DuPont Earnings Preview: Lower Seed Prices, Restructuring Charges To Weigh On Earnings Growth

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DuPont (NYSE:DD) is set to announce its 2014 fourth quarter earnings on January 27. We expect the impact of restructuring charges and lower seed prices, partly offset by higher crop protection sales and productivity improvements, to weigh on the company’s earnings growth. The prices of corn and soybean seeds, which make up a large chunk of DuPont’s agricultural products sales, plummeted last year due to record harvest projections in the U.S., primarily led by favorable weather conditions and yield improvements. In addition, DuPont also announced that it will record a $315 million pre-tax charge in the fourth quarter earnings report as a part of its ongoing restructuring program. During the earnings conference call, we will be looking for an update on the spin-off of the Performance Chemicals unit – the company’s third most valuable division by our estimates.

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 $70/share price estimate for DuPont, which is around 5% below its current market price.

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Lower Seed Prices

According to our estimates, DuPont’s Agricultural Products division contributes the most, around 35%, to its total value. In 2013, 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, 2014 has not been as good for the division. During the first nine months of the year, DuPont’s agricultural products sales revenue declined by 4% y-o-y due to lower corn and soybean seed prices and early seasonal seed shipments made by the company during the fourth quarter of 2013. This had a significant impact on DuPont’s earnings growth during the period because agricultural products contribute more than 35% to the company’s total consolidated sales revenue. [1]

In addition to lower seed prices, DuPont’s largest division has also been negatively impacted by lower demand for corn seeds. Farmers increasingly shifted away from planting corn last year due to better economies offered by the soybean crop under prevailing pricing and yield scenario. However, DuPont was not able to tap the increase in soybean seeds demand to offset the decline in its corn seeds sales because its soybean line-up is undergoing a transition towards newer seed varieties. With little improvement in commodity prices, we expect the demand for corn seeds to have remained weak during the Latin America planting season as well, which is why we expect DuPont’s agricultural segment to post lackluster fourth quarter earnings growth.

Restructuring Charges

DuPont announced a restructuring program, called the ‘Redesign’ initiative, in June 2014, when it announced that it will be taking a pre-tax charge of $270 million during the second quarter of last year. The program is primarily aimed at delivering near-term savings from the movement and elimination of costs related to the separation of its Performance Chemicals division. In addition, the redesign program is also aimed at driving significant long-term cost savings through productivity improvements across all businesses. The company plans to carry out an extensive redesign of its infrastructure as a part of the program, which will be primarily focused on automation and standardization of transactional processes across the globe that will improve its overall cost structure. Altogether, these efforts are expected to yield at least $1 billion in cost savings by the end of 2019 from a 2013 baseline – two-thirds by the end of 2015 on a run-rate basis, and the final third occurring between 2016 and 2019. Including the estimated fourth quarter charge of $315 million, DuPont has already announced a total pre-tax charge of $585 million related to the restructuring program so far, which comes out to be around $0.43 per share, after tax. [2]

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Notes:
  1. DuPont Reports 3Q Operating Earnings Per Share of $0.54, Up 20 Percent from Last Year, dupont.com []
  2. DuPont Announces Filing of Form 10 Registration Statement for Performance Chemicals Spinoff, dupont.com []