08 April 2002 00:00 [Source: ICB Americas]In February, DuPont announced plans to transform the company into five market and technology-focused growth platforms and the creation of a textiles and interiors subsidiary for the purpose of ensuring continued sustainable growth. This move, coming in the year in which DuPont is celebrating its two hundredth year as a company, marks the most recent change for DuPont, which has adjusted its portfolio through noteworthy deals totaling roughly $50 billion since 1998.
DuPont is now organized around five growth platforms and is in the process of spinning off its fibers and textiles businesses as the new entity, DuPont Textiles and Interiors (DTI). This reorganization is anticipated to provide DuPont with the ability to achieve 10 percent normalized earnings-per-share (EPS) growth, 6 percent revenue growth and a return on capital investment (ROIC) in the high teens.
"Consistent with our long-term strategy and direction, our growth platforms will be more tightly focused on markets and technologies. This will enable faster execution and improved capability for innovation and shareholder value creation," says DuPont chairman and CEO Charles O. Holliday Jr.
Sustainable growth has been the mission of the company for several years, says Gary Pfeiffer, chief financial officer with DuPont. Although the process of renewing the company is ongoing, the recent recession has increased the need for introducing significant programs, he says.
Last year was a difficult one for the US-based chemical giant. For the year 2001, consolidated sales totaled $24.7 billion compared to $28.3 billion in 2000. Full-year segment sales were $27.7 billion, down 10 percent after adjusting for divestitures. Full-year income excluding one-time items was $1.251 billion versus $2.878 billion in 2000. Underlying segment after-tax operating income (ATOI) of $1.859 billion was 49 percent below last year, reflecting significantly lower earnings in all segments, principally due to lower worldwide sales volume and margins.
Although 2001 will go down in record as one of the most challenging for the chemical industry, DuPont's most recent transformation started in 1998, and since then the company's portfolio activity has totaled roughly $50 billion (Figure 1, pg. 22). DuPont began a line of significant transformations back in 1999 by spinning off its energy business Conoco. The company then augmented its biotech capabilities with the $7.7 billion acquisition of Pioneer-HiBred International Inc., having purchased Protein Technologies International in 1998, to build its position in nutritional ingredients, particularly soy. DuPont further strengthened its portfolio in performance coatings with the roughly $1.8 billion acquisition of the coatings company Herberts. Other minor acquisitions and joint ventures in the specialty polymers, electronics and advanced fibers areas have also en-hanced the companies' product lines. The sales of DuPont Pharmaceuticals to Bristol Myers Squibb Company for $7.8 billion was the last major step taken prior to the February announcement.
Throughout this period, DuPont has also worked to align costs, which has been a challenge during the recent recession, says Mr. Pfeiffer. The company has also introduced several new programs in its efforts to focus on growth. In January 2001 all of the businesses within DuPont were given the "eight-quarter challenge" by DuPont's Mr. Holliday. In order to remain a part of the DuPont company, specific growth rates for revenues, earnings, cash availability, and capital intensity need to be met by the end of 2003.
The company has also begun to find ways to more effectively leverage its research and development capabilities. "We have always had excellent R&D programs, and now we are focusing on connecting our technology to the marketplace more effectively," notes Mr. Pfeiffer.
DuPont has also instituted a new mergers and acquisitions (M&A) rigor and now only considers companies that can augment existing DuPont business-es. The new M&A program also in-cludes the use of third-party reviews and objective negotiators and requires that a strategic plan for integration of the newly acquired company into DuPont, including milestones, be in place prior to closing of any deals.
"We have also instituted a new cash discipline throughout the company," says Mr. Pfeiffer. "Although DuPont is a capital-rich company, we have reduced capital expenditures and formalized the idea that cash belongs to the shareholders unless investments can be made that will create more value," he explains. DuPont estimates that it spent $1.6 billion on capital expenditures in 2001, and this amount is expected to be flat or lower in 2002, excluding any potential acquisitions.
DuPont's strategy for sustainable growth focuses on marrying the company's capabilities with market opportunities. The actual process involved identifying four future growth drivers after evaluating four key capabilities (science and technology; products and brands; channel strength; and global reach and expertise) and finding market opportunities that are large, have unmet needs, and reward innovation. The four growth drivers include electronics, biotechnology, material science and safety and security.
DuPont's five growth platforms generated from these drivers are DuPont Electronics & Communication Technolo-gies, DuPont Coatings & Color Technolo-gies, DuPont Agriculture & Nutrition, DuPont Performance Materials, and DuPont Safety & Protection (Figure 2, pg. 22). In 2001, these five growth platforms together totaled $20.2 billion in sales and had a compounded annual growth rate of 8 percent from 1997 through 2000. The company is realigning its external financial reporting to reflect the new management structure.
All five platforms address large and attractive market spaces, build on Du-Pont strengths and leverage related skills and technologies across businesses, says Mr. Pfeiffer, who sees the growth platforms as a natural progression for DuPont. "We have gone through three phases. First, we focused on good projects, then shifted to looking for good projects in good businesses. With these growth platforms, we are now investing in good projects in good business areas serving good marketplaces."
One critical aspect of the growth platforms is that they are designed to foster collaboration across all of DuPont's businesses. The group vice presidents of each platform are mandated to share information with other businesses and also to look for ways that developments in the other platforms can be applied to new opportunities within their own areas of responsibility. The group vice presidents of the five growth platforms will report to John Hodgson, who was recently appointed as executive vice president.
