DuPont Earnings Preview: Lower Seed Sales, Chemical Prices To Weigh On Earnings
DuPont (NYSE:DD) is set to announce its 2014 second quarter earnings on July 22. The company is expected to report a year-on-year decline in earnings per share for the quarter, primarily due to lower agricultural products and chemicals segment earnings, and other charges associated with a new restructuring program. While the company’s agricultural products earnings are expected to come under pressure from lower corn seeds and herbicide sales, lower refrigerant prices in the U.S. are expected to weigh on its chemicals segment earnings. Furthermore, DuPont also announced a Fresh Start initiative recently, which is aimed at reducing its cost structure through a redesign of its global business and support functions. The company said it expects to take a pre-tax charge of around $270 million during the second quarter as it kicks off the implementation of this program. [1]
During the second quarter earnings call, we will be looking for an update on the progress made by the company so far on the spin-off of its performance chemicals business.
DuPont generates annual sales revenue of around $36 billion by supplying high-performance materials and chemicals, electronic materials, high-performance coatings and agricultural products to industries and consumers worldwide. 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 the agriculture and nutrition divisions. Its consolidated adjusted EBITDA margin stood at around 20% last year. We currently have a $71 price estimate for DuPont, which is around 10% above its current market price.
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Lower Agricultural Products Earnings
According to our estimates, DuPont’s Agricultural Products division contributes the most, around 37.5%, to its total value. Last year, the division posted the highest revenue growth (13% y-o-y) within the company’s diversified portfolio on robust demand for its AQUAmax and AcreMax seed products, and Rynaxypyr insecticide. However, this year has not been as good for the division. 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. Additionally, 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. [2]
Amid lower demand for corn seeds and herbicides, the company expects its agricultural products division to post a similar performance during the second quarter as well. Farmers in North America have increasingly shifted away from corn this year due to better economies offered by the soybean crop under the current pricing and yield scenario. However, DuPont does not expect the increase in soybean seeds demand to make up for the decline in its corn seeds sales. This is because the company’s soybean line-up is undergoing a transition towards newer seed varieties. Furthermore, on the crop protection side, DuPont expects lower herbicide demand, primarily due to a wet spring this year, and de-stocking of inventories by its distributors to also weigh on its operating results. Because of these factors, the company expects its second quarter agricultural products operating income to decline by around 13-15% year-on-year. [1]
Lower Chemical Prices and Other Charges
Apart from lower seeds and herbicide sales, DuPont’s second quarter earnings are also expected to come under pressure from lower chemical prices. According to our estimates, the Performance Chemicals division, which primarily deals in titanium dioxide (TiO2) and fluorochemicals, contributes around 20% to its total value. Fluorochemicals are widely used for refrigeration purposes. DuPont sells HCFC 22 and Isceon refrigerants, which have been under a significant pricing pressure recently due to oversupply in the U.S. market. This is expected to weigh on the company’s performance chemicals operating margins during the second quarter. [1]
In addition, DuPont also announced a Fresh Start initiative recently, which is aimed at reducing its cost structure through a redesign of its global business and support functions. Through this program, the company plans to achieve at least $1 billion in annual cost reductions on a run rate basis by 2019. The first part of this program is aimed at eliminating any stranded costs associated with the planned spin-off of the Performance Chemicals division. The company said it expects to take a pre-tax charge of around $270 million during the second quarter as it kicks off the implementation of this program. [1]
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Notes:- DuPont Lowers Operating Earnings Outlook for 2Q and 2014, dupont.com [↩] [↩] [↩] [↩]
- DuPont Reports Q1 Operating EPS of $1.58, dupont.com [↩]