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Polypore International (NYSE:PPO)

Q1 2014 Earnings Call

May 08, 2014 4:45 pm ET

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

Thomas Daniels - Goldman Sachs Group Inc., Research Division

Christopher Kapsch - Topeka Capital Markets Inc., Research Division

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

Robert W. Mason - Robert W. Baird & Co. Incorporated, Research Division

JinMing Liu - Ardour Capital Investments, LLC, Research Division

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

Operator

Good day, ladies and gentlemen, and welcome to the Polypore International Incorporated First Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Kathy Brosco. Ma'am, you may now begin.

Kathy Brosco

Thank you, Marcus, and welcome, everyone, to our call today to discuss our first quarter 2014 financial results. Joining me 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 a presentation containing supplemental financial information are both available on our website at polypore.net in the Investor Relations section and 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 materials which can be found on our website in the Investor Relations section. At this point, I'll turn the call over to Lynn to discuss the financial results.

Lynn K. Amos

Thanks, Kathy. As we reported this afternoon, in the first quarter, sales were $161 million, up approximately 11% year-over-year. Adjusted EPS was $0.30. Segment operating income was $29.4 million and adjusted EBITDA was $42.5 million. Regarding segment results, beginning with Transportation and Industrial. Sales in the quarter increased 4% from the prior year, up 5% when excluding the effect of foreign currency and driven by volume growth in Europe and Asia. Segment operating income was 22% of sales, consistent with last year. While our first quarter results were solid, operating income margins were modestly impacted by some production issues, which has since been resolved. For the full year 2013, segment operating income margin was just over 22%. As we've stated, we expect gradual margin growth from this business over time as we focus on operating efficiencies and increasing the amount we've produced in Asia as that region grows. In the Electronics and EDV segment, sales were up 23% and segment operating income was 10% of sales compared with an operating loss in the prior year. Higher volumes in EDVs were partially offset by a decline in Consumer Electronics. Consumer Electronics sales remain low, similar to last quarter. Leading market indicators, especially new vehicle model introductions, as well as input from customers would suggest higher sales in the Electronics and EDV segments beginning in later 2014 and into 2015.

Moving on to the Separations Media segment. Compared to the prior year, healthcare sales were up 9%, primarily on higher volumes and filtration sales were up 24%, primarily due to growth in microelectronics and degasification applications. There was a modest favorable currency effect that was proportional to sales across both businesses. Operating income margin in the Separations Media segment over the last 3 years has been in the 28% range. And we expect it to remain similar this year. In the quarter, segment operating income margin was strong and comparable to the prior year at 34% of sales.

Moving onto CapEx. At this point, we still expect to spend approximately $50 million for the year, including 2 recently initiated capital investments. One in our lead-acid separator joint venture in China and the other in filtration, both of which allow us to participate in ongoing market growth. As part of our recent debt reduction and refinancing, we completed the redemption of our 7.5% senior notes and repaid all of our prior bank borrowings using cash on hand and proceeds from our new senior secured credit agreement. This resulted in a lower level and cost of debt. These actions are expected to reduce our interest expense by approximately $20 million to $25 million on an annualized basis compared with 2013 interest expense of $39.5 million.

I'd like to highlight one minor item related to adjusted EBITDA. As you know, we reported adjusted EBITDA to be consistent with our credit agreement. For the new senior secured credit agreement, we identified and add back ongoing patent enforcement expenses. Therefore, adjusted EPS reflects that change and going forward, all adjusted numbers will be presented accordingly, including prior period comparables. Before Bob's comments, I'd like to briefly touch on how we think about cash generation and the use of that cash. Over the last 4 years, we've invested approximately $400 million in capital expenditures, reduced debt by approximately $175 million, and repurchased $80 million worth of our stock. We're well positioned to generate significant cash going forward. To be clear, improving our performance in lithium will continue to be our number 1 focus and as you know, our major capacity expansion spending in the lithium segment is behind us. Also in our Separations Media and Transportation and Industrial businesses, investments to continue cash [ph] in market growth only require modest capital spending. Additionally, given our recent refinancing and the low cost of our debt, delevering is not a priority. So we'll continue to assess all options for using cash to drive value, including investments to extend our capabilities to new market and potentially selected acquisitions to build on our organic growth although there is no transaction imminent. And while the primary value driver for our company remains growth, we believe the share buyback program can be an appropriate part of our capital allocation strategy. Based on that belief and our commitment to creating value for our shareholders, the board has authorized us to repurchase up to 4.5 million shares of our stock or approximately 10% of the current number of shares outstanding. At this point, I'll turn the call over to Bob for his comments before we take your questions.

Robert B. Toth

Thanks, Lynn. We remain sharply focused on growing the value of Polypore. Separations Media and the Transportation and Industrial segments, which represent the majority of our company, are stable and growing and provide a solid foundation of cash generation. Their growth is supported by many long-term macroeconomic trends, such as, just to name a few, an aging population and rising access to healthcare and developing economies, as well as increasing vehicle penetration rates and the growing size of the vehicle fleet on the road in Asia. As these businesses grow, they'll continue to create value for the company. In Transportation and Industrial, to reinforce our leadership position in Asia, we're expanding our joint venture in China, as well as assessing additional investments in the region to continue to capitalize on our leadership position in the fastest-growing markets. In Separations Media, we've initiated a capacity investment and high-performance filtration, which will enable us to continue to capture market growth and capitalize on our membrane technology leadership there.

In the short term, growth in Electronics and EDV segment will be the most significant lever to drive value and we're intensely focused on taking actions in this area. We're rebuilding our Consumer Electronics business and while our process has taken longer than we had planned, we believe recent changes in the organization's business and sales leadership, as well as our identification of new projects and development opportunities have us on the right path. Additionally, we believe that enforcing and leveraging our patent-protected ceramic coating technology in Consumer Electronics, where both interest and usage are growing, will help enable growth in this application space. Specifically in Electric Drive Vehicles, which represents a step change growth opportunity, we have the proven technology with the proven capacity already in place and a large investments for substantial capacity are now behind us. As we announced today, we're very pleased to have formalized the long-term supply relationship with Panasonic, which we believe is another substantial data point that highlights the value of our capacity investments and our proven industry-leading products and technology. We're still in the early stages of adoption into the automotive industry, but we believe the introduction of new vehicle models provides consumers with more choice and that will ultimately drive increased vehicle sales. In addition to investing for growth and driving performance throughout our businesses, our recent debt reduction and refinancing combined with the strong cash generation of our businesses gives us flexibility to pursue growth and opportunities to create value for our shareholders. To conclude, we're very fortunate to have 2 segments representing the majority of our company, which provide us with a strong and growing foundation of cash generation. We'll continue to focus on creating value by growing these businesses and capturing efficiencies within them. We clearly understand that electronics -- that the Electronics and EDV segment has the greatest leverage to increase value in the short term. We're taking steps to regain business in Consumer Electronics and in EDVs, we have another long-term agreement in place. We're well-positioned with a substantial proven capacity and we have the preferred technology and products to capture the significant growth opportunity associated with the large-format lithium batteries and Electric Drive Vehicles and energy storage system applications. And we believe we're very well positioned to drive shareholder value as we continue to generate strong cash flow and possess the capital structure that provide substantial flexibility. At this point, Marcus, let's go ahead and open up the call to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Thomas Daniels from Goldman Sachs.

Thomas Daniels - Goldman Sachs Group Inc., Research Division

First, I was wondering on the capacity expansions in lead-acid and filtration, could you quantify those maybe in a revenue terms? And maybe, when you expect to -- those to start coming online, you guys ever generated revenue from those?

Robert B. Toth

Well, I think if you go before we made the major investments in lithium capacity, we always talked about needing modest investments to continue to capitalize on market growth and these nicely growing markets for both of those segments. And so, that's the way I'd encourage you to think about it. This is in a step change, right, where we always talk about nice growth in transportation and industrial. It's a GDP plus business, so we see continued mid-to-high single-digit growth in that business. Asia's growing very rapidly. And of course, we've got a very strong strategic position there and we'll continue to capitalize on that. And in Separations Media, in both healthcare and filtration, those both have nice stable growth in both segments. Filtration is a little faster growing, so we're just making investments to keep up with the growth in those markets.

Lynn K. Amos

As we commit to these -- as we get these projects going, I mean, the capacity will be available in the back half of 2015 and so it's going to take a little while but as the capacity in our existing plants becomes full, this capacity comes online and just allows us to continue to grow. That's the way to think about it.

Thomas Daniels - Goldman Sachs Group Inc., Research Division

Okay. Great. That's perfect. And then clearly, congratulations on the Panasonic relationship. I was wondering if you could shed a little bit more light on this. I know you traditionally had been a supplier to Panasonic. How should we think about this, is this specific vehicle wins that you guys won in a competitive perspective and now you'll be added on a go-forward basis or maybe just anything around the relationship of this specific agreement with Panasonic would be helpful.

Robert B. Toth

Well, you're right. I mean, we've had a long relationship with them and we're delighted with that. This is just like what we've talked about in EDVs since we've been talking about it. We've been working with them for years and qualifying products and getting products approved. And as we said, really starting last year, we talked about new customers coming to market with new vehicles that were being introduced. And so either way to think about it is, many of these customers are -- their vehicles that they're supplying are just coming into the market. So we've been working with them for years just like we said with Samsung. We've been working with for years.

Thomas Daniels - Goldman Sachs Group Inc., Research Division

Okay, okay. Great. And then, just one final one. I know and I'm not sure if you can talk about it but obviously NEC [ph] would be the last one out there that I'm sure everyone's interested. Are you in discussions in mid-term, long-term contracts with NEC[ph]? Or is there anything you can help us on that front just given the importance of the vehicle that these guys are in?

Robert B. Toth

Well, the first thing I'd say is NEC[ph], there's 2 really battery-producing ventures there, right? One is AESC, which is the joint venture between Nissan and NEC[ph] and that's a separate entity from the Nissan facilities in the United States and in Sunderland, U.K. So you have 3 different battery-producing locations with 2 different battery-producing entities, right. And we worked with them for years. I mean, obviously, people have largely associated us with being on those vehicles and we're delighted with the relationships we have there. As I mentioned before, we don't necessarily drive for long-term agreements in all these relationships. We value volume and we value duration. Our customers value certainty of supply and high-quality proven products and so that makes for a nice meshing of a relationship and we feel good about our relationships with our customers. So I can't really comment about any specifics there, but people know what vehicles we're on and know where our products are very proven in the marketplace and our customers know our supply capability and our future capabilities.

Operator

Our next question comes from the line of Christ Kapsch from Topeka Capital Markets.

Christopher Kapsch - Topeka Capital Markets Inc., Research Division

Yes, Christ Kapsch with Topeka Capital Markets. My question is a follow-up on the relationship with Panasonic. I mean, it's very specific to mention that this is a largely -- focus on the large-format batteries. And obviously, it's very visible and public that Panasonic just fired a Tesla, those are for the laptop batteries. So the question is, Tesla's talked about the giga factory and talked about the opportunity to lower costs as a key to drive greater adoption of their vehicles, lower cost of the battery, overall cost and the components in particular. I'm just wondering if there's anything associated with this relationship with Panasonic that could be drawn in terms of the possibility of Tesla's path to reducing cost and to transition from the laptop batteries over to a large-format for the cars, and therefore, you could participate via Panasonic in Tesla more meaningful than the current sort of royalty that you're getting on the ceramic coating in the laptop batteries.

Robert B. Toth

Christ, it's a great question or series of questions there. A lot of which, it's really not our place to answer. What I will say is we've had a long relationship with Panasonic. Very pleased with that. We're very pleased, we're formalizing that in the form of this long-term partnership. We've made a substantial investment in capacity in the United States. We believe we have the preferred products, the preferred technology and the low-cost position. Remarkably important IP, intellectual property, around ceramic coatings, which as you know, we've licensed to Sumitomo. We've got coating capability that we're assessing ourselves. And so, I think we're in a pretty unique position, but I don't have anything to add to that.

