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Polypore International, Inc. (NYSE:PPO)

Q4 2013 Earnings Conference Call

February 24, 2014 4:45 p.m. ET

Executives

Kathy Brosco - Director of Corporate Communications

Lynn Amos - Chief Financial Officer

Robert Toth - President and Chief Executive Officer

Analysts

Brian Drab - William Blair

Richard Eastman - Robert W. Baird

Jeffrey Osborne - Stifel

Kevin Maczka - BB&T Capital Markets

Chris Kapsch - Topeka Capital

Tom Daniels - Goldman Sachs

Avinash Kant - D.A. Davidson

Jeff Zekauskas - JPMorgan

Operator

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Polypore International Fourth Quarter and Full Year 2013 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference to our host, Ms. Kathy Brosco. Ma'am, you may begin.

Kathy Brosco

Thank you, Eric, and welcome everyone to our call today to discuss our fourth quarter and full year 2013 financial results. Joining me on the call today are Bob Toth, our President and Chief Executive Officer; Lynn Amos, our Chief Financial Officer, and Rob Whitsett, our Vice President of Finance; and also Paul Clegg, our Director of Investor Relations.

Our earnings release and a 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 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 in 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 Amos

Thanks, Kathy. As we reported this afternoon, results from continuing operations in the fourth quarter were as follows: sales were $169 million, adjusted EPS was $0.31, segment operating income was $33.8 million, and adjusted EBITDA was $47.2 million, CapEx was $8.4 million in the quarter bringing up to $28 million for the full year.

For 2014, given our current plans, we estimate capital spending to be approximately $50 million where approximately half of that being typical maintenance spending and the other half being gross capital, primarily targeted at the Transportation and Industrial and Separations Media segments.

I'd also like to point out that in the fourth quarter of 2013 compared to 2012 we have recognized higher income tax expense due primarily to jurisdictional mix of income, including a change in fringe stock in December of 2013.

Cash taxes in 2013 were approximately $22 million, similar to the prior year, and a reasonable full year income tax rate expectation going forward will be in the low 30% range.

Regarding segment results, beginning with the Transportation and Industrial segment; sales in the quarter were consistent with the prior year period at $79 million, while our segment operating income margin was strong at 26% of sales compared with 22% of sales in the prior year period.

The higher operating margin performance in the fourth quarter was driven by favorable sales mix and production efficiencies. While quarterly margins may vary, we are beginning to realize the expected margin improvement in this segment, particularly in Asia. Rather than considering the fourth quarter margin as the new run rate, we expect a gradual improvement of our full year margins over time.

In the Electronics and ED segment, sales in the quarter were $35.9 million, up 5% year-over-year as EDV volumes and our technology licensing fee offset lower consumer electronics volumes. As we've previously reported, during the fourth quarter, Polypore recorded no revenues from LG. In consumer electronics, we continue to work to regain business, and our progress has been slower than we anticipated.

Segment operating income was up $1.5 million to $6.8 million or 19% of sales, compared with 16% of sales in the prior year period. The technology licensing fee, up $3.5 million, partially offset by legal costs positively impacted margin during the quarter. In the near-term, we anticipate these licensing fees to be a few million dollars a year, but to be clear, the actual amount will be determined by sales volume.

In the Separations Media segment, sales in the quarter were up 10% from the prior year period, with volume growth in both healthcare and filtration businesses as well as a favorable currency effect.

Segment operating income margin was 28% of sales for both the quarter and the full year, which is consistent with our previously disclosed full year expectation in the high 20% range.

During the fourth quarter, we completed the divestiture of Microporous for a sales size of $120 million. In discontinued operations, we have recognized a gain of $35.8 million net of income taxes and subject to a typical working capital adjustment.

We ended the year with $163 million in cash. We understand the current attractive credit environment and the other options we have for driving shareholder value. We are assessing all options related to capital structure and cash deployments. Once we have something to announce, we will do so promptly.

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

Robert Toth

Thanks, Lynn. Our Transportation and Industrial, and Separations Media segments continue to deliver solid performance. Well, we want to talk a lot about these businesses today. They represent the majority of our company, and their importance and contribution shouldn't be underestimated.

These segments provide a solid and growing foundation of earnings and cash generation for our company. I know many of you know these segments and understand them well, and as always we will be happy to take any questions in a few minutes during the Q&A portion of the call.

In the Electronics and EDV segment, we are focused on solidifying our leadership position in the growing applications of electric drive vehicles and energy storage systems, and on improving our position in consumer electronics.

We are pleased with two recent meaningful accomplishments in the segment, one of which is the agreement with Sumitomo Chemical, and the other being the recent long-term supply agreement with Samsung.

First, Sumitomo, this agreement is important for several reasons. A key point is that it confirms the integrity of our ceramic coating intellectual property, the value it has for both current and future customers in both electric drive vehicles and also in consumer electronics applications. Obviously, the agreement also provides ongoing technology licensing fees. And finally, it gives us the potential to develop the business partnership with the globally recognized multibillion dollar chemicals and materials company.

The second accomplishment is our long-term agreement with Samsung. Samsung is the global leader on lithium ion batteries with a significant and growing presence in the large format EDV and energy storage systems applications. And they are very well positioned within the industry to sell into a variety of leading brands and a growing number of models.

Samsung has also demonstrated a commitment to supplying global and regional customer growth highlighted by the recent announcement of plans to make a significant investment in an EDV battery facility in China. We believe this agreement underscores the value of our capacity investments and our proven industry leading products and technology, while also providing the certainty of supply which is important to our customers to meet their needs in this growing application space.

We value our customers. We commit resources to establish and build long-term relationships with them, and we work very hard to earn their trust, which makes the current situation with LG Chem all the more disappointing to us.

