OMNOVA Solutions Inc. (OMNOVA), a US-based provider of emulsion polymers and specialty chemicals, has reported net sales of $160.2 million for the first quarter of fiscal 2009, down 15.9%, compared with the net sales of $190.6 million in the year-ago quarter. It has also reported a net loss of $0.1 million, or $0.00 loss per share, for the first quarter of fiscal 2009, compared with the net loss of $3 million, or $0.07 loss per share, in the year-ago quarter.
Included in the first quarter of 2009 were restructuring, severance and other charges of $0.9 million. The first quarter decrease was primarily the result of weaker volumes as customers took significant downtime to reduce inventories early in the quarter, which began December 1, 2008. Gross profit improved to $31.7 million, with margins of 19.8% in the first quarter of 2009, compared to $30.5 million and margins of 16.0%, in the first quarter of 2008. The margin improvement was due primarily to lower raw material costs.
We are encouraged by our improved performance in the first quarter despite what was obviously a very challenging global economy, stated Kevin McMullen, OMNOVA’s chairman and chief executive officer. Our first quarter is seasonally our weakest, and while we benefited from significant raw material cost declines, we also aggressively managed our controllable costs and cash flow to generate improved financial results and increased financial flexibility. Looking forward, though the economic environment remains difficult, there are a number of positive fundamental improvements occurring at OMNOVA which we expect will drive significant year-over-year improvement during the first half of 2009 in earnings and cash flow from operations, as well as substantial debt reduction, McMullen added, citing the following:
After a decade of unprecedented increases in the company’s raw materials, costs began to decline in November 2008. A strengthened global sourcing team is positioned to drive increased value;
Structural industry consolidation is occurring in both segments with the exit of some competitors and the closing of manufacturing capacity by others;
OMNOVA has its lowest operating cost structure in history, including previously implemented actions which are expected to provide $19.0 million of cost reductions in 2009. Employee headcount has declined 12% over the last twelve months;
OMNOVA has taken necessary pricing actions to improve its operating margins;
OMNOVA has low-cost, long-term financing which provides ample liquidity and maturities in 2012 and 2014;
85% of domestic business is now on a common ERP platform, contributing to operating efficiencies.
Selling, general and administrative expense in the first quarter of 2009 fell to $23.0 million, compared to $25.1 million in the first quarter of 2008. Due to lower average interest rates, first quarter 2009 interest expense was $2.2 million, a decrease of $1.2 million as compared to the first quarter of 2008. The weighted average cost of borrowing during the first quarter of 2009 was 4.4%, a significant improvement from 7.2% in the first quarter of 2008.
Total debt of $174.1 million represents a reduction of $22.5 million as compared to February 28, 2008, and $14.2 million lower as compared to November 30, 2008. Debt is comprised primarily of a term loan facility with $143.5 million outstanding which matures in 2014 and a revolving asset-based credit facility with $26.0 million outstanding which matures in 2012. Unused and available borrowing capacity grew to $37.9 million under the company’s revolving asset-based credit facility at February 28, 2009.
EBITDA, as defined in the company’s borrowing agreements for the calculation of the net leverage ratio, was $7.2 million for the first quarter of 2009, compared to $6.5 million for the first quarter of 2008. EBITDA for the twelve months ended February 28, 2009 was $48.5 million, compared to $47.8 million for the twelve months ended November 30, 2008. OMNOVA’s leverage ratio of Net Debt-to-EBITDA improved for the third consecutive quarter, ending at 3.4 on February 28, 2009, well under the loan covenant limit of 5.5.
Net sales during the first quarter of 2009 decreased 20.4%, to $94.6 million, compared to $118.9 million in the first quarter of 2008. The decrease was driven primarily by weaker market conditions, which led to volume decreases of $32.0 million, or 27%, partially offset by higher selling prices of $7.7 million. Segment operating profit was $7.8 million for the first quarter of 2009, up from $2.6 million for the first quarter of 2008. The year-over-year operating profit improvement was driven by lower raw material costs, which were partially offset by the lower volumes. Segment operating profit margin was 8.2% for the first quarter of 2009 as compared to 2.2% for the first quarter of 2008.
While volumes were weaker on a year-over-year basis, the daily sales run rate was equivalent to the fourth quarter of 2008. Additionally, late in the first quarter of 2009 the company’s industry leading paper coating technology won new business at two coated paper mills.
Net sales were $65.6 million during the first quarter of 2009, a decrease of $6.1 million, or 8.5%, compared to the first quarter of 2008. The decrease was due primarily to weaker markets. Price increases totaled $1.4 million, which were offset by lower U.S. and European volumes. The operating loss of $2.9 million for the first quarter of 2009 compares to an operating loss of $0.1 million for the first quarter of 2008, but was an improvement compared to the fourth quarter 2008 loss of $5.3 million. The first quarter 2009 operating loss was driven primarily by the lower volumes and restructuring and severance charges of $0.7 million.
Included in Decorative Products’ results for the quarter are sales of $20.6 million from its Asian businesses, compared to $8.1 million from one month of consolidated Asian sales in the first quarter of 2008. The Asian businesses generated operating profit of $0.4 million during the first quarter of 2009 as compared to breakeven in last year’s first quarter. This improvement was driven by lower raw material costs and reduced spending.
OMNOVA continues to offer an ever-broader selection of innovative products serving core and adjacent markets, including recyclable and 30% recycled- content wallcovering, pool liner films and disposable blood pressure cuffs, as the company enters new markets in consolidating industries.
Decorative Products has implemented cost reduction actions that will reduce 2009 costs by about $10 million annually through global personnel reductions and lower discretionary spending.