E. I. du Pont de Nemours and Company (NYSE:DD)
Citi 6th Annual Basic Materials Conference Call
December 3, 2013 10:20 AM ET
Jim Collins – SVP, Performance Materials & Industrial Biosciences
Great. Thank you, CJ. And it is certainly my pleasure to join you and everyone here at the room at the Citi Basic Materials Conference to talk about our Industrial Biosciences and our Performance Materials segments. Today, I hope to leave everyone with a few takeaways regarding our current business performance and our strategy to a more broadly leveraged industrial biosciences across our advanced materials portfolio.
Now this morning you’ll also see that both segments are delivering strong results. And I’ll review our key drivers for success. In addition, I’ll discuss the rational and decision factors that we use when evaluating and considering future investments. I’ll sharing insights into how we intend to participate in the biorefinery value chain.
Now, if you turn to the next chart, the slides for today’s presentation can be found on DuPont’s website. I will be making forward-looking statements and references to non-GAAP measures. I call your attention to the disclaimers here on slide 2 and I encourage you to review the reconciliations and risk factors included on our website and in our SEC filing.
Now before I cover Industrial Biosciences and Performance Materials, I’d like to briefly highlight the important steps DuPont has taken to build the higher growth, higher value company on chart 3. Now, DuPont is executing against a clear strategy and I’m here to tell you it’s working. We created strong positions in gross markets have redeployed capital and resources to growth opportunities, enhanced our portfolio and have significantly lowered our cost structure and working capital levels. We have three clear priorities, the first is to extend our leadership in the high-value science-driven segments of the agriculture and food value chain and to leverage the linkage across these segments.
We’re already uniquely positioned in this space and have tremendous opportunity and momentum to advance further. Market demand in this space is driven by both population growth and economic developments creating needs and requirements among our customers that we are ideally equipped to meet. Our second strategic priority is to build on our leadership position in bio-based industrials which would create bio-based businesses in areas like biofuels and biomaterials. And our third strategic priority is to Strengthen and grow our leading position as a provider of differentiated high-value advanced materials through science based solutions. This has been the historic strength of DuPont and we will extend our lease year.
So, slide 4 highlights the important portfolio enhancements we’ve made in the last two years to position DuPont for higher growth which reduce cyclicality and volatility. These include the $7 billion acquisition of Danisco along with our $5 billion sale of Performance Coatings. In late October, as CJ mentioned we announced our decision to separate our Performance Chemicals business to a tax free spin-off to shareholders. We believe this step will create significant value by establishing two strong and highly competitive public company, DuPont and in Performance Chemicals. Both of these companies will have a clear but differentiated strategic focus compelling product portfolios, leading market positions and very strong customer relationships.
Now, our teams are progressing in the key work streams to carve out financials, establish IT systems and complete all of the regulator and legal filings to enable the separation in the 18 months’ timeframe that we announced in late October. We intend to update shareholders as we progress and expect to announce a leadership team for the new Performance Chemical company in the first quarter of 2014.
So, turning now to Performance Materials and Industrial Biosciences on slide 5. This summer, our CEO, Ellen Kullman asked me to add the responsibility for Performance Polymers and our Packaging and Industrial Polymers businesses to my Industrial Biosciences role. Now, I’m excited to lead these businesses because they’re delivering strong results and I think tremendous opportunities to accelerate the integration of Industrial Biosciences more broadly across the company and these businesses.
So, to grow in the future, it helps to have a strong foundation. As you can see on slide 6, profitability has improved for the Performance Materials segment for the past few years. At yearend 2012, margins were up nearly 400 basis points and operating earnings were up about 19% from year end 2011. We’ve maintained momentum in 2013 and delivered strong results again this past quarter. We’ve achieved this success by taking full advantage of the low cost ethane with our cracker in Sabine, Texas coupled with growth in emerging markets and renewed investments in R&D.
Our margins are also supported by our disciplined approach to portfolio management. We are very selective about how we participate in this space. An example of this discipline was the evidence two weeks ago when we announced the sale of our Glass Laminating Solutions/Vinyls business which was part of our Performance Materials segment. This divestiture is consistent with DuPont strategy to build a higher growth, higher value company. Now you have no doubt familiar with the commodity polymers like polypropylene and polyethylene. Now we don’t stay here, instead we are focused on the Engineering and High-Performance Polymers like high temperature nylons, polyamides and specialty hollow pins. These polymers deliver performance that commodity polymers simply can’t match in terms of their mechanical, their chemical or their thermal performance. We also have a strong customer preference for our leading brands like Zytel, Sorona, Kalrez and [indiscernible].
So, on slide 7, we highlight the key trends and market dynamics that are driving these businesses. Food Packaging and Automotive are two of our core markets. Our High-Value Polymers functions as steel and as barriers and adhesives in multi-layer flexible packaging films. In Automotives, the OEMs and first-tier component suppliers look to our High-Performance Plastics to help increase fuel economy by reducing overall vehicle weight. Our Zytel and Vamac products for example integrate multiple parts at a lower cost while in doing higher temperatures in those tough under the hood application on turbo-charged engines.
So, turning now to chart 8. One scientific focus for DuPont in automotive has been fuel efficiency and sustainability. Now one of the most effective ways to reduce CO2 emissions from gas fuel vehicles is to make those cars lighter by replacing metals with plastics. Now DuPont is putting a science to work on vehicle weight reduction to discover and develop lighter weight alternatives to metal that can withstand the intense heat the aggressive chemicals in the high pressures in modern automotive engines. Substituting metal components with parts made from DuPont high-performance polymers like Vizilon thermoplastic composites is already a proven strategy for vehicle light weighting. But today, DuPont is working with automakers in Tier 1 component manufacturers on new thermoplastic composites for structural for load-bearing components such as heat structures, lift gates and suspension systems. So, that combined with a design versatility of plastics and also yield outstanding energy absorption capability.
So, these and many more applications can be successfully commercialized using lightweight plastics by combining the right material with the right design and the right processing technology and that’s what DuPont brings.
So, now I like to shift gears and talk about our Industrial Biosciences business on slide 9. Now, this segment has a simple mission to create the leading Industrial Biotech business by delivering innovation and driving sustainability. 2013 has been another area continued progress and we are investing in our core markets and competencies. DuPont’s capability to design build and operate cell factories on an industrial scale across the bio industrial space is unmatched. And we will leverage this capability to grow our business in the future.
Now, as you can see on slide 10, we supply a diverse set of industries and markets. In Bioactives, we are the leading supplier of micro ingredients that help animals to better digest a variety of new products and detergents we’ve introduced cold water enzymes that allow consumers to remove cup stains from clothing and to save money by washings in cold water while reducing the impact on the environment. The Biomaterials, we are capitalizing on our superior product performance and growing consumer preference for sustainable materials. Our Bio-PDO Sorona franchise has surpassed $300 million in revenue and is a strong example of integrated science. Now, we’re working to replicate this success in other areas of our company.
Finally, our Biofuels programs aim to deliver the lowest cost, low capital technology which provides governments around the world a path to meet their renewable fuels goals and reduce greenhouse gas emissions and create greater energy independence. We’re building a new cellulosic ethanol plant in the Nevada, Iowa and remain on track to start the plant in the second half of 2014. Once commercial, it will have 30 million gallons of capacity and will demonstrate on a large scale of integrated feedstock to fuel approach. The plant will provide a strong foundation for our Biorefineries segment and will assist us in our plan to secure future licensees.
So, let me take a minute or so here to share with you our perspective on EPA’s recent proposal for the 2014 renewable fuels volumes. EPA’s adjustment of the cellulosic ethanol volumes to more closely match the supply to this forecast to come on stream next year including our Iowa facility is a good example that the RFS legislation is working and that the EPA has all of the tools for needs that is necessary to align these volume targets with the advanced fuels production capability of the industry. At the same time we are disappointed in EPA’s proposal to roll back first generation volumes. These proposed targets are not in line with policy goals on which the RFS is fundamentally based and its base stand will have an impact on corn ethanol economies.
However, we do see lower corn prices and low stocks is providing more favorable dynamics for the industry. In 2014, these volumes are not final yet and DuPont along with others in the industry will continue to work with the EPA during the public comment period and beyond to get to the right point for these requirements.
So, as shown here in slide 11, as I mentioned earlier, we’re making great progress on our Iowa cellulosic ethanol plant which will deliver strong commercial scale economics for the production of ethanol. We continue to have very active licensing interest well beyond the U.S. and look forward to updating you more on this in the very near future. Our strategy in fuel ethanol is simple, it’s continued to provide new innovation that improves the productivity of fuel producers and our approach in value proposition is targeted at progressive customers versus the marginal producer. As our Biofuel technology moves forward, we will have three revenue streams, first the licensing of the engineering design in the technology to build one of these facilities, the ongoing supply of the enzymes and the fermentation microbes that actually the software that allows the plant to run. And then some direct participation in fuel production in sales with the facilities we own here in Nevada. Now, no other company brings all of these capabilities to cellulosic ethanol and of course biobutanol that’s the DuPont’s advantage.