We have worked with LG for years to develop and qualify high-quality products with unique attributes, which are proven in the marketplace today and demonstrating in vehicles that have been on the road for several years.

We also build substantial capacity at their request based on demand forecast from them with the promise of a long-term partnership. And reinforcing that, we have a signed memorandum of understanding that is intended to result in a long-term supply agreement.

Unfortunately, LG has recently taken a very different one-sided approach after attempting to have constructive, good faith discussions with them over a long period of time. Late in year and early into 2014, we reached a point where their demands were simply unacceptable and we were left with no choice, but to take legal action, which we did in January to protect our intellectual property related to ceramic coating technology. We don't take such an action likely, but we must always safeguard our assets and the interests of our company and our shareholders.

Let me be very clear about something, while we have asked for this in writing repeatedly from LG and we still have not received it to-date. Representatives of LG have verbally stated that they are attempting to qualify alternate sources of supply to our Celgard separators. We believe that action in and of itself is a further infringement of our intellectual property.

We would assume that LG would inform their customers of a change or even a potential change like this, whether or not a product to be re-qualified as a function of two things. First, the cost and risk LG is willing to take. And it's also a function of the cost and risk their customers are willing to take. Given that, we can't predict whether or not they will be successful at qualifying alternate sources. In any case, we are not aware of any solution, which did not violate our coating IP. With or without LG, we believe we will remain the industry leader and we are qualified on the largest number of EDVs in the industry.

So in summary, our Transportation and Industrial and Separations Media segments provide a very solid foundation for our company, generating significant cash flow, which will enable us to drive shareholder value.

In the electronics and EDV segment, where we have the opportunity for step change growth, we have the demonstrative field-proven products. We have proven capacity that's already installed and available, a low-cost competitive position, technical advantages and world-class quality and manufacturing. We also have a patent protected ceramic coating technology in which both interest and usage are growing not only in electric drive vehicles, but also in consumer electronics.

We believe our technology licensing agreement with the multibillion dollar globally recognized chemicals and materials company like Sumitomo and a separate long-term supplier agreement with a leading global battery manufacturer like Samsung confirm the value of our early leadership position in EDV applications, our strong technology position and our ability to provide certainty of supply, which is important to our customers to meet their needs in high growth applications like electric drive vehicles and energy storage systems.

At this time, Eric, we'll be happy to open the call with questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Brian Drab of William Blair. Please go ahead.

Brian Drab - William Blair

Hi. How are you doing?

Robert Toth

Good. How are you?

Brian Drab - William Blair

Good. Okay. So, the first question just on LG Chem, I assume that you haven't recorded any revenue from LG Chem to-date in 2014. Is that a safe assumption?

Robert Toth

Well, we haven't disclosed anything about 2014, Brian. What's clear is we sold very little in the third quarter and none in the fourth quarter.

Brian Drab - William Blair

Okay. And then, can you give any update as to what the negotiations are like with some of your other customers and if you are making any progress with any other large lithium battery manufacturers and locking down longer term contracts?

Robert Toth

Well, I think if the question there is, are the other customers like LG, I would isolate that first of all. You saw we announced the long-term agreement with Samsung. We believe we are qualified on the greatest number of electric drive vehicles in the industry. And we obviously have ongoing discussions with our customers, but I'd not put them in a category of the approach that LG has taken.

Brian Drab - William Blair

Okay, great. And on the last call you talked about exploring the second share market on a consumer electronics side of the lithium business, can you give us any update as to progress in that initiative?

Robert Toth

Well, we are making progress. We didn't have anything new to report in the fourth quarter. Just as we've said in that last quarter, even in those applications you have the need to get qualified and improve your products, right? And so, we are working through that and obviously focused on recovering in consumer electronics.

Lynn Amos

Yes. I think what you are asking Brian is if we expect to win business back in consumer electronics, the answer is definitely, yes. We are continuing to work with customers to regain business. It really coming in the form of next-generation applications and we're going to leverage our ceramic coating IP in that area as well. So it's clear, progresses have been slower than we anticipated. It's not an overnight turnaround, and that points to even in the lower qualification, lower demanding applications, there is still a qualification process, but we are committed to rebuilding that business.

Robert Toth

That's right. I mean nothing magical happens overnight in this business. Just like we've talked about before, the elasticity of demand still requires customer qualifications and approvals and then those devices have to sell. So we are obviously, given our leverage, given our operating leverage and our great cost position, we are looking at all the opportunities we have there.

Brian Drab - William Blair

Okay. Maybe just one more and I will get out of the way. In lead-acid, can you give us growth rate on organic basis for that segment in the period?

Robert Toth

Lead-acid, you have to look at that over typical year or a longer period of time. So it's a GDP plus kind of business, nothing fundamentally has changed there. Some quarters are up a little bit or sideways a little bit depending on the mix and those kinds of things, that's it.

Lynn Amos

I've really not have fully understand your question, because the numbers we present are -- they exclude any discontinued apps. So everything we present is organic.

Brian Drab - William Blair

I guess, well, just to be clear on this, excluding FX, 64% total is that where it stays flat or maybe up one or two points organically, even excluding FX?

Lynn Amos

Probably a little more than that, it's a kind of a GDP plus business. One thing I will also point out in the latter half of business, so I think it's important to understand is, if you recall last year we talked about investing through our next line of capacity and targeting that towards Asia. I think what you are seeing -- see some a little bit in our margins from this quarter is we are engaged in a customer profitability and optimization exercise, and with internal and external customers in Asia, they'll evaluate the efficiency of our current capacity prior to starting on new capacity build.

So in terms of before we commit to build a new facility or a new production line, we're going to make sure we're building for profitable business. So you saw that play a little out in the fourth quarter. I still think we are going to expand our capacity in Asia for lead-acid, that business is growing nicely. But we are going to expand the profitable business.

