DuPont (NYSE:DD) reported modest earnings growth for the first quarter due to lower agricultural sales volume and continuing pricing pressures in the chemicals segment. The company’s adjusted diluted earnings per share (EPS) of $1.58 for the quarter grew by just 1.3% y-o-y. However, DuPont reaffirmed its full-year earnings guidance on improving outlook for the chemicals business. The company expects its 2014 full-year adjusted diluted EPS to fall in the range of $4.20 to $4.45. 
We currently have a $75 price estimate for DuPont, which is ~17x our 2014 adjusted diluted EPS estimate of $4.32 for the company.
Early Seed Shipments Impact Volume Growth
During the first quarter, DuPont’s agricultural products sales volume declined by 7% y-o-y due to early seasonal seed shipments made by the company. Harsh weather conditions due to winter storms in North America also impacted its seed sales negatively. This had a significant impact on DuPont’s earnings growth because agricultural products contribute more than 43% to the company’s total consolidated sales revenue. According to our estimates, the agricultural products division makes up more than 37% of the company’s total value. 
DuPont was able to accelerate its seasonal seed sales during the fourth quarter last year due to enhanced production and distribution capabilities in some of the key Latin American markets and the expansion of its successful “direct-to-farmer” distribution system in North America. This resulted in a shift in the company’s seasonal seed sales timing, which weighed on its sales volume growth during the first quarter. However, for the rest of the year, we expect DuPont’s agricultural products sales volume to grow strongly on robust demand for its AQUAmax and AcreMax seed products, and Rynaxypyr insecticide.
Farmers skeptical of water availability during the corn-growing season use AQUAmax seeds for better yields. The product’s demand grew sharply after the severe drought in 2012. Last year, DuPont’s AQUAmax corn seeds were planted on 7 million acres compared to just 2 million acres in 2012. Apart from this, growing adoption of integrated and reduced refuge techniques is also boosting the demand for DuPont’s AcreMax line of products. The U.S. Environmental Protection Agency (EPA) requires that a refuge consisting of non-GM corn seeds be planted on a certain percentage of each field in the Corn Belt. 
In the crop protection segment, DuPont is expected to continue to gain from the growing penetration of its hugely successful Rynaxypyr insecticide. Higher demand for the product stems from its unique mode of action that reduces the environmental impact while being extremely effective against a wide range of insects. The compound selectively activates ryanodine receptors in insects that cause them to stop feeding on leaves within minutes of ingestion. It also moves inside the leaf tissue where it is protected from being washed-off. This leads to more effective and longer lasting protection of crops from insects, resulting in higher yields for farmers. Last year, Rynaxypyr contributed more than $1 billion to DuPont’s total sales revenue. 
Lower Chemical Prices Continue To Weigh On Margins
DuPont’s performance chemicals division, which primarily deals in titanium dioxide (TiO2) and fluorochemicals, has been under-performing its overall portfolio for the last few quarters. According to our estimates, the division’s adjusted EBITDA margin shrunk by more than 800 basis points y-o-y last year. This has been primarily due to lower chemical prices, which continued to weigh on its consolidated operating margins during the first quarter as well. Although sales from the division were down marginally (~3%), operating earnings declined more than 20% y-o-y due to thinner margins. 
In 2009, industrial demand declined sharply due to the global economic downturn, which led a closure of several manufacturing facilities around the world. As a reaction to the grim situation, governments around the world initiated a variety of stimulus packages to revive the industrial sectors. This led to a sharp growth in infrastructure and housing markets around the world, especially in China. Consequently, the demand for TiO2 – primarily used as a whitening pigment by paint manufacturers, and fluorochemicals – primarily used as refrigerants, surged higher. This was followed by capacity additions by manufacturers to tap the soaring commodity prices. However, after the housing market in China started cooling down in mid-2012, demand for these chemicals slumped and prices fell sharply from their peaks due to excess inventories. Although TiO2 demand has been improving recently, as suggested by the y-o-y volume gains posted by DuPont for five consecutive quarters now, prices continue to remain weak due to inventory overhang. Refrigerant prices continue to remain subdued as well. 
In order to reduce the impact of this cyclical volatility, which is inherent to the performance chemicals business, on its portfolio, DuPont decided to spin-off the division into a separate company in October last year. During the first quarter earnings call, the company officials announced that the spin-off process is on-track and is expected to complete by mid-next year. DuPont expects to spend around $170 million in the planned separation of its performance chemicals business this year. Most of the expense would be incurred to prepare audited financial statements, build the necessary standalone information technology systems, and create separate legal structures around the world. Notes: