After 4Q loss, DuPont to intensify cuts

After recording its first quarterly loss in years, DuPont will intensify spending cuts and streamline its business operations in advance of its proposed merger with The Dow Chemical Co. later this year.

The iconic Delaware-based chemical company, which lost more than a quarter-billion dollars in the fourth quarter of 2015, now expects to cut $730 million in 2016 through global layoffs and consolidated operations, CEO Ed Breen told investors and analysts Tuesday.

"This plan will further simplify our organization into fewer, larger businesses with integrated R&D, engineering and manufacturing functions," he said during a conference call. "It will sharpen our focus by giving our businesses more control over their (profits and losses) and more agility to pursue growth."

Breen offered few details about the planned changes, but stressed that the initiative is "completely separate" from the planned merger with Dow.

"We took a clean-slate approach to building the right organization for the future," he said. "The changes we are making would have occurred regardless of the planned merger."

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The company's previous plan anticipated $700 million in cost cutting in 2016. Those measures included a planned 10 percent reduction in its global workforce of about 54,000. Last month, DuPont announced it plans to eliminate about 1,700 jobs in Delaware by March, or roughly 28 percent of its workers in the state.

"I think the big takeaway today is the pace of change that's happening at this company," said Matt Arnold, an analyst with Edward Jones in St. Louis. "Under Ed Breen, it's been moving at what I would describe as light speed."

Arnold said he expects the cost reductions to continue, calling the current round of cuts a starting point.

"Not only is the company struggling to find a way to offset the current economic environment, but (further consolidation) is a logical choice pre-merger," he said. "I expect the next 24 months will continue to bring rapid change."

Earnings downturn

DuPont's plans for additional cuts were disclosed as part of its fourth-quarter and year-end earnings report, the first since the proposed Dow merger and Delaware job cuts were announced.

DuPont reported a $253 million loss, or 29 cents per share, in the fourth quarter with net sales losses in all six business units and across all regions. The report marks the company's first quarterly loss since 2008.

Adjusted earnings were 27 cents per share, down from 57 cents in late 2015, but in line with Wall Street expectations. Fourth-quarter revenue was $5.3 billion, down 9.4 percent from the previous year and short of analysts' forecasts.

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DuPont attributed the declines to weak demand for its agricultural products and a strong U.S. dollar that devalues the company's sales overseas.

"The quarter came in largely as expected amid continued challenging macroeconomic conditions, including currency pressures," Breen said.

The company's agriculture business, its largest by revenue, suffered a $54 million operating loss for the quarter. Without the currency impact, DuPont says the segment would have recorded earnings of $85 million.

Despite net sales losses, DuPont's Electronics & Communications, Industrial Biosciences, Nutrition & Health, Performance Materials and Safety & Protection saw positive earnings. Biosciences and nutrition each recorded higher earnings than the same quarter in 2014, while the other three saw declined earnings compared to last year.

For 2015, DuPont reported operating earnings of $2.77 per share, down from $3.36 the prior year. Full-year sales were $25.1 billion, down 9 percent versus 2014.

DuPont expects 2016 earnings in the range of $2.95 to $3.10 per share, short of Wall Street expectations.

"Current difficult global economic conditions in agriculture and slower growth in emerging markets are expected to continue, challenging the company's sales growth in 2016," the company said in its earnings report.

DuPont shares have fallen 20 percent since the beginning of the year, while the Standard & Poor's 500 index has decreased 8 percent. The stock has dropped 28 percent in the last 12 months.

By midday Tuesday, shares were trading at $53.61, a 1 percent jump from the starting bell.

DuPont has three priorities for the coming year, Breen said. They include delivering operating earnings growth, improving capital allocation and working capital performance and completing the proposed merger with Dow.

"Our merger process is on track," he said.

New details emerge

During his call with analysts, Breen reaffirmed the structure of the proposed merger now expected in the second half of 2016, pending regulatory approval.

The deal calls for Dow and DuPont to form DowDuPont, a $130 billion behemoth. The unified company then would separate into three independent businesses: agriculture and chemicals, material sciences and specialty products.

DuPont announced last month that the post-merger specialty products business will be located in Delaware, while the material sciences company is expected to be headquartered in Midland, Michigan, the corporate home of Dow Chemical.

Breen on Tuesday said he expects to announce the future location of the post-merger agriculture business "in the next few weeks."

Delaware's top elected officials have been lobbying hard for that company to be headquartered here, although some corporate relocation experts say that may be unlikely.

The Des Moines Register reported executives from DuPont and Dow were in Iowa last week meeting with state officials. DuPont's Pioneer seed business is located in Johnston, Iowa, and analysts have said they expect that to be a likely site of the future ag business, along with Indianapolis, where Dow AgroSciences is based.

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In the meantime, Breen said, both companies have started the work of identifying $3 billion in "synergies," or cost savings, achievable through the merger.

At least some of those savings are expected to be achieved by a reduction in the companies' global warehouse and facilities footprint, moving to a shared IT system and integrating their catalog of products.

"There is ($1.2 to $1.3) billion in ag that is very identified ... and there is so much overlap in the supply chain, the manufacturing chain and the sales chain," Breen said. "We have a great opportunity to look at more shared services across the whole platform."

In response to an analysts' question, Breen also said the three post-merger companies will look internally and externally to fill key executive positions.

"I would certainly hope some of that staffing comes from key people in the companies," he said. "But our mantra is going to be (get) the best athletes we can to run the businesses."

Push to the finish

Breen said the company also is undertaking initiatives to remain competitive while working toward its planned merger with Dow.

That includes ratcheting up its cost reductions, which will include another $200 million cut in corporate expenses.

On an operating earnings basis, those expenses as a percentage of sales will drop to about 1.3 percent this year from 2.3 percent last year, Breen said.

At the same time, DuPont expects global industrial production to increase about 2 percent, with the expectation of a slight decline in net sales as a result of a strong U.S. dollar.

With slower growth in emerging markets, DuPont is shifting its sales focus to North America, resulting in a higher base tax rate.

Despite reportedly having laid off about 200 scientists in the company's Central Research and Development division at the Experimental Station near Alapocas, Breen said the company is continuing to make a strong commitment to the hard sciences that led to its most successful innovations.

"The reductions we have done, to put that in perspective, takes our R&D to between $1.6 and $1.7 billion," he said. "Through the last 15 years, the R&D in DuPont has averaged $1.65 billion ... so we're in a very heavy, robust level and we're still one of highest R&D companies in the world."

During his conversation with analysts, Breen repeatedly pointed to Leptra corn hybrids launched in the last quarter.

"Production plants for Leptra are on track for one of the fastest technology ramp ups in Pioneer history in the summer season," he said. "Our two newest classes of genetics demonstrated strong harvest performance and are expected to comprise over half of our North American corn sales volume in 2016."

Further testing will be conducted this summer as the company awaits final import approvals in key markets, he said.

"In conclusion, 2016 is a pivotal and transformational year for DuPont as we accelerate our value-creation work, invest in our core franchises and position our businesses for a competitive future," Breen said.

Contact business reporter Scott Goss at (302) 324-2281, sgoss@delawareonline.com or on Twitter @ScottGossDel.