Lynn K. Amos

We can serve both large format and smaller format batteries for years. That we're talking about we announced today, and you're correct it's on large-format batteries. Yes.

Robert B. Toth

Most of the battery companies, I don't speak for them all, but as you can see how they're structured just like we are, right. We've got different businesses and most of them have a division between the consumer-related businesses and the large-format sales as you'd expect because there are some differences in manufacturing and those kind of things. So we just wanted to call out that this was for the Electric Drive Vehicle and energy storage system type large-format cells.

Christopher Kapsch - Topeka Capital Markets Inc., Research Division

Right. Fair enough. And then just a follow-up. Tesla did talk about a letter of intent with Panasonic and they talked about breaking ground on the giga factory and that would be sort of an industrial park within which, I guess, Panasonic may make cells at that complex. And then they talked about the manufacturing of other components for the giga factory within that complex. I'm just wondering if, from your perspective, does it even make sense for them to manufacture separators within that complex or obviously you guys have capacity on the ground here in North America. Any comments on what your thoughts are in terms of the prospects for manufacturing separators in-house versus outsourcing to a supplier like yourselves?

Robert B. Toth

Well, I think, well, first of all, you have to know how to make separator to make a separator. And there's relatively few people who actually do, especially the dry. And we've got substantial capacity, we ship it all over the world, hence, this business has high operating leverage because there's -- it's relatively easy to ship, right. The largest raw material as we talk about is predominantly the very precise distribution of air so it's an easily shipped product, low cost to ship. You can always do finishing at locations and those kinds of things to streamline the supply chain and the efficiency of the process. But I'm not going to comment on their behalf by any means but as I've said, we made the investment in this business. We've established the position. We have the proven capacity. We have the proven technology. We've got the IP. We've got the low-cost position and we've seen investments in the industry largely stopped. So I think we're pretty uniquely positioned to capitalize on Electric Drive Vehicle growth in the future.

Operator

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

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

Didn't take much to turn this into a Tesla call. I think there's going to be quite a bit of confusion here in the near term regarding that, but I guess, can you just give us a sense, at all, as to whether the Samsung contract that you signed recently or the Panasonic would be more meaningful in the near term in your view?

Robert B. Toth

I mean, look, first of all, I don't think there will be any confusion over the Tesla situation, right. To date, they're using small format cells. We said this is for large-format EDV, we've got a great relationship with Panasonic. We've got great IP. People can speculate all they want. But fact of the matter is, I don't think it will be that confusing. On the other side of that, I mean, look, these are great long-term relationships. You can't make a battery without having a high-quality separator. And at the end of the day, their growth will be a function of how cars sell. We like the cars that are coming out. We like the brands and the models that can market effectively to consumers. We think there is getting to be a lot more consumer choice and will be. We talked about being on over 100 models by around the end of next year. We're delighted with that and I think you're just on the front edge of seeing a lot of those cars come up. So that's ultimately will drive what they consume from us.

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

Right. Okay, okay. And yes, I'm basing the confusion just on the quick flood of emails I got with that question regarding Tesla right after that press release came out. So I imagine when you get back to your inbox, you'll see some of those. But on consumer electronics, can you tell us just sequentially, were sales up or down and then same question for EV?

Robert B. Toth

I think Lynn said, they were down from last year and sequentially we said they're still low, right. We don't see a lot of downside to Consumer Electronics. We see a lot of upside and we've got to take some corrective action, and we are taking a lot of corrective actions there. We're seeing a lot of opportunities, but frankly, I don't want to get out over my skis and talk about something until we see it in the results.

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

Okay. And related to Consumer Electronics, and some of the things you're doing to rebuild that business, I think it was on the third quarter call that you talked about attempting to increase your presence in the second-tier Consumer Electronics battery market, I guess, particularly in Asia. It seems like an enormous opportunity and I'm wondering if you can give any update as to how you're do in penetrating that market?

