Polypore International's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Polypore International Inc. (PPO)

Q2 2012 Earnings Call

July 31, 2012 05:00 pm ET

Executives

Kathy Brosco - Director, Corporate Communications

Bob Toth - President & CEO

Lynn Amos - CFO

Paul Clegg - Director, IR

Analysts

Michael Lew - Needham

Brain Drab - William Blair

Richard Eastman - Robert W. Baird

Craig Irwin - Wedbush Securities

Avinash Kant - D.A. Davidson & Company

Jeff Zekauskas - JPMorgan

Sanjay Shrestha - Lazard Capital Markets

Jinming Liu - Ardour Capital

Carter Driscoll - Capstone Investments

Presentation

Operator

Good day everyone and welcome to the Polypore International second quarter 2012 conference call. Today's conference is being recorded. At this time I will turn the conference over to Ms. Kathy Brosco. Please go ahead, Ms. Brosco.

Kathy Brosco

Thank you, Kacie. Hello and thanks everyone for joining us today, and welcome to our conference call to discuss our second quarter 2012 financial results. As always, the results we discuss today can be found in our earnings announcement that was released today and furnished on Form 8-K with the SEC and 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, 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 discussed in this call. And I refer you to the reconciliation of these non-GAAP measures to the most directly comparable US GAAP financial measure included in the earnings release.

Before we begin today, 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 provisions 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're 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, July 31, 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're 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 captions Item 1A Risk Factors in our most recent 10-K filing with the SEC.

Today I'm joined by Bob Toth, President and Chief Executive Officer; Lynn Amos, Chief Financial Officer; and Rob Whitsett, Vice President of Finance. And also here with us today, we like to welcome to the team, Paul Clegg, Polypore’s Director of Investor Relations. At this point, I'll turn the call over to Bob for his opening remarks.

Bob Toth

Thank you, Kathy. Welcome everyone. As we described earlier this year, we experienced sequential revenue improvement across all of our businesses in the second quarter. Having said that, we're not satisfied with our current level of performance. While the good news is that we have new capacity, we're experiencing the incremental costs associated with that without yet having the meaningful sales to provide operating leverage.

Contrasting this to where we were virtually one year ago, recall that our businesses were operating at maximum capacity utilization with limited or no upside due to those capacity constraints. In fact, in some cases, we were turning away business. And at that point in time, we were accelerating and aggressively funding major capital investments and capacity expansions.

So we understand the cost of not having capacity especially in growth markets. Given the choice of where we are today compared to last year, we prefer to have capacity available. We're bearing some added costs as a result of that and while those costs are very transparent in our financial with the current level of sales, the value of having in our capacity will be very impactful when those incremental sales occur.

And it enables us to be highly responsive to an upturn in demand. Additionally, with the majority of our cash spent for these investments now behind us, we're positioned for substantial cash generation and substantial earnings growth potential going forward and we remain keenly focused on executing to meet the growing global demand for our products.

In the lead acid business, the future is in Asia which is the fastest growing region in the world. We've taken methodical and strategic actions over the past several years to be well positioned there. Today we serve the fastest growing customers in Asia. We have the largest facility and production capability in the region with more capacity beginning to ramp up in Thailand and China. And we have the most established infrastructure to service this region including manufacturing, sales, technical support and R&D as well as distribution capability.

In healthcare with the additional PUREMA capacity that was recently installed, we're well positioned to capitalize on current and future demand in hemodialysis membranes and we anticipate demand across our healthcare applications to remain solid.

We had three customers whose production schedules were unfortunately impacted by the earthquakes in Italy, the majority of that production is expected to resume by the end of the third quarter and obviously this does not change the long-term growth potential in healthcare which continues to be in the mid to high single-digits per year.

In filtration, be reminded that about half of this business is very stable, while the other half is sensitive to macroeconomic conditions. And nothing has changed on the long-term trend line where market growth is expected to be in the high single to low double-digit range.

We have leading edge technology here that allows us to participate at the highest end of filtration performance and we continue to see development of new applications.

In lithium and consumer electronics, consumers are demanding increased mobility and this trend will continue. In the core applications of consumer electronics and power tools, industry growth projections range from 8% to 20% per year plus additional growth in new applications like lawn and garden. We have made good progress to increase sales into consumer electronics now that we have available capacity and our separators are well positioned to see ongoing market penetration.

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