Brian Drab - William Blair

Okay, thank you.

Lynn Amos

Thanks.

Operator

Our next question comes from Richard Eastman of Robert W. Baird. Please go ahead.

Richard Eastman - Robert W. Baird

Yes, good afternoon, Bob and Lynn.

Robert Toth

Hi, Rich.

Lynn Amos

Hi.

Richard Eastman - Robert W. Baird

Just a quick question on the Sumitomo license fee, one-time license or technology fee that was 3.5 million-ish, the best flow through the revenue line as what was the profit line?

Lynn Amos

Yes.

Robert Toth

Yes. Keep in mind we had legal expenses also that were flowing through that profit line.

Richard Eastman - Robert W. Baird

The profit line you offset a million bucks or so in legal. Okay. And then can I also ask, in Samsung SDIs case disagreement, fist of all, does it apply or give you an opportunity of the CE side? And secondly, was there any upfront stocking order to that announcement?

Robert Toth

Well, first of all, Samsung as you know is a very complex, large organization. So we're going to think it present some opportunity on the CE side. They run those businesses a little bit separately, but obviously they are related under the Samsung umbrella. So implicitly, perhaps yes, explicitly they are separate businesses.

Lynn Amos

Yes, the contract just with EDV and ESS.

Robert Toth

Yes, right. And there was nothing unusual about the contract. We have been in discussions with them and in development and working with them for years. This was just a culmination of that effort.

Lynn Amos

And it really didn't have anything to do with the --

Robert Toth

There wasn't anything anomaly. There wasn't anything anomalous.

Richard Eastman - Robert W. Baird

But they have been an ongoing customer?

Robert Toth

Yes. Recall last year, but I don't recall exactly which quarter, but we talked about new customers and new models being introduced. And I think some people have missed the fact that there the a few players here that are on models that are just either more just introduced or being introduced. So they have been a customer. There obviously, a lot of the models are coming to the market now.

Lynn Amos

Yes. I think that's -- I wouldn't necessarily conclude that maybe the people who do invest in the early innings of game are the people who are really winning the business today. And so, Samsung is one of those who has been doing very well recently.

Robert Toth

Yes. I mean obviously we treat all customer relationships with the proper respect in terms of confidentiality. But you can find a lot of public information or at least good speculation about what models they are on and those kinds of things.

Lynn Amos

Yes. We spend a fair amount of time on the win side and we bumped into some of their wins. But they are not really in production, and if you look on a trailing basis, really don't have a lot of market share in EDV. That's not coming under current wins. It's coming under trailing market share. That's why I was curious if there were sales to them in the quarter.

Robert Toth

Yes, we have been selling, they have been a customer. I mean we will say that, we can't say much more than that. They have been a customer, but a lot of their applications are growing and being introduced now. And they have been successful in energy storage systems.

Richard Eastman - Robert W. Baird

Okay. And then just --

Lynn Amos

And we certainly see them as a growing customer. And now there is a couple of things we pointed out when we announced the contract in terms of the duration and the volume commitments that are made, and their commitment to further investment.

Richard Eastman - Robert W. Baird

Is there a way that the language is in that press release, it basically says there is a guaranteed purchase supply volume requirements for four years and then you have some expansions. Does that guarantee a dollar amount, or does that guarantee a percentage of that whey will require?

Robert Toth

Its guaranteed supply volume and a guaranteed purchase volume, and we can't really go beyond that. So it's volume, not dollar amount.

Richard Eastman - Robert W. Baird

Okay. And then just lastly, in the --

Lynn Amos

The pricing is agreed. It's --

Richard Eastman - Robert W. Baird

I understand. And then just lastly, I am going to ask you some that you normally wouldn't give out, but I think to the street and certainly to us we are well aware of LG Chem trailing off in third and then going to zero in the fourth. And we have all I think historically believe that LG Chem through the bulk arrangement and supply is a meaningful customer. And so, if we try to do the math that I think is almost a consensus math these days, the dollar revenue number that slipped out of '14 for supplying them is clearly a double-digit millions number. And I'm trying to get some feel from you, if you could at least speak to the difficulty or the hurdle here of getting past at least the first half when LG Chem clearly took some material. What is the revenue comparison that we need to work ourselves over?

Robert Toth

Well, Rich, I am going to give you a far more comprehensive answer than you have asked for, because there is so much bad or misinformation out there, right? So I am going to kind of walk through where we are at and hopefully help you without giving a precise answer because we can't know. And I think you will see why. So as we said, right, first of all we are very disappointed in their recent approach and demands. We didn't like to play this out in the public forum, but we understand we are where we are and we understand the need to be as transparent as possible. So we're going to try to be helpful here.

As we noted, right, we work for years to develop and qualify high quality products, which are proven and demonstrated in the marketplace and on vehicles and on the applications today. We also made major investments and built substantial capacity at their specific request, based on demand forecast they provided to us along with promises of the long-term partnership. And reinforcing that, as I said, we have a signed memorandum of understanding that was established with the intent to result in the long-term supply agreement.

So last year, you are right, their demands became one-sided, unacceptable, we believe weren't the interest of our company, our shareholders and while we were still engaged in good faith discussion from our perspective during the third quarter, their demands became such that we simply had no agreed upon terms under which we do business. As a result of that, we stopped accepting orders. So we sold them very little on the third quarter, none in the fourth quarter. We remained active in discussions through the balance of the fourth quarter and earlier this year. And we continue to pursue a business relationship with them on what I'd call, reasonable terms. These discussions included numerous senior high level meetings, including with myself.

