OMNOVA Solutions' (OMN) CEO Anne Noonan on Q4 2016 Results - Earnings Call Transcript

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OMNOVA Solutions Inc. (NYSE:OMN) Q4 2016 Earnings Conference Call January 17, 2017 10:00 AM ET

Executives

Anne Noonan – President and Chief Executive Officer

Paul DeSantis – Senior Vice President and Chief Financial Officer

Analysts

Mike Sison – KeyBanc

Operator

Ladies and gentlemen, thank you for standing by and welcome to the OMNOVA Solutions’ Fourth Quarter 2016 Earnings Discussion Call. [Operator Instructions] And as a reminder, this conference is being recorded. I would now like to turn the conference over to our host, CEO, Ms. Anne Noonan. Please go ahead.

Anne Noonan

Thank you and good morning everyone. It is a great pleasure to speak with you today. In a moment I will provide an overview of important operational developments, progress on our strategic direction and my outlook for the business.

But first I’ll turn it over to Paul to make comments on forward-looking statements and to summarize our financial performance in the quarter.

Paul DeSantis

Thanks Anne, and good morning everyone. During this conference call, OMNOVA representatives may make forward-looking statements as encouraged by the Private Securities Litigation Reform Act of 1995. All statements in this conference call and in subsequent discussions with the company’s management, other than historical information, are forward-looking statements. These statements represent management’s current judgment on expectations for future results and other matters. A variety of risk factors highlighted in the company’s Form 10-K and in our most recent earnings release could cause business conditions and the company’s actual results to differ materially from those expected by the company are expressed in the company’s forward-looking statements.

In addition, certain financial measures referred to during this call are non-GAAP financial measures. For an explanation of reconciliation of these non-GAAP measures, see our most recent earnings release and investor presentations published periodically on the company’s website.

Here is a quick snapshot of our fourth quarter. We earned an adjusted $0.14 per diluted share, up from the adjusted $0.13 in last year’s fourth quarter, marking the seventh consecutive quarter of year-over-year adjusted EPS growth. For the full year, adjusted EPS reached $0.50 a share, up 39% from $0.36 last year. We were encouraged that the Performance Chemical Specialty business grew volume by 4.8% in the quarter, which marked the second consecutive quarter of growth.

Full year adjusted EBITDA was $82 million, up from $79 million last year, led by the growth in Performance Chemicals. We continue to achieve strong free cash flow and to drive down net leverage which was 3.5 times, compared to 3.9 times at the end of last year’s fourth quarter. This was driven by increased profitability and improved working capital management.

We generated approximately $33 million of cash during fiscal 2016.

Thank you and I will now turn the call back over to Ann.

Anne Noonan

Thanks Paul. Good morning everyone. First I’d like to say it’s a privilege to lead this company and to be speaking with you today. I want to thank Kevin McMullen for his 16 years of leadership.

As many of you know over the last several years I've been leading OMNOVA's Performance Chemicals segment through this transformation and building up the team. Prior to that I was with Chemtura for 27 years, most recently as President of Chemtura's Industrial Engineered Products business. I also had the opportunity to lead their Corporate Development function. Having spent considerable time in the industry and a few years at OMNOVA, there is no doubt in my mind of the unique market position and opportunity that exists at our company.

Paul covered the important financial achievements in our fourth quarter, but I will touch upon a few key areas. We were encouraged to again see year-over-year growth in the specialty business of Performance Chemicals during the quarter with volume up almost 5%. This follows growth in the third quarter where volume was up approximately 6%. With a strong finish in third and fourth quarter volume growth, for the full-year Performance Chemicals volume driven specialty sales were up over last year.

I'm particularly pleased with the performance in Asia for the Chemicals business. Our new organization and new products have driven double-digit volume growth and significantly improved profitability, driven by specialty nonwovens and what we refer to as the key space, which is made up of specialty coatings, adhesives, sealants and elastomers.

Challenges continued in our Chinese coated fabrics business where we are slowly recovering from the loss of a significant customer. We are proactively addressing the situation. Outside of China, however the coated fabrics business delivered healthy profit margins.

Lastly, we've recently seen butadiene pricing spike globally. As a result, on our index businesses, we have announced a series of price increases, which we're working through with our customers. Successful execution of plant price increases is important as ongoing investment in innovation and our global asset base drives the long-term sustainability of our business model. The index business represents more than 40% of our overall Performance Chemicals segment and approximately 80% of our butadiene purchases. We expect to catch up on pricing as index prices change, typically this is anywhere from one month to three months.

From a strategic point of view, I believe OMNOVA is well-positioned to win as a premier global innovative specialty solutions provider. I've been leading the OMNOVA specialization strategy personally for the Chemicals segment over the several years. We have a strong technology base and established positions to key markets like construction, energy and transportation. We are willing to customize which allows us to deliver solutions that are profitable and differentiated for our target customers and markets.

Additionally, we have a dedicated team of top quality professionals who are energized and motivated to drive up to the next level. I am passionate about the strength of our innovation, product portfolio and services and the opportunity they present for us to consistently and profitably grow.

One of the questions I have been getting is what are you going to differently? I’m making a number of changes on how we will execute our strategy. We’re in the process of changing our segments to drive the business faster and with more consistency. We are grouping like businesses that share similar go-to-market strategies. For example, the businesses with potential to be in our specialty segment will be characterized by higher margins and faster growing markets where specialty margins are sustainable. For our more mature businesses, we are focused on operational excellence to drive continued profit improvements and cash generation.

We expect to begin reporting on to the new structure when we report our fiscal 2017 second quarter results. Additionally, we are reorganizing key functions including sales, marketing, technology and operations to serve the business segments one standard set of processes, driving consistency and efficiency across the organization and to one market [ph] improved agility in serving our customers. For example, for 2017, we will continue our focus on marketing excellence with planned improvements in market segmentation and competitive intelligence to better define the market segments where we can win.

In 2016 we had above market growth in a number of target areas including the key space and oil and gas. For innovation excellence, we have made great strides reinvigorating the innovation pipeline and delivering sales from new products. Our vitality index reached almost 27% at the end of the year, compared to 20% for all of last year. Additionally, margins for the innovation portfolio increased almost 800 basis points over last year.

For 2017, we will turn our focus to speed of innovation and further enriching the innovation pipeline through strategic alliances.

In pursuing sales excellence, we have greatly improved our depth and breadth of accounts through our key account management structure and with the addition of new talent with industry specialization. During fiscal 2016, the chemical salesforce reported $31 million in sales from new business wins. For 2017, we will focus on leveraging these improvements across our portfolio to bring increased value and differentiation to target customers and market segments.

In operational excellence, we delivered more than $14 million of cost reductions and improved a number of processes, setting a strong foundation and enhancing our cost competitiveness to better serve our customers. For 2017, we will fully implement sales, operations and inventory planning globally, while leveraging our new maintenance and operational excellence tools across the entire global manufacturing enterprise. This will drive improved productivity and working capital.

Corporate support functions are being streamlined as well to reduce complexity and drive consistency across the entire business in a one OMNOVA fashion. Previously, the legacy segments had some independent corporate-like functions. For example, going forward, we will have one global accounting team fully leveraging our strong SAP backbone as opposed to three separate teams.

I believe these changes will result in a more streamlined organization, which will improve our speed, agility and ability to generate consistent profitable growth. As the year unfolds, I will update you on our progress. Over the next few months, I will be on the road and I'm looking forward to meeting as many of you as possible. I was pleased to meet some of you in Boston last fall at our first Investor Day. Since coming on board as CEO, I have been on a listening tour of OMNOVA employees and customers to better understand our opportunities and challenges. And I look forward to listening to your perspective as well.

So in summary, we are committed to driving OMNOVA to new heights by leveraging our specialty businesses for profitable growth and our mature businesses for continued margin growth and cash generation. I'm excited about our portfolio of products and the new opportunities we have under development. And I'm most excited by the high caliber team we have in place, I'm confident we will get the job done.

Thank you. Paul and I are ready to answer any questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We will go to Mike Sison with KeyBanc. Please go ahead.

Mike Sison

Hey, nice end to the year there, Anne and congratulations on your new post here. When you think about Performance Chemicals, the margin improvement of 2016 was very good and when you think about wanting to grow the business longer term and a lot of the changes you've made, where do you think profitability could go over time and maybe not this year, but just, what's the potential for that segment over the next couple of years?

Anne Noonan

Well, we've clearly stated that our vision is to be a premier global innovative specialty solutions provider and with that will come specialty margins, which we normally target greater than 15% operating profit margins. We're on a good trajectory to accomplish that with what we've done in 2016 and with the continued focus that we have on specialties for top and bottom line growth. And the mature businesses where we have margin and cash generation, we really believe that that is achievable over the next few years.

Mike Sison

Okay great. And then the increases in butadiene as you noted as you noted, have gone up a lot recently. How do you see earnings progressing over the next couple of quarters in light of that headwind and maybe if you can talk about some of the growth you could potentially see the volumes as you noted were very, very good in the last two quarters for Chemicals and maybe what that looks like down the road?

Anne Noonan

Okay. So from the perspective butadiene, clearly we've seen a spike in the price of butadiene globally as everyone else has. As I said, 40% of our Performance Chemicals business is indexed, so that price will come in over time. When we look, we have implemented three price increases at this point in time and I believe that we will cover all the escalation with time, obviously there will be a lag. But what we have going for us within the quarters will have some of that offset with our LIFO and inventory reval. We have the streamlining and modest cost reductions that we're going after right now through the different things that we're putting together from an organizational perspective.

And we have our continued focus on specialty growth, which should continue to buoy our earnings over time. Now with respect to volume growth, clearly our focus is on profitable volume growth, in a specialty business, we have to focus on both topline and bottom line growth and it's important that we get the price execution to continue to fund the innovation and all of the global asset investments that we made to support that.

So our goal remains to be two times – that our specialty markets to grow at two times the underlying growth rate, and also that in our mature markets to maintain our leadership positions, but really we're focused there more on margin growth and on cash generation.

Mike Sison

Great. And then last question, when you think about continuing to move OMNOVA more into specialty areas, obviously growing volume is – on the specialty area is great, I think you've done a lot of product rationalization and when you think about moving it further, can you do acquisitions, I mean, what's the potential of adding new products or platforms to accelerate that goal?

Anne Noonan

I think obviously there is a potential, but one of the things you'll see different from us moving into 2017 is not a just a focus on sure acquisitions, but also increased emphasis on looking to strategic alliances to actually grow our business above and beyond our organic growth plans. This is an area where I've used a lot in the past and it's an area where I believe that we could have a low cost, low investment, lower risk approach to growing. However, we will look at acquisitions, our primary focus is on bolt-on acquisitions, anything that we look at will obviously have to be – create quick and create accretion for our shareholders.

Mike Sison

Great. Thank you.

Operator

Thank you. [Operator Instructions] There are no further questions in queue. Please go ahead.

Anne Noonan

Well, thank you. I look forward to meeting with many of you over next few months.

Paul DeSantis

Thank you.

Operator

Thank you. And ladies and gentlemen, a digitized replay is scheduled from 02/01/2017 at 1:00 p.m. Eastern until 02/21/2017 at 11:59 p.m. Eastern. Also an audio replay will be available on OMNOVA Solutions’ website www.omnova.com until noon Eastern on 02/21/2017.

And that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.

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