Robert B. Toth

Yes, I mean, I think it is a big opportunity. Obviously, we didn't pursue that market for ages. That's grown a lot. I think it will be a sustainable market there because of the type of devices and electronics that they have available that we're not accustomed to seeing in a U.S.-centric market or view. And obviously, we're assessing it. It still takes approvals, right. You still have to work through and get qualified and get approved. And we're working through that and we're putting in place a stronger sales presence. We've got teams formed on it. I like what we see in terms of focus and understanding of the market. But again, I don't want to speculate on when that will all happen because we started from not paying much attention to that to being pretty keenly focused and seeing a lot of interest from people on that.

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

Okay. And then, one more quick one. Can you comment at all about the expected timing of implementing the share repurchase? Is that going to be done over the next couple of years or just roughly, I know you can't talk in specifics.

Robert B. Toth

I'll let Lynn add on that. We're on the front end of -- I mean, if you really think about where the corporation is today, right, let's take a step back. We weathered a lot of challenges and externalities over the last couple of years. We're on the front end of a lot of vehicles coming out. We generate a lot of cash irrespective of kind of giving beyond even current lithium performance. We see upside in our businesses. We see, as Lynn mentioned, we see upside to EDV growth as new models come out and as more choice is there, which is going to do what? It's going to throw off more cash. We have made a major step change investments we needed in lithium. I think that's a distinct competitive advantage because we've seen and everyone has seen our cost position and, as I mentioned, kind of stopped investments. We've got modest capital needs to continue to fund growth in all of our businesses. We're looking at quoting opportunities in lithium, which is again, a pretty modest capital need. So the punchline is, we're on the front end of a lot of cash generation. We've generated a lot of cash over the last several years, while making $400 million of investments. So going forward, that's going to affect the new source of cash and upside on that. And again, we're not going to comment on the implementation of this buyback, but we're on the front end of generating a lot of cash and having a lot of flexibility in terms of how we drive shareholder value.

Lynn K. Amos

I really don't have a whole lot to add to that, except that during the prepared remarks, I tried to lay out, give you a view of the kind of cash we generated over the last few years and how we've allocated that cash. And then spoke to the fact that our capital needs are not going to be what they were over the last 4 years. Our debt reduction is not going to be -- we don't need to reduce debt like we did over the last couple of years. And even we bought back $80 million of stock last year as well. So with that and the combined increase of cash, we'll go through the same allocation assessment of use of that cash as we would always do. But the other options on using the cash are going to be looking at things that drive growth particularly some of those, to things like extending our capabilities in new markets, potentially selected acquisitions that build on organic growth. But we don't have any transaction now and as we pile up cash, and as we generate cash and has the flexibility in which we do have quite a bit of flexibility under our current new credit agreement, we can -- the buyers in the market for our shares. And that's the point. It's part of our capital allocation strategy and specific timing that we report on after-the-fact.

Operator

Our next question comes from the line of Rob Mason from Robert Baird.

Robert W. Mason - Robert W. Baird & Co. Incorporated, Research Division

Lynn, how much cash on hand was used in the refinancing?

Lynn K. Amos

You mean -- look, there's 2 aspects there. We had $140 million, I guess, that's roughly will be the number that was used. Some was used -- while we're -- we would paid off the bonds and we paid off the bank debt. So in effect, we just refinanced for less. Like we had $365 million of bonds and I forgot the exact balance. $270 million of bank debt and we had to pay the premium on the calling the bond. So we used I think it's about $140 million in cash.

Robert W. Mason - Robert W. Baird & Co. Incorporated, Research Division

Okay. Okay. And then, Bob, I think last quarter, you mentioned in the fourth quarter, you did not have any sales to LG Chem? Were there any in the first quarter or year-to-date?

Robert B. Toth

No. We stopped doing business with them in the third quarter of last year and have had no sales since that -- they've not returned.

