time, we'd now like to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question is from Brian Drab of William Blair.

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

Well, I guess, you just closed by saying you can't really say much on the supply discussions. I guess I am wondering, some of these contracts or partnerships agreements, however you want to -- whatever they are that you've had with some of the larger electric vehicle battery manufacturers, are you coming to a point where those contracts are coming up for renegotiation or is this something that you've seen coming for some time, or is this a new negotiation or development?

Robert B. Toth

I think, Brian, we've said what we're going to say about the customer relations, relationships and discussions right now. The key points are we're seeing very positive signs in EDV development, near-term car sales, as well as a number of planned vehicle introductions. We know the value we bring. We've got, as I mentioned, the field-proven products. We've got the greatest number of qualified vehicles or qualified battery packs on vehicles on the road. We've got the proven in-place capacity demonstrated. We've got technical advantages. We've got the low-cost, world-class quality manufacturing, as well as very valuable intellectual property around coating. So we certainly understand the value of important customers. We're very fair and reasonable business people, but we'll always be focused on the appropriate win-win arrangements that reflect the value we bring. And we're just not going to react to short-term dynamics of situations in the ways we think are contrary to the interest of our shareholders.

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

Okay. And you've stressed the technology that you have and the IP you have around coating more on this call than any call in the past, I think. But in the last couple of calls, it's come up. And how should we think about the fact that LG Chem is performing the coating process on the separator that they use for their electric vehicles? That kind of raises the question as to how proprietary is their process relative to yours? What are the differences between their process relative to yours? How is it related?

Robert B. Toth

Well, I think in the past, you've heard me say that we believe we've got the seminal patents and strong intellectual property position here. And I think even on the last call, I answered a question that we'll either have a business relationship with people or we'll take legal action to protect our intellectual property, and I stand by that statement.

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

And -- okay. Would I be correct in assuming that this is more the former rather than the latter, a business relationship, that maybe there's some sort of agreement with LG Chem around it?

Robert B. Toth

Well, I could [indiscernible] that I just gave you.

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

Okay. And then lead-acid stepped down a little bit sequentially. Can you comment on what drove that? What geographies were impacting that or end market?

Lynn K. Amos

Brian, I think, again, like most of our businesses, you really got to take a longer-term view of not just a particular quarter. We're up I think about 9% year-to-date in the lead-acid business. Any kind of variability around -- I mean, that's probably higher than our historic growth rate has been in this industry. But -- and that reflects our Asian exposure. So I really look at the percentage of -- the year-to-date percentages as being more reflective than whether we're up a little bit or down a little bit in a quarter.

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

Okay. And then just maybe just one more on the bonds that are callable on November 15. Can you comment at all about your capital allocation recapitalization potential? And I know that you could probably do much better than the 7.5% rate that you have on those bonds and we could be talking about $0.10 to $0.20 even of EPS for next year if you're able to refinance favorably?

Lynn K. Amos

Well, I mean I think, yes, you're running math that I think most people can do. I mean, I'll say it this way, it's like we said on the call, I mean our cash position, the proceeds from Microporous, the free cash flow, we have some meaningful flexibility and a variety of options to drive shareholder value going forward. And of course, every day, we're looking at the share price dynamics, debt reduction, refinancing opportunities, internal and external investment opportunities and wanting to make sure we make the best decisions. I mean, but to be clear, our #1 priority right now is getting the lithium business back on track. And that doesn't mean that we're not studying the refinancing possibilities. And you're correct, the facts are that the rates are lower today than when we did our last major refinancing, and we're going to look at all those options. But today, I don't have anything to announce.

Robert B. Toth

I think the takeaway there, Brian, is you can see the kind of cash we generated and debt reduction we had last quarter. And as -- which is a seasonally impacted quarter to boot. And as the lithium business improves, we've got a lot of optionality for our cash, and we're going to look for the best possible ways to drive shareholder value with that.

Operator

And the next question is from Brian Lee of Goldman Sachs.

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

Just had a couple. First, I will follow up here quickly on EDV, a quick clarification if I could. When you say you're in active supply discussions, is this for new models or all on existing programs where you're already qualified?

