INSIGHT: DuPont cuts against weaker Asia/Europe industrial market

23 October 2012 17:32  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--One of the first multi-national chemical companies to report each quarter, DuPont can be a bellwether for the sector. This company’s very much science and technology driven businesses sell into important chemical end-use markets such as construction and electronics, and it has an agriculture segment which has rivals among the other large chemical groups.

The figures this time, severely depressed on poor Asia-Pacific industrial and construction sales, and a sombre outlook, point to a tough second half. They have prompted a new cost cutting drive and job losses at the firm and, somewhat strangely, surprised investors, helping to drive the stock down sharply.

The striking feature of the third quarter 2012 numbers is the 10% year-on-year volume slump in Asia-Pacific sales. (The drop in volumes in the Europe, Middle East Africa (EMEA) region of 6% is hardly surprising given Europe’s economic woes.) The negative Asia-Pacific impact on sales was heightened by an 5% decline in prices in the region.

The data cut in a different way show a sharp 20% decline in volume sales in DuPont’s electronics & communications segment and an 18% fall in volumes in performance chemicals. Not surprisingly pre-tax operating income (PTOI) from both segments was hit hard. It was down 60% in electronics & communications and 37%, or a cool $221m (€170m), in performance chemicals.

"We continue to execute well in many parts of the company, and certain segments are outperforming despite market volatility,” CEO Ellen Kullman said. But she added: “Weaker than expected demand in titanium dioxide and photovoltaic markets contributed to the decline from last year's record third-quarter earnings. We are addressing these challenges now to position ourselves for improved performance."

A volume decline in photovoltaics drove electronics & communications sales lower and pushed segment PTOI down by $59m to $40m. The drop was only partially offset by “continued strong demand for materials in smart phone,” DuPont said.

Reduced spending on infrastructure projects and weak construction markets in Europe and in Asia Pacific were largely responsible for the drop in performance chemical segment sales and profits.

The most recent quarter was set against a record quarter for titanium dioxide (TiO2) but the company said demand was lower for both TiO2 and fluoropolymers.

DuPont is selling its performance coatings business to the Carlyle Group and this transaction, coupled with the slowdown, is forcing the company to cut jobs. What it calls the “elimination of residual costs related to the DPC [DuPont Performance Coatings] divestiture” will produce savings of $230m, while “additional restructuring in response to weaker macros”, will yield $220m.

About half of a total of 1,500 job losses relate to the divestment to Carlyle and a half to the poor economic environment. Restructuring charges of $394m in the quarter drove the company to report a $174m pre-tax loss from continuing operations versus a pre-tax profit of $451m in the comparable 2011 quarter.

DuPont is not expecting a great deal from its industry-related segments in the fourth quarter. Given the below-consensus third quarter performance, and the subdued outlook, it is not surprising that the company’s shares were hit in early trading on the New York Stock exchange on Tuesday. The shares were down by more than 8% at one stage.

The company is looking only to flat sales from electronics & communications in the fourth quarter with continued pressure on its photovoltaics business. Sales and profits from performance materials will be down significantly year on year because of the weak industrial and construction markets, it says, particularly in Asia.

With automobile sales flat and important industrial and electronics markets in the doldrums, the company expects somewhat lower sales in performance materials, but higher profits based on lower costs and higher prices.

What it calls “inconsistent spending” in the public sector is expected to put additional pressure on its safety & protection business which make the high strength fibre Kevlar among other materials.

The company’s full year earnings forecast puts the pressure on sales and profits in industrial and infrastructure markets, particularly in Asia, into perspective.

The current forecast is for full year earnings per share of between $3.25 and $3.30 from $3.55 a year ago on a comparable basis.

At the end of July, Du Pont was forecasting full year earnings per share of $4.20 to $4.40, compared with $3.93 in 2011.

Read Paul Hodges’ Chemicals and the Economy blog
Bookmark John Richardson and Malini Hariharan’s Asian Chemical Connections blog

($1 = €0.77)

By: Nigel Davis
+44 20 8652 3214

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