How a DuPont Carve-Out Made a Comeback
Published November 03, 2017 FeaturesDow Jones Newswires
It was supposed to be the worst spinoff in the history of spins. When DuPont Co. cleaved off its performance chemicals business as Chemours Co. in June 2015, doubts ran high about the company's future.
Activist investor Nelson Peltz, whose Trian Fund Management received Chemours shares as a DuPont shareholder, sold off the stake within six months. A year after its launch, famed short-seller Andrew Left announced he was betting against the stock with a report titled "Chemours is a bankruptcy waiting to happen."
Chemours is a market darling today. Shares of the Teflon maker have more than tripled, and the company is on track for its second year of profits, after reporting a loss in 2015. Its turnaround involved an aggressive plan, a bit of luck in the form of a rebound in titanium dioxide prices and a legal settlement.
"Thank God I got out fast," said Mr. Left, founder of Citron Research, in an interview with CFO Journal. "It surprised a lot more [people] than just me."
Chemours on Thursday reported adjusted third-quarter earnings of $214 million, or $1.12 a share, up 91% from $112 million, or 61 cents a share, a year ago. The figures beat analysts' earnings forecasts of $1.04 a share on sales of $1.6 billion.
Chemours's transformation plan, announced at the time of the spin, included slashing the dividend, paying down debt and targeting cost cuts of $350 million by 2017. The company also launched a review of its operations with an eye to sell off nonstrategic business units and grow its refrigerants and cyanides businesses.
The executive team pursued three objectives: "Be bold, exercise speed in execution and communicate, communicate, communicate," said Finance Chief Mark Newman. "We set out with a bold plan to really double earnings from where they were in 2015 to 2017."
Chemours launched with $3.7 billion in net debt at a time when its operating profit barely breached $250 million. And more than 98% of that money came from a single division: the titanium dioxide business that makes paint and ceramics pigments.
Chemours also inherited part of DuPont's legal liabilities related to perfluorooctanoic acid, or PFOA. DuPont faced lawsuits over links to potential health problems after the chemical, used to make Teflon, leached into drinking water near some production facilities.
Analysts and investors struggled to predict the likely cost of the lawsuits. "Environmental liabilities can be viewed as open-ended and it was really hard to estimate from the outside back then," said John Roberts, chemicals industry analyst at UBS AG.
Chemours sold off three companies during its first year, raising around $700 million in capital. The company slashed net debt by $1.2 billion and delivered on $300 million of the $350 million in promised cost cuts. Other steps followed, including a 7% staff cut and plant closures.
The stronger business footing translated into higher stock prices. Chemours shares have more than tripled, to $51.12 a share by late morning Friday from its 2015 spinout price of $16 a share, after briefly trading for less than $4 in 2016.
Pressure from outside voices forced Mr. Newman -- formerly CFO at SunCoke Energy Inc. -- to redouble efforts on communicating the company's turnaround plan.
"There will always be people who try to detract from the story. Our job is to stay on message and focus on 'here is the plan, and here is how we're doing against the plan,'" Mr. Newman said.
Better business performance helped fuel a run-up in Chemours's share price. Mr. Left, the short-seller, closed out his position in the summer of 2016.
"I realized that I had no firm grasp on the [titanium dioxide] pricing and that the lawsuits are not going to put them out of business," he said.
Chemours also successfully nurtured a second business line that has diversified its earnings pool in less than three years through its Opteon refrigerant, part of the fluoroproducts units. Today, Opteon is used by all major European auto makers, and has a significant market share among U.S. auto makers.
"Now their fluoroproducts is almost equal into the earnings contribution from the [titanium dioxide] products," Mr. Roberts said. "They have two strong legs now for the company to stand on."
Still, analysts say that Chemours also benefited from several factors outside of management's control. For one, titanium dioxide prices have marched higher as Beijing's increased focus on the environment shut down parts of Chinese titanium dioxide production.
The PFOA liability that threatened Chemours's balance sheet turned out to be less expensive than expected. DuPont in February agreed to a $671 million settlement with lawyers representing thousands of people in Ohio and West Virginia. Chemours will pay half the settlement amount, with DuPont paying the remaining half. The settlement lifted Chemours shares 14% in one day.
"The things that they had control over, they did a very good job of improving," said Joe Princiotta, a credit analyst with Moody's Investors Service. "It was pretty aggressive and pretty comprehensive."
A spokesman from DuPont declined to comment.
Write to Tatyana Shumsky at tatyana.shumsky@wsj.com
November 03, 2017 11:44 ET (15:44 GMT)