However, they recently informed us that they pursue qualifications of alternate sources of supply to our products. We believe in that in and of itself qualifying alternatives using ceramic coating as a direct infringement of our intellectual property and additional direct infringement of our intellectual property. So we are left with no alternative, but to protect our intellectual property and file that patent infringement suite. So, let me be also clear about something which I said, but I think it's important. They verbally have stated that they will pursue approvals of alternate sources, not that they have them approved already. We repeatedly ask for that confirmation, even the intents that they would pursue those alternatives in writing and we haven't received that. We received no verification of any alternatives being already approved by them or approved by any other customers.

So at some point in time, obviously we have to take them (afterwards). And we would assume they notify their customers of that intent to make a potential change, but we can't speculate about whether or not that will be successful. That's ultimately a function of the cost and risk they will take and ultimately a function of the cost and risk the customers are willing to assume.

In any case, as I said, we are not aware of any solution which doesn't violate our coating IP. They have a brand as people know their business and their franchise is based on SRS, Safety Reinforced Separator, that's ceramic coated separator, which we believe is based squarely on our intellectual property. And as long as we are partners, we didn't object to the use of this technology, including their patenting of possible improvements on our technology which you have seen some of.

Make no mistake, we are disappointed with where they have taken this relationship, and yet even given that word, we are happy to do business with them under reasonable terms, which fairly recognize the value of our products, our technology as well as our intellectual property. So I can't really predict any resolution. All I can tell you is we are where we are and why we had to take action we did, but I certainly can't speculate on what the potential outcome would be.

Lynn Amos

And to come back to your numbers quarter, Rich, I mean we signed the agreement with Samsung, but nothing magically happened when we signed that agreement, and not changed overnight, and we don't know as you know, I'll prep at this comment we all manage the business for quarter and quarter results, there is always the normal quarter-to-quarter variability driven by customer order patterns. But I think the back half of '13 gives you a sense of kind of where our business is. We have one quarter, where it was about $28 million in revenue and very little LG and the next quarter was about 36. That included the technology license fee with no LG. So we think if I look at our EDV business, our EDV business is growing. Our consumer electronics right now is pretty minor. And we are working to regain that, but it's not magically driven back overnight. So I guess that's the best way I can address kind of the numbers.

Richard Eastman - Robert W. Baird

Okay. Thank you very much.

Robert Toth

Thanks.

Operator

Our next question comes from Jeffrey Osborne of Stifel. Please go ahead.

Jeffrey Osborne – Stifel

Great, thank you. Thanks for the details of that question. Just following up on the LG side, can you talk about historically your negotiations with battery companies? How long it took internally to qualify your unseparated material? But I guess more importantly, even if LG or other vendors had qualified alternative to supply to yourselves, historically, how long it took to qualify OEMs?

Robert Toth

Well, it varies. From the ground up we have said it can take several years, right? We have worked with some customers four or five years on the development of EDV applications. Now if they take then a cell that's approved and apply it to a different vehicle, it might only take a couple of years or something, right? But it's a lengthy qualification period. But that's the kind of timeline. The big mask is probably -- again, let me qualify this, it's a function of how much cost and risk you want to take. If you want to approve it out, it's a long time. And if you want to take risk, you could probably make it shorter.

Lynn Amos

If you go back to the battery development when we were involved in battery development and products will be then put on the road and tested in Alaska and Arizona, that's a three, four, five year process. We heard one of their people once say at a conference that it would take four years to get a screw changed in the battery pack and approved. So it ultimately, as Bob said, it's a function of cost and risk and I guess it would be you don't have an alternative, maybe you take more risk. I don't know how to answer that question.

Jeffrey Osborne – Stifel

I understand. Just a couple of others here, maybe just trying the coatings in perspective those common sharing of the past years definitely escalated around the topic. Can you just give us a rough sense of the percentage of your square meter shift today that are ceramically coated, and how that has changed over the past couple of years?

Robert Toth

Well, let me clarify. First of all, you only quote if you are willing to pay for some performance, right? The coating, just like we said was looking in separators. People try to make this easy and dumb it down to be pretty binary. It's not, right? At the end of the day, we talk about coating like it's a coating or not, there is a lot of different kinds of coatings. Right? There is one-sided coatings, there is two-sided coatings or one, two, three, four microns per side, there is (fast) coatings, there is roll coatings, there is revere coatings or spray coatings. So we got to be a little bit careful of trying to make this too simple, but at the risk of making it complex that I don't want to do that either, right? So you coat for -- you think about putting on ceramic at another level. You basically do it to enhance either temperature performance or safety under temperature, or you could do it for adding cycle life. So, you basically only coat where you want to pay for that performance because coatings adds cost and adds complexity to the process.

So, clearly as we have seen the trend toward greater energy density, you see a little bit of a trend in both certain electric drive vehicles and certain consumer electronics toward coating for that greater energy density, which gives you the ability to charge faster and all those kind of things. But again, it's a function of what performance are you willing to pay for, because there are also still a lot of applications out there that aren't coated. And so, you will see that it has a place in the industry, but it's -- you have to want the performance and want to pay it for the performance to do it.

We don't -- let me be clear, we don't coat right not. We don't actually coat, right? A lot of it's done at the customer level, some competitors have done it, and obviously as we've said numerous times, we will either have a business relationship because we believe we have a very strong patent position here, or we will have to protect our IP.

Lynn Amos

Yes, and I think as Bob said, within CE, you will see it more as people are trying to ramp up the energy density in the cell and EDV, coating can help mask some deficiencies (that are found), it won't completely overcome them. So the real question you have to ask is what's the value of moving to a cheaper separator? We end up adding cost and taking risk in yields and production or safety or performance in the field or things like that. I mean high-profile battery issues have plagued the industry, so certainly not something we want to be associated with.

