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Executives

Lynn K. Amos - Chief Financial Officer, Principal Accounting Officer, Secretary and Treasurer

Robert B. Toth - Chairman of The Board, Chief Executive officer, President and Member of Executive Committee

Analysts

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

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

JinMing Liu - Ardour Capital Investments, LLC, Research Division

Christopher Kapsch - Topeka Capital Markets Inc., Research Division

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

Avinash Kant - D.A. Davidson & Co., Research Division

Daniel Holland - Morningstar Inc., Research Division

Polypore International (PPO) Q3 2012 Earnings Call October 30, 2012 4:45 PM ET

Operator

Good day, everyone, and welcome to the Polypore International Inc. Third Quarter 2012 Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Kathy Brosco[ph]. Please go ahead.

Unknown Executive

Thank you, Anne. And hello, everyone, and thanks for joining us today. And welcome to our conference call to discuss our third quarter 2012 financial results. As you know, the results we discuss today can be found in our earnings announcement that was released earlier and furnished on Form 8-K with the SEC. A copy of this release is also available on our website at polypore.net in the Investor Relations section. And in conjunction with the release, we issued a supplemental financial information, which we filed as an 8-K, and also posted on our Investor Relations website.

Adjusted EBITDA, adjusted net income and adjusted earnings per share are non-GAAP financial measures we discuss in this call. I refer you to the reconciliation of these non-GAAP measures to the most directly comparable U.S. GAAP financial measure included in the earnings release.

Before we begin and as always, I'd like to 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 forward-looking statements to be covered by the Safe Harbor provision for forward-looking statements contained in the Private Securities Litigation Reform Act of 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 date on which they are made, which is Tuesday, October 30, 2012. 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 the 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.

Today, we have Bob Toth, President and Chief Executive Officer; Lynn Amos, Chief Financial Officer; Rob Whitsett, Vice President of Finance; and Paul Clegg, Director of Investor Relations.

At this point, I'll turn the call over to Lynn for the financial overview.

Lynn K. Amos

Thanks, Kathy. Before we get started, we recognize that many of you may be affected by the hurricane that is hitting the Northeast this week. We certainly hope all of you and your families are okay, and we wish you the best in getting things back to normal as quickly as possible.

Beginning now with our third quarter results, which as we reported, were consistent with the outlook we provided in mid-September. Sales were $177.6 million; adjusted EPS was $0.37; segment operating income was $33.7 million; and adjusted EBITDA was $47.6 million. CapEx was approximately $28 million in the quarter, bringing the full year expectation to approximately $140 million.

I'd like to highlight that we are nearing the completion of our major capital investment projects, and after several years of major capital investments, we are transitioning to a period of substantial cash generation going forward in 2013.

Moving on now to the segment results, beginning with the Transportation and Industrial segment. Excluding the effect of foreign exchange, sales were up 9% above the prior year period. We had strong growth in Asia, which was offset somewhat by ongoing weakness in Europe.

Also in the quarter, we began to see orders for the lead-acid battery build season in preparation for the winter months.

Asia continues to grow rapidly, well into the double-digit range, and we'll continue assessing the need to get more capacity on the ground there. The Americas are essentially flat, and Europe is sluggish, with the economy impacting the OEM and industrial portions of that business.

The year-over-year decline in segment operating income reflects the costs of meeting growing demand in Asia by exporting from our U.S. and European facilities, as well as the costs associated with our growth investments in Asia.

In the Electronics and EDV segment, as communicated in September, sales were affected by the production levels of electric drive vehicles. Additionally in the quarter, we began to experience economic weakness in the consumer electronics applications.

Segment operating income was 24% of sales, primarily due to 3 factors. First and most impactful, we're carrying the costs associated with the recent manufacturing capacity expansions. Also, we're experiencing the lack of operating leverage from lower sales. And finally, customer and product mix.

This is a high operating leverage business, and we're carrying the cost of meaningful new capacity without having achieved the expected level of sales growth. We believe we have now worked through the majority of the start-up issues at our new Concord facility. We understand the costs we're carrying and are assessing the appropriate cost structure while maintaining the responsiveness and capability to capitalize on growth.

Moving on now to the Separations Media segment. We experienced our typical seasonality in the quarter, and adjusting for foreign exchange, sales were up 2% compared to the third quarter 2011. Health care sales reflected the restart of production late in the quarter by customers that have been impacted by the earthquakes in Italy. And in filtration, about half of this business, primarily the microelectronics portion, was impacted by the economy.

Segment operating income in Separations Media was 24% of sales, compared with 21% in the prior year period. The increase was primarily due to production timing and product mix.

Turning now to our fourth quarter outlook. While the macroeconomic environment will continue to impact portions of our business, we expect the overall fourth quarter performance to improve over the third quarter, with adjusted EPS at the low end of the low $0.50 to low $0.60 range that we previously provided. Health care remains solid, and our customers in Italy have resumed production. And as I mentioned, lead-acid growth in Asia remains robust. And the lead-acid battery build season should continue to have a positive impact into the fourth quarter.

In addition to the continuation of those trends, our fourth quarter outlook premises no further weakening in the consumer electronics market due to macroeconomic factors, as well as the start-up of certain high content EDV facilities late in the quarter. The lithium business is our highest operating leverage business, with order size and timing of orders being impactful in any given quarter.

At this point, I'll turn the call over to Bob for some brief commentary before we take your questions.

Robert B. Toth

Thank you, Lynn. 2012 continues to be a challenging year, partly due to the macroeconomic factors impacting certain components of our business, namely consumer and microelectronics, as well as in the OEM and industrial portions of the lead-acid business. And of course, the biggest variable this year is the production and sales levels of certain high content electric drive vehicles.

12 to 18 months ago, we were completely sold out of capacity, with customers asking us almost daily to build more capacity based on the sales they premised. Today, we know that a plug-in vehicle and a few battery electric vehicles didn't sell the way they were expected, even in our more conservative case. So with perfect hindsight, you could argue that we installed the capacity too early.

While current demand is less than anticipated, that does not change the growing global trend for the electrification of vehicles. Mileage standards and CO2 emission requirements alone virtually dictate the need for the electrification of vehicles in some way.

Let me be clear, when we reference electric drive vehicles, we're referencing the full range of electrification of vehicles, from hybrids, which are internal combustion engines with batteries for supplemental power, to plug-ins, which are battery-driven vehicles yet have a backup combustion engine, to full-battery electric vehicles, which obviously are solely battery driven. Hybrids are clearly growing. The penetration rate of plug-ins and battery electric vehicles is very difficult to predict.

We see ongoing development programs around the globe, and we're working with the leading battery makers. While we currently have the costs associated with our added capacity, which has our attention to optimize, having that capacity enables us to be highly responsive to an upturn in demand when it occurs. We needed capacity, and while the precise timing is difficult to predict, we do have the expectation of utilizing that capacity as the market grows.

While we prefer predictable growth in electric drive vehicles, that's not necessarily practical, especially in the infancy of this industry, where we're living with the volatility of early penetration rates and build schedules.

We appreciate the support from our shareholders who have studied us for a long period of time and who understand where electric drive vehicles are going over the long term. As we're nearing the completion of our major capital investments and with the majority of our cash spend for this now behind us, we're transitioning into a period of substantial cash generation in 2013, and we have the capacity to achieve significant earnings growth potential going forward.

At this point, Anne, I'd like to go ahead and open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Brian Drab with William Blair.

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

So first question on the lead-acid business. When do you think that you'll move past these costs associated with exporting to Asia and the start-up costs at the facilities in Asia? And do you expect margins to move up from the 21% level?

Robert B. Toth

Well, I'd say a couple of things. One is, that answer is going to be a function of the growth in Asia. The good news is, Asia is growing very rapidly. There, we're capitalizing and capturing that growth. We're very well positioned there. And while it compresses margin, we've made further investments on the ground there, both with people resources to sell, as with the capacity we're putting in place in Thailand and China. And so there's multiple costs. You also have, don't forget, seasonality in the third quarter when you look at the lead-acid business in total, so you can't necessarily isolate all of the margin compression to just the costs associated with shipping to Asia. So the good news is, we've got flex capacity in Europe and in the Americas, in the U.S., to ship to Asia to capitalize on that growth, which completely de-risks when you do make the investments. So I'm not about to kind of predict margin quarter-to-quarter, but as we grow, we'll obviously make more money on an absolute dollar basis and you would expect margin to improve over time.

Lynn K. Amos

Yes, I think that, Brian, a point that I'd add to that is, fundamentally, if we produce the product in Asia and sell it in Asia, the margin profile of the business isn't different than if we produce in Europe and sell in Europe or we produce in the Americas and sell in the Americas. The profile of the business is the same. It's the exporting from one jurisdiction to the other that's costly.

Robert B. Toth

And the fact that we put some on-the-ground resources.

Lynn K. Amos

Yes, that...

Robert B. Toth

That was also -- yes.

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

Okay, okay. And then on the lithium side, do you still expect the lithium segment sales to be stronger in the second half of 2012 than the first half of 2012?

Robert B. Toth

Well, we haven't said that. We qualified guidance. At this point in time, we've tried to be crystal clear about what we're linking the guidance we've provided to, right? So at this point in time, I'd say, if those things happen, then we're obviously comfortable with our guidance, but that's what we premise.

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

Okay. I didn't mean to put words into your mouth. I thought that we had said before -- maybe I'm going back too far now, but I think at one point, you had -- your comment was that you expected second half of '12 to be better than first half of '12.

Robert B. Toth

Yes, we re-qualified that, I don't know, a quarter or 2 ago.

Lynn K. Amos

That was September.

Robert B. Toth

Was it September?

Lynn K. Amos

Yes.

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

Okay, okay. And then...

