DowDuPont Forecast Disappoints as Trade War Hits Seed Profit

(Bloomberg) -- DowDuPont Inc.'s disappointing profit forecast for 2018 rattled investors as the company flagged global impacts in crop-related sales from President Donald Trump's trade war.

Farmers in Brazil are planting more soybeans and less corn after China levied tariffs on U.S. soybeans in response to Trump's duties on Chinese goods. The shift away from corn “hurts a little bit,” DowDuPont Chief Executive Officer Ed Breen said Thursday on a call to discuss second-quarter results. A weaker Brazilian real versus the dollar also will erode earnings, he said.

The world's largest chemical maker is contending with ripple effects through global agricultural markets as trade tensions prompt shifts in crop plantings and export markets. The developments are balancing out overall, Breen said, limiting the damage for DowDuPont's bottom line “partly due to mitigation actions we have already taken and partly due to our global asset base.”

The company cut its outlook for agriculture growth, “presumably due to Chinese tariffs encouraging Brazil to favor soy,” Vincent Andrews, an analyst at Morgan Stanley, said in a note. “We expect a negative response,” he said. Corn seed fetches higher prices than soy because it has more engineered traits, such as resistance to multiple herbicides and insects.

Shares Fall

DowDuPont fell 1.9 percent to $66.19 at 12:44 p.m. in New York after dropping as much as 4.2 percent for the biggest intraday decline since June 19. The shares have dropped 8 percent this year, compared with a 3.7 percent decline in a Standard & Poor's index of materials companies.

Full year adjusted earnings per share will climb by a percentage in the low 20s as “challenging market conditions within the agriculture division” offset gains elsewhere, Chief Financial Officer Howard Ungerleider said on the call. Earnings from agriculture will rise by a percentage in the mid-single digits this year, compared with the company's prior outlook for a high-teens gain.

Third-quarter earnings per share will increase by a percentage in the mid-30s, the company forecast. That implies earnings of about 74 cents a share, compared with the 76-cent average estimate in a Bloomberg analyst survey.

The American farm sector is one of the few areas of the economy that typically operates with a trade surplus, and agriculture groups have warned of potential damage to exports from rising trade tensions. Even before tariffs were announced, net farm income was poised to reach a 12-year low this year. The Trump administration plans to provide $12 billion in assistance to U.S. farmers.

DowDupont's third-quarter sales will climb more than 10 percent from a year earlier. The company expects a more than 12 percent increase in operating earnings before interest, taxes, depreciation and amortization during the quarter. Rising raw material costs and currency fluctuations are headwinds in the second half, Breen said.

Sales in the agriculture division, which sells seeds and pesticides, jumped 25 percent in the second quarter as farmers sped up planting to make up for inclement first-quarter weather, DowDuPont said in a statement Thursday as it reported earnings. Agriculture earnings will improve by more than $100 million in the second half, aided by growth in Latin America, new pesticides and cost savings, the company said.

Higher prices and new product launches helped drive revenue gains across all segments, including an 18 percent increase in the materials science division, which opened new plastics factories.

DowDuPont's three business segments will become separately traded public companies next year. The agriculture unit will be named Corteva Agriscience after it's spun off by June 1 as part of the three-way separation. The world's largest chemical maker, created last year from the merger of Dow Chemical Co. and DuPont Co., will also split into a plastics maker and a specialty products business.

Management Changes

Management teams for the new companies will be announced next month, Breen said. Details on the plastics spinoff, which will reclaim the Dow name, will be filed with regulators in September, and Corteva disclosures will be filed in late October, he said. Investor events will follow in November.

Chief Operating Officer Jim Fitterling was named CEO of the Dow spinoff in March, succeeding Andrew Liveris, who left July 1. Liveris is now a director at Saudi Aramco, helping the world's biggest crude exporter expand its business in chemicals.

Adjusted earnings rose to $1.37 a share in the second quarter, exceeding the $1.30 average of analysts' estimates compiled by Bloomberg. Sales rose 17 percent to $24.2 billion, topping the $23.7 billion analysts expected.

Breen is in the midst of cutting annual costs at the company by $3.3 billion, giving an added boost to earnings. More than $900 million in savings were achieved through the end of the second quarter, DowDuPont said. The company lifted its cost savings target for the year by more than 15 percent to $1.4 billion.

Rising Sales

Sales volumes in the quarter rose in all divisions and regions, with an average gain of 10 percent, including a 20 percent jump in the agriculture division as farmers made up for weather related delays, the company said. Average prices rose 4 percent, excluding currency effects.

Corteva is set to be the sole publicly traded company focused exclusively on seeds and pesticides after top seed maker Monsanto Co. was absorbed into Bayer AG in June and China National Chemical Corp. in January bought Syngenta AG, the world's biggest pesticide maker.

Operating Ebitda rose 45 percent in agriculture, 22 percent in the materials science unit climbed and 23 percent in the specialty products division.

--With assistance from Vivian Li.

To contact the reporter on this story: Jack Kaskey in Houston at jkaskey@bloomberg.net

To contact the editors responsible for this story: Brendan Case at bcase4@bloomberg.net, Susan Warren

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