Dupont Q3 Earnings: Weak Agro Products Sales and Currency Headwinds Hurt Operations, And Will Continue To Do So In Near Term

DuPont (NYSE:DD) released its Q3 2015 earnings report recently. ^[1] The company’s operating earnings declined for the quarter, with most of the decline coming from weak agricultural products sales and the negative currency translation effect induced by the appreciation of the U.S. Dollar against most international currencies.  Sales volume for DuPont’s agricultural products segment has been declining in the recent past primarily because of lower corn-seed sales. Farmers are increasingly shifting away from planting corn due to an oversupply situation, as evidenced by the decline in corn prices in the commodity markets over the past few quarters. We believe this situation will persist in the near term, which means that DuPont’s agricultural products division will have to operate in a challenging environment for the next few quarters. A silver lining for Dupont is the fact that earnings were boosted by the cost reductions from an ongoing operational redesign initiative undertaken by the company. Dupont is pleased with the progress of the initiative so far, and has revised its target date for achieving $1.3 billion in annual run rate cost savings from 2017 to year-end 2016.

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Agricultural Products Division Continues To Suffer In A Challenging Environment

We estimate that DuPont’s Agricultural Products division contributes around 37% to the company’s total value. This division continues to operate in a challenging environment as seed prices remain low – mostly because of a continued oversupply situation driven by yield improvements and favorable weather conditions. In addition, farmers continue to move away from planting corn because of better returns on other crops. ^[2] During the third quarter, the company’s Agricultural Products sales dropped by 30% while operating losses from the division almost quadrupled. ^[3] According to the latest World Agricultural Supply and Demand Estimates published by the United States Department of Agriculture (USDA), corn planted area in the U.S. is expected to decline from around 95.4 million acres last year to 90.6 million acres in 2015, while corn production is still expected to surpass last year’s record level due to a significant improvement in projected yield per harvested acre. ^[4] There is a similar reduction in the corn planted area in Brazil, as well. This essentially means lower demand for DuPont’s corn seeds, which account for approximately 50% of its agricultural products division’s total sales revenue.

DuPont’s Agricultural Products division’s growth prospects have remained stagnant since last year’s decline in seed prices and a shift away from corn planting. In 2014, DuPont’s agricultural products sales revenue declined by 3.7% and margins shrunk by almost 50 basis points year over year, according to our estimates. The decline had a significant impact on the company’s overall earnings growth during the period because agricultural products make up close to 40% of the company’s total consolidated sales revenue. This was in stark contrast to 2013, when the division posted the highest revenue growth (13% y-o-y) within the company’s diversified portfolio, buoyed by robust demand for its AQUAmax and AcreMax seed products and Rynaxypyr insecticide. Going forward, DuPont expects the division’s operating environment to remain challenging in the short term and has guided for a low-teens percentage decline in sales and a $100 million operating loss for the last quarter of 2015. ^[5]

Dupont’s Operational Redesign Initiative Bearing Fruit, But Currency Fluctuations Continue To Play Spoilsport

Dupont’s Q3 2015 operating earnings per share was $0.13 as compared to $0.39 in the prior year period. ^[3] Earnings were boosted by the cost reductions stemming from operational redesign, which contributed an incremental $0.10 per share to third quarter operating earnings and drove operating margin improvement in four segments. ^[1] The company believes it is on track to deliver approximately $0.40 per share in incremental savings for the full year. All this is part of an ongoing redesign initiative undertaken by Dupont. The company is pleased with its progress so far, and has revised its target date for achieving $1.3 billion in annual run rate cost savings from 2017 to year-end 2016.

However, Dupont’s performance continues to be plagued by currency headwinds. Negative currency fluctuations reduced operating earnings by $0.17 per share during the quarter. ^[1] DuPont has operations in more than 90 countries worldwide and about 55% of its consolidated net sales revenue comes from international markets. Since the company operates primarily in local currency in these markets, a strengthening U.S. Dollar negatively impacts its financial results. Based on the average basket of exchange rates for its business, DuPont currently expects the strengthening U.S. dollar to drag down its 2015 full-year earnings by $0.72 per share. ^[1] However, the actual impact of currency fluctuations on earnings could be higher since the depreciation of a local currency against the U.S. dollar might lead to higher relative prices of DuPont’s products in the local market, thereby weakening its competitive positioning as compared to the local alternatives.

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1. DUPONT REPORTS 3Q OPERATING EPS OF $0.13; YTD OPERATING EPS OF $2.49, October 27, 2015, Dupont Investor Relations [↩] [↩] [↩] [↩]
2. DuPont Annual SEC Filings, sec.gov [↩]
3. Dupont’s SEC Filings [↩] [↩]
4. World Agricultural Supply and Demand Estimates, usda.gov [↩]
5. DuPont Third-Quarter 2015 Earnings Conference Call Presentation, Dupont Investor Relations [↩]