DowDuPont Forecast Trails Estimates as Ag Sales Face 'Tough Go'

(Bloomberg) -- DowDuPont Inc., created from the world’s biggest chemical merger, disappointed investors with lower-than-expected profit forecasts as it prepares to split into three independent companies next year.

First-quarter revenue and operating earnings will climb about 2 percent as the agriculture unit faces stiffer competition and a slow start to planting-season sales, the company said on a conference call Thursday. While the company expects growth to accelerate in the latter quarters, the full-year forecast also trailed analysts’ estimates.

Chief Executive Officer Ed Breen is struggling to meet earnings expectations while slashing billions of dollars in costs and preparing the former Dow and DuPont businesses to be spun off into three independent companies within about 14 months. First-quarter earnings will be hurt by farmers delaying orders and “aggressive competitive pressure” in crop seeds, said Jim Collins, chief operating officer of the agriculture unit.

“It’s going to be a tough go here as we start out the year,” Collins said on a conference call.

Stock Declines

Shares fell 2 percent to $74.09 at 11:08 a.m. in New York. DowDuPont has advanced about 13 percent since the merger closed, slightly trailing the 14 percent gain of a Standard & Poor’s index of materials providers.

First-quarter operating earnings before interest, depreciation and amortization will be $4.6 billion to $4.8 billion, DowDuPont said. The average Ebitda of analyst estimates compiled by Bloomberg was $5.34 billion. The sales forecast of $20.5 billion to $21.3 billion trailed the $22.1 billion estimate.

The company said it expects full-year earnings to increase by a percentage in the mid- to high-teens. That implies a range of $3.90 to $4.05 a share, Charles Neivert, an analyst at Cowen & Co., said in a note. The average analyst estimate was $4.14 a share.

The weaker-than-expected full-year outlook is likely because the company expects a pace of cost savings that trail expectations, even though the overall target is higher, Vincent Andrews, an analyst at Morgan Stanley, said in a note.

While investors may be disappointed in the 2018 outlook due to the weak agriculture outlook and lower than expected cost savings, the full synergies should be captured by 2019, Arun Viswanathan, an analyst at RBC Capital Markets, said in another note.

Bigger Savings

Still, Breen plans to wring bigger overall savings from the former Dow and DuPont businesses as he prepares for the three-way split next year. The company lifted its target for cost savings in advance of the breakup by $300 million to $3.3 billion. Savings already achieved helped boost fourth-quarter adjusted earnings ahead of Wall Street’s expectations.

The separations will be completed by June 1, 2019, DowDuPont said in a statement Thursday. That’s three months earlier than a forecast in October, when the company had disappointed some investors by extending its original timeline.

The materials-science business will go it alone by the end of March 2019, with the agriculture and specialty products following about two months later, Breen said.

The company will consider “options” for the four units contained in the specialty division, but not until after the post-merger integration is finished, he said. The company will consider divesting 5 percent to 10 percent of the less-profitable specialty units, particularly in the health and nutrition business, he said.

“They just don’t fit our strategic focus,” Breen said.

Fourth Quarter

DowDuPont exited the fourth quarter on pace to save $800 million a year, higher than the $500 million forecast in October, said Chief Financial Officer Howard Ungerleider.

Fourth-quarter adjusted earnings rose to 83 cents a share, surpassing the highest analyst estimate compiled by Bloomberg and easily beating the average prediction of 67 cents. Lower-than-expected taxes in the quarter added about 7 cents to earnings, Ungerleider said.

Revenue climbed 13 percent to $20.1 billion, compared with the $19.5 billion analysts expected. The gains were driven by 6 percent growth in sales volumes along with price increases that averaged 5 percent. That helped offset cost inflation in raw materials, Ungerleider said.

“We had good volume growth pretty much across the company and across the world,” the CFO said in an interview.

The cost-cutting program saved about $200 million in the quarter and a lower pension expense added about 7 cents a share to earnings, he said. Investors also got a boost from $1 billion of share repurchases, part of a $4 billion buyback program. The company is targeting similar buybacks in the current quarter, the CFO said on the call.

©2018 Bloomberg L.P.