Robert B. Toth

Well, what we're saying is we're in active supply discussions with customers. We didn't clarify it by model, but we'll just leave it at that.

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

Okay, fair enough. And then...

Robert B. Toth

We're already approved on over 50. We're approved on the greatest number in the industry, and we obviously are pleased with the trajectory of new vehicle introductions we see coming forward as well.

Lynn K. Amos

And we also added that we're in discussions with current and next-generation battery producers.

Robert B. Toth

Correct.

Lynn K. Amos

But clearly, next-generation battery producers wouldn't be necessarily affecting current performance.

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

Sure. Okay, fair enough. And then also on EDV, you mentioned in your prepared remarks, formalizing partnerships with customers. Can you remind me, has that always been the strategic focus, or does this reflect any shift there on how to go to market?

Robert B. Toth

No, I think -- I mean, look, we always see opportunities for win-win solutions between what I always say as volume and duration on one side, right? That's what we value, volume and over time, reflective of the value we bring, of course, and the economic benefit and security of supply on the other, right? So -- and obviously, these are long lead time qualifications and designs. But customers prefer spot. There certainly are terms for that too but definitely not the same as the terms associated with the long-term partnerships.

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

Okay. Last one from me on lead-acid. The flat year-on-year revenue growth, it seemed to be a bit softer than maybe we would have expected given your guys' exposure here. Can you give us some sense of the current mix in Asia versus R.O.W.? And then geographically, were there any specific pockets of weakness that might have offset growth in Asia?

Robert B. Toth

Well, I think that that's the year on -- you got to really look at the year there. In order -- in quarters, you could have order of timing disparities. Year-on-year, we're up like 9%, I believe, right, in lead-acid.

Lynn K. Amos

That's right.

Robert B. Toth

And so to look at any 1 quarter in isolation, it would be a little misleading. Year-on-year, we're up 9%, which is, as we've said, this is kind of a GDP plus kind of business, right? And Asia is the fastest-growing region, you're right, but you've got to look at the blended rate all the time and over a reasonable period of time.

Lynn K. Amos

Yes, the point is there's nothing fundamental that has changed in our business.

Operator

And the next question is from Jeff Osborne of Stifel.

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

Just a couple from me. I think one of the premises that you tried to lay out at the Analyst Day last fall was that separators couldn't be interchangeable on the fly. You alluded to the long qualification cycle. I just want to get a sense in your view, has anything changed in the marketplace, is kind of part A of the question? And part B, with this ongoing partnership for other discussions that you're having, what in your view are the people that are delaying orders doing in the meantime? Are they working through excess inventory, which was a challenge for you folks in the past, or is there some other dynamic going on?

Robert B. Toth

The first answer is no, right? We absolutely see nothing different about the need for qualification and long lead time without taking substantial risk in the cell or in the battery pack. As it relates to inventory, look, let's qualify first. There is an inventory overhang, like we discussed, associated with a couple of vehicles in 2012. But the point I have tried to make routinely and we'll continue to is there's always some material in the supply chain that could be managed particularly by our customers given their size, right, quarter-to-quarter. But that's not a long-term situation, right, that will play out.

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

Got you. And then my second question and the last one is just on the secondary market that you alluded to. Can you just talk about what the pricing or competitive dynamics are in that? And in particular, I would assume that would be made out of your Korean facility, and I always thought the bulk of the leverage in the model that you were trying to fill was more out of North Carolina, but perhaps the situation in Korea is a little bit worse than I thought? Or perhaps I'm just...

Robert B. Toth

No, well, I'd frame it completely differently. I think what we're referring to there, if you think of Asia or some very large countries within Asia, there's a very large and growing middle class. And you could break up the middle class probably more distinctly in the lower middle class and upper middle class than you can in some developed economies. We can debate that because that's a subjective interpretation. But what you have is you have -- if we were to buy a -- if we were to go to a high -- a Home Depot or a Lowe's and buy a high-quality lithium drill, for instance, we pretty much expect it here in the last 4 or 5 years, maybe longer, but at least that, right? Where in Asia, there are some parts of Asia where if the quality or price is such that it lasts a year or 2, that might be acceptable or we wouldn't find that very acceptable because that's a large portion of the population that's just getting that buying power and moving into that category of purchase. And that, obviously, would therefore require less demanding battery, meaning a higher failure rate and might have a different economic proposition. Now we're, obviously, I said we're going to be selective there. To date, we've largely -- well, I shouldn't say largely. To date, we've completely ignored that part of the market. But that's a growing market in Asia and so we should be astute. We've got, we believe, a world-class cost and quality position in this business. We know the operating leverage in this business, and that's a market that's going to exist with or without us, right? So we'll selectively take a look at opportunities there where we just haven't in the past.

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

And what would be your assumptions on pricing relative to your historic margins?

Robert B. Toth

Well, margins are more a function of operating leverage in this business than pricing, right? I would expect with less demanding applications, they would be priced down, but your specs are going to be wider and you might be able to have different operating leverage associated with that. Right? It's not necessarily -- you're not selling the same high-quality stuff you would be selling to global OEM applications. So there could be opportunities for additional throughput. And you've seen the operating leverage in this business, right? So that, again, that market exists with or without us. So you sit there and you take a look with the amount of capacity and investment we have. At the end of the day, that could be an opportunity. But let's not lose sight of the bigger picture here, right? That's -- that and consumer electronics are going to be nice markets for us in the future, but they don't have the scale up magnitude EDV does. And at the end of the day, we made these investments for EDV, we're just talking about how we can lever operating leverage in the shorter term.

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

Great. Last one. What would be your next messaging to investors around these discussions? Is there something -- as it perhaps there's resolution over the next 3 months you would do inter-quarter or are you going to keep that close to the vest and next earnings call would be the update?

Robert B. Toth

Well, I think I kind of said it in my prepared remarks, if there's a definitive change impacting a significant relationship, we'd disclose that.

Operator

A question from JinMing Liu of Ardour Capital.

JinMing Liu - Ardour Capital Investments, LLC, Research Division

Okay. Switch gear to your consumer electronic applications. This looks like a -- your -- that part of your business is running into a similar situation as the EDV, but it looks like you guys are depending on a few key models because the low end market is occupied by other less inferior quality products. Can you comment on that?

Robert B. Toth

Well, yes, they're about a light-year different. Let's kind of talk about each, right? In EDV, we've got the greatest number of approvals, we're on the greatest number of vehicles, we've got distinct technical advantages. We see -- as I've said, we've seen battery makers who we didn't work with on first-generation stuff that we're working closely with and discussing partnerships on next-generation stuff, and we've got the coating IP that applies to automotive as well. So I'm not sure what you're referencing on EDV. But EDV is happening, right? What we just described was that the sequential change was a function of supply discussions that are ongoing. Consumer electronics, the same things are happening, right? I mean, we're disappointed with where we're at in consumer electronics, but we've said before kind of leaky bucket, right, applications fall out the bottom over time. They reach their end of life cycle. And while we've gotten some new approvals, including into some devices that are pretty recent that you probably recognize but the sales weren't what they expected them to be. So we're disappointed with where we're at in consumer electronics. I think we're doing all the right things to get the business back. I think we'll earn it back over time and we'll have a nice consumer electronics business, but it's not instantaneous. It's not turned on a dime. It's taken us longer for those reasons. And as I've mentioned before, the whole consumer electronics market just isn't very robust right now. There's just relatively few devices that are selling pretty well, and we miss the qualification on some of those. So they're very, very, very different situations.

JinMing Liu - Ardour Capital Investments, LLC, Research Division

Okay, got that...

Lynn K. Amos

I think that's the -- it's the missing the qualification periods when a new generation of devices has come through, when they're the hot sellers...

Robert B. Toth

NCE. NCE, yes.

Lynn K. Amos

NCE has been the toughest thing for us. We're certainly working on that and it's not a question of do we have the capability of doing it. I think we do. And so that's kind of our focus on getting back into those kind of applications, and we said it's taking us longer than it's expected.

JinMing Liu - Ardour Capital Investments, LLC, Research Division

Okay. Just one more question from me. The upcoming closing of the Microporous sales, whether that -- my question is whether that sales will give you a one-time benefit from your balance sheet? It looks like you're going to realize some one-time profit from that sales of that business.

Robert B. Toth

We'll call that out.

Lynn K. Amos

Yes, I mean, the -- I think the basis in the business is somewhere around $75 million...

Robert B. Toth

$70 million.

Lynn K. Amos

$70 million. I think the -- that we've disclosed $120 million sales price.

Robert B. Toth

And we anticipate closing in the fourth quarter.

Lynn K. Amos

Cost of sale, et cetera.

Operator

The next question is from Chris Kapsch of Topeka Capital Markets.

Christopher Kapsch - Topeka Capital Markets Inc., Research Division

It's Chris Kapsch, and I had a couple of questions. One was you mentioned the tally of the number of hybrid platforms that your products are qualified, and I'm just wondering if you could delineate how many of those are plug-ins or EVs versus just the mild hybrid variance. And can you talk about any plug-ins or EVs that you've been inspect on more recently, say, for model of the year 2014 or later introductions?

Robert B. Toth

Well, no we can't, right? We've only been able to talk about a couple of vehicles that someone else talked about and said we were in, so that's the only reason we were able to talk about those. I think that we can answer your question specifically in a general way which is...

Christopher Kapsch - Topeka Capital Markets Inc., Research Division

Yes, just generally plug-ins and EVs, not...

Robert B. Toth

Yes, I mean, obviously, there's more EV, there are more hybrids than there are plug-ins than there are battery electric vehicles. Now having said that, there's a couple of new battery electric vehicles, one pretty popular brand that's coming out shortly with a couple of models. Plug-ins are becoming -- interestingly enough, if there was any change from 5 or 6 years ago to today, I would say that plug-in hybrids are becoming much more popular on luxury brands because they add a dimension of performance, as well as economics, and they don't add substantially more costs. So you're seeing, for instance, the Porsche Panamera plug-in hybrid will be out this year. I believe the Cayenne hybrid is coming out next year. You've got a Volvo out now. I think there was another Volvo announced. So what you'll see -- what you're seeing is mild hybrids or hybrids are becoming more and more popular because, of course, that's just supplementing the combustion engine. You're seeing more plug-in hybrids on what I'll call kind of the mid- and upper-price luxury segment and you're obviously seeing some more battery electric vehicles come out. And Lynn just commented, the BMW has got the i3 and the i8 coming out, you've probably seen. So we're delighted with the trend of development, but we can't talk about any specific models we're on.

Lynn K. Amos

What we can say is, I'll repeat a statement we've made in the past, which is we expect that the number of models to be over 100 by 2015 and I wouldn't back away from that number at all.

Christopher Kapsch - Topeka Capital Markets Inc., Research Division

What I was getting at is more, let's just say, it's 100. What percentage of those would be plug-ins or EVs versus some other form of hybrid?

Robert B. Toth

It's the smallest percentage. I don't know off top of mind.

Lynn K. Amos

EVs would be probably the smallest, then plug-ins would be a little bigger percentage, then hybrids would be the largest percentage.

Robert B. Toth

Yes. And the only change in the trend line is plug-ins will probably be a larger percent than we would have said 5 or 6 years ago based on the development we see.

Christopher Kapsch - Topeka Capital Markets Inc., Research Division

My other question relates to the technology advantage that has been expressed in terms of the drive process technology as an advantage in the large-format lithium-ion battery applications, including EDV. The question is, if there's a greater adoption of coating technology, does the coating impart qualities that sort of compromises the advantage of dry process vis-à-vis wet process? In other words, does that compromise one core technology-based advances that you believe that you have in terms of the performance of those separators in the large-format application?

Robert B. Toth

Well, the first thing it does is introduce another complication, which is that they're doing that they need to probably be talking to us about accessing the intellectual property to do it, right? So let's just get that clear. Secondarily, it only assists in masking the deficiency. It doesn't solve it, right? You can't -- polyethylene oxidizes and you could put a ceramic coating on it on 2, 3 or 4 microns. But at the end of the day, you still run an oxidation risk, which causes a catastrophic failure in the battery, right? So you can't solve the problem. You could enhance the performance of the product of the dry, but it's still a deficient product relative -- or the wet but still a deficient product in that sense. And you can't -- and you can only mask the shrinkage as well, right? So you still have a risk profile there. But if you're going to coat, first of all, like I said, we believe we've got the intellectual property. Secondarily, it doesn't solve the problem, it just provides some assistance.

