Plastics Can Be Pretty Special, PolyOne CEO Says


There's a simple chart that Bob Patterson points to when he wants to explain the transformation his company has gone through over the past several years.

Patterson is CEO ofPolyOne ( POL ), a maker of polymer materials and other products for the plastics industry, which beat quarterly earnings views on Monday.

A decade ago, the company focused primarily on low-margin, commodity-type products. PolyOne was profitable, but growth was slow, and its stock price hovered in the single digits.

But after a management shakeup that included hiring the now-retired Stephen Newlin as CEO, PolyOne set about turning itself into a designer and manufacturer of higher-margin, more complex specialty products.

This shift is demonstrated in a chart showing the trajectory of specialty products as a percentage of PolyOne's operating income. In 2005, specialty products made up 2% of operating income. That ratio now sits at about 64%. The projection next year is that it could rise as high as 75%.

'Engine For Growth'

"Innovation is at the heart of our transformation, and so is product-mix improvement," Patterson told IBD. "The specialty platform is our engine for growth. We think it could represent 80% to 90% of our earnings profile by 2020."

That platform covers a wide range of uses and end markets, ranging from construction and industrial to health care and consumer goods.

One of PolyOne's newer innovations is an authentication technology, called Percept, that is designed to protect everything from branded apparel to glucose testing equipment from counterfeiters.

Another recent innovation is a metal replacement technology whose applications include lead-free radiation shielding, such as for CT scans.

Patterson also points to a broad platform of products, based on soft-touch materials, called thermoplastic elastomers, or TPEs. These materials are used in consumer products such as soft-touch grips for razor handles and toothbrushes.

"We have great exposure in consumer markets, but we are also focusing on advancing applications in the health care space for TPEs," Patterson said.

One of those applications is for arthritis medications packaging, he says. "With TPEs, you can make a soft-grip material that makes it easier to use for elderly patients. It is also being used to help facilitate grips on medical devices used by physicians during surgery, where gripping is important. Soft touch is used to facilitate that."

PolyOne's product ideas come from its own research and development team as well as from customers.

"They are working to solve the customer's needs -- to try and determine the right color for a product, the right flexibility, the right functionality. That's a key to their success: working with customers to solve those challenges," said Elliott Schlang, managing director of Great Lakes Review, an institutional research boutique in Cleveland.

Demand for these types of products helped PolyOne run off four straight quarters of 25%-or-better sales growth before logging a 3% decline -- missing consensus estimates -- for its 2014 second quarter, which the company reported after Monday's close.

In a statement, PolyOne said that the Q2 revenue dip was partly due to the company's decision to "exit certain unprofitable products" associated with last year's buyout of Spartech, a maker of bulletproof barriers and aircraft cabin windows.

PolyOne's bottom-line performance was much better during the quarter. The company posted Q2 earnings of 51 cents a share, up 38% from the prior year and a penny ahead of views.

Analysts polled by Thomson Reuters expect full-year EPS gains of 37% in 2014 and 36% in 2015.

"The driving force behind their growth, by far, is the fact that this is a company that has done a very good job transforming itself from a commodities chemical company into a specialty chemicals company," Schlang told IBD.

It's one thing for a company to aspire to this kind of makeover, Schlang says. It's another to actually pull it off while still putting up solid financial results.

PolyOne's ability to do so is a credit to its executive team, says Schlang, who owns shares of PolyOne.

"Behind the transformation has been a dramatic management change, with Newlin changing the whole direction of company," he said.

Newlin took over as PolyOne CEO in February 2006 after previous stints atEcolab ( ECL ) and Nalco Chemical. He spent the next eight years helping PolyOne establish itself as a leading supplier of specialty polymers.

In May, Newlin stepped down as CEO, but he remains executive chairman of the PolyOne board of directors.

Patterson, Newlin's replacement as CEO, has been with PolyOne since 2008. He previously served as chief financial officer, executive vice president and chief operating officer.

Schlang calls Patterson "extremely bright, articulate and well experienced."

"In my opinion, he and Newlin are two peas out of same pod, and I look at that as a continuation of the transformation of the company," Schlang said.

Maintaining Momentum

For his part, Patterson, 41, doesn't expect to make any radical changes as PolyOne's top executive.

"As I stepped into this role, I acknowledged that we have fantastic momentum," he said. "In that regard, certainly things don't need to change in terms of our strategy and our emphasis on execution."

PolyOne is part of IBD's Chemicals-Plastics group, which ranks No. 77 among 197 industries that IBD tracks. Another stock in the group that makes specialty products isA. Schulman ( SHLM ).

Ferro ( FOE ), which belongs to IBD's Chemicals-Specialty group, has also been listed as a player in the specialty plastics market.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Investing Ideas

Referenced Stocks: POL , ECL , SHLM , FOE

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