Compounders take stock as a solid 2015 moves toward a bright 2016

Business results for North American compounders and concentrate makers have been mostly positive so far in 2015 — and executives see good things ahead for 2016 as well.

Through September, U.S./Canadian sales of most commodity resins to compounders were up, according to the American Chemistry Council in Washington. In major-volume compounding resins, polypropylene sales to compounders grew 2 percent to 1.63 billion pounds and PVC sales to compounders grew almost 5 percent to 1.03 billion pounds in the nine-month period.

The picture was more mixed for resins compounded in lower volumes. Sales of high density polyethylene and solid polystyrene to compounders each grew 2 percent in the nine months, with HDPE sales topping 91 million pounds and PS sales almost reaching 42 million pounds. But compounding-related sales of low density PE fell 11 percent (to just over 58 million pounds) and linear LDPE fell 13 percent (to less than 210 million pounds).

Lower selling prices and a stronger U.S. dollar affected the results of U.S.-based compounders A. Schulman Inc. and PolyOne Corp. in 2015. This was evident in Schulman's masterbatch concentrate sales for the fiscal year ended Aug. 31. The unit's global sales fell more than 3 percent, even as sales volume in pounds grew almost 9 percent.

Fairlawn, Ohio-based Schulman's custom performance colors and engineered plastics units managed global sales gains of 1-5 percent for the fiscal year. For Avon Lake, Ohio-based PolyOne, global sales at its three compound/concentrate units fell 5-15 percent in the first nine months of 2015.

“We can't change exchange rates,” Schulman CEO Bernard Rzepka said. “The U.S. and Canada are doing well and we're making good progress in Latin America. But there are still significant challenges in Brazil and Argentina.”

Rzepka added that without the currency changes, Schulman “would have blown through our [earnings per share] targets with organic growth.”

Indies rock

Several independent compounders and concentrate makers reported solid results for 2015.

“It's been a remarkable year for us — ahead of the last two years,” said Ryan Howley, president of Techmer PM in Clinton, Tenn. “Our growth has been in high single digits. We've had a lot of good results and got a lot of good publicity from the 3-D printed car and from the visit of the president and vice president.”

Asahi Kasei Plastics North America — a major polypropylene compounder in Fowlerville, Mich. — is having “a very good year,” according to President John Moyer. “We were up 10 percent at one point and are still up 6-8 percent.”

“The market, in general, has been good,” said William Murray, president of Teknor Apex Co. in Pawtucket, R.I. “I'd say we're up high single-digits overall — single digits in PVC and higher in TPEs.”

Penn Color Co. — a concentrates maker in Doylestown, Pa. — is having “a really good, solid year” with mid-to-high single-digit growth,” according to market development director Robert Kaminski. “Construction has come back little by little and packaging is steady,” he said.

2015 has been “another very solid year,” for concentrates maker Americhem Inc. in Cuyahoga Falls, Ohio. “We've seen good growth in automotive and building and construction,” President John Deignan said. “And residential housing has been strong in Asia.”

Auto still on the go

Compounding and concentrates officials were lined up to sing the praises of the automotive market. The U.S. market should exceed 17 million builds of cars and light trucks this year, surpassing its pre-recession totals. Lighter-weight parts are using more plastic, increasing material demand.

“Automotive and heavy truck have been the strongest markets for us,” said Michael Garratt, president of PolyOne's Performance Products & Solutions unit. “Along with many material suppliers, we're seeing strong demand for formulated polypropylene products both with the domestic [automakers] and ‘new domestics,' particularly in Mexico.”

Garratt cited interior trim such as instrument panels and A and B pillars as specific auto applications where PolyOne has seen growth.

At Asahi Kasei — which gets a great majority of its sales from automotive — sales vice president Iichiro Kitsuda said that North American build numbers “have exceeded expectations — we hope it can be sustained.”

“Automotive has had a strong year, and we've targeted specific applications,” said Matt Miklos, Americas commercial vice president for Americhem. The firm this year worked on a pickup truck program that needed color harmony on all of its plastic interiors, which used a variety of materials.

At Teknor Apex, Murray said he thinks the auto field has rebounded because “people feel better about the economy.” Pent-up demand for new vehicles also has played a role, he added.

Schulman's Rzepka said that automotive growth “has created more jobs and a lot of opportunities — not just sheer volume growth, but high-quality opportunities.”

VW impact

Most automotive compounders interviewed for this story have programs with Volkswagen AG. But executives with those firms didn't expect to see much immediate impact from the recent scandal in which VW admitted to falsifying carbon emissions on many of their diesel vehicles.

“The question is how this will play out in consumer minds and how it might affect other European carmakers,” said Murray at Teknor Apex. “Consumers have short memories.”

Schulman “has a good program” with VW, according to Rzepka. “Like Toyota did, VW now has quality issues,” he said. “They have to handle it professionally.”

Although Asahi Kasei doesn't do much work with VW, Kitsuda said VW's struggles “could create an opportunity for the Big Three” U.S. automakers.

