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Executives

Kathy Brosco - Director of Corporate Communications

Bob Toth - President and CEO

Lynn Amos - CFO

Rob Witzit - VP of Finance

Analysts

Kevin Maczka - BB&T Capital Markets

Brian Roth - William Blair

Jeff Zekauskas - JP Morgan

Richard Eastman - Robert Baird

Michael Baum - BlueBay Asset Management

Bret Devor - Longacre Management

Vladimir Jelisavcic - Longacre Management

Michael Levene - BB&T

Polypore International, Inc. (PPO) Q2 2008 Earnings Call Transcript July 31, 2008 9:00 AM ET

Operator

Good day, everyone. Welcome to the Polypore International Second Quarter 2008 Earnings Results Conference Call. Today’s call is being recorded. At this time, I’d like to turn the conference over to Ms. [Kathy Brosco]. Please go ahead.

Kathy Brosco

Thank you. Hello everyone, and thanks for joining us today. Welcome to our conference call to discuss our second quarter finical results. The results we discuss today can be found in our earnings announcement that was released yesterday afternoon and furnished on Form 8-K with the SEC. A copy of the release is also available on our website at polypore.net in the Investor Relations section. In conjunction with the release we also issued supplemental financial information yesterday, which we filed as an 8-K and also posted on our Investor Relations website.

Before we begin our presentation, I’d remind you of some important considerations. This conference call and webcast might contain forward-looking statements within the meaning of Federal Securities Laws. We intend these statements to be covered by the Safe Harbor Provisions for forward-looking statements contained in the Private Securities Litigation Reform Act, 1995.

These forward-looking statements are subject to risks, uncertainties, and assumptions made by management about Polypore and the industry and environment in which we operate. These forward-looking statements are not guarantees of future performance and may differ materially from actual events or results because they involve estimates, assumptions, and uncertainties.

You are cautioned not to place undue reliance on these forward-looking statements which speak only as of the day on which they are made, which is Thursday, July 31st, 2008. Polypore undertakes no obligation to update or revise any forward-looking statements whether as a result of new information, future events, or otherwise. You are also directed to consider the risks, uncertainties, and other factors discussed in documents filed by us with the SEC, including those matters summarized under the caption Item 1A, risk factors in our most recent 10-K filing with the SEC.

Joining me today are; Bob Toth, President and Chief Executive Officer; Lynn Amos, Chief Financial Officer; and Rob [Witzit], Vice President of Finance.

At this point, I’ll turn the call over to Bob who will start things up by sharing Polypore’s business highlights for the second quarter.

Bob Toth

Thank you, Kathy. Good morning, good afternoon, everyone. I’ll begin by providing some general remarks about the quarter and Lynn will provide a more detailed look at the financials.

The company had a strong quarter, and all of our business is performed well. The factors you heard us describe over the last several quarters continue to drive growth. The global breadth and customer base, high recurring revenue, enabling microporous membrane technology in a growing and sustainable demand for mobile power and for purity as it relates to high performance filtration.

Looking at each segment first within Energy Storage, in our transportation and industrial, or lead-acid separator business, performance was strong in an economic environment similar to first quarter. Business grew 36%, driven by strong organic growth, Microporous acquisition and a positive effect from foreign exchange. Regarding Microporous we are pleased with the integration progress and we’re focused on brining margins more in line with the rest of the lead-acid separator business.

As we discussed last quarter, the FTC requested information from us about this acquisition. We are committed to addressing their request quickly, and in the second quarter we incurred sizable expenses to provide the information, while there is a rigid or defined timetable for a review of accounts made a transaction such as us. We hope to know more about their view of the transaction in the third quarter and we remain confident in our position.

On the electronics, or lithium separator side, the market continues to grow due to increasing demand for mobile power, the penetration of lithium-ion batteries, and an increasing number of electronic devices, and lithium-ion batteries penetrating new applications with large formats cells.

Revenue growth in the quarter was strong at 23% and above the last 12 months average. LTM last 12 months now at 17% is of course a more meaningful measure due to nature of this business.

During the quarter we acquired South Korean based Yurie-Wide Corporation, which bring the new membrane process technology to the company’s expanding lithium-ion product portfolio, already the broadest in the industry, and add to our manufacturing base in Asia. We expect this acquisition to be accretive beginning in late ‘09.

