UPDATED: A. Schulman Inc. boss Bernard Rzepka has paid the price for recent struggles at the global compounding leader.
Officials at Fairlawn, Ohio-based Schulman announced at the close of business on Aug. 18 that Rzepka had left the company. He was replaced as president and CEO by Joseph Gingo, who is credited with rebuilding Schulman before relinquishing the top job to Rzepka in 2014.
Gingo was president and CEO from 2008-2014.
“Joe led this company through a remarkable seven-year renaissance as its chief executive officer, and the board is confident that he will restore A. Schulman's operational and financial performance to the high level our shareholders expect,” lead independent director David Birney said in a news release.
“We thank Bernard for his dedicated service to A. Schulman during the last 24 years,” Birney added. “His many contributions throughout his career with the company should not be overlooked or minimized in light of this transition.”
Schulman recently downgraded its earnings expectations for its 2016 fiscal year.The firm also is engaged in a lawsuit against the former owners of Citadel Plastics, which Schulman acquired for $800 million in 2015.
Gingo, 71, plans to undertake a comprehensive review of Schulman's business plan, as well as near- and longer-term global end market trends. Schulman intends to hire an advisory firm to assist in the review.
“The goal is to verify our market intelligence, refine our vision and improve our execution,” Gingo said.
Schulman is one of the largest compounders and concentrate makers in both North America and Europe, and as well as one of Europe's largest resin distributors. The firm employs 5,000 at 60 sites worldwide and posted 2015 sales of $2.4 billion.
The shakeup marks a major reversal for the firm. Rzepka took the CEO job in January 2015, and two months later Schulman announced the Citadel deal, which remains the largest transaction in the company's 88-year history.
At the time, the deal looked like the exclamation point on a five-year run that had seen Schulman make 10 acquisitions under Gingo. Citadel had posted sales of $550 million in 2014, employing 1,200 at 21 plants, including 17 in North America. The company was founded in 2007 by private equity firm Wind Point Partners of Chicago, which then grew the business through several acquisitions, primarily those of compounder Matrixx Group and composites leader Bulk Molding Compounds Inc. Wind Point then sold Citadel to Palo Alto, Calif.-based HGGC — another private equity firm — in 2012.
Essentially, Citadel and Schulman had been taking a similar consolidation-based approach to the compounding and concentrates market. But Citadel's $800 million price tag was more than Schulman's first 10 deals combined. Schulman paid a multiple of almost 11 times EBITDA for Citadel.
Some consolidation of the Citadel business was expected, especially since both Citadel and Schulman had assets in Evansville, Ind. But unexpected problems at Citadel's Lucent Polymers unit proved to be the first falling domino that led to Rzepka's ouster.
Schulman first reported issues with some materials made with recycled or reclaimed content at Lucent's Evansville plants in October 2015. But the situation didn't boil over until January 2016, when they again were cited in a Schulman financial report. The disclosure sent Schulman's per-share stock price down almost 25 percent on Jan. 11.
Rzepka told Plastics News on Jan. 13 that the affected materials mainly were polypropylene and polycarbonate blends used in compounds. “Once we realized we couldn't replicate the formulas, we stopped shipping all products that didn't comply and looked into prior shipments [of the materials] at all facilities,” he said.
But a subsequent investigation showed deeper problems with the Lucent business, leading Schulman on June 15 to file suit in Delaware Chancery Court against the previous owners of Citadel, accusing them of falsifying results. Schulman is seeking unspecified damages from former Citadel owners including Huntsman Gay Capital Partners, as well as from several former Citadel executives.
In the filing, Schulman officials said that Schulman “never would have purchased, much less paid $800 million for Citadel had it know that [Lucent] was engaging in fraudulent business practices that…substantially reduced [Citadel's] profitability and growth prospects.”
As recently as June 29, Rzepka was defending the Citadel deal. “Despite reported challenges, I firmly believe this acquisition was the right move for us,” he said in a conference call with analysts. “We would have missed an enormous opportunity for future growth had we not made this move.”
But the picture worsened on Aug. 11, when Schulman announced that its net income for 2016 would be lower than previously expected due to “deteriorating market conditions facing the industry” in the United States and Europe. The announcement sent Schulman's per-share stock price tumbling almost 27 percent to $21.89 on Aug. 11. It had started the day just under $30.
Rzepka had a tough act to follow in Gingo, a former Schulman board member who took the top job in January 2008 after a career of more than 40 years at Goodyear Tire & Rubber Co. At the time, Schulman was under fire from activist investors for complacency and for financial underperformance compared to its peers.
In addition to the 10 deals, Gingo reduced the firm's reliance on both the automotive sector and on the European market. In fiscal 2007, Europe had accounted for more than 70 percent of Schulman's sales and all of the firm's profit.
For Rzepka, the announcement ends a 24-year Schulman career. He joined the firm in Germany and had served as its executive vice president and chief operating officer for more than a year before taking the top job. Previous positions included general manager of the Europe, Middle East and Africa (EMEA) region and managing director of Germany.
Market analyst Kevin Hocevar — who covers Schulman for North Coast Research of Cleveland — said in an email that he “wasn't overly surprised” by the move back to Gingo.
“Obviously, things haven't gone great for Schulman since Gingo stepped down from the CEO role,” he said. “The stock price has been nearly cut in half,” and the company's earnings-per-share forecast for 2016 is below what the company earned when Gingo left.
“And this is despite the balance sheet becoming significantly leveraged to acquire Citadel, which was expected to be nicely accretive to earnings but remains dilutive,” Hocevar added.
One industry veteran said that Schulman “has placed so much emphasis on acquisitions that they dropped the ball on operations.” He added that some of Schulman's current challenges might be the result of the Citadel businesses not being able to benefit from extensive use of recycled resins. Lower oil prices have lowered prices for virgin resin, making it difficult for recycled resins to compete.
Schulman also confirmed that executive James Irwin — who worked on the Citadel deal — has left the firm. Irwin joined Schulman in January 2014 in the newly created position of senior director of corporate business development. In that role, he was responsible for the firm's global mergers, acquisitions and divestitures.