Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Polypore International, Inc. (NYSE:PPO)

Needham 2012 Growth Conference Call

January 11, 2012 4:50 PM ET

Executives

Robert Toth – President and CEO

Lynn Amos – CFO, Treasurer and Secretary

Operator

Okay let’s get started. The next presentation will be from Polypore International. We’re recommending PPO shares as we think this is company that’s well positioned to benefit from the evolution of the electric vehicle landscape. At this point in time I am pleased to introduce the COO of Polypore Bob Toth and CFO, Lynn Amos also to let everyone know we’re bringing more chairs too. So be patient, thanks.

Robert Toth

Okay, well thanks everyone for taking time to join us today, I appreciate it and I have a quicker here with no obvious button on it. So this will be interesting. I’ll guess which one moves it, good.

I’ll jump right into it. We’ll try to give you some time for Q&A afterwards. I’ll try to keep this at the right level for everyone whether you’re new or pretty familiar with the story. What we are is a leading global high technology filtration company with our core capability in microporous membranes. So as you think about filtration, what we do is we center our capability in microporous membranes. What’s a membrane?

Some of you probably know extremely well what a membrane is but let me kind of describe it right. Your skin is a membrane. There are not holes in the membrane. You get a whole in your skin blood would be squirting out but right now all that’s coming off is CO2 penetrating that membrane, right. So we make membranes not things with holes in it. And we’ll talk about how we apply that to four different businesses.

We talk about global because in fact we are. About 80% of our sales are outside the United States and we’ll talk about that. And we talk about filtration, high technology filtration because we manage the flow of things you can’t see, things that at the nano, micro or ultrafiltration level, things like ions and energy storage applications.

So if you can see it, it’s not anything we’ve been dealing with in terms of managing the flow in our portfolio. And again we’ll talk about that in each particular business.

If you look across our four businesses, the commonality is really on this page. So, in all of our businesses, the highly technical sales, highly technical selling relationships with the customer, so they’re basically oligopolies, relatively few good competitors in the space that have the technical capability and different competitors if you will or different participants by business no one that cuts across the universe or memories that we have.

We’ve got the broadest array of both proprietary process technology and product technology. And by process technology, I mean the way in which we put pores, we put pores into things all of the way as you can and by product technology I mean the things in which we put those pores. And the things in which we put those pores covers a very, very broad range but to keep it very simple couple of ways to think about it, many of them are flat sheet related meaning often thinner than a human hair, three layers thick in many cases could be 9 microns to kind of 20 microns maybe two different polymers in those three layers.

And we make things that are things like hollow fibers which could be if you looked at it a little larger than a human hair, more or like a thread but it would be tubular in structure, meaning hollow like a pipe, right but billions of microscopic pores upon the surface. And again we’ll talk about how we apply those things to our different businesses.

Our markets have a very attractive mix of both growth and stability, meaning about 70% of our portfolio is very high recurring revenue in nature. The other 30% somewhat tied to macroeconomic conditions but typically in the sense of if the macroeconomic conditions are very favorable or very poor, you could either delay or accelerate purchase as you don’t ever just kind of trade them out like you do in some let’s just say luxury item. So it’s a different mix that way.

And I’ve already mentioned that that we’re very global. Easy way to think about is Asia is the biggest region but each of the regions are pretty comparable in size. Asia is over 40%, the Americas and Europe are pretty equally split as the other two regions will have a slide that will show that.

Analysts

Last but not least we’re really in a unique position. I mean, we’re – if you think about membrane companies, we’re a pretty unique asset, right. We’re probably the only one you can think of in the world that centers our business on microporous membranes. And we really are focused on capitalizing on two very long term trends and I joke about it but these are trends our kids and our grand kids are going to be talking about. The demand for mobile or portable energy, we all want to be more mobile.

We don’t want to be tied down with cords and we all want information at our fingertips. And the trend associated with purity as it relates to high performance filtration whether that’s water, whether that’s waste water, whether that’s the deionization of industrial waste water, whether that’s food and beverage or whether that’s raw materials to drive enhancements and yield and productivity and things like that. Virtually everything in the world needs to be pure and that trend will continue, it won’t go the other way.

Okay we have four businesses. Let’s talk about how we apply some of this technology. We have two operating segments. On the left side of the page is energy storage, on the right side of the page is separations media and we have four businesses, two within each of those.

In energy storage, we’re managing the flow of ions. Now what does that mean, when you’re looking at your tablet or your laptop or your blackberry or your – whatever electronic device you’re using, to use that, to power that, you’re pulling electrons and the ions are flowing between the anode and the cathode. They’re flowing through our membrane. Think of it again like CO2 coming through our skin right now. Ions are being managed in one direction. When you’re charging it, you’re putting electrons back. When you’re putting the electrons back, the ions have to flow the opposite way and that’s what we manage the flow of in energy storage applications. We do that in two different predominant chemistries.

The first business, Electronics and EDV is lithium ion chemistries and there is a whole array of derivatives of lithium iron chemistries. The second business, Transportation and Industrial is lead-acid chemistry businesses, our chemistry batteries. We don’t make batteries. We make the separator membranes that we sell for the battery producers.

On the right side of the page, we have a healthcare business that’s predominantly treatment of end stage renal diseases and blood oxygenation where we’re either providing the functionality of the artificial kidney or providing the functionality of the artificial lung. We also have some exciting new growth things that are that are little longer term.

And then the fourth business is Industrial and Specialty Filtration. We talk about that a bit as our home grown business because we basically take technology from all of our other businesses and apply it to unique applications space. So what do I mean by that?

One of our products in that business is really an offshoot of a medical technology for blood oxygenation, where we remove oxygen from processing liquids for pharma and biopharma and microchip manufacturing and flat panel display. And so you use to do that by alternative capital investments. You use to do that by building a force stress system or a vacuum tower or something like that. Today you do it through our modules where we extract the oxygen from those processing liquids.

So right now, in microchip plants around the world there’s probably about 2.5 million gallons per minute of processing liquids going through our modules where we’re extracting oxygen because you can have oxygen making a microchip because it’s an oxidizer. I’ll come back to a page or so on each of the businesses.

