DuPont CEO Defends Strategy as Peltz Calls for Breakup

DuPont Co., under pressure from activist investor Nelson Peltz to break itself up, defended its conglomerate structure as one that will deliver “superior value.”

While Peltz’s proposals are partly aligned with DuPont’s strategic direction, each business gets competitive advantages from being part of the larger corporation, Chairman and Chief Executive Officer Ellen Kullman said today.

“Our board of directors, our management team and I are confident our plan will deliver sustained and superior value for our shareholders,” Kullman said on a call with analysts.

Kullman’s comments mark the first time she has defended her strategy since Trian Fund Management LP, the hedge fund founded and run by Peltz, last month stepped up its campaign for change at the biggest U.S. chemical maker by market value. Peltz published a letter calling for DuPont to be broken up and criticized the board for missing earnings targets.

In an interview, Kullman pointed to third-quarter results as evidence of the effectiveness of her strategy as she cuts expenses and focuses on new products. Net income rose to 47 cents a share from 30 cents a year earlier. Profit excluding some items was 54 cents a share, beating the 53-cent average estimate of 19 analysts in a Bloomberg survey.

“The third quarter reflects the momentum we are building as we execute our plan,” Kullman said by phone.

Operating margins rose in five of seven units as the company sold some units. The divestitures along with lower spending by farmers contributed to a decline in revenue that surprised some analysts who on average had estimated higher sales.

Growth Issues

“Growth has been an issue for this company,” Stephen Hoedt, a Cleveland-based analyst who helps manage $28 billion including DuPont shares at Key Private Bank, said by phone today.

Kullman has announced measures to boost shareholder value since Trian acquired a stake in DuPont last year. DuPont plans to spin off its performance chemicals unit, which makes pigments and refrigerants, eliminate $1 billion in costs by 2019, and buy back $5 billion of shares.

Trian wants DuPont split into two entities: businesses such as agriculture and nutrition, and other more cyclical operations such as performance materials and electronics. Performance chemicals, which Kullman has said she plans to separate next year, would constitute a third company.

Kullman said areas where she and Trian are aligned include the need to expand margins, boost productivity and return more capital to shareholders through share buybacks and increased dividends.

Financial Flexibility

On the other hand, DuPont’s capital structure provides it the financial flexibility to grow amid seasonal agriculture revenues, the CEO said. DuPont businesses also benefit from the company’s global scale and science research, brand recognition and market access, Kullman said.

Anne Tarbell, a spokeswoman for Trian, declined to comment on Kullman’s defense of her strategy.

It’s doubtful that much value can be created from monetizing businesses beyond the chemicals unit, Hoedt said. Still, third-quarter results show that even DuPont’s high-margin agriculture business can be hurt by commodity markets, he said.

Sales in agriculture, DuPont’s largest unit, dropped 4.3 percent amid lower prices and volumes for corn seed. U.S. farm income is falling as bumper crops of corn and soybeans undermine grain prices.

“The agriculture business is suffering under some pressure, and this is supposed to be the crown jewel,” Hoedt said.

Market Share

The DuPont Pioneer seed business lost 1 to 2 percentage points of North American market share in both corn and soybeans this year, the company said on the call.

The drop in soybean market share is because DuPont was slow to license Monsanto Co.’s newest version of Roundup Ready soybeans, engineered to survive applications of Roundup weed killer, said Mark Gulley, a New York-based analyst at BGC Financial LP. DuPont agreed to license Roundup Ready 2 as part of a legal settlement in March 2013, years after others adopted it.

“They probably have the worst technology position of all seed suppliers,” Gulley said by phone today.

Kullman in the interview said the Roundup Ready 2 trait was available in about 5 percent of DuPont’s soybean seeds this year, a level that will continue to rise. She declined to provide a 2015 estimate.

DuPont rose 0.1 percent to $67.95 at the close in New York. The shares have gained 4.6 percent this year.

The company reiterated its forecast for 2014 operating earnings of $4 to $4.10 a share.

DuPont, founded in 1802 to make gunpowder, produces thousands of products from Corian countertops to Tyvek personal protection gear and Kevlar anti-ballistic fiber.

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