Du Pont's Big Remake May Need A Remix

Efforts to transform itself into a growth machine are behind schedule and stumbling

Give DuPont Chairman and Chief Executive Officer Charles O. Holliday Jr. credit for thinking big. After taking the helm in early 1998, Holliday shifted the transformation of the $29 billion chemical and materials giant into high gear. Spinning off the massive Conoco Inc. oil and gas unit and pumping big bucks into a biotechnology seed company, Holliday promised investors he would remake DuPont from an Old Economy producer of cyclical commodities into a dazzling industrial growth company. The push into ag-biotech and pharmaceuticals was at the heart of that overhaul. The company's goal: to generate 30% of its income from those life sciences by 2002.

Today, Holliday's grandiose ambitions have brought major disappointment. The backlash against genetically modified crops is slowing new-product introductions, and the company's failure to strike a pharmaceutical alliance has left it with an undersize drug operation. At the same time, DuPont's older businesses are getting hammered by forces that include higher oil and gas prices and a weak euro, causing the company to ratchet down its 2000 earnings outlook.

These missteps have left the investment community increasingly disenchanted with Holliday. Wall Street sources say Wilmington (Del.)-based DuPont has stepped up a review of all its businesses and could decide soon to exit some of the laggards. Still, investors grouse that Holliday, 52, has no coherent strategy for getting DuPont back on the growth path. The stock has slid about 28% since Holliday took over in February of 1998. That compares with a 40% gain for the Standard & Poor's 500-stock index and a loss of 24% for S&P's Chemical Index. Says John B. Fields, senior portfolio manager at Delaware Investments, a large DuPont shareholder: "They are stumbling around looking for a growth engine and have clearly not found one."

As recently as July, Holliday reiterated that the company would deliver 17% to 20% earnings-per-share growth this year. But two months later, higher energy prices and the weak euro forced DuPont to slash that forecast to 10% to 14%. That just adds to four years of disappointing profit growth. Since 1996, income from continuing operations, adjusted for the disposition of Conoco, has barely budged. So while Bear, Stearns & Co. analyst Jeffrey Peck expects income from continuing operations to rise 5.5% this year, to $3 billion--on $29.3 billion in sales, up 9%--that only brings it back to what DuPont earned in 1996.

"CREDIBILITY HOLE." But the dismal stock performance has seriously strained Holliday's ties to investors. "The board should be asking hard questions," says Robert S. Goodof, analyst at DuPont investor Loomis Sayles & Co. "He has a huge credibility hole to dig out of." DuPont Director and ZiLOG Inc. CEO and President Curtis J. Crawford says the board "unequivocally" backs Holliday.

For his part, Holliday acknowledges that he could have done a better job of reminding investors just how long the DuPont transformation could take. But he has no plans to back off from the strategy of pushing into emerging biotechnology. That should yield breakthroughs not only in drugs and agriculture, he argues, but also in developing new materials for use in markets such as electronics and apparel. Still, Holliday knows the public backlash can't be ignored, and he's trying to build a dialogue with activists and protesters. His most public effort this year was to create an advisory panel of outside experts to guide DuPont in developing and commercializing biotech products. However, with the agriculture and drug operations expected to generate just 15% of operating income this year, DuPont is no longer promising a third of earnings from those segments by 2002. Says Holliday: "Making this transition to new lines of products won't be a simple white-glove handoff."

With any major earnings boost from biotechnology several years away, DuPont will be relying on its more traditional businesses for growth. Not all of those are dogs. Last year, it sold about $500 million worth of Corian, the synthetic material used for things like high-end countertops, and sales are growing at an estimated 15% a year as Americans put more of it into larger kitchens and bathrooms. Sales of materials used in circuits and electronic insulation, $1.4 billion in 1999, are said to be growing by double digits.

But analysts and investors say that can hardly offset the drag from larger and more troubled products. The company's nylon and polyester businesses accounted for more than $7 billion in sales last year, about one-quarter of DuPont's total revenues. But polyester has lost money for the past two years, largely because of continued weak pricing. Meanwhile, nylon has also seen pricing pressure and declining earnings. Holliday has put much of the polyester business into a series of joint ventures--a move many view as a first step toward getting out altogether. But some want swifter action. Says ING Barings analyst Paul T. Leming: "If I have one overriding criticism, it's their unwillingness to get out of commodity fiber businesses."