Additionally, the new lithium separator facility in Charlotte, North Carolina will be coming on line by the end of this year. And finally we continue to be involved in the major hybrid electric vehicle and electric vehicle development programs.

Moving on to Separations Media, our high-performance filtration business, we had strong underlying growth as well as positive affect from FX. Healthcare had solid performance again with the continued acceptance of our synthetic PUREMA membrane.

It’s important to note that the second quarter of last year included approximately $5 million in cellulosic membrane sales, which were discontinued in 2007. Net of that, net of cellulosics, the healthcare business grew approximately 28%. And our filtration and specialty sales grew approximately 17%, driven by the continued demand for our products and high-performance filtration applications.

At this point, I will turn it over to Lynn to share more detail around the financial results.

Lynn Amos

 

Thanks Bob. The results for the second quarter reflect strength across all businesses, as well as the high-recurring nature of and growing demand for our products. As we reported yesterday, Polypore achieved 26% sales growth in the second quarter, up roughly $34 million over the same period in 2007. Net of approximately $11 million of foreign exchange impact, sales were up 17%.

The second quarter included very strong core business performance and a full quarter of revenues from the acquisition of Microporous, which performed as expected and generally consistent with the guidance provided at the time of the acquisition.

Income from continuing operations excluding one-time items was $11.5 million or $0.27 per diluted share, compared with the loss in the prior year of $1 million or a loss of $0.04 per diluted share. As a reminder, GAAP earnings include approximately $0.08 of non-cash amortization expense on a quarterly basis. Excluding this, cash EPS would have been approximately $0.35.

The second quarter was highlighted by the successful completion of the following offering of common shares; the acquisition of Yurie-Wide Corporation that added a new membrane process technology to our expanded lithium-ion product portfolio, and growth in all businesses at or above long-term market growth rate.

Looking more specifically at the performance drivers, segment operating income margins were up 30 basis points in the quarter, compared with the year ago, slightly below previous quarters but as expected due to margin impact from the Microporous and Yurie-Wide acquisition in the Energy Storage segment.

Recall when we acquired Microporous, we noted their historical margins will lower than what we typically achieved in the lead-acid business. Additionally, when we acquired Yurie-Wide in May we noted that there will be no revenue in 2008, but there would be approximately $2 million of research of development expenses associated with completing and commercializing the process technology.

Following up with what Bob said earlier in second quarter we incurred $1.5 million of expenses associated with the responding to the FTC’s enquire in a very condense timeframe.

Adjusted EBITDA for the quarter, which is a key financial measure in our credit agreement, was $46.7 million compared with $38 million last year. For the 12 months ended June 28th, 2008 adjusted EBITDA was $173.7 million, up from a $146.2 million in a prior year. To be clear, adjusted EBITDA as upon in the credit agreement provides for adjustments including the pro forma impact of acquisitions, which are reflected in our 2008 and LTM numbers. I refer you to the conciliation of net income to adjusted EBITDA in the earnings release.

Turning to interest expense for the quarter, it was $16.1 million, down nearly $8 million compared to last year. Reduced interest expense reflects the debt re-financings that occurred in conjunction with the 2007 IPO transaction.

The year-to-date tax rate increased modestly to approximately 28%, which was driven by the newly constructed plants we acquired in Austria and South Korea related to Microporous and Yurie-Wide respectively.

Once we demonstrate an ability to make a profit in these new tax jurisdictions, we will be able to recognize a tax benefit on operating and losses incurred during the start-up period. Consistent with what we told you last quarter, we expect to achieve a longer-term tax rate in the mid-20% range, plus or minus a few hundred basis points.

At this point, I’ll move on to the second quarter segment result. Beginning with Energy Storage, sales grew 33% over the same period last year. This was up 25% net of the euro-to-dollar exchange rate. And segment operating income was 20% of sales compared to 22% in the prior year, which reflects the impact from the acquisitions and the FTC cost I mentioned a moment ago.

Specifically in the lead-acid battery separator business, second quarter sales increased 36% over the prior year. The sales increase resulted from higher volumes associated with strong core business performance, a full quarter of Microporous, continued strength in the euro-to-dollar exchange rate, and price adjustments to help offset the ongoing escalation of raw material and energy costs. Net of the acquisitions and foreign exchange, the core business grew greater than 10%.

