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June 13, 2005 02:00 AM

Abd outlines big changes for Spartech

Joseph Pryweller
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    After telling analysts that his company took its eye off the ball and needs to rein in costs drastically, new Spartech Corp. President and Chief Executive Officer George Abd shed light on a series of restructuring moves launched this quarter in North America.

    Abd replaced longtime President and CEO Bradley Buechler in early May, after Buechler opted to resign.

    In his first public statement, Abd did not hesitate to question some of the previous decisions by top management, both in acquisitions and leadership structure.

    In a June 7 conference call with analysts, Abd said he was disappointed at the flagging profits recorded by Clayton, Mo.-based Spartech for its second quarter, ended April 30. But he also said the firm ``will not flinch'' at taking options to enhance its business.

    ``The last few years, we've not had the same focus on earnings results and operating results, and we have not focused on cash flow and return on invested capital,'' Abd said. ``I look forward to confronting and addressing those issues.''

    Spartech, a major sheet producer, compounder and profile extruder, is making some aggressive moves to remedy a dire problem, he said.

    The publicly held company recorded an $80,000 loss for the quarter, ratcheted down its earnings guidance for the year and took restructuring and fixed-asset charges of more than $10 million. A series of moves to sell or close seven plants is well under way.

    Abd was quick to analyze Spartech's areas of vulnerability. The firm has fallen short of providing value in its acquisitions, including that of large film and sheet maker VPI LLC in October.

    The firm faces significant challenges in the next six months, he said. While Spartech had expected end-of-year earnings of $1.50-$1.60 a share, Abd revised the number to 39-44 cents a share.

    ``This is not the earnings release I envisioned in my first [quarter] as the CEO of Spartech,'' Abd said during the call.

    ``However, I am very optimistic about the challenges we have ahead of us and what we will bring to the shareholders of our business. I'm confident in our continued customer service, new product development and market leadership.''

    High on the list of priorities is ridding Spartech of underperforming or redundant operations. In February, Spartech said it would spend at least $6 million to close or sell underutilized plants. The figure now has grown by about one-third to $7.6 million.

    Spartech gave some new details on the planned plant closings. A sheet extrusion plant in Redlands, Calif., is targeted for shutdown in the third quarter and will be sold by year's end, he said.

    According to several outside sources, work from the 60,000-square-foot Redlands plant will shift to a Spartech facility in La Mirada, Calif.

    And, in another move that had not been reported, a 94,000-square-foot compounding facility in Conneaut, Ohio, ceased operating in March. The work moved to an ex-VPI location in Manitowoc, Wis. The Conneaut plant is being prepared for sale, Abd said.

    Abd criticized the VPI deal, which cost $83.5 million. The purchase gave Spartech three plants, but the company is shutting two others.

    ``We have to take a harder look at our return on investment and the price we're paying for acquisitions,'' he said.

    The company may close or sell several more facilities later in the year to further reduce costs, said Chief Financial Officer Randy Martin in the same call.

    In May, Spartech also decided to sell an operating line at an undisclosed color and specialty compound plant and shift the work to a former VPI location, Martin said.

    Look for the firm to close more plants as the year progresses, said Michael Sison, an analyst with Cleveland-based Keybanc Capital Markets who follows Spartech.

    ``I would imagine that as they complete this round of restructuring, they're going to find other areas to improve,'' he said. ``I suspect there will be at least one more round or two to look at before this is finally completed. They have plenty to do. We just have to be patient.''

    And instead of a decentralized, plant-by-plant approach preferred by Buechler, Abd favors a more centralized chain of command with plant officials reporting directly to Spartech vice presidents in Missouri.

    Buechler's looser approach may have been his biggest failing, Sison said.

    Buechler should be applauded, Sison said, for building a formidable company that ended last fiscal year with $1.12 billion in sales. In the sheet division, Spartech was a dominant player under Buechler's watch and maintains a strong business model.

    Yet, the corporate staff was too lean, allowing costs to get away from the company, he said.

    ``They could have benefited from adding more infrastructure earlier and not been so lean and mean [in Missouri],'' he said. ``They need to continue adding people and [to] build a management structure that better fits a big company. It may take nine to 12 months, but that can help turn things around.''

    Buechler signed a retirement agreement May 26 that will result in a $3.7 million charge to earnings in Spartech's third quarter.

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