The message may finally be getting through. Chief Operating Officer Richard R. Goodmanson, the former president and CEO of America West Airlines whom Holliday lured to DuPont last year, is leading a detailed review of all the company's businesses to examine growth prospects and returns. And although DuPont insists the 2000 earnings woes aren't influencing the review, Wall Street sources say the effort has become more intense recently. DuPont also hired Richard U. de Schutter, who ran Monsanto's G.D. Searle & Co. drug unit, earlier this year to figure out what to do with its subscale pharmaceutical business. While Holliday won't comment specifically about whether DuPont is likely to exit the drug business or the commodity fiber businesses, he says: "There clearly will be portfolio changes."

At the same time, Holliday wants to move ahead in faster-growing businesses. DuPont is pushing Corian beyond countertops and into furniture, for example. And inks used in printers are also being used to create patterns on silk fabrics, which gives textile manufacturers more flexibility. As these extensions help boost sales, Holliday is betting that Six Sigma, the manufacturing efficiency program used at General Electric Co. and elsewhere, will shave hundreds of millions a year off pretax costs.

BUGGY WORKERS. Holliday maintains that DuPont's labs will also turn out some strong new products. Among them: crop-protection chemicals such as herbicides and fungicides and a polymer called Sorona. Sorona will be used to make a more resilient--and probably higher-margin--form of polyester. While initial production of Sorona will be done chemically, DuPont is gearing up a cheaper method using genetically engineered bacteria that produce its key ingredient. But while investors say these products have promise, they don't see any home runs. "The new-product success rate seems to have stalled," contends Loomis Sayles's Goodof.

The skepticism stems in part from DuPont's reputation for responding sluggishly to more innovative rivals. In 1998, shortly after Holliday took over, DuPont's crop-protection business stumbled badly as the farm economy weakened and the company's herbicide business got slammed by the popularity of Monsanto Co.'s Roundup Ready soybeans. Those soybeans are genetically designed to withstand Monsanto's Roundup herbicide, pumping up demand for Roundup and eating into demand for weed killers from competitors such as DuPont. "All the companies that depend on traditional herbicides have been hurt by the move to Roundup Ready," says Marc S. Curtis, a soybean, rice, corn, and wheat farmer in Leland, Miss.

ON A LIMB. DuPont's aggressive push into biotech, of course, was supposed to level that playing field. In October of 1999, DuPont used $7.7 billion from the spin-off of Conoco to buy 80% of seed company Pioneer Hi-Bred International. DuPont, which already owned the other 20%, was criticized for overpaying. The Pioneer deal will dilute earnings for several years, and it came on the heels of paying $2.6 billion to buy out Merck & Co.'s 50% interest in the DuPont Merck Pharmaceutical Co.

The dealmaking spree reflects Holliday's belief in the power of biotechnology--whether to develop new drugs or genetically modified seeds with better nutritional value. In the spring of 1999, he went out on a limb, saying that DuPont expected to strike a major alliance by yearend to bulk up its drug business. He also announced it was taking steps to create a life-science tracking stock for those businesses in its portfolio. But as the drug industry consolidated, DuPont, with a small research operation and a modest new-drug pipeline, was unable to find a partner. At the same time, the backlash was building against genetically modified foods. The company shelved its plan to create a tracking stock. Today, DuPont only garners less than 3% of sales from genetically modified seeds. And Holliday says the company is holding back on introducing some genetically modified products until it has a better handle on how consumers will accept them.

The broken promises and weak growth leave Holliday little margin for error. "Investors are looking at DuPont right now and saying `Show me.' They are waiting for the growth story to unfold," says Gene Pisasale, senior investment officer at Wilmington Trust Corp., DuPont's largest shareholder with about 50 million shares. Holliday may not have much time to prove that his vision of a transformed DuPont can become reality.

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