Christopher Kapsch - Topeka Capital Markets Inc., Research Division

Got you. And then just based on what you just said, how critical is this advantage that you strongly believe you still possess? How critical is that technical aspect? How critical is it in terms -- in the context of the supply discussions that are ongoing?

Robert B. Toth

I'm not going to get into the details of the supply discussions. Like I said, we'll either have a business relationship or we'll protect our IP.

Lynn K. Amos

And we've outlined a lot of advantages that we bring. So it's not really fair to just point to one, right? We're field-proven. We're on a lot of cars that are on the road. We've got the capacity in place, proven, ready to go. We have the technical advantage, as mentioned. We've got a low cost. We've got world-class quality and manufacturing, as well as the coating IP. So I mean...

Robert B. Toth

And let me add something else, right, which is this is out in front of this curve a bit. But we've seen a number of investments stop. Interestingly enough, people don't put press releases out when they stop those investments or maybe never started. But we're seeing a number of investments stop, which also I think is a function of why some people are coming to talk to us where we couldn't serve them in the first go-around, the first-generation battery. So I think the dynamics in the marketplace are starting to change, and I think we're pretty well-positioned. We've got the capacity, we've got the cost position, we've got the technology, we've got the better products hands-down for the applications and we've got the IP.

Lynn K. Amos

Investing against that is a big risk.

Operator

And the next question is from Richard Eastman of Robert W. Baird.

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

Bob or Lynn, could you just give us a sense of the EDV sales in the quarter? Are we still at a 50-50 mix? I'm sorry, the lithium sales, are we still at a 50-50 mix of CE and EDV in the quarter?

Robert B. Toth

No, I think the easier way to think about it in the quarter and, again, I'm always cautious of getting too granular on the quarter. But if you think about year-on-year in the quarter, right, Q3 last year to Q3 this year, I think last year, in the first half, we said it was about 50-50, right? First quarter was a little higher. Second quarter was in that zip code. So for the first half, it was around 50-50. And what we said this year was the decline year-on-year was primarily CE. EDV is a bigger piece, obviously.

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

Yes, I understand that. I understand that, but basically, if that's the case, it would -- it feels like -- and these are rough numbers, these are our numbers, but it would then seem like the CE piece of the business wouldn't be much greater than perhaps 0?

Robert B. Toth

I'm not sure how you did the math. But last year, it was, I think, Q3 was around 44, right?

Lynn K. Amos

That's right.

Robert B. Toth

And so, let's just say, give or take, half and half. And then this year, Q3 was 28-ish and the decline was primarily associated with CE.

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

So -- okay. So let me ask another way. The -- sequentially, though, we had a nice snapback in volumes in the second quarter that was largely delivered by the EDV piece of the marketplace. And so, if we drop off as rapidly as we did into the third quarter, was the sequential decline in the total revenue for lithium, was it largely split between the 2 businesses, the 2 end markets?

Robert B. Toth

It was more EDV. The sequential decline was primarily EDV. The year-on-year decline was primarily CE.

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

Okay, okay. And then just one more thing, Bob, you talked a couple of questions ago just about the technology. And when we think about the coating -- coating the wet material for this application, for large-form applications, it adds even more expense to the wet versus dry for these. So again, I'm just trying to get a sense of -- one defensive position here is that we're the low-cost producer -- yes, the low-cost producer on the dry side. Obviously, we must be close to selling below cost if we're on the wet side with coated product into this application?