Jeffrey Osborne – Stifel

And just a quick clarification Bob, the litany of different process steps that you have mentioned for coding, in your view, any of those types or formulations would infringe on the patents that you folks have? There is not just --

Robert Toth

We have very broad patent coverage on IP here, yes.

Jeffrey Osborne – Stifel

Got you. Two other quick questions here, there are a lot of concerns in the market about pricing, you mentioned that Samsung does have pricing attached to it, which is nice to hear for that full year period, but in the past you have talked about pricing being kind of flattish over the past couple of years. Is that something you could just update us on what you're seeing in the market and if possible just provide a distinction between your Korean facility and your North Carolina facility in that same (way)? I don't know if this is a related question or not. But just on the consumer side, obviously a bit of a disappointment over the past year or two with the market developments there and the lack of growing that. Is there a reason to why you still want to be in that business, just given some more competitive --

Lynn Amos

Well, maybe I will comment here on the pricing directly, answer the question of their upcoming (inaudible) market --

Jeffrey Osborne – Stifel

Yes, absolutely.

Lynn Amos

We'll disclose the effect of pricing and mix on our change in sales in our SEC filings and that will be tomorrow, I guess. But the number, the price impact wasn't a big number in 2013. Overall pricing, it's not very elastic in the short-term due to qualification period. So I want to be clear here, in consumer electrics, we are winning back business for us that remains a very important priority. There has been a lot of wet capacity chasing new application, and that's made the pricing environment there more challenging.

So I think that's what you are alluding to the answers, yes. I'm not going to disclose our pricing by facility, but if you switchover to EDV and EDVs the drive technology has several safety and performance advantages, and there is longer lead time. So it's a little less price elastic, but as we said many times before -- again, I think we already said on this call, we value volume and duration, because this is higher growth application space. And the two things we value are volume and duration, and those that are willing to commit to that, commit to the long-term partnerships for volume and duration they will get a pricing benefit for that. But again, this is a high operating leverage business where volume is really the big favorable leverage to our economics.

Robert Toth

Yes, I think Jeff, you asked a lot there and those are really good questions. So let me first comment on kind of the consumer electronics piece of it. Make no mistake, we are disappointed with where we at in consumer electronics. I have not concern long-term that we will work our way back in. But fact of the matter is that it's been tougher to get in for a couple of reasons. One is we thought we would get qualified back in the summit applications that are selling well, and frankly it proves the kind of barrier to entry there to some extent. Our customers don't have a lot of incentive to do that, right? They don't have incentive to go back to the battery maker and get a new system qualified once it's approved.

So that's kind of hurt us, right? We are working diligently with them on next-generation stuff or working diligently on Second Tier stuff, and we have got -- the war in there is slugging it out just like you would expect in a good competitive environment. So, no issue there, but we didn't recover business that's kind of in devices that are being sold today, and that was little bit of a disappointment to us.

It's an important market, it's not why we invested $300 plus million, but it's an important market and we see it growing and we see leverage associated with our coating intellectual property there. So we believe we will have a good present stock in consumer electronics, but quarter-to-quarter, tough to predict.

The pricing environment -- and I know you didn't ask it this way, but it's a lot of people try to confuse people, and it's not that complex. It's really not that complex. This industry has been around a long period of time, it requires a qualification, if it didn't, we're sure that would be in everything today, right, because we have got the low cost position and we have been in there slugging it out with customers. But fact of the matter is in the short-term there is not a lot of demand elasticity associated with price. But to Lynn's point, right, there is access wide capacity, and guess what? What's not working so well in EDV applications and large format applications? So it's being isolated to consumer electronics at a time where we walked away from some qualifications and have to earn our stripes to get back in.

Again, we will, but at the end of the day, people try to frame, is it competitive or not, binary? And that's not the way to think about it. You need to think about it like a continuum, right, as they are little more competitive or little less competitive, but that will be a function of a lot of variables. At the end of the day, we are pretty satisfied with what we're seeing in the industry right now, dry clearly has proven performance advantages in the large format cells. We have seen that universally. We have seen wet producers gravitate for dry. As we have said, if we can't get it, the alternative is you can't make a battery unless you figure out a way to make wet work and try to mask its' deficiencies. And at the end of the day, we are seeing investments stop in the industry. So if you believe some fundamental supply/demand market clearing point, that's a course correction that's starting to happen. And we have made the investment in dry and we have the cost position in dry. So as that grows we think we are in a great position for the large format cells.

Jeffrey Osborne – Stifel

I understand. I appreciate the detail response, thank you.

Robert Toth

Thanks.

Operator

Our next question comes from Kevin Maczka of BB&T Capital Markets. Please go ahead.

Kevin Maczka - BB&T Capital Markets

Thanks. Can we go back to lead-acid and the margin improvement you saw in the quarter for a minute? Can you just comment a little bit more on when you say there is a mixed benefit, is that geographic mix that maybe it's higher margin business in Asia which is growing faster and the efficiency portion of that, maybe can you just comment what are some of the further initiatives you have that you're pursuing to push those margins even higher on the efficiency front?

Robert Toth

Well, there is a lot there, Kevin, right? We sell our whole host of grades in that business. And so, you can have product mix and you can have geographic mix. As we've said, if you sell more in the regions in which you produce, you have inherently higher margin. If you export more to Asia that impacts margin because of the shipping cost etcetera. And Lynn mentioned that the team with the new business leader, Pete Smith, they are doing a terrific of focusing on margin improvement across the board, and are obviously looking at all of the kinds of things you would expect internally to drive yield, ranging from your (SNLP) process to process engineering and those kind of things. And we are also looking at our customers, because at the end of the day, you're always investing your capital for your lowest margin customer, if you think about it that way. And in Asia, we have grown very, very rapidly, and Lynn kind of mentioned that we're taking a look at optimizing our customer mix as well. So you had all of that kind of going on. You had very favorable product mix, you had very good regional mix and you had some customer selection in the fourth quarter, that all contributed the margin. And the right way to think about it is, we have been doing all the right things, but don't look at fourth quarter as necessarily a go-forward run rate because you have to have all those (moons) line up, but we do expect to see margin improve modestly year-to-year.