In the lithium battery separator business, sales grew 23% in the quarter and 17% on a LTM basis on continued demand for consumer electronic products and expanding application. Separately as expected, the recovery for loss sales related to major customer’s plant fire is now fully settled. We receive $1.9 million in the quarter and $2.4 million in total, and the customer is back to full operating levels.

Moving onto Separations Media, for the second quarter segment sales were up 9% from last year, down 3% net of the euro-to-dollar exchange rate. As noted in the earnings release, the prior year included sales of cellulosic hemodialysis membrane, which were discontinued in 2007. Excluding those sales and the impact of the euro-to-dollar exchange rate, sales increased by 10%. Segment operating income was 18% of sales compared with 12% a year ago.

Within the healthcare side of Separations Media, second quarter’s sales grew 5%. Backing out the $5 million cellulosic sales from the prior year, sales increased 28%, primarily driven by the continued demand in PUREMA, our synthetic membrane with best-in-class performance and a positive euro-to-dollar exchange rate.

Within the filtration and specialty business, second quarter sales grew 17%, driven by ongoing demand for our high-performance membranes in a growing number of filtration applications and a positive euro-to-dollar exchange rate. The impact of foreign exchange on both Separations Media businesses generally was split proportional to sales within the segment.

Realizing that we have new investors and analysts following Polypore this quarter, I would like to take a moment to address the couple of items that often prompt questions. First, raw material and energy costs; I wouldn’t define this as a critical success factor for the business. We have not immune from the ongoing significant escalation in these costs.

We have largely been able to offset the impact of this through previously introduced price adjustments and internal cost reduction efforts. We will continue to be focused on managing this dynamic in the business.

The second item involves a seasonality of our business. Third quarter results are seasonally lower due to our large manufacturing presence and many customers in Europe. Manufacturing operations and that of our customers are impacted by the European holiday period. It is during this time period when we typically plan for extended shutdowns and investments.

Now, I’ll turn it back over to Bob for some brief comments before the Q&A.

Bob Toth

Thanks, Lynn. We’re very pleased with the performance in the first half of the year and continue to see robust development activity in our markets and across the businesses. The core business is strong and we expect the continue making progress on the recent acquisitions.

We maintain the guidance for fiscal 2008 that we issued on May 15th in conjunction with the acquisition of Yurie-Wide in Korea and the secondary offering. Second half of the year will be impacted by the typical third quarter seasonality and the ramp up of new production lines. As we noted in our press release, given the strength of our business today, we are comfortable with the higher end of our published guidance ranges for fiscal 2008.

On that note, I’d like to open up the call for Q&A.

Question-and-Answer Session

 

Operator

 

Thank you. (Operator Instruction). We’ll go first to Kevin Maczka with BB&T Capital Markets.

Kevin Maczka - BB&T Capital Markets

 

Gentlemen, good morning.

Bob Toth

Good morning, Kevin.

 

Kevin Maczka - BB&T Capital Markets

I might have missed it but what was the contribution to revenue and margin from Microporous?

Lynn Amos

 

What we disclose there was that the results were consistent with what we updated our guidance for, when we announced the acquisition in February. And when we announced the acquisition in February we said that for 10 months of the year revenue would be in the $35 million to $40 million range and EBITDA would be in the $7 million to $9 million range. So that’s a 10-month run rate.

Now going forward, it’s just being absorbed into our lead-acid business and we won’t record on it separately. But that gives you all kind of run rate for that business.

Bob Toth

 

That’s pretty indicative of what you can assume for the quarter.

Kevin Maczka - BB&T Capital Markets

Okay. And I think Lynn you said if you back that out, the core lead-acid business grew greater than 10%. You have got healthcare if back out the cellulosic decline growing 28%. Can you just give some more color on how these businesses are growing so much faster than what I think the end markets are growing at?

Bob Toth

Well, I think the – yes, I’ll try to do that. The lead-acid business, we continue to be unbelievably well positioned in Asia, and of course that’s the fastest growing GDP region. In addition, you’ve got the ongoing conversion from the lower performing batteries and separators to the higher performing batteries which we enable. And I think you might recall that in the first quarter we saw some economic impact on that business. It can’t be – we talked about batteries. You could perhaps delay things a quarter or two, but we saw some recovery on the industrial side quarter-to-quarter. So, we saw nice growth there in lead acid.

On the healthcare side, you really have multiple dynamics that work here. In terms of PUREMA growth, you got PUREMA basis market acceptance of the best-in-class performance. You’ve got of course your customers converting from cellulosics to PUREMA. And then you’ve got your market growth which is north of 6%.

Now obviously, going forward what we continue to say as we hang [our head] on the market growth rate, we have been very, very pleased with the conversion from cellulosics to synthetics. It’s little difficult to take that exactly because of the fact that it’s just not a one-for-one replacement. Customers have to make some investments and things like that. We see very nice growth with all of our customers at this point in time. Lynn do you have any built on that?

Lynn Amos

No, it’s okay.

Kevin Maczka - BB&T Capital Markets

Okay. And if I could just ask one on lithium and then I will jump back in line. You have got three major competitors chasing all this opportunities in hybrids and power tools and other emerging applications that you have talked about. Have you seen any change in the competitive behavior, or is anybody with kind of an excess capacity environment that they live in, is anybody getting more aggressive to try to win some of that early business?

Bob Toth

I don’t know that. Well, they know, I haven’t seen any dramatic differences in behavior by any means. To high value highly technical cell and you make the cell by getting involved in the development effort not by price elasticity. So, we haven’t seen any dramatic change in behavior, the type of cell or sale that occurs. And I wouldn’t conclude that there is a lot of excess capacity in the industry. You have nameplate capacity which is one thing, but largely a relevant in this business. You have effective capacity and people closely guard what effective capacity is.

So you have to when you see announcements on capacity, I mentioned that we really don’t get in the announcement game. You have to some time discount what the stated capacity is to what the true out is for those facilities.

Kevin Maczka - BB&T Capital Markets

 

Okay guys. Congratulations.

Lynn Amos

Hey, thank you.

Operator

We will go next to [Brian Roth] with William Blair.

Brian Roth - William Blair

Good morning Bob. Good morning Lynn.

Bob Toth

Good morning Brian.

Lynn Amos

Good morning.

 

Brian Roth - William Blair

So, couple of questions for you. First of all after the acquisition of Yurie-Wide is it too early to pass this one or are you having a more success in the market for lithium making the cell now you have a broader portfolio there.

Lynn Amos

Well, we are definitely very positive on the receptivity we are seeing. Recall that we said in the way lithium grows as one application at a time each and every battery is uniquely configured. So, we’ve had a very positive response from our customers and from our potential customers. So we are delighted with that. But that’s really all we’ve seen today. We don’t have anything in the market at this point Brian.

Brian Roth - William Blair

Right. Okay. And then going back to lead-acid, I just wanted to drill down a little bit further here. Now, in the first quarter, just looking at the 20% of your business that’s in industrial markets, you actually had a decline in organic sales there. And with the strong performance during the second quarter, looks like you had material increase. I understand that you said people can’t go without their batteries for too long and they are eventually going to come back and buy their battery. But are you going to expect to see this type of volatility quarter-to-quarter, or is it – and can you give us a better idea how much of the volatility is market driven and maybe specifically order driven?

Lynn Amos

I don’t know, but I would describe it as tremendous volatility. I think you always got these kinds of business as I mentioned several times, we really don’t manage these things quarter-to-quarter. These are longer term plays and fact to the matter that any one quarter the timing of big orders can impact performance by quarter, not mean much, but hit March 31, instead of April 1, or the other way around. So, I would kind of come back to what I said last quarter, which is in any given quarter you can see some economic impact on the industrial side of lead-acid in particular and filtration, it’s not dramatic. Right.

If you’re thinking about or had budgeted take an example we have budgeted (inaudible) for the second quarter, you might be able to put that off for a quarter or two, but you battery dies you got a problem loading trucks or getting things upon on racks or off-racks. So, you can’t delay it forever and that’s the kind of using your word there. That’s kind of volatility you can kind of see in that business. As you might try to stretch something out, but at the end of the day you can’t stretch it out too far and so, I think in the first quarter everybody was raining in and tightening the belt and maybe we just saw that come back second quarter.

Brian Roth - William Blair

Yeah, and I think the conclusion I will draw on the industrial is less one, it’s not like we are seeing strong across the board strength in industrial, but we are seeing, it’s more about sequential improvement of that. The industrial market is still slower than it was last year.

Bob Toth

 

That’s right.

Brian Roth - William Blair

Okay, thank you very much.

Bob Toth

 

Thank you.

Operator

We go next to Jeff Zekauskas with JP Morgan.

Jeff Zekauskas - JP Morgan

Hi, good morning.

Bob Toth

 

Good morning, Jeff.

Jeff Zekauskas - JP Morgan

Few questions, in lead-acid batteries, did price grow faster than volume or volume faster than price when you strip out the acquisition?

Bob Toth

 

Yeah, the vast majority of the growth was volume.

Jeff Zekauskas - JP Morgan

In lithium, was there -- can you give us the lithium growth x currency?

Bob Toth

 

Virtually no currency.

Lynn Amos

 

Yes, virtually no currency in that business, we call in the energy storage side the vast majority of the currency impact is lead-asset.

Jeff Zekauskas - JP Morgan

In rough terms, if I remember correctly last year, the second quarter was weak lithium volume quarter last year and third quarter was exceptionally strong. Do you expect to grow your volumes and lithium in the third quarter?

Lynn Amos

 

We haven’t got at end of quarter-by-quarter forecasting of lithium and this is a business that we describe as having its characteristic of kind of lumpiness just as a function of the market. But we are very-very pleased with the development we have there, with the activity we have there, with the receptivity of the acquisition we had there. And so, we are encouraged by the business but I am not about kind of get into quarter-to-quarter sales, just because fact to the matter is how it works, customer could bring in something in the third quarter or move something in the fourth quarter. And in the long term, it means nothing. It just means what they order hit. So, we haven’t tried to get into guessing quarters in that business.

Rob Witzit

 

I think that is also the reason we put out there the 17% LTM number for you, is that really a better way to gauge over a longer period, how we are doing in that market?

Lynn Amos

Yeah, and going back to quarter you referred to as being weak, that was off $1 million. Right, so we got qualify that a little bit and this is really a business that we look at and measure on a longer term basis than one quarter.

Jeff Zekauskas - JP Morgan

And your separations margin really improved nicely and your profit growth was very good. Did that mainly come from the health care side or from the filtration side?

Lynn Amos

 

The filtration business has always been a good one. The healthcare business, Jeff, I think is -- it was one area we take a lot of pride and since the IPO is having fully transformed right if you. You kind of go back in time you had (inaudible) coming down and synthetics of course not yet scaled up. Now we have introduced the best in class performance with PUREMA and we saw a nice ramp up in the economies of scale start to occur there, saw great customer receptivity with that. Secured business out in the market with the made investments to drive the economics even more favorably recall fourth quarter you saw the pick up in margins in the fourth quarter. And we are just seeing continued acceptance and scale associated with that. In fact, we’re in third quarter third quarter here as Lynn mentioned, we take the opportunity to optimize some of our investments in production or driving some production efficiencies in terms of capacity and things like that here third quarter right now as well.

Jeff Zekauskas - JP Morgan

 

I guess lastly, when you look auto battery markets for lithium in 2009, how many cars do you think globally will have lithium battery and who will be the key companies that will try to bring those cars into the market? Can you give us some idea your outlook for next year?

Lynn Amos

Sure, our outlook has not changed from a development perspective. Right? Virtually every major manufacturer has the development program going right now with lithium and there is several ways to slice and think about the growth there. I have continued to say in fact I think you know for the three plus years I have been here I continue to say that the material volume, this will follow the classic automotive adoption curve. Material volume will be post 2011. Three ago we might have debated whether or not that was right that was really going to be 2013 or 2014, and now we might debate whether or not that’s right and might be 2010, because all of signs would suggest acceleration as suppose to a later launch if you will.

So as you think about ATV virtually all the development is in lithium. There still will be a few nickel introductions where it basically get slammed into a few platforms that are existing and modified, but you will see Mercedes has announced their introducing the S Class lithium and that will out at the end of the year, sometime I don’t think that they had picked an exact date. And the S Class will be nice. You can't ask for better flag shift to have out there in terms of the high quality, highly engineered sophisticated vehicle on the road. But in terms of material volumes, I don’t know what total S Class sales are but this will be some subset of S Class sales.

Jeff Zekauskas - JP Morgan

Yeah.

