DuPont's agriculture business is now its largest division by sales. Image source: Getty Images.
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Times sure are a-changin' atDuPont(NYSE: DD), but its management wants you to know that they're all a-changin' for the better as it looks ahead to its probable merger with fellow chemical giantDow Chemical(NYSE: DOW).
Here are the three most important things DuPont's management wants you to understand.
1. The merger's a done deal...almost
DuPont management clearly considers the merger with Dow Chemical -- and the subsequent breakup into three smaller, more narrowly focused entities -- a near-certainty. The deal has been approved by shareholders of both companies and the management of both companies are also in favor.
The one thing that's preventing it from moving from a near-certainty to an absolute certainty is regulatory approval. Naturally, the merger of two large multinational companies is subject to regulation from numerous bodies across the globe. On the second-quarter earnings call, CEO Edward Breen was asked about what part of the regulatory process had him most concerned. He replied:
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Well, I mean, there's four large markets that really matter significantly here. China, Brazil...the EU, and the U.S. So, that's the four big regulatory ones. Dow and DuPont are already in deep conversation with all the relevant agencies in those jurisdictions. ... This is...a huge merger and I'm sure it's going to get a thorough review. But looking at the timeline, I still think we're on a timeline by the end of the calendar year to accomplish this.
But that timeline may have been thrown into jeopardy. Chuck Grassley, chairman of the Senate Judiciary Committee, recently announced plans to hold hearings in late September on the wave of mergers in the agricultural industry, including this one.
Which brings us to management's next point...
2. It's all about ag
Although it's historically been seen as a materials science company, DuPont has been pivoting away from that business and focusing more on its lucrative agricultural unit, which currently makes up 39% of the company's sales (compared to just 21% for performance materials).
Indeed, on the second-quarter earnings call, agriculture was front and center, with James Collins, the company's executive vice president of its agriculture business, appearing alongside Breen and CFO Nicholas Fanandakis.
Much of the call's Q&A session was devoted to questions about agriculture, about specific products like the company's new Leptra corn seeds and its Dermacor rice seed treatment, but also about soybean volumes and the Brazilian corn market. It was in response to an unrelated question about R&D, though, that showed how much the company has shifted focus from its materials science roots.
Analyst P.J. Juvekar of Citigroup posed a question about the company's overall R&D spending, which dropped by $125 million YOY to $850 million in the first half of 2016. Breen replied (emphasis mine):
We obviously want a hefty R&D.We especially want it in the ag business. We want to be one of the top spenders, if not the top spender in R&D in ag.
Given the reduced overall R&D spend by the company this year, and reports of recent layoffs and cost reductions in the materials science division, it seems clear that agriculture is now the company's primary focus over materials science, which should cheer up investors in materials science rival3M.
This talk of reduced spending, though, brings us to...
3. Costs are being cut, cut, cut
DuPont's management has promised shareholders that it would cut costs in advance of the merger with Dow, and they want you to know they've made good on their promises. These cuts are over and above the anticipated $3 billion in synergies due to the merger.
Over and over on the call, management -- particularly Breen and Fanandakis -- stressed cost-cutting as both a goal and a reason for the company's performance this quarter. According to Breen:
We continue to drive cost savings across the company. ... We set a goal at the beginning of the year to deliver $1 billion in cost savings on a run-rate basis by year-end. Our operating cost savings totaled about $135 million in the first quarter and $220 million in the second quarter. This is consistent with our cost savings commitments.
Breen highlighted a 44% quarterly reduction in corporate costs as a major part of the cost-cutting equation, while Fanandakis credited cost savings as a driver of increased segment operating earnings, particularly in the company's smaller units of industrial biosciences, protection solutions, and electronics and communications.
DuPont is fully committed to its merger with Dow Chemical, and aside from the upcoming Senate hearings -- which may be more about Chairman Grassley showing he takes the concerns of his constituent Iowa farmers seriously -- there have been no recent news to suggest it's in jeopardy.
The company is clearly committed to reducing costs ahead of the merger and is seeing some success in that regard. DuPont may be over-focusing on agriculture, but after the merger-and-split, the agriculture business will become its own company, and that focus will pay off for shareholders.
All in all, the fate of the merger will matter far more to shareholders than this quarter's results, but it's good to know that in the meantime, management has a steady hand at the wheel.
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