Robert B. Toth

No. I think I've answered this question several times in the past because -- and I'm not sure why people get stuck on it. You wouldn't coat wet to try to just mask its deficiencies and make it work versus dry unless you had no choice. And some people may not have had a choice, right, if we didn't supply them. You fundamentally first make the decision as to whether or not you want the performance attributes of a coating. And in that case, it helps mask some of the deficiencies of the wet, but it doesn't solve the problems, right? You don't go, well, here's what I'm going to do, right? I'm going to coat wet, so I can have a competitive product with Polypore's dry, right? That math, to your point, good luck with that math, right? But if you go, well, I'm going to coat, does it make them equal? The answer is no. It makes the wet just a little less deficient, right? Does that make sense?

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

Well, yes, it does. And I guess maybe that was my point a little bit. So if we're -- there's only a few players then that would be in a position to coat dry material.

Robert B. Toth

Well, I mean...

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

And doesn't it still add to the cost equation? Again, if you're low cost and they're adding cost to their process, then why -- again, it just leads you down on this path of saying the negotiations are price-oriented because obviously you have other -- every other attribute you delivered?

Robert B. Toth

Yes. You're not coating because it's dry or wet, unless you want to try to mask the deficiencies of the wet, right? You're coating because you want some performance attribute to the coating and you're willing to take that cost, which again gets back to kind of the cost components of a battery, right? You're wanting an added safety layer or temperature performance or something like that to coat. That's why you coat. So it's kind of a separate decision. It's just like some people will use our trilayer because of the shutdown performance you get with the trilayer. And some people might not use trilayer, right?

Operator

The next question is from Jeff Zekauskas of JPMorgan.

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

In your press release, you said that your EDV sales -- your EDV volumes declined sequentially because you're active in supply discussions or you say as you're active in supply discussions, why is there a volume decrease sequentially because you're active in supply discussions?

Robert B. Toth

Well, there's always material in the supply chain. We've talked in the past about having large customers that place large orders. And because there's always some material in the supply chain, that could be managed, and it could be managed particularly by our customers. It can't be managed forever, but it can certainly be managed in the short term.

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

Right. But why would the supply discussions lead to the volume decrease?

Robert B. Toth

Well, because they can manage orders and we report in quarters, but we tend to look at the business on a long-term basis. And so certainly, order timing, some people can view as impactful on us.

Lynn K. Amos

Given the amount of disclosure we are required to provide every quarter and talk to people about how much of our sales, they go to a relatively small number of people that we talk about going into which type of application. It can serve people's interests.

Robert B. Toth

And the takeaway there is we're going to continue to make decisions and we're in a great position to make decisions in the best interest of our shareholders and not react to short-term dynamics.

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

Right. I think that you had another statement where you said that you wanted -- you intended to formalize your relationships. What does formalize your relationships mean?

Robert B. Toth

Well, these -- a lot of people have entered into this with a partnership, and we're certainly willing to do that in a formalized sort of way. Or as I said, people can buy spot, but spot terms are materially different than the long-term partnership term. So we're fine with either one, but you don't get long-term partnership terms with spot arrangements.

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

So was it fair to say that you're coming to a point where there's sort of a rethinking of your price and volume commitments going forward to the EDV customer base and that this decision-making, which is going on now, is of greater magnitude than what you've been doing over, say, the past year as far as your negotiations with your customer base?

Robert B. Toth

Jeff, we're not going to go to what we're saying beyond what we said, which is we know the value we bring to our customers. And we certainly are interested in having partnerships with customers and we're certainly willing to sell spot. And we also see the dynamics in the industry starting to turn, where some investments have stopped, where some people have approached us to discuss longer-term arrangements, and we're always willing to take on partnerships and opportunities that are win-win. And so beyond that, I'm not really going to say or speculate because that's in fact some of the leverage that people try to use in what we disclose, and we're just not going to go there.

Operator

The next question is from Craig Irwin of Wedbush Securities.

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

So Bob, we're all familiar with up-down scenarios of your ongoing negotiations with these key lithium customers. Can you talk to us a little bit about what you have the potential to do? What sort of capabilities you have to either redirect the capacity elsewhere if you saw an adverse outcome in some of these negotiations? Or if there were things you can do internally to mitigate the impact, potential mothballing of certain lines or if there were other adjustments that you can make to your existing footprint?

Robert B. Toth

Craig, I'm not going to speculate on the outcome of these discussions. Like I said, we're willing to sell in a long-term partnership and we're willing to sell spot, but those are dramatically different terms.

