DuPont concerned but confident for second half

25 July 2002 17:44  [Source: ICIS news]

Neither DuPont’s $408m (Euro402m) acquisition of ChemFirst nor its second quarter profits increase are insignificant. The one reflects DuPont’s strategy, clarified recently at the 200th anniversary celebrations, to take advantage of add-on opportunities which fit closely with its new operating structure and growth aims. (DuPont is known to be looking at a number of opportunities to bolster its higher growth electronics and safety & protection businesses.) The other shows that the company, while benefiting from some volume growth, is not able to push through price increases to any great extent and will have to rely heavily on restructuring over the coming months to safeguard margins.

ChemFirst fits well on two fronts. DuPont clearly wants the company for its electronic materials and technologies businesses, which last year, in the difficult operating environment, generated sales of $86m and earnings before interest, tax, depreciation and amortisation (EBITDA) of $7m. ChemFirst Electronic Materials makes 248nm semiconductor photoresist polymers, products that are growing at anywhere between 8% and 13% a year.

ChemFirst’s EKC Technologies develops and sells photoresists and etch residue removers, a segment estimated to be growing at something like 14% a year, and chemical mechanical planarisation slurries (CMP slurries) which are experiencing growth of over 20% a year. The purchase certainly gives DuPont greater CMP scale and potentially complements the current DuPont/Air Products nanomaterials joint venture. It helps the company enhance its position in photoresist polymers and gives it current generation (248nm) capability to add to its own developing next generation (157nm) photoresists expertise.

ChemFirst’s First Chemical Corp makes aniline, nitrotoluene and derivatives and while not immediately obvious as a close fit for DuPont is a strong cash generator. It links directly into the polyurethane (PU) chain which in itself is growing at twice the rate of gross domestic product (GDP) growth. Last year First Chemical generated an EBITDA of $43m on sales of just $192m.

Second quarter figures show that DuPont has been benefiting from inventory rebuilding across the product chain so it is not surprising to hear management express some caution about continued growth in the third quarter given current market uncertainty. Second quarter profits (after tax operating income) before exceptional charges and gains grew by 45% compared with the second quarter of last year mainly based on lower raw material and fixed costs. Sales volumes were higher in some businesses but were largely offset by lower selling prices. The underlying results show sales for the quarter down 4% at $6.7bn and after tax operating profit at $853m. The as reported figures shows a net profit for the quarter of $543m compared with a loss of $213m in the second quarter of 2001 which was hit by significant restructuring charges.

DuPont’s chairman and chief executive, Chad Holliday, highlighted the positive momentum being experienced across many markets and many of the DuPont businesses in his second quarter report but did suggest that slowing global economic growth would be a feature of the second half. Inventory re-stocking is by no means over, the company’s economists believe, so more volume growth can be expected from that source. Stock market turmoil creates uncertainty but Holliday spoke of strong housing and automotive markets, low inflation and interest rates, the weaker dollar and better productivity in DuPont businesses driving growth in the second half. Prices appear to have stabilised, the chief executive added, and should begin to improve as demand continues to increase.

Against this background, DuPont expects to see a significant improvement in its second half results although its predictions have proved to be well below some financial analysts' estimates. The company expects third quarter earnings to be about double those of the depressed third quarter of 2001 on an underlying basis. A sequentially stronger fourth quarter is expected to benefit from seasonal trends and continued economic recovery producing a significantly stronger earnings performance.

By: Nigel Davis
+44 20 8652 3214

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