PolyOne Corp. plans to cut its debt by at least $200 million, possibly by selling some ``nonstrategic assets.''
The Cleveland-based compounder and resin distributor announced Dec. 17 a variety of other cost-cutting moves, including a new round of job cuts. The decision followed news that PolyOne will lose between $16 million and $20 million in the fourth quarter.
``Simply put, this performance cannot be allowed to continue - it calls for immediate action,'' Thomas Waltermire, PolyOne chairman and chief executive officer, said in a news release. ``Our management team ... will take the necessary actions to accomplish this task swiftly.''
In a Dec. 18 conference call, officials offered little insight as to which assets could be sold or how employment levels would be affected.
``We want to get our debt down and simplify the company, but we're not running a fire sale,'' Waltermire said.
``Many of these initiatives in debt reduction were part of our plans going into 2002 and 2003,'' Chief Financial Officer David Wilson added. ``This isn't a near-term liquidity issue we're trying to avert.''
PolyOne spokesman Chris Farage later said the firm will look at all ``noncore'' assets before considering alternatives, including selling off assets.
The fourth-quarter profit warning battered the company's stock price. PolyOne shares lost half their value Dec. 18, falling from $6.40 to $3.20, in trading on the New York Stock Exchange. By early Dec. 20 PolyOne's stock price had recovered to $4. It was above $10 as recently as mid-September.
The company also announced that it will stop paying a quarterly dividend to shareholders and will continue a salary freeze for U.S. employees into 2003. In addition, PolyOne is reviewing ways to reduce the cost of various U.S. employee-benefit programs. The firm already has doubled the percentage of medical costs to be paid by employees and now is reviewing its 401(k) match programs.
Officials previously have identified its resins and intermediates business - which consists of its 24 percent stake in PVC maker Oxy Vinyls LP of Dallas and its 50 percent stake in chloralkali maker Sunbelt Chloralkali of McIntosh, Ala. - as ``noncore.'' Industry contacts also mentioned PolyOne's rubber compounding, specialty inks and engineering films units as candidates for sale, but PolyOne officials declined to comment on those businesses.
A good portion of expected job cuts could come from sales, general and administrative personnel, including sales staff and corporate and business management personnel, Farage said. Cuts could be announced as early as the first quarter of 2003.
Most of the recent decline has been in PolyOne's North American plastics compounds and colors unit, which is its largest single business. Fourth-quarter sales in that area are expected to be down 12-14 percent vs. the third quarter, after dropping 4 percent vs. 2001 in the first nine months of the year. Compared with the fourth quarter of 2001, this year's fourth-quarter North American compounds and colors sales are expected to be down 4-5 percent.
Weakness in the construction and transportation markets was singled out as having a major impact on PolyOne's sales. About $17 million in losses will come from margin compression because of higher chlorovinyl chain costs and lower selling prices for PolyOne's compounds, officials said.
Budget cutting isn't new to PolyOne. The company already is in the final stages of a major cost-improvement plan that includes closing 14 less-efficient plants and eliminating 600 jobs by mid-2003.
In the conference call, PolyOne officials made some very candid and eye-opening statements about the firm's status and areas that need to be corrected.
Most notably, officials said some customers have described PolyOne as ``not the easiest supplier to do business with.'' They said PolyOne has been hurt by competition from smaller, regional competitors, as well as by processors taking more of their compounding in-house.
``Some of our organizational structures are just too complex,'' Waltermire said of customer reaction, which was measured by a detailed, segment-by-segment analysis of customer satisfaction done in the second half of 2002. ``We were told we weren't responsive and weren't fast enough. That has to change.''
Smaller competitors have played a role by gaining business based on price and responsiveness, according to PolyOne officials.
``There's been some loss of position to new, small, very low-cost entrants, as opposed to larger competitors,'' Waltermire said. ``In a market where volume isn't increasing, people are scrambling. It's not hard to get some equipment and start mixing some plastic.''
In 2003, PolyOne will try to regain some ground in its color compound business, where a number of smaller customers have gone elsewhere.
``We haven't got the model right with smaller color customers and we've continued to have some erosion,'' he said.
``This has been a very challenging year for our color sales people, since we've made major changes in where our color products are produced. They've had to work on maintaining business instead of going out and getting new business.''
Robert Ottenstein, a stock analyst who covers PolyOne for Morgan Stanley Dean Witter in New York, credited PolyOne for its honesty in the conference call and said he thinks the announced changes have the company headed in the right direction.
``[PolyOne's] smaller competitors have low barriers to entry, and some of their customers haven't been 100 percent happy with their service, but I don't think any of these things are new,'' Ottenstein said in a Dec. 19 phone interview. ``What happened was, nobody thought the economy would be this weak.''
``It would have been a very different conference call if the economy was moving forward. But [Waltermire] is a pro and I think ultimately they'll work things out.''
Merrill Lynch analyst Karen Gilsenan was not as convinced, downgrading PolyOne stock to ``sell'' on Dec. 19 because of lower demand, margin squeeze and pricing pressure.
``After years of restructuring, [PolyOne] is going back to the drawing board,'' Gilsenan wrote in a Dec. 18 note to investors. ``New actions, including dividend suspension, suggest growing liquidity concerns.''
Fitch Ratings also downgraded PolyOne's unsecured debt from BBB- to BB, which is considered ``junk'' status. Chicago-based Fitch cited ``uncertainty regarding the level of financial improvement that will be attained in the near-term'' as a reason for the downgrade.
Sources throughout the compounding industry agreed that the number and influence of smaller, regional compounders continues to grow.
``These new companies are being started by people with a lot of experience in the business who have relationships with customers, low overhead and aggressive pricing,'' said Bert Lederer, senior vice president with compounder Teknor Apex Co. of Pawtucket, R.I.
``We're seeing [regional influence] more in color compounding than in PVC,'' Lederer said. ``Proximity is a bigger issue in color. A customer can drive to somebody's plant to do a color match in an hour or they can FedEx it and get it overnight. Both ways work, but personal service is very important.''
Compounding industry consultant John Jones pointed out that a lot of these newer companies are oriented to specific customers and regional markets.
The new companies ``are very responsive and take an entrepeneurial approach,'' said Jones, president of Applied Market Information LLC in Wyomissing, Pa.
The trend of processors taking compounding in-house has been seen primarily in the solid PVC market, where processors often do their own compounding as businesses such as window profiles grow and mature, Jones added.
``PVC is quite amenable to dry blending your own mixtures and additives,'' he said. ``You don't have to be a big company to do that.''
On Dec. 18, PolyOne officials were trying to keep their chins up.
``We've gone through 18 months of playing catch-up, and we're tired of being on the back foot,'' Wilson said. ``It's time to go on the offensive and get after it.''
``We've still got a good business model,'' said Waltermire. ``But serious fixing needs to be done.''