Lynn K. Amos

We think this will play out. And when it plays out, that's when we'll be able to communicate more specifically to your questions.

Robert B. Toth

Yes, and as we said, if there's a definitive change to a significant relationship, we'll disclose that.

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

Okay. And can you give us an affirmation today that there was no material change in these existing relationships within the last 30 days?

Robert B. Toth

Let me reanswer the question with the answer which is, if there is a significant change in relationship, we'll disclose that, and I don't recall any disclosures to date here.

Operator

And the next question is from Charles Costley [ph] of Stifel.

Unknown Attendee

Obviously, I am not an analyst. I'm simply a stockbroker or financial advisor. And having only come recently in the game the last 2 years, we've pretty much missed on earnings per share for at least 4 straight quarters. And I keep hearing about really some solid things coming forward. They just don't seem to happen and you're not extremely -- you're not very forthcoming at all on any of these calls compared to other calls I listened in. What am I missing or am I just not sharp enough to get the story?

Robert B. Toth

Well, I don't know. But I could tell you that we disclosed more than anybody in the world on this. And hands down, we disclosed more than anybody in the world. And as we've said all along, we are in this business in the long-term interest of our shareholders. We won't succumb to short-term dynamics. We don't provide guidance, so your reference to a miss is perhaps a little misguided.

Unknown Attendee

That's true. Perhaps, the analysts have been way overoptimistic in the past.

Robert B. Toth

We described very specifically the technical advantages we have. We described the fact that we generated a substantial amount of cash in the quarter, and you're using some broad estimate of apparently outside numbers on which to measure us and perhaps that's just erroneous on your part.

Unknown Attendee

I believe you're correct.

Operator

The next question is from Jeff Osborne of Stifel.

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

Just a couple of quick ones here. So Ube did disclose last week that volumes were up and pricing was down. I was wondering if you could just talk about general pricing trends?

Robert B. Toth

Year-over-year, there wasn't a significant factor in pricing in the lithium business. We disclosed that and that's in the...

Lynn K. Amos

That would be in the 10-Q when it comes out tomorrow.

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

Okay, good to hear. And then the 50 EDVs is impressive, but obviously, your customers are more of the battery makers. So I was wondering if you could just give a rough number of how many EDV battery suppliers you're qualified in at this point.

Robert B. Toth

Well, as we've said, we pretty much work with all the major battery producers. And we're not going to get in to specifics on who's current and who's next-generation.

Lynn K. Amos

There's only a handful of...

Robert B. Toth

Yes, there aren't many.

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

I understand. And the last few quick ones here is, Bob, you alluded to some changes in the field service organization. I was wondering if you could just detail that. And then also, are we at a point in the industry's maturation where people would be dual sourcing separators?

Robert B. Toth

Well, we've made -- we have a change, a new business leader in Celgard business. We're making a change in the field leadership on some of the very direct roles of the organization, so I'm not in a position to comment on those specifically because we don't tend to discuss those externally. But obviously, we're making changes with regard to our customer coverage. Dual sourcing goes back to a fundamental decision of what costs and what risk profile you want to have and where else you can get material from. We solve the security of supply problem. We've got 2 facilities for this and, obviously, have the capacity and the proven capacity in place. So security of supply from our perspective isn't an issue. If someone wants to dual source, you have to design in a completely separate system and would have to get that approved and you have to be willing to take that degree of risk with a second source and components and those kind of things in terms of field-demonstrated performance. So people can do that. It's just purely a -- it's a substantial cost and a substantial risk. And as I've said all along, I think how that plays out in automotive is when volumes get substantial, people may be awarded different car lines and kind of source it that way. But to have numerous battery packs on a particular vehicle at this stage, people could certainly do it if they want, but it would be pretty costly.

Operator

There are no further questions at this time. I'd like to turn the call back over for closing remarks.

Robert B. Toth

Thanks, Latoya. And thanks, everyone, for your interest and support. We look forward to reporting our fourth quarter and full year results with you in February. Thank you very much.

Operator

Ladies and gentlemen, this concludes today's program. You may now disconnect. Good day.

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