US PolyOne warns on abrupt demand slowdown, raw material costs, tariffs

HOUSTON (ICIS)–PolyOne saw an abrupt demand slowdown in September in end markets such as building and construction, particularly in North America, the CEO of the US-based polymer materials firm said in an update on Wednesday.

Furthermore, October order rates suggests that the slowdown is continuing into Q4, CEO Robert Patterson said during PolyOne’s Q3 earnings call.

Customers were delaying orders, citing concerns over weak consumer demand, rising input costs and tariffs, the CEO said.

“Customers are increasingly pointing to a slowdown in certain end markets in North America, in China, and we are experiencing this first-hand in building and construction, and in appliance, to name a few,” he said.

Raw material costs, tariffs

At the same time, freight costs were up $3.5m year on year in Q3, and prices for raw materials rose, with nylon and butadiene (BD) both up more than 50% year on year, Patterson said.

Another negative are tariffs, which are expected to affect PolyOne by an annualised $5m, based on the company’s current import levels, he said.

To counter the rising costs, PolyOne implemented surcharges, “and we are just beginning to capture them”, he said.

Customers, while not liking higher prices, were appreciating the situation, but higher raw material costs were an ongoing challenge in Q4, he said.

“Customers, I think, have a better appreciation of for the dynamics that exist today, that is not to say that they willingly accept these price increases, but I think they are more aware that they are coming,” he added.

September PPS sales down 12% year on year

In Q3, PolyOne’s performance products and solutions (PPS) and its distribution segment were most impacted by the September demand slowdown and other challenges, with both segments recording declines in year-on-year operating income and gross margin.

For PPS, combined July and August sales were up 7.5% year on year, but September sales were down 12%, predominantly driven by declines in North America. In distribution, July and August sales were up 15% but flat in September, Patterson said.

PPS provides products and services for vinyl molding and extrusion processors, along with services including materials testing, component analysis, custom formulation development, colourant and additive services, part design assistance, structural analysis, process simulations, mold design and flow analysis and extruder screw design.

Meanwhile, the PolyOne Distribution business distributes more than 4,000 grades of engineering and commodity grade resins.

While PolyOne’s other segments – colour, additives and inks, and specialty engineered materials – are expected to expand their operating income in the current Q4, that growth may not be enough to offset the declines in PPS and distribution and the challenges from higher costs, Patterson said.

PolyOne therefore expects Q4 adjusted earnings per share (EPS) to come in unchanged year on year at about 41 cents, he said. Q3 adjusted EPS was 62 cents, up from 58 cents in Q3 2017.

“Hopefully, what we are hearing from our customers, and what we are experiencing today, is short-term,” he added.

Robust M&A pipeline

Patterson also said that PolyOne’s pipeline for mergers and acquisition (M&A) has become “robust”, after things were “a little slow” earlier this year, and he indicated that the company soon conclude bolt-on deals in engineered materials.

“It’s always amazing to see how [M&A] things can change over the course of a quarter or so,” the CEO said, adding that PolyOne may be able to capitalise on the current weakness in certain end markets.

Photo by Imaginechina/REX/Shutterstock

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