The punch line of what I just described is we’re in a unique place where the membranes provide the vast majority of the functionality, the vast majority of the differentiation in the applications but they are fairly to very low cost in use. I’ve already mentioned that we got the broadest array of products, flat sheet hollow fiber. We make tubular products we’ve got module technology and IP. We’ve got the broadest array of processes.

We put pores into things about all the way as you can. Pay separation, which is sometimes referred to as a chemical or wet process where you are introducing a solvent into polymer and extracting it at the microscopic level, dry stretch technology, where you’re basically manipulating the polymer or the molecular structure of the polymer through mechanical techniques stretching and temperature management.

We have multi-layering technology and patents and we can deal with a very broad array of polymers, which is often very important in terms of being able to bring the appropriate set of properties to the application. All of that allows us to participate in some pretty good long-term growth space associated with beverage as I mentioned food filtration, lithium batteries, pharma, you name it. And so we’re pretty excited about the long-term prospect certainly.

Cutting across a page or to on each of our businesses, I mentioned that the first business on that one page was the lithium separator business. And that’s what we refer to here as electronics and electric drive vehicles. Easy way to think about this business is the core market until fairly recently this still is the core market. The core market has largely been consumer electronics and power tools with growth moving in the lawn and garden. That core market is growing about 8 to 20% a year. Some year it is higher, some year it is a little lower but that’s kind of the range of what the experts say.

If you look then at the large format sales, first they went into power tool, large format sales being bigger batteries, went power tools. Now, they are making their way through lawn and garden. That will add some growth to that. Certainly over time drive that to the higher end. And then we’re at the emergence of electric drive vehicles and just to be clear electric drive vehicles covers the range of mild hybrids to plug ins to battery electric vehicles. And of course we’re in the front-end of that and we have an early leadership position in that.

So, when you look at the core growth in this business people would describe it an 8% to 20% kind of growth with additive growth coming from some lawn and gardens trends as well as a especially discontinuous growth and a very positive sense from a electric drive vehicles.

This chart we show probably need to update it because we use to stand up here not that long ago and people would debate whether or not electric drive vehicles are happenings. Well they are happening and they’re happening around the world in the pretty big way they’re just starting to get to be pretty obvious.

These aren’t our estimates but what we use to show was there wasn’t a lot of debate whether or not they will happen the debate is around over what timeline and how big they will be. And fact of the matter is these curves are already wrong on the low side so that’s all that the blue was intended to indicated it let’s not have a big debate on whether or not people will buy hybrids. I could tell you three or four years ago I stood up here and people would say no one will ever buy those things, well about 2.5% of the world is and the whole bunch more are coming out and then people would debate whether or not people will buy plug ins.

And then one came out and it’s selling quite well so the question is what’s the penetration rate over what time period ultimately. We’ve talked about publicly that we’re involved in the development of over 50 vehicles to be launched between now and 2015 and when we’re talking about those, those are name brands that – you think of as car manufacturers and models we’re not talking about niche vehicles and things like that the number could get a lot of bigger when you start including those things. But at the end of the day we’ve established an early leadership position here we’ve got a lot of expansions going in associated with this.

So let’s talk about those we’ve got I’ll do the easy one first Korea at the bottom that expansion is now complete that’s modest expansion targeted for consumer electronics in Asia. That’s a process that’s quite similar to the manufacturing process that are two primary competitors Asahi Kasei and Tonen would have. And we believe that technology is more applicable for consumer electronics. We have the other process, which is at Charlotte and now our new facility in North Carolina, in Concord, North Carolina.

We’re the only producer in the world that makes lithium separators both ways that you can make lithium separators, which people refer to as a dry process or wet process. We have both. We can sell both into any application. Dry has some unique advantages in Electric Drive Vehicles. The other primary differences between an Electric Drive Vehicle size cell and your laptop or Blackberry or iPod or whatever, is size and light. Batteries are designed to the life of the device.

So, if you have a Blackberry, that battery is designed to last two or three years. A battery for a car is designed and warranted to last eight to 10 years and when you design a battery out that long, fact of the matter is it will come off the car probably with about 80% of its useful life left because you can’t exactly, precisely design catastrophic failure out that far.

So, why is that important? Some polymers will oxidize and they oxidize in a high voltage charge and some won’t. We can use a broader array of polymers I mentioned given our technology in the dry process. So, that’s one of the key advantages that we have we believe for Electric Drive Vehicles. We’ve got five expansions that we’ve announced targeted at Electric Drive Vehicles between those two facilities, Charlotte and Concord. The first one began in the second quarter of 2011 at Charlotte at one of our existing buildings there and that was up and running and we got the full run rate benefit of that in the third quarter of 2011.

The second investment is just beginning to ramp up there at Charlotte. The ramp up process we talk about being it’s hard to paying precisely because we don’t fully control it. The customer has to have a hand in this. It’s about three to nine months, meaning each and every battery has to be approved. Business in lithium each and every battery is unique, if you don’t believe that try changing out a battery with somebody else’s device. Each and every battery is unique. Therefore each and every battery, the chemistry within that has to be approved, so there is an approval process and that’s what we talk about during the ramp up. You get your business one battery at a time.

So, the second investment is just beginning to ramp up in Charlotte. Coincidentally, we’re just opening our new facility in Concord, North Carolina so, that first phase will begin ramping up in the front half of the year here. The second phase begins ramping up later in 2012 into 2013 and the third phase of Concord, which is the fifth expansion associated with electric drive vehicles is targeted to begin ramping up 2013 and be fully operational in 2014.

Now what we’ve disclosed in terms of impact on those is today I believe our LTM run rate in this business is about $183 million from that earlier side, I think that’s what the number was, is that what it was? The first four phases of that, so think of everything except that last one under Concord. We’ve said, allows us to achieve about $400 million run rate capability in that business some time in 2013. We haven’t quantified the last expansion there under Concord other than saying it’s a $105 million investment required some building outfit but the vast majority of that is equipment but we haven’t disclosed exactly what that will be worth in terms of capacity but you can certainly take some guesses.

So, the punch line is, we’ve got a lot of expansions going in right now, starting up right now. Some started up in 2011 to drive growth in 2012 but especially meaningful growth in 2013 and beyond. Transportation and industrial is the lead acid separator business. We’ve been talking about this business for five or seven years predominantly going to Asia and it continues too. We’re the only major producer with a presence there. We certainly have the largest scale there, multiple facilities, the largest facility of its kind in Thailand.

The bar chart on the left is simply to represent, people think of this as an automotive business or as an OEM business. Fact the matter is about 80% of this business is replacement if you ever had your car battery dying, a nice cold wet day you can to relate to that. And in fact the matter is there is about 900 million vehicles on the road approaching 1 billion vehicles on the road that have a finite life with acid battery in it so that’s what drives the high returning revenue nature of this business.

And there is correlation between OEM and replacement. If you don’t get a new car you may not go out a battery that day, but over time your battery is going to die and you need a battery for the old car and that’s the way this works. About 80% of this business is transportation related about 20% are industrial applications it’s harder to measure but probably about half of the industrial business is always replacement.

The takeaway as I mentioned this is a business where we centered on in Asia to-date we’ve been running at a high rate of capacity utilization. What does that mean? About $90 million to $95 million per quarter of revenue capacity in this business to-date and we have new capacity coming online in 2012 the first phase of which is a joint venture with a very large battery producer in China Camel Group. And then we also have a more modest size line coming on in our Prachinburi, Thailand facility and we say modest size because we basically we’re dealing with the roof line we had and putting equipment in where we could.

The Asia region will continue to outstrip growth around the rest of the world Europe and the Americas will grow around GDP may be a touch better especially in some of the former Eastern European countries. The fact the matter is Asia is the highest GDP region and there is continued conversion from lower performing batteries to the higher performing batteries which require our type separator and there are myriad applications in Asia that we don’t think of like converted batteries in India for instance that are nice and growing applications.

In healthcare switching gears over the separation media side of our company. Hemodialysis and blood oxygenation are the two primary subsets of this business today. Those represent about 90% of this business with hemodialysis being the slightly larger of those two.

In hemodialysis, we’ve got the best performing membrane, meaning it most resembles the human kidney and that’s our PUREMA membrane. We recently expanded there and the reason we expanded there is to be able to participate in the industry growth. Then in hemodialysis, the patient population grows about 6% plus per year and there is a trend toward increased frequency of treatment which will drive a little more additive growth on top of that.

In blood oxygenation, we’re the world leader. You know that’s had a bypass procedure, there we provide the functionality of the artificial lung. So, if you have bypass procedure your lungs can’t function in an non-pressurized environment. You open the chest cavity you have to have a way to get the CO2 oxygen transferred. So, what happens is the blood leaves the patient, I mentioned earlier that we make a hollow fiber, that’s either tightly wound in a blood oxygenator or woven into a mat and then wound into a blood oxygenator. And what happens is the blood passes through, through the center portion of that hollow fiber, we extract CO2 and through center portion, we introduce oxygen and the oxygen permeates back to the blood. So, oxygen rich cooler blood, the bad phone Gotham City, that’s all right.

So, in that particular case, we’re the world leader, hands down. We talk about having over 85% market share. Likelihood is very high, as in close to one-to-one that if you know anybody that’s had bypass procedure our membrane provide the functionality during that procedure.

In terms of other medical applications or new treatment methodologies, a lot of very exciting things going on there that I actually don’t like to talk about because you will expect to see it next quarter. But fact of the matter is, these are things that will evolve over a longer period of time and they are very exciting. There are things like cancer treatments with blood filtration.

There are things like treating auto immune disorders with blood filtration, things like rheumatoid arthritis et cetera. Variety of skin disease that are arguably autoimmune related, gravity-fed plasma separation, blood component separation, because if you think about when you give a blood donation, they have to remove the while cells. They often separate into components and you usually need two things for that, usually need a centrifuge and if you have a centrifuge, you need power. Well, on a battlefield, there’s not a lot of that.

Places like India there is not a lot of that. And so we can do that with gravity through our membranes. So the good news is we’re front and centered in these technical developments and the good news is we know how to make these things work technically. The bad news is we don’t drive commercial success. So we kind of go long for the ride as they get in to the market place will benefit from that.

So the take away here is we’ve got tremendous membrane, blood, blood gas capability and we take a lot of that and we apply it to this fourth business, which is our Specialty and Industrial Filtration business. The genesis of this business was membranes. We make membranes, right. We make flat sheet, we make hollow fiber. We make tubular and we make unique performance in them and then we go look for a home for that and that is the genesis of our filtration business.

A lot of people you would think of as a peer companies are often customers or more likely to be potential customers than any kind of a competitor. So that’s what we do with membranes. We sell flat sheets, we sell hollow fiber. We sell tubular membranes et cetera.

Our Liqui-Cel is the offshoot of blood oxygenation technology that I mentioned earlier and there are just numerous applications where basically you need to manage the interaction of blood or liquid gas transfer and we got a real franchise around that, that thing sort of blood oxygenation technology. And then – so those two OEM and Liqui-Cel, they probably make up about 90% of this business. And really the new one for us is Liqui-Flux modules where we may take membranes and put them in modules for unique performance whereas in the past, we’d run down the street and look for somebody to buy those membranes and put them in modules for us.

I don’t know how good we’ll be at that yet but for the sake of an example, there are numerous applications out there. If you think of any distillation process, any distillation process it’s just an inefficient high cost way of separating things. You can do that effectively with membranes. The question is what’s the infrastructure established for that distillation process and how long does it take to displace that and that’s a little bit like Liqui-Cel. As I mentioned earlier, if you went back 10 or 15 years ago that’s what we would have been saying about Liqui-Cel, today it’s a great business for us but back then there were forced draft systems and vacuum towers to do that. We could do it a lot more efficiently with membranes.