So, now I like to provide some insights on how we plan to integrate Industrial Biosciences more broadly across DuPont and detail our opportunity assessment methodology for developing new polymers and new renewable opportunities.
On slide 13, you can see we currently have broad participation across the biorefinery value chain. Today, we access low cost sustainable sources of carbon like corn starch, we convert them to basic sugars, then we use that sugar to create bio products such as bioactive materials PDO and biofuels corn-based ethanol. In the future, we expect to unlock new sources of carbon to create bio products from agricultural wastes such corn stover and energy crops like switchgrass. In fact, that is what we will do in our Nevada, Iowa biorefinery which will produce ethanol and some lignin coal product. As technology continues to advance, we believe we will see other products being made from these sustainable nonfood sources of biomass.
Now, today we have strong operational and scientific synergies between Industrial Biosciences and our agricultural teams which have proven critical in creating a sustainable supply chain for our cellulosic ethanol facility. In Performance Materials, there is also a clear connection between our expertise in Material Science and Industrial Bio. We are leveraging this connection now to accelerate our renewably sourced material program, today for example our Performance Materials teams works with automotive customers to use Sorona in molded automotive parts. Looking forward, we are evaluating new opportunities to develop advanced bio-based materials. You are well aware of Sorona which is made by polymerizing PDO with TPA. We are now evaluating other polymerization partners for Bio-PDO monomer to build on the commercial success and scale of our facility located in Nashville Tennessee.
In Performance Materials, a number of our product lines are already renewably sourced oxygen such as our Hytrel RS and Zytel RS offerings. We believe with our Industrial Biotech competency we can further improve the supply chain economics for these products and capture additional market share. In the 1930s DuPont assured in a new wave of materials like NeoGreen a first synthetic rubber Nylon and Teflon metal catalyst played an important role in the history of these materials development. Today, we believe the new wave in materials will be enabled by biocatalyst. We continually ask ourselves what can biology do that chemistry can’t. With the recent advancements in bioengineering there are number of untapped diversed areas such as Advanced Materials, composites and personal care where we believe we can create new materials with tremendous commercial applications. We’re at the early stages of our growth runway in this arena.
So, slide 14 highlights some commercial success with renewable materials in a wide range of applications from cell phones to ski boots. Our Performance Polymers business already has a broadest offering of renewably sourced Engineering Polymers in the industry. DuPont’s renewables portfolio today delivers about $400 million in annual revenue and that number is expected to grow in the future. Of that amount, we generated about $300 million in sales from Bio-PDO Sorona and about a $100 million in other Performance Materials products. Renewables are important to Performance Materials for three primary reasons, first the development of renewable polymers will help us continue to meet our customers evolving needs. More customers in automotive, electronics and consumer areas are expressing strong interest in bio-based materials.
Companies that develop renewable polymers with equivalent or sometimes better performance and cost profiles, will have a competitive advantage. With our strong segment margins, this is a business most depending and growing. Second, utilizing our bio-based routes provides feedstock diversity and the potential to lower manufacturing cost. To be viable, bio-based routes must have a minimum offer long term cost competitiveness to the oil based feedstock alternatives. Our intent is not to pursue renewable polymers that will increase our long term cost manufacture. And then finally, we believe we can accelerate our growth rates and gain market share with a strong renewables portfolio. We believe there are areas where we can create and market new materials with unique differentiated properties from bio-based sources that are just not available today from traditional petroleum feedstocks.
Sorona was just our first example of providing the material that was softer and more stain resistant than any product that you could buy on the market. By successfully developing naval materials we believe we can achieve higher growth rates for these new products in the 3% to 5% segment average that you’ve seen before.
So, in summary Performance Materials will develop renewable polymers when it makes economic sense but we will also fully leverage – we will also continue to fully leverage our low cost ethane position. These are not mutually exclusive strategies and we have the capability and the intention to utilize both.
So, in summary on slide 15, here is what we expect to deliver in 2014. We will maintain our strong momentum in Performance Materials to our global reach, our application development expertise, the renewable polymers expansion and a continuing favorable feedstock environment. We will grow the value of the Industrial Biosciences business by delivering innovative new products with higher value and use, capitalizing on our Danisco synergies and accelerating our global expansion in emerging markets especially in places like China and India. We will selectively invest in renewable polymers, design to defend our base business, reduce our manufacturing cost and accelerate our growth rates. And we will move forward aggressively to start up our cellulosic ethanol plant in Nevada, Iowa in the second half of 2014. And finally we will accelerate the integration of Industrial Biosciences more broadly across DuPont’s Advanced Materials program.
So, in closing Performance Materials and Industrial Biosciences are delivering strong returns and are our important levers in DuPont strategy to build the higher growth, higher value company today and in the future. Thanks for the opportunity to be with you today.
