by Jack Kaskey

DowDuPont Inc. warned that it expects profit to fall this year amid a slowdown in China and Europe, triggering the biggest stock rout since the 2017 merger that created the chemical colossus.

The weakening global outlook comes just as the company prepares to split itself into three. Operating earnings for the combined businesses in 2019 will be “slightly down” and sales will be “about flat,” DowDuPont said Thursday as it released fourth-quarter results. The company also forecast declines in first-quarter sales and profit, while analysts had expected significant gains.

China is the main source of the weakness amid falling demand for materials used in autos and smart phones, Chief Executive Officer Ed Breen said on a conference call. European demand also is soft, and there is some weakness in the U.S. housing market, he said. Markets should normalize in the second quarter as customers use up inventories and home-building rates improve, he said.

“We expect global economic expansion to continue in 2019 at a moderately slower pace than 2018,” Chief Financial Officer Howard Ungerleider said in an earnings statement. “We continue to closely monitor macroeconomic and geopolitical developments, including ongoing trade negotiations and the pace of economic activity in China.”

Three-Way Split

In just two months, DowDuPont plans to spin off its materials science operation as the new Dow, a global leader in plastics for packaging. That’s to be followed June 1 with the separation of the Corteva agriculture business, leaving behind a stand alone DuPont focused on specialty products such as Kevlar and automotive plastics.

The shares fell 8.2% to $54.01 at 1:37 p.m. in New York after sliding as much as 9.5%, the biggest decline since Dow and DuPont combined to create the world’s largest chemical company. The stock was the worst performer on the Dow Jones Industrial Average, dragging the index to a slight loss.

By creating more focused companies, Breen intends to increase shareholder value. But the shares haven’t responded to the plan. DowDuPont fell 22% in the 12 months through Wednesday, compared with a 5.1% decline in the Standard & Poor’s 500 index.

Feedstock Costs

The anticipated decline in full-year earnings is due in part to lower prices for materials used in electronics, rising raw material costs, a strengthening U.S. dollar and lower joint-venture earnings, the company said. Currency pressures, particularly a weaker Brazilian real and euro, are expected to wipe out the benefit of slightly higher prices and sales volumes.

“We remain focused on the actions in our control, including capitalizing on our growth investments, capturing cost synergy savings, delivering productivity actions and advancing our spin milestones,” Ungerleider said.

First-quarter sales will drop by a percentage in the mid-single digits, with a larger decline expected in the Dow materials science unit, according to a company slide presentation. Operating earnings before interest, taxes, depreciation and amortization is expected to drop by a percentage in the low-teens, led by a larger decline in materials science.

The company said it expects first-quarter operating Ebitda between $4.2 billion to $4.4 billion, while analysts on average had estimated $5.31 billion. Sales will be $20 billion to $20.5 billion, trailing the $22.6 billion average estimate.

Fourth-Quarter Beat

Amid the disappointing guidance, DowDuPont posted fourth-quarter adjusted earnings of 88 cents a share, beating expectations by a penny. Earnings rose in each of the four DuPont specialty products divisions, while they declined in the two largest Dow materials science units. Sales were flat, missing expectations, as currency changes offset the 1% gains seen in both volumes and average prices.

Profit margins for making polyethylene plastic, the biggest division at the pending Dow spinoff, tumbled in the fourth quarter and should stabilize in the first half of 2019, said Jim Fitterling, who will be CEO of the new company.

Low profit margins at the DuPont specialty products division will improve as the year progresses, Breen said.

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, Tony Robinson

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