Bob Toth

 

And what I mean by the classic adoption curve, the day you live for, the day that Mercedes announces though put that in the E platform and G platform, and the M platform and the A platform, and the C platform, right, because that’s when you will see the volume. And they haven't disclosed anything beyond the S Class.

Now you have to assume that they are doing a lot of engineering behind the scenes and of course adaptation of engineering is a lot different than the front end engineering and design for one vehicle. So, it would be a much shorter lead time from them to adapt it to other vehicles and I am just using them as an example virtually every car company is in the same boat. General Motors has announced the volt and there is some preliminary volume projections out there beginning in 2010, Nissan has announced to the vehicle ideally in '09 and plug in vehicle by late 2010.

So, you are seeing very rapid escalation of development becoming visible to consumer and that’s a very positive thing. You have seen tremendous consumer receptivity of hybrid of course $120 plus oil helps that and there is no end insight for high oil prices. So we expect to see continue demand there. So, it's a little tough to pay just to your question precisely, when the big volumes hit but it's not tough to see the development programs that are going on and how those will be extrapolated into the broader platforms of the car companies, selling material volumes.

Jeff Zekauskas - JP Morgan

Okay. Thank you very much. It's very helpful.

Bob Toth

 

Thank you.

Operator

We will take our next question from Richard Eastman with Robert Baird.

Richard Eastman - Robert Baird

Hi. Just a couple of questions, Lynn was there any FX impact at the EBIT line?

Lynn Amos

 

Yes, there was a little benefit to the EBIT line relative to last year, it was -- when you get the net income it's under a million dollars. It's not a huge number.

Richard Eastman - Robert Baird

Okay. And then question on the energy storage gross margins. If I pull out the business interruption recovery your gross margins are lower than they were last year. And let me just put and takes there like you revise presumably would be a bit of hit microporous would be lower than lot, it would be lower contribution and then FX would bump that up presumably. So, the question is, is your core lead acid business is the gross margin that you are receiving there? Is it stable year-over-year or higher or lower?

Bob Toth

 

I think you got. I will let Lynn answer it more technically perhaps, but you got, you do have several dynamics there and you decided them pretty well. You got some different margin associated with microporous if you just rolling in terms of the law of average or math here. You don’t have FX working for you. So, I am not sure exactly I heard how you said that but we don’t have any positive from FX. Despite you got raw material energy we are not immune it when said the all of the inflationary pressure when we got those and there is not instantaneous in terms of when we can pass those a long, so we got some upward movement there. And we got a number of production lines where we had cost and of course we had pure cost associated with the acquisition of Yurie-Wide. So, you had more things moving south and moving north in the period. So, it's really as a result of those major changes. Lynn, do you want to qualify that any further.

Lynn Amos

I think you hit it. I mean the biggest single mover in the margin was the impact of microporous in the quarter and then of course why there is also a negative impact. And I took Bob's point in that and my point in the earlier part of the conversation was that we are being impacted by raw materials, but we have action plans in place to address that and manage that as we have in the past

Richard Eastman - Robert Baird

Great. Lynn or Bob, if you look at like a purchase price variance in the quarter year-over-year, so the price less cost increase. Is that a positive or negative number?

Bob Toth

 

Well, yes I mean I wouldn’t just the price less cost increases went do a better but your question is are we 100% recovering our cost increase, is that your question?

Richard Eastman - Robert Baird

Yes.

Bob Toth

 

The answer is no, we are not.

Lynn Amos

No, there is always some lag.

Richard Eastman - Robert Baird

Okay.

Lynn Amos

We are all getting hit with inflationary [taking thrive] in by an airline ticket today it's more expensive. And so we are seeing that across the board and I think when said it well, and generally where raw materials and energy are as a component of our cogs, right, it's well under half. But Lynn said it's not a critical success factor but you certainly can have when you sudden spikes and things you certainly going to have some impact on the new play catch up. We are very-very disciplined and very focused on that to play that catch up quickly and have in fact, over the last several years. So, we have every expectation of doing that with kind of high value sales that we have.

Richard Eastman - Robert Baird

Okay. And then question on the operating margin within the Separations Media business, the filtration and specialty fees is, I think is, been above that kind of 18% mark. How much runway is left in healthcare, is there a lot of room for that business to scale-up in the contribution margin, presumably as well above the 18%?