Robert W. Mason - Robert W. Baird & Co. Incorporated, Research Division

No, I know I understand the nature of the relationship, I'm just curious if anything had changed on that front. And then, just with the Sumitomo license fee, thought to be an ongoing thing. Was there any in the first quarter received from that?

Robert B. Toth

Yes. I mean, we're not going to call it out. I think the way to think about it is, we said it would be a few million dollars, $2 million to $3 million in the early years. It's always going to be a function of current builds and sales. And if you use that number quarterly, that's probably pretty accurate.

Robert W. Mason - Robert W. Baird & Co. Incorporated, Research Division

Okay.

Lynn K. Amos

I want to make one point there on your question about LG. I mean, and maybe it's not exactly what you were asking, but I think it what's become clear now with what we know is LG was intentionally misleading us last year. And if you look at the pre-purchasing that took place, what was transpiring was the pre-purchasing in the second quarter of last year. While they were implying to us that the second half of last year was going to be much stronger and then ultimately came in and started making unreasonable demands. They purchased about $14 million of separator in the second quarter of 2013 so when you look to 2014, that's a number that we'll be comping again.

Robert B. Toth

And you can see the growth we've plowed through that highlights the growth that's occurred in that phase as well.

Lynn K. Amos

With no -- yes, right. With no LG [indiscernible]

Robert W. Mason - Robert W. Baird & Co. Incorporated, Research Division

Okay. Now that's a good point. The -- Lynn, you did mention some interruptions in the lead-acid business during the quarter. It sounds like you're past those but I was just curious what the magnitude of the impact was.

Lynn K. Amos

Sure. It was a little bit -- the nature of them one out play out was, we had some big ice storms here the U.S. that took down our U.S. plants in Kentucky and Indiana that cost us several days of production. That was just a matter of losing production, having it get and getting it back up. I was here in the order, about a few margin points.

Robert B. Toth

Yes, the way you think about it and the reason we really we wanted to identify it is, you had a very strong margin performance in that business in the fourth quarter. And as we talked about then, we had -- the variables were all pretty positive, right. You had a positive production mix, you had a positive sales mix and you had very robust operational efficiency and production in the quarter. First quarter wasn't as strong. We had some weather issues, et cetera. And so we wanted to really highlight the sequential difference in margin and highlight the fact that this is 22% to 23% operating income margin business with the trend toward the positive side of that, of course, as we continue to produce more in Asia where we sell it.

Lynn K. Amos

But that's not instantaneous, right, because you got to have capacity in Asia to produce it, so I would continue to add our investment.

Operator

Our next question comes from the line of JinMing Liu from Ardour Capital.

JinMing Liu - Ardour Capital Investments, LLC, Research Division

First is about the contract with Panasonic. Can you explain to us the guaranteed supply of purchase volume part and whether that is going to be a step up within there for the next 5 years?

Robert B. Toth

I'm not sure I completely follow the question. Are you saying...

JinMing Liu - Ardour Capital Investments, LLC, Research Division

I think it's part of the Panasonic supply agreement announced today, there is a guaranteed purchase volume requirement. I just want to understand whether that's evenly spread over the next 5 years or you have some step up back in the field in there or with the volume requirements?

Robert B. Toth

Well, we can't get into confidential terms, but I can tell you that, obviously, as I said, we value volume and duration and our customer's value with certainty of supply and high quality and proven products. And all of the EDV projections are expected to show substantial growth. And so it's related to that. Beyond that, I really can't say much.

Lynn K. Amos

And I think it's a bit obvious that people who enter into contracts that have guaranteed purchase requirement and for a lengthy term must expect their volume to grow or they wouldn't be inclined to enter into guaranteed purchase requirements for long term.

JinMing Liu - Ardour Capital Investments, LLC, Research Division

Okay. So we should -- okay, all right. I got that. Is it -- actually, it's interesting to hear you guys are mentioning potential acquisitions again, especially with what happened with Microporous. So are you guys focus your targets mainly on the Separations Media segment or so you're looking at the capacity separator industry again?