So, just quickly running through the four businesses again, top to bottom this time. In the lithium business, you can see the primary revenue drivers are just numerous consumer applications, almost beyond things you’d even recognize. If you got an air sensor on your tires on your car that means you’ve got four lithium batteries in the tires. If you go to the closet and it automatically comes on and if it’s not plugged in there’s a lithium battery in that, paper towel holders, vacuum cleaners, you name it. So they’re just numerous new applications. You have two dimensions of growth here, one more and more of these things being sold around the world, the other, more and more new applications coming out each year.

So, we talk about the end use market growth rates that not that we premise but the “experts” would premise would be greater than 8% and then on top of that is electric drive vehicle growth. Transportation and industrial, again high recurring revenue, big belief worldwide and has a finite light lead-acid battery in it. Industry continues to move to Asia. That’s going to be a greater than GDP business. We talk about that being kind of mid to high single-digits in the long run. More recently we’ve grown faster than that but fact that the matter is over the long run that’s kind of a mid to high single-digit grower.

Healthcare business, I’ve already talked about hemodialysis, blood oxygenation and all of the exciting new things that could fit the broad category of plasmapheresis or new treatment methodologies and then industry owned specialty filtration as a business that should also continue to grow greater than 8% per year, some people would say 10% to 20%.

I’ve already talked about the global nature of the business. This just highlights where our sales are and where our resources and our people are distributed actually pretty proportionally to our sales. Key takeaways, I have kind of hit these things, high recurring revenue nature of business in lead-acid, healthcare pretty stable business despite whatever goes on in the economy and needless to say a lot of new exciting long-term things going on. Filtration growth going across myriad applications, it kind of comes project related though. So people are expecting to see 8% or 10% per quarter that’s not the way that necessarily works and the lithium business we see continued growth in the mobile and portable energy space associated with consumer electronics and power tools and lawn and garden type applications.

We’ve obviously got substantial investment ourselves taking place. I should have pointed out earlier that all of the industry investment has to be out in front of us for assembly plants and for battery plants before we have to start our investments and of course you have got very early stage development taking place in energy storage systems, which a lot of people believe and frankly I do too, it will be very, very large whether or not it’s bigger than electric drive vehicles. I am not sure how you measure that yet but it would be very large and of course here today you have got significant investment associated with the expansions in electric drive vehicles.

So in that note, I’ll hand it off to Lynn.

Lynn Amos

Thanks. The kind of tag along to one of the things Bob said, when we tend to think across our businesses with a bit of a portfolio effect with our four businesses we have our lead-acid or healthcare filtration and our core business in lithium on consumer electronics if you think about the lead acid healthcare infiltration growing mid to high single digit may be low double-digit then you’ve got lithium business that’s got a core business going 8% to 20% with a step change opportunity for EDV. That’s how we can look at the business, right.

We have three businesses that drive our good nice growth business that a lot of companies would love to have with the step change growth opportunity and the three other businesses healthcare, filtration and lead acid provide the funding for the step change growth within lithium. And again all highly profitable businesses, all cash generating businesses and so it’s a bit of self funding there.

So we’ll talk a little bit about our growth over the last few years from 478 million in 2006 to 742 million LTM through Q3. As you look at this chart of revenue and EBITDA one thing I’ll point out here is 2009, you know the easy assumption there is that that was driven by the economy. Well, reality is we’ve got a high recurring revenue business and not much of that was really due to the economy. This led $93 million dip in revenue we had in lead acid, Johnson Controls one of our major customers in 2008 did a virtual vertical integration with our competition.

There is really two players on the lead acid separator side ourselves and a company called Intec when they facilitated management buyout they moved $60 million from our side of the ledger to theirs. So a big chunk of that with another 20 million or so was related foreign currency. So the economic impact on our business pretty small, $15 million to $20 million in the world’s worst economy since the 30s.

So businesses continue to grow. We’ve continued to generate cash and over the last few years we’ve put in a capital structure to support the growth, our leverage the two and a half times. We don’t have bonds maturity 2017 our term loans mature in 2014 we have $100 million of cash on hand. Over the last few years we’ve strengthen our capital structure and increased liquidity. In 2010 we refinanced our bonds and also paid down $75 million of debt at the time. So if you think about that our confidence in our cash flow is that a time period when we are entering the most significant capital expansion in the history of the company we had enough confidence in the cash flow, also pay down 75 million of debt.

We have leverage that has gone from 5 times to 2.5 times. We generate 122 million cash from operations in the first nine months of the year and we’re funding this big chunk of capital that Bob talked about with our cash flow from operations. We have $375 million that we’ve announced since August 2009, 5 lithium expansions for EDV, 1 lithium expansion for consumer electronics. Our hemodialysis expansion and a couple lead acid separator expansions. So, obviously we continue to invest for growth and generating the funding to do that. So, we’ve very comfortable there.

Again, businesses a lot of core strength in recurring revenue base and the step change opportunity I mentioned all the business are in a high value application space a strong margin profile. We have about a 31% EBITDA margin across the enterprise. We talk about our businesses all being within a few hundred basis points plus or minus from that.

Our fastest growing business which is the lithium business is also our slightly higher margin business and faster growing. So, over time our bias obviously is towards margin expansion over time. But again we’ve got a lot of cost going in today as we are investing in this capital. So, of course most of them are already in. I should say through the third quarter we have, we’ve actually open the facility in Concord, so we’re bearing the cost.

We mentioned on the third quarter call, we’ll have few million dollars of incremental cost. In the fourth quarter, by the end of the year, by the end of 2011, we basically have the cost in and now we’ll start realizing the revenue is that – starts coming off in ‘12. And this capacity expansion is going to drive growth in ‘12 and substantial growth in ‘13, as we get all this capacity up qualified and sold them into the market.

So, I think that’s the last really page of data and we’re happy to take questions at this point.

Question-and-Answer Session

Unidentified Analyst

(Inaudible)?

Robert Toth

I think it’s a speculator. People like – you guys, who like to trade in this stock. We’re invested.