Robert B. Toth

That's right. Yes, before the Investor Day.

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

Right, okay. And then, within the lithium segment, too, in your press release and your comments today, you didn't really -- I don't think that you called out the trial run costs or operational issues that specifically pressure on -- a source of pressure on margins in the third quarter. I think, Lynn, you mentioned that you've moved past those issues. When did you move past those issues? Were they still weighing on margins in the quarter?

Robert B. Toth

Well, I think back in September, we said that the things that were going on in second quarter carried into third quarter. I think the point Lynn made now is that they're pretty much behind us.

Lynn K. Amos

That's right. There were some of those costs in the third quarter, Brian. But to the point I made earlier in the first part of the call, we think they're largely behind us. A lot of the R&D projects that we were working on, as well as the manufacturing issues, we've wrapped up in the third quarter. So at the end of the day, if the question is around the margin of the lithium business, really there's -- you just need to tick through the points, again, that we referenced. I mean, [indiscernible] we're carrying the cost of capacity, and that's the most impactful thing. The -- and you can do the math on that, I mean, on your own and basically see that, that the $20 million to $25 million cost -- annual cost including depreciation, and then you've got the -- just the lack of volume.

Robert B. Toth

Operating leverage, yes.

Lynn K. Amos

And the other things are pretty minor. Product mix is a little bit, customer mix is a little bit, and these costs are a little bit.

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

Can you elaborate? You said I can do the math, $25 million annual cost. What math are you talking about?

Lynn K. Amos

Well, if you looked at the margin that we're generating this year relative to last year's sales level and you make some reasonable premise on what the contribution margin is on the incremental sales we had last year, you can see what kind of operating income we're producing today.

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

Will that kind of...

Robert B. Toth

And quarter-on-quarter.

Lynn K. Amos

And we disclose our depreciation, so you can look at what the run rate of depreciation was in the first quarter of 2011 and you look at what the run rate of depreciation is today. That's going to get you that $8 million to $10 million of depreciation cost. And the total cost structure has gone up $20 million to $25 million, including that depreciation on an annual basis. And that's the part that we're assessing.

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

Right. And that kind of is in line with the next question I had for you. Instead of looking at it year-over-year, could we look for a second just at third quarter of '12, so this most recent quarter, compared with the first quarter of 2012, where the revenue level in the lithium segment was essentially the same, it was $43.5 million this quarter, $42.5 million in the first quarter, but operating profit was down $6 million. Can we just kind of focus in for, just for a second, on that $6 million and break it down? Is it -- I guess, first of all, depreciation is probably another $2 million or so in depreciation from first quarter to...

Lynn K. Amos

About $1.5 million, from first quarter to third quarter.

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

And then what's the next biggest issue after that, that -- in building up to that $6 million, is it the operational issues...

Lynn K. Amos

The full cost of that plant, of that facility. So the Concord facility was still in the scaling kind of up mode.

Robert B. Toth

Yes, you've got to be careful on how granular you get. I think Lynn gave you the salient point, which is the way to think about the total cost. When you try to get micro on these, which you can, it's a little bit dangerous on some of the conclusions you could reach, right? They're just going to be wrong. First quarter, we weren't running trials. We didn't do those kind of things that we did second quarter and third quarter, so you have that delta. You've got some depreciation delta. You've got customer and product mix always quarter to quarter to quarter, and I could probably go on and list 4 or 5 other things that just aren't relevant quarter-to-quarter, even though you take a macro number like 40-something and 40-something and you go, what happened, right? So you can get a directional answer, but really, really we've layered in substantial costs for growth capital. We're delighted to have the growth capital. I wish we didn't have the substantial costs and the lack of operating leverage, but operating leverage and the costs are the drivers here, right?

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

I mean, what...

Lynn K. Amos

The margin, with sales, we believe we'll get back to a margin level comparable to what we had before.

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

Into the 40s?

Lynn K. Amos

Yes.

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

Yes. And Bob, I know I'm going to be wrong. I'm just trying to limit how wrong I am, right? And the thing that I'm trying to get to -- really, the main question I'm trying to answer here is, what happened in the third quarter that we've moved past at this point, that's not going to be there in the fourth quarter, and how significant was that? And I still don't really feel like I have a great feel for that. I'm focusing on what was onetime in nature. These trial runs, were they significant in the third quarter?

Robert B. Toth

Well, our customer -- I mean, that's what I mean, though, you've got to be a little bit careful. I mean, I understand what you're getting at. I'm -- but you have to be a little bit careful in any one quarter. You're going to have different customer and product mix every quarter. There were some costs and trials, and we're not going to get that granular on what all of those things were. I'm not sure we're actually able to be precise to the most granular level on how much was the technology trial and the process trial and how much was getting the equipment scaled up, right, because those all get balled up in the manufacturing cost. But you had, I mean, you still had substantial start-up costs in the third quarter with no operating leverage, right? I mean, you've scaled up a facility, you've teased out equipment that is not selling anymore out of it.

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

Okay. And you mentioned mix. My last question is, what was the mix between -- roughly between EV and consumer electronics and lithium?

Lynn K. Amos

It's similar to the last quarter in that the consumer electronics was a little higher than EDV.

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

Like 60-40 or like 51-49?

Lynn K. Amos

Yes. It's over half.

Robert B. Toth

Yes, I mean, in some cases, we don't mean -- we're not trying to be coy, Brian, but in some cases, the customer may take a grade X and some of that may go into consumer and some of it may go into EDV. And it's a little difficult to tell in any given quarter, right? So there's always a little rounding error.

Operator

And we'll take our next question from Richard Eastman from Robert W Baird.

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

Bob, could you just talk, or Lynn, just kind of on that mix. So we're talking maybe 48% for consumer electronics versus 52% for EDV. How did those fare year-over-year?

Robert B. Toth

Actually, I think it's a little higher in consumer electronics.

Lynn K. Amos

Yes, higher in consumer electronics and lower in EDV.

Robert B. Toth

In reverse, put that around, yes.

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

Yes, but just how did -- were they both down year-over-year, the same general percentage or...

Lynn K. Amos

Well, we said in the fourth quarter of last year, that was the first time that EDV had exceeded consumer electronics. So consumer electronics last year, I think, the mix would've been pretty comparable to what it is this year in the quarter.

Robert B. Toth

Of course, I mean, we can look up and kind of give you...

Lynn K. Amos

It's about the same.

Robert B. Toth

A better answer, but yes.

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

All right. And any traction on -- significant or measurable traction on rebuilding the consumer electronics supply?

Robert B. Toth

I think we saw some traction in the second quarter. I think the downside this quarter was we saw some consumer electronics weakness. I mean, that's what you're seeing, right? Certain things are -- select certain devices are selling well, but categories aren't necessarily selling so well. And that's -- so you're pushing the boulder uphill, but the hill got a little steeper.

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

Yes, okay. And if -- I'm going to just kind of assume, I guess, at this point that the lithium op margin percentage has largely bottomed here, given that sequentially, we're expecting lith sales to be higher -- separator sales to be higher. Is there any reason that, assuming we get the volume and the sales, that the incremental margin in lith quarter-to-quarter isn't the number that looks like 60-plus percent?

Robert B. Toth

Well, the first thing I'd say is, we didn't say -- we didn't get granular and say what each business is going to do kind of quarter-to-quarter, right? So just to qualify, we didn't say it was up or down or sideways in lithium. We just said what the quarter is premised on, at a macro level for our overall business. So when you look at margin, you go, okay, right, that's a function of a lot of things. We've layered in the costs, and we're obviously assessing what costs we should have relative to demand as the demand scales up and over what time period. We look at operating leverage, which we didn't have a lot of in the quarter, and you look at some of the stuff that we've talked about in terms of scaling up equipment and running trials and high-cost inventory from stuff you produced earlier in the year that are running at slow rates. You don't have all of those events taking place each quarter. Now we're not going to go out on a limb and kind of predict margin, certainly not try to predict it quarter-to-quarter, because you've got a business that we've described as kind of lumpy quarter-to-quarter, with customer mix and product mix and order size and timing and all those kind of things. But make no mistake, we're not happy with where that margin is, but I'm not going to put a stake in the ground and try to predict margin, to be honest with you.

Lynn K. Amos

And I really appreciate the desire to know kind of what that's going to be next quarter. But I guess I would just raise the point that we're dealing right now with, particularly, in the EDV space, a couple of very large customers that are opening plants and scaling production and the exact timing of that, it's not precise and it's subject to change. And their big customers and big orders. So the direction we believe of where the EDV business is going is positive, and the longer term is very positive.

Robert B. Toth

Operating leverage is huge.

Lynn K. Amos

And right now, we're dealing with the imbalance.

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

Did I misunderstand you, Bob, did you comment that you're assessing cost in the lithium business?

Robert B. Toth

Yes, I mean, we always are. No doubt about it. But make no mistake, right, we've added a lot of capacity and costs here, and we're taking a look at how to pace that with the demand expectation going into 2013. We've got planning underway...

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

Okay. So you're assessing the pace of spend relative to the growth. You're not assessing the fixed cost for anything, i.e. a write-down?

Robert B. Toth

Well, we always look at our cost. We're going to -- you've got people associated with scaling up capacity and those kind of things. And what we've got to do is make sure that we see the demand materializing as we pace our spend associated with that capacity, right? It was easy, it was an easy decision to scale up equipment and prove it out and have the flexible capability to be responsive and adjust to the market growth as it occurs. Now we've got to get a good handle on how fast is it going to grow and over what time period and what's the appropriate cost structure to have in place to meet that.

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

Okay. But it's -- you're assessing the variable cost here, right?

Lynn K. Amos

Marginally, yes. And we also want to make sure we have the right fixed cost structure in place for the level of business we expect. I mean, so it -- I mean, it's -- we're going to look at that both ways. I mean, but what we won't do, what we are not going to sacrifice the flexibility and the capability to meet the demand in a business that we believe is growing and that we've positioned ourselves very well for from a product and technology position, from a customer position, from a capacity position. We're grateful to have the capacity, so we're not going to sacrifice our capability to have it, but we're not going to carry costs that we do need to carry to keep up with the level of demand.

Robert B. Toth

Yes, I mean just for instance, right, you're not likely -- just purely for the sake of an example, you're not likely to staff a lab for a $400 million run rate capability in this business in January. So you're going to take a look at those kind of costs and say, how do we optimize the cost structure we have or how do we see the demand materializing over the time period. We have every expectation of needing the capacity. What's the right time period? And that will be a function of how quickly some of these things bounce back, what the build schedules are for certain high-content EDV vehicles, how quickly some of the new hybrids get into the market and how well they sell and those kind of things.

Operator

We'll take our next question from JinMing Liu with Ardour Capital.

JinMing Liu - Ardour Capital Investments, LLC, Research Division

First one is, given the -- what happened in the developed markets, Europe, U.S. and China, can you give us a breakout for your sales in those 3 regions?

Robert B. Toth

For lead-acid, are you referring to?

JinMing Liu - Ardour Capital Investments, LLC, Research Division

Overall, yes.

Robert B. Toth

Well, no. I mean, we actually give our -- we actually break our sales down geographically by region at the end of the year. And we've said, by business in some cases like lead-acid, that Asia, not China, Asia is the largest region. But we don't break it down, certainly, by country.

Lynn K. Amos

I mean you can -- we can talk about the regions here. In the lithium business, the vast majority of the customers are Asian. They're certainly the biggest chunk. In the lead-acid business, Asia is our biggest region of the 3 regions, U.S., North -- the Americas, Europe and Asia.

Robert B. Toth

Fastest growing.

Lynn K. Amos

And it is the fastest-growing as well. And in the health care business, we have business in all -- Health and the Separations Media business, we have business in all areas. I'd say, maybe we're a little stronger in Europe and Asia in that business than in the Americas, but not significant. And -- but -- so I would -- I think, Europe -- I'm sorry, Asia is probably, I think, last year it was close to 40% of our business and it's getting bigger.

Robert B. Toth

Yes. And just to be clear, Asia is bigger than China for us. We sell a lot into a lot of different countries.

Lynn K. Amos

That's right.

JinMing Liu - Ardour Capital Investments, LLC, Research Division

Okay. You mentioned that you may do a further capacity expansion in Asia for your lead-acid segment. Can you give us more color on that, like where and how big the capacity is going to be?

Robert B. Toth

Well, in Asia, you've got -- it's growing well into the double digits, and we've got the ability as we've said to ship there and de-risk future investments, right? In effect, you capture the business, you have the position and then you build the capacity and shift the production to Asia. So we've got Thailand, that's ramped up now, and the first step at our joint venture with Camel, our customer. We've talked about a second investment at Camel in China, which we haven't declared the precise timing on but we've kind of said next year, right, 2013 into 2014 kind of timing. And then we're always looking at where else do we add capacity and when, and that's going to be a function of the market growth there. To date, that's been well into the double digits. So you just keep pace with spending in effect by adding lines as you need them in -- over in Asia in lead-acid.

Lynn K. Amos

Yes, I think, the comment I'd make on the second line that Bob referenced that, with going to our Camel joint venture that, as you will recall, that's equipment that we owned that we've moved in, so there's not a big incremental cash capital cost associated with that, just some installation costs. If there was a future line, that's going to be driven by the market need and demand growth. I mean, frankly, keeping our facilities in North America and Europe full and taking a few points of margin hit to run those facilities where you already have the investments, so that's just smart, and de-risking the future investment as you've secured that business.

Robert B. Toth

Yes, and keeping it in some perspective, too, the scale of those investments is not like what we've spent over the last several years, right? It's -- we've scaled up significant capacity in lithium and we added capacity in health care and we added capacity in lead-acid. What we're talking about in Asia is you're basically just adding capacity with lines in Asia, which is not significant capital.

Lynn K. Amos

Yes. And let me just put that in perspective, the -- a typical line for us in lead-acid could be in the $20 million to $30 million range, kind of for a big line.

Robert B. Toth

Where you needed a building, et cetera.

JinMing Liu - Ardour Capital Investments, LLC, Research Division

Okay. Lastly, just very quick, the 2 facilities you are looking at to divest, are those facilities related to the Microporous acquisition?

Robert B. Toth

Well, Piney Flats was -- in Tennessee was the Microporous acquisition. Feistritz, we of course built. But they're both under that umbrella, so -- and what we said is, we're assessing the options. We haven't concluded what we're doing, so we're assessing the options.

Lynn K. Amos

We're still pursuing the appeals path, but I think Bob said before, I mean, we're going to assess the options and not wait until it's a forced decision on us to come to that conclusion.

Operator

We'll take our next question from Chris Kapsch from Topeka Capital Markets.

Christopher Kapsch - Topeka Capital Markets Inc., Research Division

Yes, I just had a quick follow-up on your updated outlook for the fourth quarter versus the commentary and outlook that you shared, I guess, September 11. And it was -- I'm just curious, it looks as though in the consumer electronics lithium-ion separator business that there's late-in-the-quarter slowdown for consumer electronics. And so I'm wondering if the delta and moving down the guidance for the fourth quarter is really attributable to sort of the de-sell in that end market or is it continued or additional lack of visibility on the EDV side of the lithium ion business?

Robert B. Toth

Well, I don't know that it's precisely one or the other. Clearly, we did see consumer electronics get a little weaker late in the quarter. That's a business where you have, best case, weeks of lead time and kind of visibility, right? Typically, a couple of weeks, so order patterns there can change very quickly. But what we saw in September led us to believe that fourth quarter is going to be a little weaker than originally premised around the macroeconomic factors driving that business. And on EDV, we've been, I think, very transparent about what we're linking that to. Now we don't control the precise start-up of new facilities, needless to say...

Lynn K. Amos

Or the rate of start-up.

Robert B. Toth

Or the rate of start-up and how many vehicles they build. And so, you get a little smarter each day on that, and so I don't know that it's precisely one or the other, but the factors you cited, EDV, facility start-up and production levels and macroeconomic factors impacting consumer electronics are the adjustment.

Christopher Kapsch - Topeka Capital Markets Inc., Research Division

All right. Okay. And then, I mean, given that the EDV ramp, at least for a couple facilities, is likely to be late in the fourth quarter, then you could sort of say like well, exiting calendar 2012 or notwithstanding some, maybe some seasonality in the other businesses going into the March quarter, but in exiting calendar '12, you could be at a higher run rate in the first quarter than what you posted in the fourth quarter, right?

Robert B. Toth

Well, I mean, look, I can't dictate -- I'd like to. I can't dictate kind of how these certain high-content EDVs sell, right? So that's a variable. And that's in fact, the short-term dynamic. That doesn't really impact the long-term acceptance or adoption rate of EDV. But when you've got certain high-content EDVs, trying to game the production of precisely when plants will start up and how much they'll produce when we don't control that is a little difficult. So we're just trying to be clear on the variables. And you know what, whether it falls into November or December or January, it doesn't have any impact on the long-term trend here, right? We see more and more vehicles coming out. The difficulty is the penetration rate of a plug-in vehicle, which we all can kind of guess the name of, and the start-up of 2 new facilities. And I don't know -- I'm sure many of you have seen the start-up of an automotive facility. It's a pretty big undertaking, of which we have no control. If they started up and walked 5 cars through a day, that's different than if they started up and run 100 or 1,000 cars a day, right? So -- or whatever the maximum number is. So we don't control that. Although they're premised to happen, those are the variables that we're talking about. But again, they are late in the quarter, as we've said, so if something slips to January, we can't do anything about that. We've just tried to be crystal clear about that. But the fact is, you've got further investment taking place in a plant in Hamtramck, Michigan. How that vehicle sells next year, how they market, how they market some of the new features on it, how they market some of the additional investment they made in it, we don't control. I have no idea. You have an electric drive vehicle that you had one less efficient high-cost plant in Zama, Japan and now you have 2 new facilities starting up around the year end. That should be positive. You have some Renaults starting up next year that didn't produce this year, so I don't -- it probably can't go below 0, right? So that should be some upside. But the number of those vehicles and the ultimate production rate, which will be driven from the ultimate sales rate, is what we don't control.

Lynn K. Amos

And we're seeing hybrids continue to do pretty well. Just some pure hybrids based on the...

Robert B. Toth

But it takes several hybrids to make up for one of those battery electric vehicles. And that's where the difficulty in the short term is in the numbers.

Operator

We'll take our next question from Craig Irwin with Wedbush Securities.

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

I think these little power blocks are going to be a growth category for a while. Just to turn to the market a little bit. When we look at 2013, 2014 and some of the consumer applications that are doing extraordinarily well, maybe there are always deltas up or down in the short term, but the longer-term growth trajectory is pretty evident. And when we roll up the probable growth rate of the lithium separators market, we get something in the very high 30% range. What would potentially drive the delta for Polypore as far as growth rate on the lithium separators business versus the market in 2013?

Robert B. Toth

Well, let me first comment on the growth rate. I mean, you're right. The growth rate in this industry is high when you draw a trend line. The volatility around the trend line has always been there, and we're experiencing that now. And we've seen it in the past. I mean, we saw, I think I referred to it in one call, in what was it, '08 or '09, we saw a moment of silence for a quarter when the world kind of ended and then it came roaring back. And that's the way consumer electronics largely works. You've got -- in consumer electronics, you've got fundamentally, right, the trend of people wanting to be mobile and having information at their fingertips driving that business. And so, you always just have new applications coming out. Things we can't think of today will be here tomorrow just like it's happened for the last 15 years. I can guarantee you that 15 years ago, people weren't thinking about lithium batteries going into tire pressure sensors on cars so it can send a signal to your dashboard, right? So more and more new applications happen and more and more people around the world are getting access to the things that are out there, right? So you've got population growth and access to these things, more middle-class people having access to these things around the world. So that's all true. And then you've got EDV and energy storage systems, which are layered on top of that. So to get to a blended average growth rate, it's just a question of how high is the growth rate. Now the good news is, the step change growth rate applications, because of the size, the large format cells in electric drive vehicles and energy storage systems, we know our product is the preferred product. We know our process technology is the preferred process technology. So while we regrettably had to shed some consumer electronics business last year when we were sold out, we regrettably had to do that, and we are building a lot of capacity, and we're going to continue to work hard to earn that back. And I think before that, you would've seen us growing share in that market because we're the only producer in the world that has both process technologies. So we were growing there until we had to have that kind of self-inflicted pain of walking away from some business. And what we see is, the good news is, in the large format cells, we see tremendous progress in the form of development programs and our products being used and tested and people looking at next-generation stuff. The bad news is, in the short term, we can't really predict how many volts will sell per month or how many they'll bill or what their production schedule will be. But I think we've got the preferred products, the preferred technology. And I think we're working with the right people. And the growth rate, you're right, it's high, I don't know whether it's going to be 10%, 15%, 20% or 30%, though.

Christopher Kapsch - Topeka Capital Markets Inc., Research Division

My next question was share and I'm glad you did mention share. So last year, according to IIT, you achieved the #1 market share in the lithium separators market because of your success in EDV -- in the EDV category. So if we look at this year as a transitional year and we start looking at 2013, 2014, can you speak a little bit about what you would expect as far as being able to leverage your capacity, the benefit of the lower cost CapEx and the experience -- the past experience in the consumer market, as far as maintaining your leadership position in this market?

Robert B. Toth

Yes, well, it's good news and bad news on the capacity, right? We're delighted to have significant growth capacity available to us. We're delighted to have paid for that out of cash from operations. We're not so delighted to be carrying the fixed cost without the operating leverage. That'll change over time. You're spot on. So the good news is, I think our customers recognize that. I think our -- I think it's well known that we've got good products, good technology, very proven, since the formation of this industry, and that we've got a world-class cost competitive position. And we've got capacity waiting to serve that market. So that's a pretty good competitive position to be in going forward.

Lynn K. Amos

One thing that I would add is, just recall that in the short term, right, this is not material that you can just -- you have to be qualified on batteries. You win it one battery at a time, and it's pretty sticky once you're on it. Very difficult to switch you out. But when you go back and try to win business, you have to win it one at a time.

Operator

And we'll take our next question from Avinash Kant from D.A. Davidson and Company.

Avinash Kant - D.A. Davidson & Co., Research Division

So the first question I had was, could you talk a little bit about the capacity utilization that you will add in the lithium-ion business at this point, and how do you expect it going forward into Q4?

Robert B. Toth

Well, I mean, I'm not going to predict capacity utilization quarter-to-quarter. What we've said is, with the first -- with the expansions, except for the last phase of capacity expansions at Concord, and we said we would have the capability to have a revenue run rate in this business of about $400 million, right? And we're not there. I mean, you can see what our revenue run rate is, so you can do whatever math you'd like, taking into consideration there's always noise of product and customer mix in that revenue number, but that gives you a directional idea of where we're at. And that last phase of capacity, which we can definitely pace, the equipment is largely in, but we can definitely pace, is a substantial capacity addition on top of that. So the one thing I would say is, unlike many industries, capacity utilization isn't quite as impactful of a metric as it is in some businesses, right? We don't need to operate at 80% or 90% of capacity utilization to be having a pretty good day in this business.

Avinash Kant - D.A. Davidson & Co., Research Division

Okay. And a follow-up was on the decision to sell some of that lead-acid business that you talked about. Kind of a 2-part thing. First, when do you expect a final decision on that, whether you have to sell that business or not? And the second one is that if you were to sell the business, what would be the use of proceeds that you'd get from the sale?

Robert B. Toth

Well, I think -- well, first of all, we haven't decided to sell it. What we've said is, we're going to assess the options we have for it based on the inbound interest to date, right? And we've been at it for 4.5 years. There's probably -- I don't know how you precisely time these things because there's not a rigid timeline or process, but you probably -- we've said, what, you probably have another year, 1.5 years before you'd have to divest it, right, something in that range, bid or ask. But we've been at it for 4.5 years, and we're not going to wait until the last day to assess our options. And given the interest we've had in it, we're going to assess the options. Now what we're going to do with the proceeds, I'm not really going to speculate. Whatever we do with the proceeds will be a function of how much cash we generate. So if there was a divestiture, and I'm not saying there would be, but if there is, right, that would be cash. And we're transitioning into a period where -- keep in mind we've spent, what, $374 million, $375 million over the last 3 years in cash from operations on capital and we've paid down $75 million of debt. So doing nothing moves us into much more of a cash generation mode going forward. Ultimately, what we do with that will be a function of how much we generate.