"A company can operate successfully for 200 years only by continually reinventing itself," says Mr. Holliday. "DuPont people in our businesses know this is key to a strong future. Each of the five growth platforms has the critical mass to pursue our strategies on integrated science, knowledge intensity and productivity improvement while capitalizing on strong market positions, quality products and brands. At the same time, our new textiles and interiors subsidiary will have the scale, global reach and flexibility to be highly successful in an industry undergoing fundamental structural change," says Mr. Holliday.
The company is looking to these three broad strategic pathways of integrated science, knowledge intensity and productivity improvement for achieving sustainable growth in the five platforms. Integrated science involves using DuPont's significant technology capabilities in chemistry, physics and engineering across all of the platforms and integrating them into the marketplace. It also includes the integration of a significant platform of biotechnology with the traditional strengths of DuPont in chemistry, physics and engineering. The company is looking to the market and then going back to the lab, rather than developing technologies and then trying to find applications for them.
Knowledge intensity focuses on the vast knowledge that DuPont can bring to its customers beyond the products themselves. The company is looking at a completely different business model that allows DuPont to capture additional value beyond the per pound price of its products. Productivity refers to the company's efforts to constantly improve itself. "DuPont has embraced the Six Sigma approach, and productivity improvement has now become a way of life for everyone within the company," says a company official.
The Five Growth Platforms
DuPont Electronic & Communication Technologies, with 2001 sales of $2.7 billion, is composed of DuPont Electronic Technologies, DuPont Display Technolo-gies, DuPont Imaging Technologies and DuPont Fluoroproducts. The company's stated mission of this growth platform is to deliver technologies that meet customers' needs for innovation and productivity and to create value beyond materials.
DuPont Fluoroproducts is included in this platform partly because the decision was made not to break up existing strategic business units when creating the growth platforms. In addition, the inclusion of fluoroproducts in the electronics and communications platform is expected to encourage the desired collaboration across platforms, which is a critical element of the overall strategy. "We put businesses in platforms where the future indicates they should be, not where they have been historically," says Mr. Pfeiffer.
The mission of DuPont Coatings & Color Technologies is to develop and market coatings, ingredients and systems that address industrial and consumer needs for aesthetics, functionality and durability. The platform is comprised of DuPont Performance Coatings and White Pigments & Mineral Products, which according to DuPont, are both number one in the industries they serve. Sales in 2001 totaled $4.9 billion. "The objective and challenge for this platform is to extend beyond the traditional market and generate cash for reinvestment in the other growth platforms," says Mr. Pfeiffer.
Pioneer Hi-Bred International, Crop Protection Products and Nutrition and Health (made of Protein Technologies International and Qualicon) are the business units in DuPont Agriculture & Nutrition. The mission of this growth platform is to create value by leveraging a broad portfolio of products, brands, R&D capability and global market access across the food value chain. Sales in 2001 were $4.3 billion. DuPont sees this area as a growth platform because increasing productivity and using bio-technology will be the only means of increasing food supplies as farming acreage is reduced in the future.
DuPont Performance Materials is the only platform that is not a marketplace, but rather a grouping of capabilities. The company's stated mission for this platform is to provide customers with more productive, higher performance polymer materials, systems and solutions to improve the uniqueness, functionality and profitability of their products. Component businesses include engineering polymers, packaging and industrial polymers, DuPont-Teijin Films and DuPont-Dow Elastomers. This platform had sales of $4.7 billion in 2001.
DuPont Safety & Protection has the mission of leveraging science, technology, know-how and the company's passion for safety to create solutions for customers. The component businesses in this platform include Advanced Fiber Systems, DuPont Chemical Solutions, Nonwovens, DuPont Safety Resources, and DuPont Surfaces. This platform had total sales of $3.6 billion in 2001. "DuPont is the safest company in the world by an order of magnitude, and we have the obligation to share our knowledge and capabilities with others."
The last business area is DuPont Textiles & Interiors (DTI), which the company expects to separate from DuPont by the end of 2003. DuPont's Mr. Pfeiffer says that DTI is the largest integrated fibers company in the world with an integrated set of technologies that is focused on an integrated market.
Although many of the businesses within DTI (Apparel & Textile Sciences, DuPont Flooring, Nylon Intermediates, Specialties & Polymers, DuPont Industrial Rubber, and polyester fibers & related intermediates) played key roles in the creation of the company as a world leader in the industry, today they no longer fit with DuPont's growth platform strategy. "DTI has the scale and scope to succeed outside DuPont and will be able to operate more profitably than it could as part of DuPont," notes Mr. Pfeiffer.
In preparing for the separation, DTI will be focused on migrating to an industry-competitive cost-structure and driving growth in key branded platforms. The separation will give DTI a clear commitment to leadership in the industry and allow management to focus on DTI results alone rather than all aspects of DuPont. As a distinct entity, DTI will also be expected to have a grater ability to seek new alliance partners and look to longer-term acquisitions and divestitures. Mr. Pfeiffer says and that once separate, the company will be able to use its substantial cash generation ability to drive shareholder value.
A key aspect of the plan to create the five growth platforms and separate out DTI includes the ability of DuPont to offset 100 percent of the residual costs of the separation. The company expects to achieve these goals while meeting its financial commitments to its shareholders.
"Our financial targets remain un-changed. We are aiming for 10 percent normalized EPS growth, 6 percent top-line growth and an ROIC in the high teens," says Mr. Pfeiffer. "We will focus our strategies of integrated science, knowledge intensity and productivity on the five growth platforms, and manage the formation and separation of DTI to maximize shareholder value. In this way DuPont is taking the next step to achieve sustainable growth, and will do so while meeting its financial commitments."
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