DuPont’s (NYSE:DD) third quarter earnings came out largely on expected lines, as higher demand for agricultural products fueled sales growth at the company while lower performance chemical prices continued to weigh on earnings. Overall, the company was able to post a modest 5% adjusted earnings per share (EPS) growth year-on-year on cost savings from restructuring activities and a lower effective income tax rate. DuPont also reaffirmed its full-year adjusted EPS guidance of $3.85 per share, ~5% above last year. 
DuPont generates revenues 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.
Our $58 price estimate for DuPont will soon be updated to reflect the third quarter earnings announcement.
DuPont’s agricultural products division continued its strong performance during the third quarter as well. The division led consolidated sales growth for the company amid higher demand for its seeds and crop protection products. At $1.6 billion, sales from the division grew 15% y-o-y on strong volume growth in insecticide sales and better seed prices. 
Volume growth in the crop protection segment, which contributed more than 60% to the growth in agricultural sales, was primarily driven by increased demand for Rynaxypyr, which has been a hugely successful insecticide for DuPont. 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 causes 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.  The American Chemical Society recently named the scientists who developed Rynaxypyr at DuPont ”Heroes of Chemistry“. The company expects Rynaxypyr sales to top $900 million this year. 
Sales from DuPont’s agricultural products division were also boosted by the company’s recent acquisition of a majority stake in Pannar Seeds, Africa’s largest seed producing and marketing company. The deal provides the chemical giant with an opportunity to expand its reach in Africa, thereby increasing its global seeds market share. (See: DuPont Plants The Seeds For Growth In Africa With Pannar Deal)
Lower Performance Chemical Prices Weigh On Earnings
DuPont’s performance chemicals division that primarily deals in fluorochemicals and titanium dioxide (TiO2) continued to weigh on the company’s consolidated earnings. Sales from the division were almost flat y-o-y, as higher volumes were more than offset by lower prices. Furthermore, higher input costs resulted in a sharp 38% decline in the division’s operating income. However, this was a meaningful improvement over the second quarter in which operating income from the division declined by 58% y-o-y. 
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 at the customer level during 2011. This inventory build-up led to a sharp decline in the pigment’s prices during 2012 through the first half of this year, which weighed significantly on the company’s 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 25% y-o-y sales volume growth during the third quarter. Moreover, the company also implemented sequential price hikes on its TiO2 products globally in July and October this year.  These indicators suggest that TiO2 prices have touched a cyclical bottom and are expected to trend higher in the coming quarters when the company will also benefit from easier y-o-y comparisons. We therefore expect earnings pressure from DuPont’s performance chemicals division to continue to decline over the coming quarters.
During the second quarter earnings call, DuPont executives expressed their interest in exploring 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 during the third quarter earnings call that they have made significant progress on the matter and are moving with a sense of urgency.  We believe, the spinoff of TiO2 and other performance chemicals businesses will not only reduce operating risk associated with DuPont’s consolidated operations but will also allow the company to focus more on science based integration of its Agricultural, Health and Nutrition and Industrial Biosciences divisions.
- Q3 2013 DuPont Earnings Conference Call, investors.dupont.com
- DuPont Rynaxypyr Technical Bulletin, dupont.com
- DuPont SEC Filings, sec.gov
- DuPont Titanium Technologies Announces a Price Increase for Ti-Pure® Titanium Dioxide, dupont.com
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