Lynn Amos

Well, I think the way I had answered that, Rick, as we get operating leverage in that business like we do in all our businesses, right. It’s very consistent that way. And we are running a unit now that was built few years ago. We are running that unit pretty hard. We are optimizing that. So, we should have some links associated with that there. And also as I think I have mentioned several times, some time over the next 6 to 18 months we will have to think about and just to find expansion potentially with PUREMA if we continue to see the growth. So, I think, I don’t know that I would characterize, it's a little tough question to answer because I don’t know what I characterize at any differently than any of our other businesses, where it’s a very low variable cost business and you get economies of scale and you get production efficiency as it ramps up

Bob Toth

 

That’s right. I think particularly what you have seen over the last few years in healthcare with scaling down of cellulosics, drove our margins down in scaling up of synthetics flow draft. I mean I think, as we continue to drop the volume in the healthcare business, particularly in PUREMA, it should be additive to the margin.

Richard Eastman - Robert Baird

Well, I guess maybe the point was on healthcare side, at one point, let’ s say PUREMA volumes went there to even breakeven. Now obviously they have improved dramatically, but one would assume with volume going forward that they would come in at more typical conversion margin, incremental margin.

Bob Toth

 

I think the way to think about it, Rick, is I am going to work for memory here for a bit, so forgive me if this is isn’t that on. I think you look at fourth quarter in that business. It has been great quarter in terms of margin and all the moons landing up with very-very good production. First quarter, we didn’t have as optimal of a production efficiencies and things like that and, so you kind of had a range there of operating margin in that business, which is probably not a bad range to think about kind of going forward and then promising that we should get additional operating leverage as that business grows.

Richard Eastman - Robert Baird

Okay, alright. And then just a last question, the filtration and specialty, I think I can work my way towards this number but what a currency add to that 17% growth?

Bob Toth

 

As we don’t really get in with that (inaudible) business, but the currency within Separations Media is really proportional to sale. I think we were to think of –

Lynn Amos

 

It was 11 total in the quarter.

Bob Toth

 

Right.

Lynn Amos

 

And that was kind of spilt 7 and 4, it's a little round numbers. 7 and 4 between energy, storage, Separations Media. And then within Separations Media you can conclude that it’s pretty proportional to sales. That will get it pretty close.

Rob Witzit

 

And we think about the filtration being, we said all the businesses were at or above our long-term trend rate and you will see in lot of our investor presentations that filtration is a market we didn’t think about it as 80%-ish growth rate.

Richard Eastman - Robert Baird

Okay, very good, thank you.

Bob Toth

 

Thanks Rick.

 

Operator

We will take our next question from Michael [Baum] with BlueBay Asset Management.

Michael Baum - BlueBay Asset Management

I am sorry, I missed the start of the call, but I just wonder if you could provide me with the organic growth rates on constant currency basis for the businesses, lead-acid, lithium, healthcare and filtration, please?

Bob Toth

 

Let's start at the top with the total, Lynn I don’t have the number right in front of me. It's about $11 million of FX impact at the top line.

Lynn Amos

 

That’s correct.

Bob Toth

And that was split between energy storage in Separations Media roughly again easy numbers here 7 and 4. In energy storage virtually all of it, the vast majority of it is lead-acid.

Michael Baum - BlueBay Asset Management

Okay.

Lynn Amos

No, currency impact on lithium, and in Separations Media we just said take that little over four and kind of divided proportionally to those sales for those businesses within that segment and you get pretty close.

Michael Baum - BlueBay Asset Management

Okay. On the acquisitions?

Lynn Amos

As we mentioned that the --

Bob Toth

 

There is only that qualify just to be clear there is only one that really contributed revenue here. Right. The Yurie-Wide acquisition in Korea for our lithium business was a pure cost play. That’s we’re finalizing the development of the product and we will introduced and we said that there won't be any revenue in '08.

Lynn Amos

 

And then as we said on few minutes ago that the microporous acquisition has performed generally in line with the guidance update that we provided when we made the acquisition, we made the acquisition on February 29. We set the impact on revenue to be $35 million to $40 million for 10 months and the impact on the EBITDA would be $7 million to $9 million for 10 months. So that get you kind of a monthly run-rate. Now challenged there is we’re absorbing that business into the rest of lead-acid business and we’re not going to continue to report on it separately, because we can move volume between plants.

