E.I. du Pont de Nemours (DD) has been a dependable stalwart for decades in the American markets. It has been in the process of a very important identity transition as a company for the last couple years, transitioning from a chemical company to an Agri-related business. I believe it is in the last stages of its transition with the sales of its last division. This is going to be a major move for the company and when it's complete, I would expect the company become much more profitable. Let's take a look at the "performance chemical division" and see how the company is transitioning.
DuPont had a great third quarter! Both revenues and profits were higher than last year, but only profits beat analyst expectations. Earnings rose 41% compared to a year ago and revenue grew by 4.6% to $7.74 billion which is very close to the $7.78 billion Wall Street expected. Here's a breakdown of the companies most profitable sectors this quarter:
- Electronics (4% of revenue) 67% increase in sales.
- Safety & Protection (10.9% of revenue) 16% sales increase.
- Agro-science Products (32% of revenue) 15% increase in sales.
Obviously the best news comes from its Agro-science Products sector. One of the reasons the company has done so well in this area is because it is starting to benefit from its increased ownership in Pannar Seed. This is a seed company based out of South Africa that operates throughout the continent of Africa.
Performance Chemical Division
The company's performance chemicals division was an indisputable low point, posting operating earnings of $254 million - a $159 million decrease over this time last year, or a 38% decline. DuPont attributed the slump to "price declines for titanium dioxide, refrigerants and fluoropolymers, along with higher raw material inventory costs, principally ore costs" that more than offset any volume increases it saw.
There is a decline in global Ti02 prices compared to 2012. The company does not expect this to continue but expects industry fundamentals to improve. In the second quarter of this year, the company communicated that it expected the industrial production to improve, but it's happening a lot slower than expected.
The decline in Performance Chemical segment earnings had a larger impact on overall earnings this year than it did the prior year. Operation earnings declined by $159 million for the quarter while the other segments: (Performance materials, Electronics and Communications, Safety and Protection, and Industrial Biosciences) had great performances and double digit growth compared to the prior year.
Selling this Division
In its quest to become more profitable, DuPont is going to separate itself from a large piece of its traditional chemical business. Its Teflon brand and titanium dioxide pigment are either going to be sold or spun off; the company believes the prospects for growth are not very good and it is moving away from this type of business.
This is not the first time the company has done this. Earlier this year DuPont sold its automotive coatings unit to a private equity firm for $4.9 billion.
But this sale/spinoff would have a greater impact on the company. Performance chemical is the second largest division averaging about 24.8% of the value of the stock according to Trefis. In the past, it his been one of the most profitable businesses for the company. In fact, last year's operating income totaled $1.8 billion on sales of $7.2 billion.
Sales of this division is going to be a challenge for DuPont, but not impossible. Rockwood Holdings (ROC) recently put its titanium dioxide business up for sale and announced in September that it would sell it to the Huntsman Corporation (HUN) for $1.3 billion. There are buyers out there. Whether it's a private equity buyer, like it found for its paint business, or a company like Huntsman Corporation, there is interest out there for DuPont business.
As I wrote earlier, DuPont does not see this division as a profitable investment anymore, because of the direction it intends to move.
According to CEO Ellen Kullman, DuPont is going to focus on agriculture chemicals, seeds, nutrition, bio-based chemicals and advanced materials. For this reason, it seems natural that the company would want to sell the areas that are outside this focus. A company can only do so much to create growth opportunities and its performance chemical division just has no future with the company.
In DuPont's quest to focus more on agriculture, nutrition and bio-based chemicals, the company acquired Danisco for $5.8 billion in 2011. This acquisition move DuPont at the front of the line in the industrial biotechnological field. For those of you that are unfamiliar with this field, industrial biotechnological addresses global challenges of food production and reducing the consumption of fossil fuels. This move helped DuPont immediately. The first quarter of 2012 saw its "nutrition and health segment" revenues grow to $808 million which is a 232% increase.
I can see DuPont's vision and I think it's a good strategic move for the company to make these changes. Population growth in the years to come will put a strain on food and energy consumption. The opportunities to solve these global challenges are right up the company's alley.
DuPont's future embraces science to solve global problems and grow its business. The Agricultural and Industrial Biotechnological fields offer the greatest opportunity for the company to excel and apply their knowledge. The reason the company disposed of their paint sector was because it offered limited opportunity to make a difference; the performance chemical sector is in the same boat. Even though it is a strong business with good margin, it is fairly volatile and does not fit into the future vision of the company.
This is a good transition time for the 200-year-old chemical company. Just a couple years ago, the titanium dioxide added up to a third of the company's profits. But the falling demand and downward spiral in price gave the company the kick needed to exit this business and focus his energies on food and agricultural products. The Ti02 business paid a lot of the company's bills and served its purpose; but now it's time to move on. The move by DuPont to focus on areas where it is finding steady growth will make it prosper. I look for it to become a leader in the food sector like Monsanto (MON).
The company is taking a major step in getting rid of 24.8% of the value of its stock short term. But I believe the company's moving in the right direction; food and energy will be two of the major problem-solving arenas that the world will need help with. DuPont's strategic transition into the fields will help them become profitable for years to come.