Lynn Amos

Yes, the only thing I would add to that is we put expansions in the lines in joint venture in China. We put a small line in Thailand. We've gone through a period of getting those assets up and running, and we are largely through that, and those assets are running pretty well. So comparatively, that's a positive.

And then I'd add a layer on to what Bob said, in terms of this customer mix as well as this product mix and geographical mix, and when you're looking at that customer optimization and you're trying to figure out where is it worthwhile to invest, where do you need to either decide that business you don't want or that the need to adjust the price in order to retain that business and adjusted upwards in order to retain that business, because you certainly wouldn't invest for that. That's the exercise we're going through before we're getting the capital. But it's very rational, and I would hope the process you would expect us to follow to committing capital. So I think the 26% operating income we realized in the fourth quarter in that business shows what the business is capable of, but the right way to think of it is more, if you look at our full year rate in the mid 22% -- 23% range that we are at, and we see that progressing gradually over time, because it appears it's going to be different every quarter.

Kevin Maczka - BB&T Capital Markets

Got it, and on that front, Lynn, in terms of new capital, I think you said half year $50 million CapEx goal for this year is lead in Separations Media growth CapEx. Can you say a little bit more about that in terms of what's coming next after the investments you have already made in Taiwan and elsewhere?

Lynn Amos

We talked about making an investment. We actually thought we might kick it off in '13. So if you think back to early 2013, we had talked about a 25 million or so investment targeted towards capacity in Asia. So we've been driving our facilities and operations trying to improve productivity going through this customer exercise that we just talked about, and we will probably start that $25 million expansion in lead-acid some time in '14. We won't spend all that $25 million in '14, so some of that will rollover in '15. But we will also be spending some money in our Separations Media business, because we also see opportunities there in some of our filtration application – our OEM filtration applications that are growing.

So, that really point being that we are committing capital to those two businesses, Separations Media and the Transportation/Industrial that demonstrate a remarkably consistent performance in cash flow, good solid cash generation that supports this business, good times and bad, and we have a step change growth here in lithium that we're working really hard to fix. So that's where we are going to commit our capital to, and we're working hard to really drive the optionality value of this company in the lithium's business over time.

Kevin Maczka - BB&T Capital Markets

Okay, very helpful. Thank you.

Lynn Amos

Thanks, Kevin.

Operator

Our next question comes from Chris Kapsch of Topeka Capital. Please go ahead.

Chris Kapsch - Topeka Capital

Hi guys, good afternoon. I just have a couple of follow-ups on the discussion surrounding LG Chem and the discussions there, developments there. And just given the implied risks associated with a supplier like that to the automotive OEMs and engaging in re-qualification as they verbally suggested is something that they'd attempt to do. I'm just wondering given the risks to them, the risk to their customers, at any point in your conversations and discussions with them in trying to reach an agreement that's acceptable to you and to Polypore at any point the ultimate customer here being engaged in the discussions on trying to resolve this issue?

Robert Toth

Well, Chris, we can't say much. What I can say is, again, we have asked for their intent to accrue alternate sources in writing repeatedly. And we don't have any verification of that in writing from them. And we don't have any verification from their customers. So, that's about all we can say at this point.

Chris Kapsch - Topeka Capital

Right. And then, when you were originally qualified under this rigorous process for this particular battery, do you -- at the time, do you have visibility in terms of how many model years this particular battery might be used at the volt platform or other platforms? In other words, could --

Robert Toth

Well, you're approved until there is a change, right? There has to be a major change for there to be a different approval, right? So if they run the platform, you are on the platform. If you think about it intuitively, that is the right way to think about it. If you are on volt until there is a major change for some reason and they redesign the volts or redesign everything or something like that, then that would be a new approval. But that hasn't been done.

Chris Kapsch - Topeka Capital

Right, at this point you don't see visibility for the potential for that into the foreseeable model years on that particular platform?

Robert Toth

I'm not sure I'm actually following the question. I think we were approved as people know, right? We didn't disclose what other people did that we are on the volt. I'm not sure if anything else is approved. I mean that's not -- we can't answer that.

Lynn Amos

That question about who the battery supplier has qualified and approved on the battery pack needs to be directed to the battery maker. We clearly have been disclosed that we were the supplier. If they change that, that's their information to disclose, not ours.

Robert Toth

We don't have any verification of that's been done.

Lynn Amos

Right.

Chris Kapsch - Topeka Capital

Okay. And just a different question about your comments about the fact that wet material just doesn't work that well in large format EDV applications, I'm just wondering if there -- are you aware of any instances where a ceramic coated wet has in fact sufficiently mask the deficiencies of a wet separated material on and is being used in EDV applications?

Robert Toth

Well, let me broaden that and give you a more comprehensive answer, because this is a little bit like the people seem to try to confuse people on price and people try to confuse people here. If you're -- as we've said, we couldn't cover the waterfront, right, when electric drive vehicle development was taking place, and there were places where we didn't even get involved because we didn't have the resources or the capabilities at that point in time. And we are in, as we've said, we've seen those people approach us back for drive.

Now, if your choice is not make a battery or try to manage around the deficiencies of what, that's what you're going to try to do. We never said that wet won't work, right? It's got clear deficiencies that you have to manage around, and some risks you might take in those large format cells, shrinkage for instance, oxidation for instance. And you go "Well, okay, so how do you minimize the risk?" Well, if you're only going after a low-energy density cell for instance, then the risk is a little less, and if it's a high energy dense cell, again you get all those kind of things and variables to think about.