Bob Toth

 

You could bank our guidance, 10 month guidance into a pretty accurate look at it though quarterly.

Michael Baum - BlueBay Asset Management

Okay, thank you very much.

Bob Toth

 

Thank you.

Operator

We take your next question from [Bret Devor] with Longacre Management.

Bret Devor - Longacre Management

 

Hi. Thank you very much for taking my question. We have been seeing some literature on potentially on lithium-ion batteries produce without separators. I wanted to see if you had any comment on that and the ability to actually advance the technology?

Bob Toth

I don’t have any real comment. I think people try to do that for years I mean forever basically since what it has been around I don’t think it has been very fruitful today, I mean Lynn you probably have more history on that than I do.

Lynn Amos

There is announcement in this space about new technology every day. I just thinking you have to always kind of decide what's really going to get commercial.

Bob Toth

 

I think it's great concept, but I think it's has been around for like it has been around and we haven't seen any stuff change improvement that way.

Bret Devor - Longacre Management

 

Okay. Great. Thank you very much.

Bob Toth

 

Thank you.

Operator

We will go next to Vladimir Jelisavcic with Longacre Management.

 

Vladimir Jelisavcic - Longacre Management

 

Hi. Thanks a lot. Let me take a question. Question regarding the percentage of separator cost relative to total battery package that anode cathode and all of the different parts, can you just give us a rough sense of what that percentage is for the different categories of energy storages?

Bob Toth

 

Yes, absolutely. In lead-acid, the separator is providing a tremendous amount of functionality and it's typically well under 5% of the cost, good round number there. And in the lithium-ion batteries again providing the vast majority of the functionality and working hand and hand with their electrolyte in that case and it's typically under 15% of the cost.

Vladimir Jelisavcic - Longacre Management

 

Understood. Does it change with the size of the battery much?

 

Bob Toth

 

Probably not dramatically, no, no it shouldn’t. I mean, it’s basically, the size of the battery is largely, you got same insides right, just having a different dimension of housing, so generally speaking I think that’s pretty proportion.

Vladimir Jelisavcic - Longacre Management

Okay, thank you, I appreciate that.

Operator

(Operator Instructions). We go next to Michael Levene with BB&T.

Michael Levene - BB&T

Good morning. You answered most of my questions, just on regarding the technology, I have seen absence packs on lithium ion separator and I have seem them on TV a lot. How should we think of this, is this just marketing or do they have some technology that may be a little bit better than what’s out there?

Bob Toth

 

Well, I think you have to start with really asking in that question, but let’s talk about the market, right. It’s a pretty fine eyed or well defined universe of engineers that would be working on these things. And so, I think you have the question what would be the most effective and efficient way to get to that audience. But having said that we are absolutely delighted with the fact that they are advertising because it impacts consumer awareness and it’s the classic of one coke advertisers, Pepsi sales were up too.

So, it’s bringing a lot of consumer awareness to the development of lithium ion batteries in hybrid vehicles. But having said that I can’t really say why they are doing it and what impact it's really having beyond that. In terms of their product, we haven’t seen anything that has been a normal breakthrough. Again, I have to kind of refer you to that to them, but we are pretty confident of what we see in terms of development and how our products fits in that marketplace and I really, I can't speculate too much about why they are doing it.

Michael Levene - BB&T

Okay, and then on the $1.5 FTC cost, how of much that is internal versus external resources that you had to go out and pay for?

Bob Toth

 

I can't say that, I made a slice of that but that’s probably a lot…

Lynn Amos

 

Primarily external.

Bob Toth

 

External, yeah, I mean it's basically you have a tremendous level of activity in a very condensed time period and so that’s what occurred in the second quarter.

Michael Levene - BB&T

Okay, thanks very much.

Bob Toth

 

Thank you.

Operator

And it appears we have no further questions at this time. I would like to turn the call back to our speakers for any additional or closing remarks.

Bob Toth

Great. Thank you very much. Well I would like to thank everyone for their support, their interest and the coverage of the company, we certainly appreciate it, and we look forward to talking with you again next quarter. Thanks.

Operator

And once again that does conclude today's call. We do appreciate your participation. You may disconnect at this time.

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Source: Polypore International, Inc. Q2 2008 Earnings Call Transcript
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