Packaging leading other markets

“Flexible packaging was one of our stronger performers this year,” said Robert Fielding, North American senior vice president at concentrates leader Ampacet Corp. in Tarrytown, N.Y. “We continue to innovate with special effect products for both the rigid and flexible packaging markets.”

“Packaging is really strong,” added Howley at Techmer. “It's a changing business. We're seeing success with products like detergent pods, which may have an impact on the bottle side.”

For Penn Color, Kaminski said that packaging “has come through” with recycled PET in sheet and other bottles. The firm has seen “good growth” in its custom-formulated Aqua Bright-brand recycled PET.

Health care, automotive and packaging “have been particularly strong for us over the past several years and continue that strength this year,” said John Van Hulle, president of PolyOne's Color, Additives and Inks unit. “Customers in these markets have high expectations for innovation from their suppliers.”

Van Hulle's unit is focused on helping customers improve profitability, he added, by optimizing color usage, increasing sustainability by using greater amounts of recycled materials and expanding shelf life and product safety with improved barrier technologies.

Somewhat surprisingly, Deignan said that in 2015 Americhem has had “a record year” in building and construction. That market has been slow to recover in the U.S. in the years since the recession of 2007-2009. Pre-recession housing starts peaked at 2 million per year in the United States, but are on pace to be just over 1 million in 2015.

Americhem's growth there has not so much come from new construction, but from home improvement markets such as siding, cladding, decking, fencing and windows. “We've seen some share shift with new products to enhance weathering and products in darker colors,” Deignan said.

PolyOne's Specialty Engineered Materials unit has seen growth from a wide array of markets in 2015, according to President Craig Nikrant. “Hunting and shooting sports has been a very big focus for us,” he said. “We've innovated some really exciting applications and solutions, using our engineered materials and Glasforms composites.”

Nikrant also cited solar wire and cable applications, as well as communication and data cables, as growth spots. “We've been able to solve many long-standing challenges our customers have had in wire and cable,” he said.

The vitality index for Nikrant's unit is 39 percent, meaning that 39 percent of its sales come from solutions that were invented in the last five years. “I think that [percent] really underscores our ability to develop new products and specialty solutions,” he said.

PolyOne's Performance Products & Solutions unit — including Geon-brand PVC compounds — is continuing to develop applications for outdoor high performance, Garratt said, and also is moving forward on developing new injection molding applications for non-phthalate materials.

Asahi Kasei has commercialized PP compounds using microsphere technology from 3M to offer improved performance in auto exterior body panels, commercial operations vice president Ramesh Iyer said. Ampacet's Fielding added that although flexible packaging has been strong for his firm, the pipe market has been challenging, as low oil and gas prices have affected demand in that sector.

And a very specialized market has led to extra attention for Techmer. The firm supplies the UV-resistant carbon black concentrates used in high density polyethylene shade balls that are being used in California reservoirs to prevent water from evaporating in the drought-stricken region. 96 million of the spheres now are in use. “We've had numerous requests to buy the product used in the shade balls,” Howley said.

No low resin

Although commodity and engineering resin prices have come down quite a bit since mid-2014 — as global oil markets fell — compounding/concentrate officials said they haven't seen much impact at their firms, since most of those moves have been passed along to their customers.

“If you don't move fast enough [as a resin buyer], you can be hit badly,” said Rezepka at Schulman. “But we don't necessarily have a cost advantage from lower resins prices. Lower prices don't necessarily mean that your earnings will improve.”

“Prices are raw material driven, and we're all in the same arena competing, so there's not a huge impact,” added Murray at Teknor Apex. “It's a level playing field.”

Concentrate makers in particular are less affected because their products are highly loaded with colors and /or additives and use less resin.

“When you consider that our solutions are being used at rates from 4 percent to less than 1 percent of our customers' finished products and are highly loaded with pigments, dies, and performance additives, the impact of resin cost becomes very diluted,” said Van Hulle at PolyOne.

“Resin is a smaller percentage of our total offering,” added Americhem global supply chain director Rod Manfull. “Polypropylene supplies have been a little tight, but other than that, nothing significant.”

Deals challenged but improving

The pace of compounding-related acquisitions slowed in the first half of 2015, but seems to be picking up in the second half of the year.

The exception to the slow first-half pace was Schulman's blockbuster $800 million deal for Citadel Plastics Holdings Inc. That deal nearly doubled Schulman's U.S. compounding sales and gave the firm a solid presence in thermoset compounds.

Citadel posted sales of $550 million in 2014, employing 1,200 at 21 plants. West Chicago, Ill.-based Citadel had earnings before interest, taxes, depreciation and amortization of $75 million in 2014. That means the sale price has a healthy earnings multiple of 10.7.

For Schulman, the deal was its 11th acquisition or joint venture in less than six years, but is by far the largest. The firm spent less than $600 million combined on the previous 10 deals, with the largest being its 2010 acquisition of ICO Inc. for almost $200 million.

“Acquiring Citadel makes us a big player in the U.S.,” CEO Rzepka said. “For quality, you have to look long-term.”

But at the same time, he acknowledged that the materials M&A market is changing. “Multiples are up, so you have to have deep pockets,” Rzepka explained.

RTP Co. of Winona, Minn., recently snagged Polymer Partners, a compounder and concentrate maker in Henderson, Ky. A destructive fire at its U.K. plant led Teknor Apex to sell related brands, assets and customer lists to local compounder Petlon Polymers. Compounder/recycler Chemical Resources Inc. of Princeton, N.J., expanded its focus by bidding $3.7 for the assets of bankrupt resin distributor Thornton & Co., although that sale has not been finalized.

A pair of cross-border deals also was completed. Israeli compounder/concentrates maker Tosaf Group bought color concentrate producer Adtec Colorant Corp. of Arlington, Texas, for an undisclosed price. Adtec specializes in color concentrates and liquid and additive masterbatches for injection molding, blow molding, film and extrusion markets.

The other international deal involved global polyolefins leader LyondellBasell Industries, which bought PP compounder SJS Plastiblends Pvt. Ltd. of Aurangabad, India. Houston-based LyondellBasell said the acquisition will enhance its position in India's growing automotive market.

The LyondellBasell-SJS deal is scheduled to close in late 2015. SJS employs almost 60 with annual production capacity of about 25 million pounds.

The most unusual compounding-related deal of 2015 so far may have taken place in Indiana, where startup color concentrates maker Precision Colors of Fort Wayne was acquired less than a year after opening its doors. The firm was acquired by Fort Wayne-based investment firm Ellis Co., which also owns Jasper Plastic Solutions, a maker of high density urethane foam products in Syracuse, Ind.

Precision employs four and is on track to post sales of $1 million in its first year of operation, making color concentrates based on polyethylene and ABS for construction, consumer and medical markets.

Many compounding and concentrate execs say their firms remain interested in making deals if they can find the right fit. Ampacet might look to Asia to make a deal or build a new facility, Fielding said. Murray added that Teknor might consider making a move in Europe.

But Techmer's Howley admitted that the M&A field is tougher now than it was just a few years ago. “There are fewer attractive opportunities out there, and multiples are at record highs,” he said.

Expansions keep pace

Several expansion projects also are proceeding across the North American compounding/concentrates sector. Penn Color hopes to break ground by the end of the year or in early 2016 on a massive 100,000 square-foot expansion of its manufacturing site in Hatfield, Pa. The $20 million project will create several new jobs, Kaminski said.

Asahi Kasei in early 2016 will open a new PP compounding plant in Athens, Ala. The exterior of the building is almost complete, track and road structures are in place and eight of 10 storage silos have been installed, according to Moyer.

In New Castle, Del., Techmer is renovating an existing building to serve as a new compounding plant. A January opening is expected, with full operations set to begin in the second quarter of 2016. The plant will replace a production site in Aston, Pa. — 20 miles north of New Castle — that Techmer acquired when it bought specialty compounder TP Composites Inc. in 2013.

Production at the Aston site was spread over several buildings, while New Castle will be all under one roof, Howley said. The new plant also will have 50 percent more production capacity than the previous location.

Teknor Apex by mid-2016 will add a new nylon compounding line at its plant in Brownsville, Tenn. The new twin-screw line will be Teknor's fourth in Manchester and will have annual production capacity of 20 million pounds. Murray said the line is needed for automotive market growth.

Sweet ‘16?

The coming year is looking a little brighter for compounders and concentrate makers as it approaches, with economic growth slowly building.

“The mood among our customers seems to be very upbeat,” said Van Hulle at PolyOne. “New projects are continuously entering our pipeline. These run the gamut from color refresh to groundbreaking new ideas.”

“When I look across this business and see the resources being committed to these projects by our customers, it demonstrates to me they are very optimistic about both the near and long term future.”

As for 2016, Van Hulle added that “like most years, I'm sure there will be surprises along the way.”

Next year “is a presidential election year in the United States and the ebb and flow of that process will likely dominate the news cycle and impact perceptions of the economic climate,” he said. “But in the long term, those surprises and ebbs and flows will be forgotten by what I see as continued growth and opportunity across all our geographic regions.”

PolyOne's Garratt said that cautious optimism “seems to be the predominant mood” at his unit's customers. “There doesn't seem to be a question about whether their markets will grow,” he explained. “Concerns are more squarely focused on the rate of growth.”

For 2016, PolyOne's Performance Products & Solutions unit “is looking for moderate growth in North America and continued strength in building and construction and automotive,” Garrat said.

“For Asia, the level of demand will likely fluctuate in line with recent economic changes, but we still see tremendous upside for our business,” he added.

“We have really good momentum going into 2016, and I expect that to continue,” added Nikrant at PolyOne's Specialty Engineered Materials unit. “Certainly Asia and Europe will still present challenges, but we have a strong and vibrant solutions portfolio, new applications we're working on and we've made a lot of progress in regions we've targeted for growth.”

At Asahi Kasei, Moyer is taking his direction for 2016 from his customers.

“The question for 2016 is how will global issues affect America,” he said. “But I was at a customer event not too long ago, and a lot of people there were bullish about the industry.”