So, wet can work. It's a little bit like -- and you could find whatever analogy you'd like, right? I can unscrew a screw with a coin or I could use the tool that's most efficient for it like a screwdriver. You can go on and on with the analogies and examples. What is not the most sufficient or elegant solution?

Now, if your ceramic coating, you've got a different problem called -- unless you've licensed our technology, you've got an intellectual property issue. Ceramic coating, you wouldn't do unless you wanted to pay for the performance of it. And while it minimizes the deficiency of wet in those applications, it doesn't eliminate it, right? You can ceramic coat and manage shrinkage to some extent. Ceramic coating enhances oxidation resistance, but it still doesn't make it as good as dry in that particular case.

So, again, you can use wet. It's always a function of cost and risk. It's not the most elegant solution. It will have an impact on your productivity, if you're a battery producer. And at the end of the day, if your ceramic coating -- again, we're not aware of any solution that doesn't violate our intellectual property in that regard.

Chris Kapsch - Topeka Capital

Well, just a follow-up. Two points on that commentary, in your prepared remarks you talked about I guess LG Chem enhancing the ceramic coating technology, in fact putting, issuing your own patents on that. Can you just provide some more color on that? Does that somehow compromise your claim to IP in this application? And then --

Robert Toth

No, not at all. I mean, patent -- possible or potential patent improvements can always be a patented, right? It doesn't compromise the seminal patent, the foundational patent (impression).

Chris Kapsch - Topeka Capital

Okay. And then the -- you said you're not aware of any solution, but now you have a licensee in Sumitomo Chemical, what if LG Chem were to use their material, which is licensed, which is coated with ceramics licensing your technology, would that not be a solution that circumvents the -- what you're inserting as a violation of your IP rights?

Robert Toth

Well, there is no incentive to do that at all. And that would require needless to say a pretty lengthy qualification period. So, between not having incentive a lengthy qualification period, I'm not sure that that's a logical sequence of events.

Chris Kapsch - Topeka Capital

Okay. And then a complete different subject, I appreciate your comments about acknowledging the favorable credit markets, and just wondering if you could provide any color on what the intent is there in terms of what you might want to try to accomplish and over what timeframe, in terms of --

Lynn Amos

Yes. I don't know that I can say at this point a lot beyond what I've said. I mean, certainly we are sitting with a good stockpile of cash here on the balance sheet for generating --

Chris Kapsch - Topeka Capital

For generating more cash?

Lynn Amos

Yes. We're generating more cash as we go. We are very close and understand the credit market and we understand our balance sheet and our options there. And we're looking at all the options for driving shareholder value. So, I really can't jump ahead of any public disclosures on that point.

Chris Kapsch - Topeka Capital

Okay. Thank you very much.

Robert Toth

Thank you.

Operator

Our next question comes from Brian Lee of Goldman Sachs. Please go ahead.

Tom Daniels - Goldman Sachs

Hi, this is Tom Daniels coming in for Brian Lee. Thanks for taking my questions. First question is just maybe semantics, but when it comes to wet versus dry, I guess I was always on the impression, dry was a process technology and you guy specialized in cost effective tri-layer separators. Could you just confirm that it's your tri-layer separator that is your core IP here? And then for the Samsung relationship, are these predominantly tri-layer separators you are shipping, or am I not thinking about this correctly?

Robert Toth

Well, kind of correctly, but not all the way around. Let me give you a more comprehensive answer. First, we're the only producer in the world that has both, right? We have wet and dry. So we are trying to know what people like about each. And in fact if you look at Polypore more broadly, we're probably the largest or one of the largest wet producers in the world, across all of our product lines, not just lithium, right? So we understand all the process technology here, but in lithium we've got both. And so we know what people want, and we've had both since the development in EDV and large format cells started, and so we clearly know what's the performance differences are, what people cited and what people wanted, that's just kind of an interesting chair to be in from our perspective, which is why we invest in dry since that's what people wanted.

So, we have wet, we have dry, and dry -- now, within each we have hundreds of grades, right? We do have some intellectual property around our tri-layer, you're correct. And that offers some unique performance, and people can certainly use that and they can also use mono-layers. So we have both. And then you layer in the intellectual property we're talking about, which is on the ceramic coating on top of that. So it's kind of all the above to your question.

Lynn Amos

Yes, this is Lynn, to add-on, maybe it's following on, but we make a mono-layer dry PP. We make a mono-layer PE. We make tri-layer, which has polypropylene and polyethylene. I mean, we can make films to whatever customer requirements are in the dry process technology. The process technology is what defines dry, not anything else. And the intellectual property that we have around that process technology, a lot of that's around -- it's not necessarily patented, it's know-how in twenty some years of experience in doing this. And tri-layer, yes, it's a very famous product for us that can make a lot of different variance of dry process products. And that is really a function of specific customer needs.

Tom Daniels - Goldman Sachs

Okay, got it. So, I mean is there a way you guys can help you understand percentage of shipments in the EDV, that is a tri-layer versus a mono-layer, just because I would assume that for the folks who do wet, as you guys are shipping a lot of mono-layer separator into the EDV applications, that to me would seem like it's a less barrier to entry than most of your customer wins are on a tri-layer side where it's specifically harder to do if you are a wet manufacturer?

Robert Toth

Well, unfortunately we can't give without comprising some confidentiality, but the fact that you're aware of it and people talk regularly about it probably gives you an indication of the popularity of it.

Tom Daniels - Goldman Sachs

Okay, that's fair. Then, in terms of the Samsung relationship, is there any way you guys can talk about -- I know in the past you've provided the number of vehicles that you were on, is there any way you can give us a sense of the vehicle platforms that you're on with Samsung or maybe just an aggregate updated vehicle platform number count as we kind of exit 2013 here?

Lynn Amos

Well, I mean I want to address it, I think what we've always said is we expect to be on over 100 by 2015. If your question is even without LG, I think it would be pretty close to that number. And certainly be well over that number by '16.

Robert Toth

And unfortunately or fortunately, we actually don't disclose those things, right? In a couple of cases that got out I believe, and the volt, we didn't disclose that. That's the only reason we're able to talk about those. But as I mentioned earlier, you could probably track down some industry reports and see that there are some models and some brands that are actually taking a lot of time and effort to position these products appropriately in their portfolio to cell.

Tom Daniels - Goldman Sachs

Okay. And do you guys know if you're exclusive for Samsung EDVs, because we do have those contracts and those models, I think everyone is pretty well aware of that. I guess our difficulty is determining which ones Polypore is on versus that are not on?

Robert Toth

No, we can't get into that, but obviously we believe we have got a pretty good relationship with them given the long-term agreement we just signed.

Tom Daniels - Goldman Sachs

Okay, great. Thank you very much, Bob.

Robert Toth

Thank you.

Operator

Our next question comes from Avinash Kant of D.A. Davidson.

Avinash Kant - D.A. Davidson

Good afternoon, Bob and Lynn.

Robert Toth

Hi, Avinash.

Avinash Kant - D.A. Davidson

One or two questions, the first one is that could you talk a little bit the utilization rate that you have earning right in the lithium ion business at this time?

Lynn Amos

Well, it's pretty straightforward. We talked about having about 400 million revenue capacity before that final phase of businesses that -- the final phase of capacity in concord that we haven't completed. So if we have $400 million of revenue capacity and pick your number, you had a revenue number for the quarter. Annualize that, and that will get you to a percentage, it's going to get you in the zip code, it's not perfect, their package and the zip code.

Avinash Kant - D.A. Davidson

Right. And so did you give out the Sumitomo's revenue numbers that you had exactly or we just want to guess it?

Robert Toth

We said in the quarter, there was a one-time licensing fee of $3.5 million offset by some legal expenses. And then we said going forward that it probably be a function of the volume they do, but a few million dollars a year is the way to think about that in the near-term.

Avinash Kant - D.A. Davidson

The legal expenses this quarter were 1 million, roughly?

Robert Toth

We didn't break those out exactly, but that's not too far off, might have been. You ever take it higher or lower, but in that zip code.

Avinash Kant - D.A. Davidson

Okay. And then again, of course, I mean coming back to the same question here; we have the time to figure out with respect to LG and Samsung. I think you didn't gave us the exact number in terms of what percentage of your separator sales are coming from dry versus wet. Is it a majority or not, at least can you give that?

Robert Toth

Yes. I mean we have always been bigger in dry, right? And so it's the majority. But we don't disclose -- we don't break that out.

Lynn Amos

I also said earlier that what that -- what we sell dry into both consumer electronics and into EDV and ESS. I said that EDV and ESS was the majority of our business in the quarter. And that consumer electronics is relatively minor.

Avinash Kant - D.A. Davidson

So, you would agree that within the EDV, the majority of your membrane cells are coming from dry, right?

Lynn Amos

Within EDV, I'd say --

Robert Toth

Yes, hands on. The real key there is it's really not a straight question or anything, right? I mean we have both, and we have both when all this development started and people didn't want that.

Lynn Amos

Nobody come to us and asked us to sample them, and the wet process known for EDV. People generally know that dry process works better. And now, if you can't make a battery, you are going to use wet? If you don't have dry, you are going to use wet? No doubt about it.

Avinash Kant - D.A. Davidson

So does the Samsung contract fell out whether this is for all dry, all wet or electronic consumer --

Robert Toth

We are not going to get into any details on that, other than it's obviously a long-term relationship, we're delighted with it, we sight it for EDVs and ESS, so you could probably speculate on which process that would be.

Avinash Kant - D.A. Davidson

Okay. Thank you so much.

Robert Toth

Thank you.

Operator

And we have time for one more question from Jeff Zekauskas of JPMorgan. Please go ahead.

Jeff Zekauskas - JPMorgan

Thanks very much.

Lynn Amos

Hi, Jeff.

Jeff Zekauskas - JPMorgan

Hi. I think you have 2 million shares remaining on your share repurchase authorization. Do you plan to complete that in 2014 or in the first half of 2014 or first quarter? What's the timeframe for that?

Lynn Amos

Well, technically that 2 million share authorization expired at the end of the year. But the best of technicality, as I said earlier, we're looking at our cash availability, our available cash out of capital structure. We are looking at all of the things we have in our hands to drive shareholder value getting a share repurchase authorization, it's as simple as the decision with the Board, which could be done very quickly. But we are looking at the whole capital structure and we will make that decision before we announce anything otherwise.

Jeff Zekauskas - JPMorgan

Okay. And your stock comp expense, I think was $21 million in 2013. Would it be more or less order of magnitude, what might it be in 2014?

Robert Toth

Well, its non-cash and it's a function of the share price, which is granted, which determine the value of the shares, right? So --

Lynn Amos

I wouldn't expect it to be a lot different in '14.

Robert Toth

Yes. And maybe lower, yeah.

Jeff Zekauskas - JPMorgan

Okay, great. Thank you so much.

Robert Toth

Thank you.

Operator

Those were Q&A session. And now I'll like to turn it back forward to Mr. Toth for closing remarks.

Robert Toth

Right, thank you very much. We certainly appreciate all the questions. We certainly appreciate all the interest in our company. And we very much look forward to reporting our results and progress throughout 2014 with you. Thanks very much, everyone. This would end the call.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for your attendance. You may now disconnect. Have a great day.

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