Robert B. Toth

Well, recall, Microporous was just a very opportunistic acquisition. They were the only producer in the world of rubber separators, still are, all right. So if you look at our businesses, you go -- what are we interested in? We're interested in selling high-value, highly functional products and so we'll look for ways to extend that reach into new applications or new geographies or accelerate our growth in high-growth regions. I think that acquisition was a little unique and that it came our way as opposed to us really being out searching for it. And we don't have anything imminent as Lynn said, but I think with where we're at in life and the amount of cash we'll be throwing off in this business, it's an opportunity to look for ways to accelerate growth.

Lynn K. Amos

Yes, make no mistakes though. We're clearly focus right now on getting our business growing and the directions that it's going. And you can see that I think in the evidence for the last couple of quarters where we landed 2 pretty significant supply agreements on the EDV side over the long term. And we feel pretty positive about that.

Operator

Our next question comes from the line of the Jeff Zekauskas with JP Morgan.

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

So if Panasonic is taking specific quantities, how do you determine price? Are they doing that according to a certain price or the price is left open? How does price enter into the contract?

Robert B. Toth

Well, as we've always said, it's literally exactly what we said in this business since we IPOed in '07, which is, we value volume and duration, right. So when people commit volume and over long periods of time, they get incentive as they grow. And so that's exactly what you could expect in this particular case. It's a high-operating leverage business. We're delighted to have a strong position with them and as they grow, they will get some price incentives and will benefit.

Lynn K. Amos

If you're asking if the prices are defined today, the answer is yes, on the volumes.

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

Okay. Does it represent an increase in average price or a decrease in average price from where you are now or are they roughly the same?

Robert B. Toth

Well, as they grow, they'll get price incentive and we'll make more money because of the operating leverage. I mean, that's really how these things are. I can't get into competitive dynamics here but that's consistent with what we've said literally like I said since we've been public.

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

So currently, your operating margin in EDV is about 10%? Is that a representative margin?

Robert B. Toth

Should be representative of today at the current sales level, right. You're dealing with a law of small numbers. If you go back in time when we were showing growth, people were calculating the contribution margin well north of 50% and some quarters you saw north of 70%.

Lynn K. Amos

Yes, I think the important thing to keep in mind here is, we're sitting here with a capacity to do about a $400 million revenue run rate. And we're carrying the cost of that capacity. Today, we're running at about $30 million revenue per quarter. $120 million revenue run rate. I don't have my calculator in front of me, but that's probably 25-ish percent, 25%, 30% utilization. We're bearing the entire cost of that. This is a low-variable cost business, relatively high-fixed cost business. So as your revenues grow, not a whole lot of incremental costs as you go up and that's where you'll get substantial margin expansion with the revenue growth. You can almost look at the numbers when you look at the comparative number to last year. When you see last year's revenue number at $24 million, I think, was the first quarter number last year in revenue and a slight operating income or a slight operating loss. You can see that where our general breakeven margin in terms of revenue needs to be to make money in this business.

Robert B. Toth

And the easy way to think about it is, with every incremental dollar of revenue contribution margin in this business is north of 50%. That's what -- that's the easy math that people figured out.

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

And then lastly, did your average prices in Electronics and EDV changed sequentially? Did it go up or did it go down?

Lynn K. Amos

No, we'll disclose that in the 10-Q that's actually probably it's -- it's insignificant but I think, it's out now, I think, with the 10-Q was out and we, as always, have disclosure we have in that there's no significant impact from price.

Operator

This concludes the Q&A portion of our call. At this point, I would like to turn the call back to Bob Toth for closing comments.

Robert B. Toth

Okay. Thanks, Marcus. Thanks, everyone. We'd like to thank all of you for your interest in and support of our company. We very much look forward to reporting progress to you for the balance of the year. And Marcus, this concludes our comments. Thank you.

Operator

Thank you for attending today's conference, ladies and gentlemen. This does conclude today's program. You may all disconnect and have a wonderful day.

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Source: Polypore International's (PPO) CEO Robert Toth on Q1 2014 Results - Earnings Call Transcript
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