E. I. du Pont de Nemours and Company (NYSE:DD)
Goldman Sachs Basic Materials Conference Call
May 22, 2013 11:10 ET
Tom Connelly - Executive Vice President and Chief Innovation Officer
(Abrupt Start) company. Tom?
Tom Connelly - Executive Vice President and Chief Innovation Officer
Thanks, (Brian). I welcome this opportunity to share my perspectives on DuPont today and to let investors know what you should expect from us going forward. I’ll be reviewing our strategic priorities and our operating priorities but I also want to spend fair amount of time talking about two areas that are important to my role in DuPont. First of these is our return on R&D and the efforts that we’re taking in terms of our science and technology innovation. And secondly to spend a fair amount of time talking about our global reach, the regions outside the U.S. report to me in DuPont and that has been an exciting part of our growth story.
The point I want you to takeaway from all my comments today is that our programs surrounded in the market realities and we have a very strong commitment to developing and delivering superior returns for our investors. Move on before I get started I’d like to just review some familiar language, I will be making some forward-looking statements, these statements are based on management’s current expectations or projections in our estimates. Forward-looking statements include comments on the company’s strategy, our product development, market positions and our financial projections. These statements represent no guarantee of future performance and many factors including those outlined in our report to the SEC will provide more details on the sources of uncertainty and I refer investors to those statements.
Now to get us underway I’d like to talk about DuPont’s purpose. DuPont is a science company important to remember that. We work collaboratively to find sustainable solutions to some of the world’s tough challenges, solutions that make people’s life better, safer and healthier. This is our purpose that’s a constant, our core values are a constant, the way we achieve our purpose does vary over time but I can assure you that science and technology plays a key role in this. I’d like to flip over and talk about our strategic priorities at this point.
First of all, all of these priorities are directed at one thing and that is generating and delivering attractive shareholder returns. The three spaces represented here are places where we see tremendous opportunities for growth, growth in ways that customers in these spaces will be rewarded for technology and we do see tremendous headroom for innovation in these spaces. So the three of these are Ag, nutrition, bio-based industrial and advanced materials. Each of these spaces has the room to create some distinctive businesses in it and to apply a very broad science capability. So for - the first priority is around Ag nutrition. Our goal here is to be the clear leader in high valued science leading from agriculture right through to food value chain. Today we are uniquely positioned with our strength and production in agriculture both on the chemistry, seed and trait side as well as our position in food ingredients that was enhanced through Danisco. We have momentum in this space and we continue to drive our advantage.
Second is to grow our position in differentiated advanced materials. This has been the historic strength of the DuPont Company in area where we’ve been known for a long time. We create new materials, we create new classes of materials and bring them to market in ways to solve problems and create value for strength. This is a strong area for us and we continue to expand it. Our third area is that of bio-based industrials, this is the newest area for us. It is the - our ability to create transformational solutions and spaces such as enzymes of biomaterials and bio-fuels.
We leverage our technology, we make use of certain core technologies like our ability to develop and operate cell factories, our ability to engineer proteins and engineer the metabolic pathways to produce those proteins and then we leverage DuPont’s market access so I’ll talk more about our markets in just a minute. We leverage DuPont market access to move these products into the marketplace; we draw on our position both in advanced materials and our position in our Ag space in order to do that. These are our three strategic priorities.
The next chart shows our operational priorities and I’ll spend most of my talk today drilling down in these operational priorities. We’re focused in three areas increasing our return on R&D very (central) to my work as Chief Innovation Officer and I’ll cover this in depth today. Secondly capitalizing on our global reach developing markets now represents nearly a third of DuPont sales in it’s the fastest growing geographic segments. And third is developing and delivering on execution, this includes both our work on productivity as well as our work on our prioritization products; I’ll drill down in each of these areas in the next several slides.
As I get started I would like to make just a few comments on our portfolio. DuPont sales 2012 roughly $35 billion, two significant portfolio changes. Our portfolio is continued to evolve in the last couple of years, you’ve seen two major shifts. The first of these concluded just two years ago this month was our $7 billion acquisition of Danisco a business that include - it has improved several businesses within DuPont as well as the more recently concluded transaction earlier this year we completed this sale of our Performance Coatings business of $5 billion transaction.
Now the addition of Danisco will capitalize growth and allowance to expand in some key areas for us such as nutrition and it’s also helped us in the area of our bio-based industrials. These are opportunities to enrich our portfolio and accelerate our growth rate. Coatings by comparison was an area where we do not feel we could achieve an adequate cash return and I would say moreover it was a space in which we had difficulty being rewarded for innovation and our ability to differentiate ourselves through innovation had diminished over time, under the circumstances we believe that the right decision was to monetize that resource. And interestingly we’ve been able to essentially pay for the Danisco acquisition from the proceeds of the sale of Performance Coatings along with the improvements in productivity we’ve made in our working capital which resulted in a $2.6 billion reduction in our working capital over the last few years. So the combined effect of the working capital work and the divestiture of coating essentially has paid for the Danisco acquisition and in the same time improved our portfolio and positioned us for stronger growth.
I’d like to show the key markets for DuPont shown here on the next chart. These are all markets that benefit from certain mega trends like the growing population, the need for more food and more nutrition food and our ability to come up with more sustainable sources of energy. So let me quickly just comment on the ones shown here in agriculture a very strong market position in the seed business in both corn and soy places where we’re growing share globally, literally introducing 100s of new products each year. We’ve also had blockbuster products from our Crop Protection business including some of the pipeline as well. In Nutrition Health and Food markets we now have a meaningful presence through the acquisition of Danisco and buying out our partner in the Solae soy protein business. We now have critical math and increased relevance in the eyes of the global process food manufacturers.
In the area of industrial biosciences we have market leading positions in this space including our enzymes and proprietary microbes. We have an exciting pipeline of major new initiatives in the areas of food, fuel and industrial materials. Automotive markets present a good opportunity for us because of our work in light-weighting vehicles new materials for light-weighting vehicles, new materials that enable electric and hybrid electric vehicles, our capacity here is made us of preferred development partner for major automotive OEMs in the first tiered suppliers.
In the area of mobile devices and displays we are advancing our position as the innovative supplier of enabling material technologies for solutions for improved functionality and improved energy or reduced energy usage and also for improving the performance in vivid colors in displays. Photovoltaic is a strong area for us and we have strengthened our position with our innovation in our thick film paste uses front-side conductors through our encapsulating films that both increase the conversion efficiency (prolong) the module light and increase the return for solar panel installations. And finally in the production space we have new offerings such as our process safety consulting that’s been very popular in developing markets and light-weight Kevlar fabrics that have increased comfort while enhancing protection for Law Enforcement Officers.
So one thing that comes through in our activities in each of these markets is our emphasis on science based innovation as I’d like to outline on the next chart. Science has always been a key part of the DuPont company, innovation has been the way we’ve grown our businesses for than 200 years but things have changed today, our markets are more dynamic, they’re more global our portfolio is shifted and our approached innovation needs to keep up with these trends and changes.
In 2012, DuPont recorded about $10 billion of revenue from products introduced within the past four years and these have been generated across the full range of our portfolio it includes a new fungicides for disease control in production agriculture, it includes a new enzyme-based offerings for enhanced bakery goods, it includes new formulations of Nomex for protective garments. Science is the innovation that delivers improvements for our customers and for a society but it also important to recognize that science is the driver of revenue earnings growth for our company and it is the way that we capture value from our innovation.
We have continued to increase our investment in R&D in recent years, but we’ve done this on highly selective basis as you can see from this chart. Science is the innovation but we want to apply it in areas where we can generate the highest return. We have increased our investment in R&D by 50% within the past five years but again as you can see from the chart we’ve done this in ways that we’ve directed it toward markets spaces in specific projects that have the maximum value associated with them for example the ag has been the area where we’ve grown our research the most in the past five years, the ag segment has increased sales at a compounded 13% per year annual growth rate and earnings have increased at 19% per year annual growth rate at the same time we’ve nearly doubled our investment in R&D in this area.
So once again an example of how we have directed our investment in R&D and towards the market space that generates the most return. The process by which we do this that would characterize both the bottoms-up and a top-down process we run this on an annual cycle, business as come in through our products that we called the prioritization of initiative that make proposals for new initiatives or update us on existing initiatives, the leadership of the company in the office of the Chief Executive of which I am a member look across the entire portfolio. DuPont we look at all the initiatives being proposed and we choose what the market spaces in this specific projects where we see the maximum ability to generate an additional return attractive return.
We deploy our technology resources globally as can be seen on my next chart. We apply our research and technology to some of the world’s toughest problems, and these exist really on a global basis. Last year we invested $2.1 billion in R&D and we did this truly on a global basis through our research laboratories through our application development centers and through our latest creation which is the - our innovation centers which were first introduced in the year 2011.
What we want to do is bring the creativity of our total capability to customers anywhere in the world at the innovation centers in particular we tap into the capability of 10,000 DuPont scientists and engineers located in 150 research facilities in 35 countries and we want to make all of those resources available to our customers in any specific location which we do through first rate video conferencing facilities. We’ve developed a very strong pipeline of new projects in the developing regions that have resulted from this innovation centers have been the basis for growing number of customer DuPont partnerships. Our innovation centers have proven to be a very low cost and highly effective way to bring DuPont innovation to customers in all regions of the world. And I would say that our innovation capability is not just broad in a geographic sense it’s broad in the science sense as well as can be seen on this chart it’s probably difficult to read unless you have a handout but shown here are the 32 core technologies within DuPont is the 32 science areas where we have a clear intend to be a world-class.
Shown on the left side of the chart are our historic strengths in areas of chemistry and material science. As shown on the right side of the chart in green our more recently built really developed over the past 15 years or so world-class capability in the area of biology. As we build out this capability we work with other companies, we work with government laboratories, universities and as well as with customers in other companies to really develop this world-class capability. We also recognize that some of the most exciting innovations don’t occur within a single scientific discipline but across disciplines. So our ability to put together these pieces to bring together a new science areas is the clear differentiator from DuPont, within DuPont we call this process integrated science.
It’s our ability to bring together biology, chemistry and material science in creative new ways to deliver to develop and deliver to our customers faster better solutions that are sometimes transformative as for our customers business. Within DuPont we recognize we have capable competitors who may have strength in few or even several of these science areas but in terms of the breadth of the DuPont science this is the clear differentiator for us and a real key to the way we create value for our customers. I’ll illustrate this with one just one example many of you maybe familiar with the story around DuPont's Sorona polymer. I’d like to use it as an example to illustrate that when we talk about integrated science it’s not just a tag line it’s really the way we work.
So if we talk about our Sorona polymer it starts by turning our chemistry and material science with our biology to generate a new business new to DuPont $300 million plus business is the unique polymer in Sorona that has a great environmental footprint, it has outstanding performance and it has value and use lower cost of use for our customers who have adopted it. We start with Bio 1,3 propanediol or BioPDO as we like to call it. BioPDO starts from corn and that corn could be produced using DuPont pioneers high yielding hybrids. The corn is transformed into simple sugars using enzymes developed using DuPont Genencor science.
Those sugars are transformed into BioPDO using a proprietary micro organism developed by DuPont. And finally the BioPDO is polymerized to produce Sorona polymer using a DuPont proprietary process. At every step along the way we use a different DuPont science capability. And then that Sorona polymer is taken to the marketplace through channels and applications know-how developed across DuPont businesses. So from start to finish this is a DuPont story of integrated science. It’s found applications that is Sorona has found applications in the automotive space but not just in the automotive space we are seeing adoptions in carpeting, in apparel, and in personal care applications as well. And I’d like to emphasize that Sorona is successful first and foremost because it’s a better product not simply because it’s green a great story of DuPont integrated science and one that we’re duplicating across our portfolio.
As Chief Innovation Officer it’s important to me to understand the return we’re getting on our R&D spend to make sure that we’re generating as much as we can from our portfolio of R&D programs. One of our key metrics is around our sales of new product. Within DuPont we define a new product as the product introduced within the previous four years. This steady stream of innovated new product last year we introduced over 1500 new products, it’s very important to our customers it presents opportunities for us to increase our share it present opportunities for us to increase our margin and it positions us as the preferred development partner for our customers high value all of those things.
So our steady stream of new products as also resulted in higher growth and higher margins for our businesses. Last year 29% of DuPont sales come from our new products this is very much inline with our aggressive target of generating 30% of our sales from new product. In total DuPont had new product sales of over $10 billion last year as you can see from the chart on the right all of our businesses participated in this revenue from new product of course ag you can see is the largest of the contributor. This investment in technology is paying off, our compounded growth rate for new products over the past three years has been 11% growing much faster than our portfolio as a whole. We spend a lot of time managing the projects within our portfolio. I talked about the sales coming out of it but we have strong managing processes for the projects that we have underway from our R&D shown here it’s about a quarter of our top 100 projects. This is critical part of our growth portfolio and we see very strong oversight from myself and our other members of the office of Chief Executive. We want to make sure that these are the right projects that they are hitting their milestones and that we are positioning ourselves for a maximum return on our innovation spend.
They comprise projects from across DuPont’s portfolio, the size of the bubbles are related to their peak year revenue. The color represents the part of the portfolio from which they come either Ag or nutrition or bio-based industrials or advanced materials. We have a strong pipeline across our portfolio. I would like to highlight a project that - a product that isn’t even on the chart. It just graduated from our chart. It’s our Rynaxypyr crop protection product a blockbuster insecticide. We launched this product in very different way. We move faster and with greater collaboration during the launch phase of this product. Annual sales grew to over $750 million in about four years. This has been the fastest ramp up to a product of that size in the history of the DuPont company.
We have innovating and exciting new projects underway across our portfolio some things coming to market soon include our next generation refrigerant Opteon YF. This is used for mobile air conditioning, automotive air conditioning if you will. Zero ozone depletion potential, very low global warming potential exciting new products that’s being adopted first in Europe and will spread around the world. Our OLED technology organic light emitting diode technologies and materials that will be used in flat panel displays and have the potential to replace broadly LCDs and then application. And finally seed treatment, new DuPont chemistries applied to seed and increasing yield for farmers’ innovation across our portfolio.
Our pipeline is well positioned to deliver significant growth. On a risk adjusted basis, our portfolio is positioned to deliver $7 billion in top line growth in the 2016 timeframe. So, in summary we are highly focused on generating a superior return on our R&D pipeline. We are leveraging our innovation centers. We are leveraging our applications develop know-how. We are making meaningful progress and I committed to deliver even more for - from our innovation in the future.
I would like to move to our next operating priority and that is global reach. In 2012, nearly a third of DuPont sales came from the developing markets. Now within DuPont, we have six developing markets Latin America, Central and Eastern Europe, Middle East, Africa, South Asia, Southeast Asia and China. These six markets in total have been the fastest growing geographies within DuPont almost $11 billion of revenue in 2012. We have ongoing efforts to increase our functioning capability and footprint in the developing regions I’ll just highlight a few of the projects and progress we have underway.
In China, our Go West effort very much aligned with the Chinese central government effort to move from the coastal regions further inland I’ll be in Chengdu in three weeks time to check the progress of our newest office in China. In ASEAN, recognizing the growing middle class population that’s larger than the U.S. creates great opportunities for our nutrition business, for our Ag business and our industrial businesses as well. In India, we have launched DuPont India Acceleration directed at increasing the sales and marketing capability of our team there launching a number of India specific innovation efforts and we have opened innovation center in Pune within the last year or so.
In Latin America, we have been successful across our portfolio. We are well established in Latin America and in fact our penetration in economies such as Brazil and then Mexico is on par with our penetration in the U.S. We see great opportunities across that portfolio but specifically opportunities in the area of food and in the area of bio-based industrial. So, strong growth within the developing regions it’s generating very attractive sales growth as can be seen on this chart.
Over the last five years, our sales in developing regions have grown at a compounded 14% a year. China has been terrific and growing at a compounded 19% per year over their last five years. We continue to increase our investment and our capability in these areas most of our innovation centers have been launched in developing Asia in Eastern Europe and in Latin America and they are paying a great dividend for us. And we find that as the customers in these countries become more sophisticated drawing on our science based through our innovation center becomes very natural for them. And as the incumbent we position ourselves as the prepared development partner for customers in developing markets as they become more sophisticated.
I would like to jump over now and start to talk about our execution priority. Of course with regard to portfolio analysis, we have recognized that having the right portfolio is absolutely essential to developing superior returns for our investors. So, as a leadership we look at our portfolio on a regular basis normally a couple of times a year. We look at each of the businesses, the attractiveness of the market pace, the financial result they are generating the growth prospects they have the ability to innovate and to be rewarded for that innovation and the cash return on the R&D that we are deploying. This is done at the corporate level for our 12 businesses. Each of our business Presidents does the same –process for his or her individual lines of business at a lower level of granularity.