Lynn K. Amos

Yes, I mean, if you look at our capital needs going forward, we spend $20 million to $30 million a year on maintenance kind of capital. And we have, as Bob mentioned, we have capacity in lithium. We have capacity in the Separations Media business and health care because we added that. We've got some capacity coming online in lead-acid, but that would be a potential place depending on the timing of needing some capacity in Asia, and we've talked earlier on this call about kind of what the magnitude of the line might be. So -- but if you put those together on capital numbers, and you're going to start generating a lot of free cash flow just by reducing our level of CapEx spend. And I think I said this last call, as we move into that mode, into whether it's first or second quarter of 2013 on those, when we're having that call, the year-end call in February, or whether we're having the first quarter call in, whatever that is, May, late April or May, that's the time that we're going to be addressing more specifically where we're going with that.

Avinash Kant - D.A. Davidson & Co., Research Division

Okay. And just a clarification, there have been a few questions on the lead -- lithium-ion business between the electronics and the EDV side, but net-net, despite the assumptions that you have for the electronics business that could be under pressure a little bit here, you still expect the lithium-ion business to grow sequentially in Q4, right?

Robert B. Toth

We didn't detail that. I mean, what we said is, we expect overall performance to improve for the company, and we've said we expect to be at the low end of the range. But we're not going to get -- I mean, look, we just -- we actually can't get too granular on these things, right? Orders could swing a week one way or a week the other way and absolutely mean nothing, but can be very impactful in the quarter. And you just saw, even in the third quarter, we adjusted in, what, early September and it was a little better than we said. That's just what happens in this business, we have high operating leverage businesses and pretty large order size, and they can move a little bit, give or take.

Lynn K. Amos

Yes. We said low- to mid-30s, and we did 37.

Operator

And we have time for one more question. That question will come from Daniel Holland from Morningstar.

Daniel Holland - Morningstar Inc., Research Division

Could you talk a little bit about some of the drivers affecting the operating margins in the separators business this quarter? And also, just could you remind what's the -- what would lead to that sequential dip kind of going from the second quarter to third quarter in that segment?

Robert B. Toth

Are you referring to lead-acid or to lithium?

Daniel Holland - Morningstar Inc., Research Division

No, the separators, the health care.

Robert B. Toth

Separations Media? Separations Media?

Daniel Holland - Morningstar Inc., Research Division

Right.

Lynn K. Amos

The Separations Media, the third quarter is our seasonally low quarter. In the month of August, we have -- the large facility in Separations Media is based in Wuppertal, Germany, and the month of August is the traditional holiday or shutdown month that most of all Europe observes and we're no different. So that has an impact on our production schedule. So when you don't produce, you don't absorb the cost, and it's just a seasonally lower quarter every year for us.

Robert B. Toth

And last year was, what, 21%. It's up to, what, 24% this quarter. We always talk about margin in that business in a range because you produce -- we've just got a tremendous product mix and tremendous differences in production timing in that business, so we always talk about a range.

Daniel Holland - Morningstar Inc., Research Division

Okay, no, that makes sense. And one more, if I may. Just on the operating cash flow this quarter, actually year-to-date. I was a bit surprised to see it come down as much as it did YTD. I mean, is there like an inventory release or something like that's going to happen in the quarter and the fourth quarter that's going to help even that out on the year-over-year comparison or is there anything else that I'm kind of missing there?

Robert B. Toth

I want to make sure we're talking the same numbers.

Lynn K. Amos

Well, I mean, if you -- the starting net income from the first 9 months of last year to this year is just less, right? We have -- we're starting with $25 million less in net income.

Robert B. Toth

And we still had a pretty healthy amount of capital spend.

Lynn K. Amos

And but on operating cash flows, we -- you are correct that we've got some additional working capital. I think on the second quarter call, I mentioned that we were running very low on inventory fairly pretty much across the business at the end of 2011. And then when we moved our inventory levels up to around $110 million or so, $110 million, $113 million at the end of the second quarter, I said that number felt about -- maybe it was the first quarter, but that number felt about right. And so we're at $118 million on inventory today. Arguably, we might have $4 million, $5 million extra, but it's not a significant amount. And a lot of that is -- of that increase from that $113 million number is in raw material that's sitting in new plants. So nothing I'm really worried about.

Robert B. Toth

Okay. Well, thank you very much, everyone. We certainly wish everyone well out East and we certainly hope for the best as well. And we look forward to reporting our fourth quarter progress results in early 2013. Thank you very much.

Operator

This does conclude today's conference. We thank you for your participation.

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