Georgia Gulf Corp. is making progress in assimilating its $1.6 billion acquisition of Royal Group Technologies Ltd., but the work isn't over just yet.
Atlanta-based Georgia Gulf reported its fourth-quarter and full-year 2006 financial results April 4 - almost three weeks after an extension date the company had been given. In a conference call that day, Ed Schmitt, chairman, president and chief executive officer, cited accounting issues and divestment of several Royal businesses as reasons for the delay.
The final picture Georgia Gulf presented for 2006 showed sales growing more than 9 percent to over $2.4 billion, but profit tumbling almost 50 percent to $48.5 million.
The fourth quarter was a rough one for Georgia Gulf - North America's fourth-largest PVC maker and one of its largest PVC compounders - as the firm lost more than $47 million in that three-month period. Schmitt cited ``lousy market conditions'' and nonrecurring items as reasons for the loss. Sales volume and prices for PVC resins and compounds ``were off significantly in the fourth quarter,'' Schmitt said.
``Demand for PVC in all end uses declined because of the housing and construction market,'' Schmitt said. ``PVC operating rates were in the mid-70s in the fourth quarter, after the industry had averaged 94 percent in the first three quarters.
``We also saw a volume decline because of a sharp downturn in building and remodeling activity,'' he added. ``There had been significant rebuilding in the wake of Hurricanes Katrina and Rita in late 2005.''
Georgia Gulf has moved quickly to shed unprofitable Royal businesses. In the first six months after the Royal deal closed Oct. 3, Georgia Gulf sold businesses that had accounted for almost $300 million in annual sales. Woodbridge, Ontario-based Royal ranked as North America's largest maker of PVC building products.
``When we bought Royal, we were chastised for paying too much,'' Schmitt said. ``But we indicated we'd get rid of businesses not making money for Royal and that's exactly what we did. We had thought to eliminate between $200 million and $250 million of sales, but the number was almost $300 million.''
Businesses sold or closed to date have included window coverings plants in Houston and Coral Springs, Fla.; and two building products plants in Mexico and one in China. Royal's Roadex Transport, Royal Dynamics and Quick Stop Pipe units also have been sold.
Those moves have trimmed more than 1,200 of the 7,100 employees Royal had at the time of the deal. ``Centralizing'' and ``delayering'' have eliminated almost 700 additional jobs, officials said.
Businesses sold had a negative impact of $29 million on earnings in 2006, officials said, adding that some remaining noncore Royal businesses will be sold later.
Along the way, Georgia Gulf has reduced its debt by $290 million since the deal. The firm also settled a class-action shareholder lawsuit with U.S. and Canadian investors for C$9 million (US$7.8 million). The lawsuit involved questionable deals in real estate and other areas made by former Royal officials.
``That was the so-called billion-dollar lawsuit,'' Schmitt said.
The civil side of a lawsuit over alleged price fixing also was settled for $2.4 million, officials said. Elsewhere, sales personnel have been added in several geographic areas in a move that could increase sales later this year.
But Georgia Gulf is facing short-term challenges. The first quarter should result in ``significant losses'' before the firm returns to ``moderate profitability'' in the second and third quarters, according to Jim Matthews, vice president and chief financial officer. The firm also is cutting its 2007 capital spending budget from $125 million to $100 million. About $60 million will be spent on legacy Georgia Gulf businesses, with the remainder spent on Royal units.
Schmitt is taking a longer-term view of the market and of Georgia Gulf's prospects. He cited U.S. government estimates showing that although new construction spending is expected to decline slightly between 2005 and 2010, then it will recover, growing 8 percent to $453 billion between 2010 and 2015.
In another government estimate, home improvement and maintenance spending is expected to grow steadily between 2005 and 2015. Growth of 44 percent during that period will size that market at $402 billion in 2015.
``It's important to look beyond the fourth quarter and look at the earning potential of this company,'' said Schmitt, who's been with Georgia Gulf and its corporate predecessors for 27 years. ``The market's challenging today, but it's not going to be that way forever. And the actions we've taken leave us well-positioned for when the markets recover.''
In an April 9 note to investors, New York-based Bank of America Securities lowered its 2007 per-share earnings estimate for Georgia Gulf from $1 to 80 cents.
``We believe [Georgia Gulf's] near-term upside is limited by PVC supply additions in 2008,'' Bank of America analyst Kevin McCarthy wrote in the note. ``Successful integration of Royal Group is key, given [Georgia Gulf's] high financial leverage.''
Projected North American PVC capacity additions from Georgia Gulf and competitors Shintech Inc. and Formosa Plastics Corp. USA are expected to total more than 2 billion pounds from 2008-10. Financially, Georgia Gulf's net debt before the Royal deal equaled 23 percent of its market capitalization. Post-Royal, that number has climbed to 70 percent, according to Bank of America.
McCarthy also pointed out that sales in the Royal businesses of outdoor building products, and profiles and moldings for windows and doors, fell 27 percent in the fourth quarter of 2006 when compared with the same quarter in 2005.
On Wall Street, the new financial information sent Georgia Gulf's per-share stock price down from about $17.50 to $16.75 on April 4. It closed April 11 at $16.07.
The firm's per-share stock price was around $30 before the deal was announced in early June.