Lynn Amos

Yeah, but then we didn’t drive the stock down, I mean...

Robert Toth

Nothing’s changed on our business.

Lynn Amos

Performance is going up, right, so it’s ....

Unidentified Analyst

(Inaudible)?

Robert Toth

No. No, I think you’ve got – I mean look if people want to gamble on this, they can. I mean we’ve been high graded stock, right. We’ve seen two and have seen 75 and fact of the matter is if you look at over the short-term, okay, you can make story, which is not for me to do, okay. We don’t have new capacity meaningful coming on until sometime in 2012. We’ve got a lot of people who made a lot of money in the stock that might need to book some of those gains.

There is a flood in Thailand that people still think we haven’t come clean on in the technical facility. There is of whole player, six months ago which is resolved now. You haven’t heard much about that being resolved but big news, when there was buyer stock, about $3 in an hour when Bloomberg did a super special report on something that was public six months earlier. Since then there has been a remedy and hardly roughly read about it, it is not very newsworthy.

So there’s been a lot of news out there that if people want to speculate they can. Fact of the matter is we’ve done nothing to drive it, I mean we put up some pretty clear direction as to what our business is doing and what investments we’re making.

Lynn Amos

I’d go back to first quarter of 2011, I think we did $0.55 of earnings and we’re entering in a capital expansion period and on that call, you can go back and listen to the transcript there, get the feel out there. I’d say that we did on 50 or we added on 60, it doesn’t change a single thing about where this company is headed. I’d tell you the same thing on second quarter, the third quarter, fourth quarter, first quarter this year with what we’re doing today is going to drive growth in ‘12 and substantial growth in ‘13 and I haven’t figured out how to manage the volatility. We don’t give guidance. We qualitatively we – is what we give, but haven’t figured out how to manage that. I think you have, yes sir.

Unidentified Analyst

(Inaudible)?

Robert Toth

Well, nothing about lifting the spot, right if you think about you remember I mentioned each and every battery is unique, let’s kind of set the stage. You’re managing the ion flow in a very precise way for some balance of a whole bunch of performance, meaning power density, energy density balance, how quickly it recharges, how long it last under use, you name it, right. So, the separator and the electrolyte always work hand and hand in that. They’re not interchangeable products. You actually have to have that system approved in that battery or you’re kind of (inaudible), right that’s the way that works.

So, if we were in a battery and our customer ran out of the role of our material, they couldn’t say hey, go grab a role on the Asahi Kasei after the shelf and let’s keep running even if it was identical ones back, they can’t do that, right. So, now let’s kind of talk about going forward, we’ve been working on Electric Dry Vehicle applications for five years. In fact, when we went public in ‘07, I could tell you that I took a personal beating from a number of people because they were saying, why are you guys increasing SG&A than I said we’re making investments for electric drive vehicles, right. You have to make it out in front because it’s a three to five year development cycle on the front end and we were doing that then so we’ve been partnering with these people for a long period of time.

Now then you’ll say, well, so what does that mean in terms your capacity projections. Well, we have line side on projects. We know things that aren’t announced. We can’t talk about them but we’re involved in these programs whether or not they all sell to their projections I can’t predict but I could tell you that we can apply our thinking to those projections and build capacity appropriately.

So we build to no macro projections, right. I don’t care what anybody says what they think about would penetration rate will be. But that doesn’t mean anything to us. We’re building it kind of from the ground up on particular projects and particular models knowing when they are expected to launch and all of our customers have to be investing out in front of us. So we can see the line of site on the investments in the infrastructure from an assembly plant perspective and we can see the investments in the infrastructure from the battery plant perspective and we’re not building to that capacity, right we’re building to specific projects and projections.

Lynn Amos

I would just add to that right that the lithium business has always been if you look back to the first quarter we went public, right. It always has been and always will be lumpy right, it just in the nature of the business. Now we’re growing and the bigger we grow hopefully the less lumpy it will get but at the end of the day, it doesn’t really mean a whole lot unless we gain these business or lose big chunk of business, right. So as we’re looking at this capacity expansion, we know what we believe but take your most, barest case assume there will be no electric vehicles, assume there will be no plug ins that just 5% of the market over the next four or five years become hybrid vehicles, right. That more than doubles the size of the lithium separated market and we’re not building enough capacity.

Robert Toth

Yeah the – and he mentioned we use the term lumpy the volatility is not because the market swings wildly it’s because you basically have about a dozen really big lithium battery producers and it can change based on their production schedule. Right so our customer can move an order up or back a week, that could be a $5 million order if that falls into a quarter or out of the quarter people think that means something and it just means that they change our production schedule how to hang their batteries. And that’s why Lynn said the real question asked is – does that mean if you have really good quarter up 30% so that mean the industry is now growing that forever no probably not. But it means the production schedule in that particular quarter was favorable. If it’s a more modest growth rate you must have lost some piece of business than it does mean much either, right. It means there is a production schedule move probably the other way. Yes.

Unidentified Analyst

(Inaudible)?

Lynn Amos

No, we don’ t have any new debt coming on. That’s just our maturity schedule on our existing debt.

Unidentified Analyst

Maturity?

Lynn Amos

Yes, that’s how that debt, we don’t have any maturity until 2014 on our terms loans and 17 on our senior notes.

Robert Toth

And we’re funding all over current expansion from operation.

Lynn Amos

She had question.

Robert Toth

Yes. What’s different by business, very different by business. So it’s kind of going left to right the energy storage, the separation media and lead acid, there is two major competitors, there is us and Entek.

Entek has some affiliation with Johnson Controls. So, we have about half the world and more they have under half the world I mean there’s some smaller players in Asia. That’s kind of the way that shapes up. If you look at the lithium separator business there is three major suppliers that have been since the formation of the industry. There is us, there is Asahi Kasei out of Japan and Tonen Toray out of Japan. And then a minor player Hubai which is a licensee of our old technology from the 90s but the three majors have about 80% or 85% of the market and there’s a few minors that play in kind of the secondary market, non OEM stuff primarily in Asia. In healthcare...