We probably have time for a few questions, if someone would like to ask? Yes proceed.
Jim, we talked about this over the year but could you talk about the renewable mandate that is creating rollback and how does that impact DuPont. And also talk about the timing for biobutanol and cellulosic ethanol.
So, as I mentioned earlier, we are encouraged by the fact that the EPA is using the knobs and capabilities that has available to them to adjust the targets for a second generation fuels to be more in line with the capacity that is coming online in the industry. One of the large criticisms of our test in the past especially by the oil industry is been that they were being forced to buy a second generation biofuel like volumes that didn’t exist. And so, we’re very encouraged that the EPA is beginning to use those knobs to adjust the required volumes the RDOs to better come in line and we intend to be a big part of supplying those volumes.
So, over time those numbers will continue to increase just like the mandate requirement. For grain-based ethanol as I said we’re disappointed with the fact that they reduce the overall targets and the biggest concern there is the take the teak out of the rim system. The rim system was established so that those who follow the law were awarded for that and those who didn’t follow the law had to pay. And so the only reason that you hear people complaining about the rims is because they’re not following the law and they’re being asked to pay. But this reduction in volume, we now take the teeth out of that system. And so the ongoing mandate to continue to blend ethanol and gasoline has diminished slightly.
I also want to clear up when saying this idea of a blend wall is truly a mess, the only folks who created the blend wall were the old companies who didn’t want to blend ethanol more than 10. But the RFS always in vision moving beyond 10% inclusion rights and there are many, many cars on the roads today that can handle even higher blend rate. But here is what butanol comes in, we actually believe that butanol has a blend for gasoline, it has some other advantages especially in the use of the existing pipeline system. And butanol shows additional advantages to our refinery partners who actually and being much more efficient at producing the blend based for gasoline that butanol can be blended with that allows them to run more efficiently.
So, butanol continues to sort after, we’re on track with our first conversion of high water energy in Minnesota with the base we expect to be producing butanol in 2015. And we’re excited about both of these opportunities to continue to advance renewable fuels in this country that are great for the environment and need to be critical part of our energy emissions.
Any other question?
This is a technical question if I could. I think the latest opportunity for enzymes be and following the dynamics of enzymes when it needs if I may, then the enzyme needs another molecules or add to when that are used in vaccine. How they advance with each other and then enhance its performance. Is DuPont doing anything to sort that or in writing to the universities, I’m from Columbia University which follow such dynamics in a short temporal and expressive case?
Great question. And it’s not the answer, if you see as I mentioned in the talk the enzymes are out Mother Nature’s catalyst, right. And with our cellulosic ethanol facility, we’re learning some very valuable lessons about how to breakdown the sugars that mother nature has polymerized into biomass using chromes out of enzymes. We’re learning how to break those polymerization volumes back to their fundamental sugar building blocks. Once you understand how to break those apart, you also start to gain the knowledge about how to putting back together the way you want to build it.
So, as you mentioned, the ability to use enzymes in concert with other fundamental building blocks to actually begin to build them. And this is when I talk about naval polymers, so these would polysaccharide polymers the use of sugars of polymerization base that the world has never seen before and they would have polymer capabilities and properties that we never had access to. So, it’s the advantage of DuPont we were a materials company and we have some very strong folks who understand branch change structures of polymer matrices. With that knowledge we consume down with our biochemist and say can you design an enzyme that would make this type of polymer. And we’re right at the front edge of the explosion that we saw back in the 1930s with metal catalyst and condensation polymers, we think we’re at the beginning of that next wave.
So, I’m actually quite excited about that and we do work with a number of companies and academia to advance that technology. So, yes we’re working in that space. Great question.
As DuPont takes action to streamline the portfolio, are there – or which areas are you looking to augment through acquisition or more of asset growth?
As I mentioned earlier, the three strategic priorities of the company certainly agriculture and nutrition will continue to be very – that we’re very interested in. Our Advanced Materials segment looking for opportunities there. And then continues advancement in this Industrial Biosciences space. And so, we hold those of this three strategic priorities and we continue to ask ourselves the question and be ready for when those opportunities to develop, I think Danisco is a great example. We’d known Genencor for a decade, we knew Danisco for a little bit shorter period regard joint venture and we were patient and waited for that opportunity to become available. That also shows that DuPont company can move quickly when it needs to a – in that acquisition that has done – has proven to be very beneficial for our company, it created the leading industry a food industry player with nutrition it helps – and it helped us to take a significant step on our path for industrial bio.
Other questions? Okay. I’m seeing none.
Thank you, again for the opportunity to be with you here today.
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