The Reinvention of an Industrial Titan: DuPont is again remaking itself, with a shifting R&D strategy and a pile of acquisitions and divestitures. The CFO gives his take on the transformation.

November 22, 2013

The Reinvention of an Industrial Titan

DuPont is again remaking itself, with a shifting R&D strategy and a pile of acquisitions and divestitures. The CFO gives his take on the transformation.

David McCann

The quaintly named E.I. du Pont de Nemours and Company was founded in 1802 as a gunpowder manufacturer. That remained its main product until late in that century, when it delved into dynamite and nitroglycerin. (The company later upped the explosive ante considerably by helping along The Manhattan Project and production of the first atomic bombs.) For most of the past century, DuPont remained a U.S. industrial titan even while entering and exiting a dizzying array of businesses. It’s arguable that no major American company has reinvented itself as many times as DuPont has.“Driving these changes has been the high point of my nearly 35 years with DuPont.” — Nick Fanandakis

The $35 billion enterprise’s perpetual evolution continues apace today. A current transformation effort has been under way since 2009, when longtime company executives Ellen Kullman and Nick Fanandakis were promoted, respectively, to CEO and CFO. Highlights of the shift have included spikes in capex and R&D spend for some business lines at the expense of others; the sale of one sizable business line and a planned tax-free spinoff of another; several major acquisitions; and cumulative reductions of $2.2 billion in costs and $2.6 billion in working capital.

Most people still refer to DuPont as a chemical company, and it is that, but it’s many other things too. “The fact is that we haven’t been a chemical company for quite some time, because actions we’ve taken have dramatically changed DuPont,” says Fanandakis, a 34-year veteran of the company.

For example, from 2007 to 2012, there was a 9 percent compound annual growth rate (CAGR) in capex and R&D spend for what DuPont now calls its “core segments.” Those include agriculture, electronics and communications, industrial biosciences, nutrition and health, performance materials (i.e., polymers for commercial use), and safety and protection.

Meanwhile, the company’s performance chemicals line, which includes its titanium technologies and fluoroproducts businesses, experienced a -3 percent CAGR in such investment over that time period. And R&D/capex CAGR was -13 percent for DuPont’s performance coatings (e.g., automotive paint) business.

The company has chosen to invest in businesses that it considers to have the strongest growth prospects. It sold the performance coatings division to The Carlyle Group for $4.9 billion in a deal that closed last January. And just last month DuPont announced plans for a tax-free spinoff of the performance chemicals group to shareholders, a separation that is expected to take 18 months. That business is strongly profitable — $1.8 billion of operating earnings in 2012 on $7.2 billion in revenue, the best margin of any DuPont business line — but growing slowly. “The separation will give investors a clear investment choice: cash [in the form of high dividends] for performance chemicals or growth for DuPont,” Kullman told analysts in an Oct. 24 conference call.

Says Fanandakis, “We had a very disciplined process that allowed for critically evaluating all of our resources and differentially managing our portfolio of businesses so that we would put the dollars and focus where we felt the greatest opportunity for growth and high value were being created.”

One key goal was to reduce the cyclicality and volatility of earnings. For example, earnings per share for the TIO2 (titanium dioxide) component of the performance chemicals unit was 65 cents lower this year than in 2012. “That’s a lot of volatility,” Fanandakis notes. “It is driven by cyclicality in the business. Over 40 or 50 years it grows at about GDP rates, but it has up and down supply-and-demand cycles. It’s a very commoditized business — not from a product standpoint, because we do have some differentiators, but from a process standpoint. What we’re talking about is building a business that is not dependent on cyclical commodities but more on using innovation and science to bring value to customers and shareholders.”

With its divestitures and acquisitions, DuPont has strategically positioned itself to target three “mega-trends,” all driven by global population growth, says Fanandakis. One is the need for more food, as well as healthier food, because of dietary changes that are taking place as per-capita income levels rise in emerging markets.

Accordingly, several DuPont acquisitions have been in the agricultural space: Denmark’s Danisco, with business lines in food ingredients and industrial enzymes, for $6.3 billion in May 2011; a majority stake in South Africa’s Pannar Seed, Africa’s largest seed producer, in July of this year; two other seed companies in early 2011; and Solae, a joint-venture developer of soy-based food ingredients, in May 2012. (DuPont had already owned a 72 percent stake in the joint venture and then bought the other 28 percent.) The company also has a crop-protection business that includes the low-toxicity insecticide Rynaxypyr, which is generating almost $1 billion of revenue.

“You don’t have any more arable land, so to provide more food to the growing population you’ve got to look at getting more productivity out of each acre of land,” Fanandakis says. The agriculture division will account for 37 percent of company revenue after the performance chemicals spinoff, but it gets 50 percent of DuPont’s R&D spend, he notes.

The second mega-trend is the need to reduce the usage of fossil fuels so as to slow down climate change. That’s population-related too: a 2009 study determined that each child born in the United States adds more than 9,400 metric tons to the “carbon legacy” of an average parent. DuPont has diverse efforts in this area, from photovoltaics, a type of solar energy generation, to the production of biofuels, to polymers enabling metal parts in cars to be replaced with engineered plastic to reduce weight and improve fuel efficiency.

Mega-trend number three involves global efforts to protect lives and the environment. DuPont pitches in with a product lineup that includes Kevlar, used to make the bullet-resistant vests for law enforcement, and Nomex-brand fire-protective equipment and clothing. On the environmental side, the company provides sulfuric acid regeneration and sulfur gas recovery services for the refining industry and a line of environmentally friendly sulfur-based products.

Meanwhile, driving working capital reduction has been a strong focus since Fanandakis became CFO. “When you go through every business and their supply chains in a disciplined, end-to-end process, the number of inefficiencies you can find is amazing,” says Fanandakis. The company has liberated cash by reducing inventory levels, eliminating less-utilized or redundant warehouses, changing customer payment terms and reducing past-due accounts — days sales outstanding has decreased by 12 percent since 2009.

DuPont also has succeeded at delaying payments to its own vendors: days payable outstanding has increased by 11% in four years’ time.

The overall transformation efforts seem to have helped significantly boost DuPont’s business results. Its operating margin swelled from 10.9 percent in 2008 to 17.6 percent in 2012. And the company returned 182 percent of shareholders’ investments from the beginning of 2009 through mid-September 2013 through stock-price growth, dividends and share buybacks. By comparison, the average total shareholder return of S&P 500 companies was 107 percent over that time, and DuPont’s proxy-statement peer group returned just 95 percent of shareholders’ investments.

“We’re not done with our portfolio changes,” says Fanandakis, “but it’s been exciting to be a part of the transformation of this 211-year-old company. For me, driving these changes has been the high point of my nearly 35 years with DuPont.”


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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