Unidentified Analyst

(Inaudible)?

Robert Toth

Well, we don’t disclose that. The three majors are pretty comparably sized out of that 85%. Asahi has probably been the biggest in consumer electronics and then people might actually debate whether we’re bigger than Tonen or Tonen is bigger than us but it gives you an idea we’re all pretty similar, right.

Lynn Amos

But well I would, well, that market share is the short share on consumer electronics and we’re certainly off to an early leadership position in EDB and we believe there’s advantages our product have. But to talk about market shares at this nascent stage of the industry isn’t that particularly meaningful either.

Robert Toth

Yeah sure. And then in healthcare in blood oxygenation I mentioned we’re the world leader. In hemodialysis, we compete with people who have their own basic membrane and basically make membrane to make dialyzers to make their dialysis machines to put in their clinics with their doctors people like Fresenius. Our customers are the people who don’t have membrane capability. So, in the segment of people who don’t have membrane capability, there’s only a couple of us that can kind of supply them and one is a much older technology. And then in filtration, it’s almost irrelevant. We kind of just participate when we have noble performance, yes.

Unidentified Analyst

(Inaudible)?

Robert Toth

It’s really the same things we’ve been looking for which is the confidence level and the projections and enough tangible facts to substantiate it.

Unidentified Analyst

Are your actions giving you greater (inaudible)?

Lynn Amos

We’ve been saying, we’ve been assessing the opportunity for additional investment. I think fact of the matter is we’ve kind of math it out between here and 2013, ‘14 because we may be do a little more in that time period and may be, but we kind of math out between here and 2013, ‘14 and the people. We’ve taken a business that was $120 million run rate at the end of 2010ish in 2010ish and we’re saying we can go to $400 million run rate by 2013. We haven’t commented on the single biggest piece of the expansion. So we got lot of expansion underway.

Robert Toth

What we’ve done today is, we’ve committed all the capital and equipment to fill out our existing sites. Our next step would be for an expansion would be acquiring a piece of land or buying an existing building or doing something, we would have to move to third site. We don’t have land space for building space for more capacity. Yes.

Unidentified Analyst

(Inaudible)?

Robert Toth

I mean, there is reports on that. So I won’t comment on what we know or think but I’ll comment what the reports out on that say that, there is really only one other competitor making substantial investment and that’s targeted to keep up with consumer electronics and that we’ve got the biggest investment underway in the industry. Yes?

Unidentified Analyst

(Inaudible)?

Robert Toth

Look, the right way to think about our business, I mean regardless of what we did over the last 12 months, the right way to think about our business is, the kind of the way I started which is the lead asset, healthcare and especially filtration. They’re going to be mid single digit, low double digit growers with a relatively low beta around that. If we’re limited by capacity or something or yeah you could always have a disruption somewhere that could impact you a little bit but relatively low beta on the other three businesses. On the EDV it’s – we’ve talked about our capacity roll out and that’s all we can sell, right. We can sell what we can make.

Lynn Amos

But the vast majority of the growth, I mean that business alone has, you look in business has grown a lot right, that’s driven the vast majority of the growth

Unidentified Analyst

Sure.

Lynn Amos

Of the rise.

Robert Toth

And clearly that’s going to be the biggest business for us in the near term.

Unidentified Analyst

So the automotive, I mean you have the growth in China in automotive because of China.

Robert Toth

Not really however.

Unidentified Analyst

Trending back towards GDP.

Robert Toth

Well in lead acid, we grew in Asia.

Unidentified Analyst

Yeah.

Robert Toth

And there is a, there is a misperception that Asia is China in that business. China is, there is some big markets in Asia. Right, big market in India, big market in Vietnam, Thailand, Malaysia, Indonesia, Japan,

Unidentified Analyst

China and Korea.

Robert Toth

China and Korea. So, it’s – so China is not Asia in that business, it is in some, but it’s not in the lead asset business. So, we’ve grown across Asia. People have tried to heavily weigh China into that. But it’s a nice market something we aren’t afraid. And then in the lithium business the vast majority of the big players are in Asia.

Lynn Amos

Yeah, may be a way to think about the lead asset business is. There, the markets of Europe, Americas and Asia are all relatively similar size with Asia being slightly bigger. They have to do at different growth rates. Europe and the Americas are kind of GDP 2% or 3%, may be arguably at times a little more or little less. The Asia business, while it’s been growing 20 plus 30% we’ve never projected that as the continuing rate. But it’s probably fair to say for the foreseeable future, it’s mid-teens somewhere in that range you blend them all together you get to a mid to high single-digit growth rate for the business.

Unidentified Analyst

(Inaudible)?

Lynn Amos

Well, the way to think about that is, the real answer to that comes from the sale of the battery pack manufacturer right. But I think intuitively if you think about something, that’s been in development for five years is being launched on the visible flagship right I mean look at the vehicles that these things are on, the Mercedes S class, the BMW 7 Series was their first one. You can order a Porsche 918 Spyder right now for $800,000. They’re going to make 918 of them.

So, you kind of have to say, what are you trying to learn, right, what are you trying to learn from this and how do you want to source recognizing that the parts aren’t interchangeable right. So, when you think of something very technical, very sophisticated new technology not a lot of incentive to dual source, so right. And by the way a lot of cost because you got – these things didn’t just happen. They were running around in Arizona and Alaska and everywhere else before people ever read about that, right. So, these are been development for lot of years. Yes.

Unidentified Analyst

(Inaudible)?

Robert Toth

Yeah, well I think it’s – there is no speculation, we don’t have an offering there at the mid tier we got all the offerings. But firstly I am pretty back based part engineer so I don’t get too excited or depressed about it and if you believe it, it’s going to go to lithium, right. So, it’s kind of frame now the segments of it. People talk about there is AGM batteries, which has a different separator technology two to three times the cost of a flooded lead-acid battery. We plan flooded lead-acid batteries. So, let’s kind of deal with the fact, so, worldwide there is about 400 million flooded lead-acid batteries produced each year and there is about 3.8 million I think was the last number I saw at the AGM, somewhere in that neighborhood. So, let’s deal with the scale of percentages here on that, first.

