Georgia Gulf Corp. will idle 450 million pounds of PVC resin capacity at its Sarnia, Ontario, location later this month. The Atlanta-based firm plans to keep the capacity down until sometime in the first quarter of 2008.
``We are scaling our PVC resin operations to synchronize with the seasonally slower demand period,'' Ed Schmitt, chairman, president and chief executive officer, said in a Dec. 4 news release.
The Sarnia capacity has been used for in-house production by Royal Group Technologies Ltd. - now called Royal Group Inc. - the Woodbridge, Ontario, building products firm Georgia Gulf bought for $1.6 billion in 2006. Georgia Gulf has closed several Royal plants since making the deal, and two more plants - both in Woodbridge - will close in early 2008.
Royal plants in the Toronto area now will be supplied with PVC from other Georgia Gulf sites, spokesman Mark Badger said.
Georgia Gulf officials said in early November that the firm would idle 700 million pounds of PVC capacity because of low demand and poor profitability. After the Sarnia move, another 250 million pounds of capacity could be removed from plants in Oklahoma City; Aberdeen, Miss.; or Plaquemine, La.
At the same time, Georgia Gulf has started initial production testing at a new PVC line in Plaquemine with 450 million pounds of capacity per year. In the release, officials said the new line should be at full production during the first quarter of 2008.
Georgia Gulf also is facing financial pressure from its debt load, some of which is a result of the Royal acquisition. In a recent conference call, officials said the firm ``may not be in compliance with certain [debt] covenants'' if industry trends continue. Those trends include a drop of almost 10 percent in U.S. housing starts from the second quarter to the third quarter of 2007.
Industry sources said that if Georgia Gulf trips those covenants, the firm could face higher interest rates on its remaining debt, or even the possibility of its lenders taking on an active role in the management of the company.
In a Nov. 5 note to investors, stock analyst Kevin McCarthy of Banc of America Securities LLC in New York said his firm's financial projections ``suggest that Georgia Gulf will come uncomfortably close to tripping two financial covenants in coming quarters.''
``Much will depend on the seasonal `harvest' of cash flow from working capital ... and timing of sale/lease-back transactions that the company was unable to complete in 3Q,'' McCarthy wrote. ``Any further market downturn or increase in interest rates could also worsen an already-tight situation.''
In the conference call, Georgia Gulf officials said the firm had expected to receive $50 million from sale/lease-back transactions in the third quarter, but was unable to do so. They now hope to receive $25 million from such transactions in the fourth quarter, but said that income might be delayed until the first quarter of 2008.
In spite of recent financial challenges, Georgia Gulf officials said the firm reduced overall debt from $1.7 billion to $1.5 billion between October 2006 and September 2007.
The firm also remains on track to achieve almost $160 million in annual savings resulting from the Royal deal by the end of 2008, they said.
In the first nine months of 2007, Georgia Gulf posted a loss of almost $39 million. During that time, the firm's PVC-related sales were down 20 percent to less than $1.1 billion, while that unit's operating profit fell 60 percent to $84.1 million.
In spite of a slump in the housing market - which accounts for at least 60 percent of North American PVC demand - Shintech Inc. and Formosa Plastics Corp. USA also each have large expansion projects under way. In total, the region is expected to add about 1.5 billion pounds of new capacity next year.
Based on estimated 2007 sales, Georgia Gulf ranks third in the North American PVC market, with a 15 percent share.