During the Deutsche Bank Global Industrials and Basic Materials Conference held on June 13, DuPont (NYSE:DD) lowered its earnings per share (EPS) guidance for the first half of the current year. Previously the company guided for a 7-9% y-o-y decline in EPS, which it now expects to be 10% below H1 2012 earnings. The company attributed the projected decline to lower than expected agricultural segment earnings due to unseasonably cold and wet spring weather across North America and Europe this year. However, the company has reposed faith in the turnaround of its performance chemicals business by the end of this year as TiO2 inventories fall to more normalized levels.
DuPont generates revenues by supplying high-performance materials and chemicals, electronic materials, high-performance coatings and agricultural products to industries and consumers worldwide. The company relies on its technological expertise and research & development to deliver products that cater to market needs. Most products manufactured by DuPont are used as raw materials by other industries, making it a predominantly B2B (business-to-business) based company with the exception of agriculture and nutrition divisions.
Lower Agricultural Earnings
A majority of North America and Europe witnessed a cold spring season this year with showers that delayed planting, damaged already planted crops and also led farmers to abandon planting in some acreage. While the abandonment of acreage due to wet and cold weather are expected to lead to lower seed sales directly, it will also negatively impact sales of crop protection products such as herbicides and pesticides sold by DuPont. Farmers in North America are also turning in their corn and soybean seeds due to planting delays caused by cold weather. This is further expected to reduce earnings from the agriculture division as it will increase both supply chain costs as well as the cost of goods sold. It should be noted that the company realized $0.02 operating income per share benefit during the first quarter due to the accelerated pace of seed deliveries, which is expected to be reversed during the second quarter. Hence, the agricultural division’s second quarter earnings are expected to witness modest growth and this is not encouraging since this division is one of the primary growth drivers for DuPont.
Cyclical TiO2 Near Its Bottom
TiO2 forms a majority of DuPont’s Performance chemicals business as it drives almost haft the division’s revenues. Slower-than-expected demand for the white pigment led to a huge inventory build-up at both manufacturing as well as customer levels during 2011. This inventory build-up led to a sharp decline in the pigment’s prices during 2012, which dragged DuPont’s earnings significantly. However, the company suggested that inventory levels with customers have already normalized and producer level inventories will continue to normalize by the end of the second quarter. This is an encouraging sign given that TiO2 volumes were stable year-on-year during the first quarter, and even grew by 8% on a sequential basis from last quarter. This reflects a strong underlying demand for the pigment and also shows that the current price levels are largely due to inventory offloading by manufacturers, which is not a sustainable trend amid rising demand. As the producer inventory levels normalize over the next couple of months, we expect growth in the underlying demand to drive TiO2 prices higher. To sum it up, we expect 2013 to be the year DuPont’s TiO2 business touches its bottom as the second half of the year would see easier year-on-year comparisons as well.