So, people have put out this big growth rates on AGM. There’s really only a couple of AGM producers, right. There is a lot of flooded producers, so, there is only a couple of AGM producers. So, there is a lot of incentive to obviously have fewer producers than more if you’re playing in that space. Now, you go wide as an AGM battery that use and what does it get used on today? For an AGM battery, as I mentioned it’s two to three times the cost, it’s a much bigger battery and it’s typically used on things that pull power when the car is not running.

So, if you think about a flooded lead-acid battery, it’s always operating around 85% to 90% charge. Turn the keys, start car, you want the car start more than once generator powers battery backup. And AGM battery, if you have a Mercedes for instance, you can buy a new Mercedes today, drive it in the summer, you go out to your garage, eight hours later and there is the fan still running, that makes a lot of sense to probably use an AGM battery.

Now, if you take ideal, stop, start in a suboptimize way and say, I just want to slam that on a vehicle pretty quickly without redesigning that vehicle. I want to get the benefit of the CO2 emissions reduction, maybe get some mileage benefit depending on how you measure mileage standards. You can do that more likely initially and instantaneously with an AGM battery because it’s a bigger battery, right that’s kind of what it’s designed for. Doesn’t mean it’s the most elegant or optimal solution and I don’t know if you’ve driven this yet, but the ideal, stop, start, they are kind of interesting, they’re a little different.

In fact, they read an article and I can’t say this is an absolute fact because we know you can’t always believe everything you read in the press. But I did read an article that said they have optional switches on these in Europe and over 70% of the consumers turn it off and it’s a little different right? Go to your stop light next time, stop the car shut it off. Light turns green, start it, go. The only difference is you’re not pressing the button right, it’s done with the peddles on an idle stop start.

So, if you want to put that on a vehicle to achieve CO2 emissions requirements or something like that you can do that pretty quickly. Now if you believe that and you say that’s the answer, that’s the way to get to CO2 emissions and that’s the way to get to mileage standards then you go to a lithium system but you have to design it in like Buick did with the eAssist, right? Where the engine shuts off somewhere before you stop and start somewhere after you go?

So, all that said I kind go back to the first answer. I don’t get too depressed or euphoric about the potential of idle stop start on led acid. Best case it might enhance the growth rate a little. Worst case it might lower it a little or leave it then that just makes the case for lithium mile hybrids because that’s what they do.

Now back on the growth projections, the best growth projection I have seen from the biggest AGM producer, I think they have the market – stick the number in their deck went to 35 million potential by 2015, don’t hold me exactly to this. If you know whom I’m talking about you probably look up on their website and they’re building capacity to about 17 million. So, what were the other half, see 17 or 20 something like that, I haven’t seen the latest but that means the other half of that’s probably some version of enhanced led, because it’s one thing to stick a $300 battery on a Mercedes or Porsche. Try putting it on a Fiat or an Isuzu, right, so that’s going to be a little different, yes.

Unidentified Analyst

(Inaudible)?

Robert Toth

No. I mean these things all ramp up over a time period. Everything is right on time. But it’s just because you have capacity you can’t sell anything until things get qualified. So we always said around yearend.

Lynn Amos

And right now it’s ramping up. We’re trialing, we’re qualifying, we’re ramping up.

Robert Toth

Yes?

Unidentified Analyst

(Inaudible)?

Robert Toth

Well, each business is a little different. I actually don’t really expect the different dynamic than what’s occurred in lithium since the formation of the industry. It’s an industry that structures incentive around volume growth, high operating leverage business. If you look at this industry since it’s been around my guess is the math would be there’s been a “kind of couple of percent or few percent decline per year” but that’s associated with your volumes going up in the operating leverage.

And I would expect that same phenomena to take place in electric drive vehicles. The volumes will be bigger. So, it will drive the price curve down faster but that’s in a trade off you’d make every day of the week. So, you don’t decide price today, right, you kind of decide it four or five years ago when you put a cost curve together and they put a volume curve together and you kind of marry up on the front end of the development. Yes.

Unidentified Analyst

(Inaudible)?

Robert Toth

Well, I think the first caveat I’ll comment on it then I’ll give it to Lynn. It’s a function of the adoption curve here, right. All of this capacity we’re building is for a kind of a few percent penetration in automotive. So, tell me where we’ll be on that curve and when, right. That’s the first question I have thrown out.

Lynn Amos

I mean I look at our business, I mean we’re a former LBO where there was 8.2 times levered, right, at 2.5 times it’s a walk in the park. I look at our business and its cash generation and the consistency of it and cause a corporate finance, I would think three times leverage is kind of a nice safe place to be. We’re under that now. I certainly wouldn’t have problems going over that based upon the certainty of cash flows but I don’t have the need to either, we’re funding everything we’re doing with cash flow operations and we’ll grow as we continue to grow EBITDA we delever that way as well.

Unidentified Analyst

(Inaudible)?

Robert Toth

No. I mean, what I’ve always said is we’re not trying to build any empire here of fifth or sixth leg of growth, right. I think we’ve got pretty good stuff and we got tremendous growth prospects that are organic in front of us. I only say look if we find something that allows us to get membranes in the market that are faster and unique way, or if we find somebody building another plant that are not being successful because I think these are using businesses to get in, those are the acquisitions we made, right. A Korean facility we bought for asset value four or five years after somebody built it, at the Hangin China facility we bought for asset value four or five after somebody built it.

Unidentified Analyst

(Inaudible)?

Robert Toth

Well, that all happens in advance, I mean that’s the one thing that I think people don’t understand much about our process. First about the multi set of process, actually don’t like calling it a batch but you can think of it as a batch, think of it as I don’t say how many steps but think of eight very, very technical steps in our process, good to say that. So you have to have that in place and produce the product and test the battery and demonstrate to the customer that you could produce exactly that way where the process begin with them.