This information guides our decisions about what’s in the portfolio and what’s not but it also guides our application of resources to hose businesses. I have already described that process the prioritization of initiatives that we don on R&D projects. I can tell you that w do the same thing on marketplace initiatives we do the same thing on capital expenditures. We do the same thing on access to mergers and acquisition funding. So, strong part of our managing process is around the portfolio analysis, which is done repeatedly and regularly. And you can see the output of that process in our increased investment in the Ag space for example.
I would like to say a few more words about our M&A process within DuPont. It’s an important part of DuPont. You can see here some of our recent M&A activities as we consider M&A first and foremost we need to see alignment with our strategic direction, compatibility with the directions that we are going. I’ll say that attractive opportunities in Ag and nutrition or bio-based materials or advanced materials could all be considered normally. We are looking at smaller bolt-on type acquisitions and most of the examples shown here meet that category. In this case, we are looking at adjacent spaces, market spaces or perhaps the geographic extension or complimentary technology that we would like k to add. There was also place for the more transformative acquisitions that impact multiple DuPont businesses.
Danisco was a key example of that but whether we are talking about our large or small one; we run the same way discipline process. We set high financial hurdles before we consider an acquisition and the financial hurdles are much build around generating an early return from that. We are looking for being a cash and earnings positive as quickly as possible and that normally that means in the first full year post acquisition that’s what we are able to achieve with Danisco and that’s what we want to do on a going forward basis. But you can see many more of our transactions were on a much smaller scale than Danisco.
From an overall standpoint you can see, we divested more revenue than we acquired. But as we went through this process, we have come up with a stronger portfolio with stronger cash return and stronger prospects for growth. I’ll say another experience that we have generated over the last four years is an expertise in terms of acquiring and integrating acquisitions in an efficient way and doing that quickly and on the reserve side, dealing with residual costs in the case of divestiture getting those costs out of the portfolio as quickly as we can.
When we talk about returns to shareholders I need to talk about dividends. Dividends have always been important for the DuPont Company. Of course specific decisions on dividends are poor decisions but it’s always been an important part of DuPont value creation for shareholders. Four weeks ago, the Board approved our most recent dividend increase a 5% increase in our dividend. Since 1904 when we began paying dividends we have never missed the quarterly dividend in the financial crisis. We did not suspend dividends, we did not decrease the dividends, we are highly committed to our dividend as it means for returning value to shareholders and we are committed to increasing our dividend as we grow our earnings.
Our second mechanism over a second for returning value to shareholders is through stock repurchases. In the past two plus years we’ve repurchased $2.3 billion most recently as we completed the sale of our Performance Coatings business. We announced and then quickly completed in the month of April $1 billion repurchase debt last month.
So let me draw my remarks to a conclusion and highlight some of the comments that I made along the way. First of all we are committed to increase our return to shareholders by building our market leading positions in our three strategic areas being ag and nutrition, industrial and biosciences and in advanced materials. We will do this by increasing our return on our R&D by capitalizing on our global reach and by delivering on first trade execution in the areas of productivity and portfolio management. You have seen that we are investing in a highly differential way across our portfolio our investments correlate with our view of the opportunity space and our ability to generate a superior returns in the next few years.
As we take a look across our portfolio and recognizing that we are in a challenging market condition we are committed to our long-term five year rolling growth rate targets of 7% top-line and 12% growth in earnings per share on that rolling five year spaces. We recognize that this is our route to delivering a superior return to shareholders, we appreciate your investment in DuPont and we will continue to reward that investment by growing the return on that investment. And I’ll conclude on that note. Thank you very much.
I don’t know where Brian is but I’ll take the questions.
We probably have time for one question if there is one in the audience.
A lot of the proceeds from the sale of the Performance Coatings business are overseas, and so could you talk about how the company anticipates using those going forward? And should we anticipate that the next growth measures are likely going to be focused more overseas?
So I would – you’re quite right, some of the proceeds we developed around the world DuPont does have cash overseas which could be used for overseas investments. We have other mechanisms for making use of that cash as well. To highlight the Danisco acquisition of course there were substantial Danisco assets outside the U.S. so that was a very efficient use of those resources. So I don’t think that the geographic orientation of a potential acquisition target would be to determine in fact that we start with the strategic we talk with our ability to generate a return we talk with the complementarity of technologies or market spaces. The – I would consider the geography is a second order factor, not a primary driver.
Okay. Thanks very much Tom.
Tom Connelly - Executive Vice President and Chief Innovation Officer
Alright. Thank you.
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