Omnova hopes move sparks rebound

BEACHWOOD, Ohio—The recent move to new headquarters in Beachwood will represent a fresh start for Omnova Solutions Inc., said Kevin McMullen, chairman, president and CEO.

The maker of specialty chemical and emulsion polymers could use it, as the company is forging ahead with a number of growth initiatives after what McMullen called a disappointing third quarter, in which the company posted net income of $1.8 million, or 4 cents per diluted share, compared with earnings of $9 million, or 19 cents per diluted share, in the like period a year ago.

McMullen said the biggest driver of the 80 percent drop in net income was the company's legacy, core business—paper coatings.

Demand for paper coatings is dropping as the trend moves toward electronic media. Omnova doesn't report paper coatings separately, but sales in the Performance Materials product line, which also includes carpet latex, made up about 25 percent of the company's sales in the quarter, the company said in an email.

McMullen said the company is seeing growth in some of its specialty businesses, and it's looking to grow those segments at a faster rate in the future.

Those product lines include chemicals for oil and gas drilling, a relatively new segment for Omnova. McMullen said the specialty coatings business for products ranging from masonry to metals to garage floors also is strong, as is the engineered surfaces business. The company is a big player in the kitchen cabinet market, McMullen said, and it sees growing opportunities in retail display.

McMullen also expects Omnova's nonwovens business to grow, though it underperformed in the third quarter. The company provides a binder that's used in towels, wipes and diapers.

He expects growth in the diaper and adult incontinence product markets: emerging markets with growing middle classes have a greater need for diapers, while areas without large birth rates have a growing need for the adult products. And the company plans to watch for medical and filtration opportunities in this segment in the future.

Omnova also is investing in its plants, repurposing those making less successful products to support areas of growth. In the company's North American coated business, McMullen said there is an overcapacity of styrene butadiene, which is used in a variety of the company's businesses to help with qualities like binding, water resistance and gloss.

For instance, the company is converting excess styrene butadiene capacity at its plant in Mogadore to hollow plastic pigment, which an email from the company noted is being used for specialty paper and packaging applications, markets with more stability than publication papers. The company also is moving some operations from its Akron plant, which will still be used as a finishing facility, to the converted Mogadore location. In all, the changes are expected to save the company $4 million each year.

Omnova is adding capacity in the growing Asian market, including at its plant in Caojing, China, which has been running since 2011. The plant gives the company the opportunity to support customers locally. Omnova also has plants in China, India and Thailand.

“That's a big opportunity for us,” McMullen said.

Jennifer Klein, president of the Ohio Chemistry Technology Council, said the chemical industry has seen growth in the past decade, though she didn't speak specifically about member company Omnova.

A lot of the growth has come from capital investment, Klein said, pointing to the expansion of companies in Northeast Ohio like PPG Industries Inc. or Ashta Chemicals Inc. Currently driving growth is the affordable, abundant feedstock for the industry made possible by shale gas drilling, she said.

Deutsche Bank took a relatively positive look at Omnova in its Sept. 26 analyst report, released shortly after the company's third-quarter results were announced.

The report noted the drop in share price after the “disappointing” quarter—it had fallen to $5.25 at the end of the day on Oct. 9, down from $7.01 on Sept. 24, before the third quarter results were announced—but said the “share price decline is overdone as trends going forward appear to have stabilized.”

And though Deutsche Bank expressed concerns about the pricing pressure Omnova faces in its styrene-butadiene business, it said restructuring initiatives, including “manufacturing rationalization, asset repurposing and cost reduction actions” are helping to offset that. Overall, it gave the stock a “buy” rating.

KeyBanc Capital Markets continued to give Omnova's stock a “hold” rating in a Sept. 30 analyst report, due to some “near-term headwinds” that look to be out of the company's control and general uncertainty around earnings.

KeyBanc said it was disappointed that Omnova “failed to meet consensus expectations for the third quarter in a row” but that Omnova remains well positioned in the long term as it puts a “focus on growing its specialty applications, works toward rebuilding its margin profile and rationalizes excess capacity.”

In addition to its focus on growth markets, Omnova has been fine-tuning its strategic marketing strategy. McMullen said the company now has a stronger focus on gaining deeper insights into customer needs, leading to the development of new products.

McMullen said the company also trained its marketing team on how to better assess the market and discover what makes Omnova's products stand out versus the competition.

The company's Oct. 13 headquarters move from Fairlawn to Beachwood will encourage more teamwork and collaboration among employees, McMullen said. The location features open floor plans with few offices, which is intended to promote community and transparency, along with informal gathering spaces and technology to better communicate with employees around the globe.

Additionally, the operating costs for the new site will be lower, and the company will eventually own the building, unlike leasing which it does now, McMullen said.

Omnova has also had some changes at the top recently, with chief financial officer Paul DeSantis joining the company in June and Anne Noonan being hired as president of its performance chemicals segment last month.

“Fresh perspectives are always good,” McMullen said.

Noonan will be critical going forward, McMullen said, as she comes to the company with plenty of experience in mergers and acquisitions, turnarounds and new product development.

DeSantis said that while the most recent quarter was challenging for the company, Omnova ended the quarter with more cash on its balance sheet than the previous quarter—about $13 million more, the company said. Overall, McMullen is optimistic about the possibilities for growth.

“I think there are lots of opportunities for this company,” he said.