So, somebody asked about the stock price recommitted, a bunch of people running around in December going oh, there is a huge wave of cost coming after they get all their stuff, it’s like, we don’t understand our business very well. We have to have those people hire trends. We opened Concord in July and you go why jump in Concord in July if you’re just starting to ramp up in 2012. Well you got to have trained numbers. It’s a clean room environment, you got to get all the equipment step by step by step and prove it out and then when we make batteries and we made repeatable progress exactly on those products, then your customer starts testing and then they may have to have their customer test it.

Lynn Amos

Yeah, all those cost for the existing facilities are largely in the numbers today but we said on the third quarter call was we had put a lot of the cost in for that Concord facility and there would be cut two or three million more in the fourth quarter as we got closer to the scale but that’s largely the cost. So we just have cost for that revenue.

Unidentified Analyst

(Inaudible)?

Robert Toth

Yeah, I mean you can go from 20 quality engineers to 40 or something like that, but that’s as you ramp up volumes.

Lynn Amos

That’s right.

Robert Toth

It’s not just cost.

Lynn Amos

Right now, it’s just cost, yeah.

Robert Toth

Right now, it’s cost, yeah, right. But we absolutely look at locations or labor force, right because we have a pretty highly qualified main reports.

Unidentified Analyst

(Inaudible)?

Robert Toth

They can double order and they can get double, it doesn’t matter. Each and every battery is unique and the lead time here is very short. There is no inventory. Nobody gains inventory, I mean they try but it’s really not a good bet, but which firm is going to sell next quarter. Try to figure that one out then it’s pretty expensive land fold you’re on.

Unidentified Analyst

(Inaudible)?

Robert Toth

We make hundreds and hundreds of grades. Could they do it somewhere, maybe they, (inaudible) they’re gaining it, right. I don’t know if somebody’s buys 40 grades which ones are they going to try build the stockpile and hope they sell, because it’s not like they can use it one of other batteries. So it’s a pretty short. I mean, we’re pretty fickle consumers, right. Think about our behavior, what are you going to buy next quarter? Right, well depends on the promotion, depends on their – depends on what they want to make, and that’s exactly what they have to live with, that’s what I meant by orders can move around like crazy, they do. And people think that mean something and it often mean absolutely nothing other than an order moved around, right.

Unidentified Analyst

(Inaudible)?

Robert Toth

Well, we actually have 100 grades, hundreds of grades and it depends on the business. We can make in the lithium business all of the assets are fungible. So that mean you can sell it because you make those, it’s going to be qualified on that line, right. So if today, use an extreme example, because today no more electric vehicles would be sold ever. We could use that capacity for consumer electronics, you just approve those products on it, right. So if you are able to sell it tomorrow, we’ll probably not, it wouldn’t get approved but I can tell you, may be three months, right. So it’s very fungible. Weather doesn’t impact that’s much, I mean look 70% of our – think about the product portfolio we just walked through, right, weather doesn’t impact a heart patient much. It doesn’t impact...

Lynn Amos

He’s talking about lead-acid.

Robert Toth

You’re just talking about

Lynn Amos

Lead-acid is a global business for us. It’s a global business for us so when we have a warm winter in North America and we have cold winter in South America.

Robert Toth

It could impact it in a month but it’s not like impacting it over period of time. So the failure would drive the failure to lead-acid batteries warmer temperatures, that’s why Asia has got higher growth right. You just to happen to notice it when it’s a little bit cool and you need cold crank power. So if this mild, January through March those batteries won’t last any longer in fact it’s probably detrimental and the first cold project – is going to fail. So whether or not, it’s in a quarter, yes it could have that impact, but it doesn’t any meaningful impact on it. Yes?

Unidentified Analyst

What’s your environmental (inaudible)?

Robert Toth

No that’s a positive demand drive. But we don’t use lead or acid, we make the separator membrane that get used in the more sophisticated facilities that are responsible in how they handle that acid right?

Lynn Amos

Yeah. I mean so for us right to the extent they’re battery producers in China that are impacted by that. It could mess with the supply chain for a few months. But there is no more people walking or driving because of whether they can produce the battery there. Over a six months timeframe if it’s extended and affected somebody or the gross amount of batteries in that country they’ve just import more.

Unidentified Analyst

(Inaudible)?.

Robert Toth

Oh yeah, I think it’s going to be huge market. but I think it’s on the next wave of, EDV we’re scratching the surface now and we think about, we have a hard time kind of articulating all the detail. We talk about electric drive vehicles and we talk about it like A type of vehicles, well it is, but it’s while hybrids and it’s pulling in and it’s battery (inaudible) and it’s buses and it’s go on and on and it’s pretty fragmented, it’s not a market right.

That’s where energy storage systems is that where I mean what will happen which is what you’re seeing, to get solar energy total will take energy on the grid you got to manage it somehow very practical. When right to get that out of the grid you got to mange it somehow. Transformers over time in villages or neighborhood you’ll manage full grid differently over time.

And the other hand of that is you’ll see the big players fully integrate what they are doing in automotive to ESS because I mentioned earlier that these batteries will come off the car with 80% of their useful life. So you can re-package it and something where it has 100% useful life which could be an energy storage application. So that’s what you’ll see transpire overtime. And then you’re not amortizing the cost of the battery over 8 or 10 years. You’re amortizing it out over 25 to 30 years.

And LG already has a pilot program in (inaudible) on energy storage, you can look it up on their, probably on their site. So it’s happening there’s lot of pilot programs going in but it’s going to – the uptake will be as it’s needed, right. You’re not going to say, well, let’s wipe out the grid as we know it today and start over. So you’ll see more growth in places like developing economies which we don’t get a lot visibility out in the US press, but that’s what you’ll see taking place and then as the archaic US grid gets updated you’ll see the investment taking place in that line.

Okay, I think we only have time for a minute or two, so thanks.

Unidentified Analyst

Thanks very much. Thanks everyone.

Lynn Amos

Thanks

Robert Toth

Thanks.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Polypore International's CEO Presents at Needham 2012 Growth Conference (Transcript)
This Transcript
All Transcripts