DuPont (NYSE:DD) reported lower second quarter earnings Tuesday on lower TiO2 and silver prices as well as higher costs incurred by the company’s agricultural products division due to bad weather. The company’s adjusted diluted earnings per share declined ~15% to $1.28 for the quarter. DuPont executives also announced their intentions to spin off the cyclical performance chemicals business that primarily sells TiO2, fluoropolymers and other performance chemicals globally. 
Lower TiO2 Prices
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According to our estimates, the performance chemicals division makes up more than 25% of DuPont’s total value. The company’s Titanium Dioxide (TiO2) business contributes almost 50% to the division’s revenues. TiO2 is a chemical used primarily as a whitening pigment because of its brightness and a very high refractive index. Slower-than-expected demand for the white pigment led to a huge inventory build-up at both the manufacturer as well as the customer level during 2012. This inventory build-up led to a sharp decline in the pigment’s prices, which negatively impacted DuPont’s second quarter earnings.
However, improving demand for the pigment and reduced production capacity have been driving normalization of the inventory levels over the past few months. Growing demand of TiO2 is clearly reflected in DuPont’s 12% y-o-y and 18% sequential sales volume growth. Moreover, the company also took pricing on its TiO2 products this month on improving demand scenario. These indicators suggest that TiO2 prices have touched a cyclical bottom and are expected to trend higher during the second half of the year when the company will also benefit from easier y-o-y comparisons.
During the second quarter earnings call, DuPont executives expressed their interest in strategic alternatives for the company’s performance chemicals division in order to reduce cyclical volatility that is inherent to this business. Although the company has taken no final decision on the subject yet, the CEO, Ellen Kullman pointed out that they do not want to prolong the decision making process any further. The spinoff of TiO2 and other performance chemicals businesses will not only reduce operating risk associated with DuPont’s consolidated operations but it will also allow the company to focus more on science based integration of its Agricultural, Health and Nutrition and Industrial Biosciences divisions.
According to our estimates, DuPont’s agricultural products division contributes more than 30% to its total value. The division posted highest revenue growth within the company’s diversified portfolio on robust demand for genetically modified seeds and crop protection products. DuPont’s seed business received a boost from growing demand for its Acremax and Aquamax seed brands while Rynaxypyr insecticide led the growth in its crop protection business.
However, cost pressures due to cold and wet weather in most parts of North America and Europe during the second quarter led to a 1% y-o-y decline in operating income. The abandonment of acreage due to unfavorable weather conditions in these regions reduced DuPont’s sales revenue from seeds and crop protection businesses. Some farmers in North America also turned in their corn and soybean seeds due to planting delays caused by cold weather. This resulted in higher supply chain costs as well as the cost of goods sold by the company which negatively impacting the division’s operating margins. Moreover the reversal of $0.02 operating income per share benefit recorded by the company during the first quarter due to the accelerated pace of seed deliveries further pressurised operating income in the second quarter.
Lower Silver Prices
Although DuPont gained market share in the photovoltaic space during the quarter, lower usage per watt and lower silver prices, which the company transfers to its customers, negatively impacted the company’s Electronics and Communications division earnings. Sales from the division declined by 18% y-o-y while operating income decreased by 4%. We expect the division to perform better in the second half of the year primarily due to growing demand for photovoltaic and consumer electronic products. However, lower silver prices might still be a drag on sales revenue.
We currently have $55 price estimate for DuPont, which will soon be updated based on the second quarter earnings announcement.Notes: