DuPont: Breen, R&D to stay, Ag to go?

DuPont Co. shares rose this moring, despite weak third-quarter results (as the company had warned) and a generally down market, after interim DuPont CEO Ed Breen told investors:
  - DuPont will have a permanent CEO soon (could be Breen);
  - "Everyone is talking to everyone" among the world's big pesticide-makers, and DuPont could do a big deal  transforming its volatile ag division (leaves questions: Acquisition, sale, spin-off? With FMC, Dow, Monsanto?);
  - Don't assume Breen will break up DuPont -- the way he split Tyco -- Breen reminded us he was also CEO at Horsham-based General Instruments, where he invested in new products and boosted sales.

Breen spoke encouragement to the researchers and engineers at DuPont Experimental Station -- and praised the company's far-flung global salesforce. He made clear he is leaning toward cutting the company's vast financing and administrative aparata farther than the reductions begun under departed CEO Ellen Kullman. Highlights from CEO Breen's and CFO Nicholas C. Fanandakis' remarks to investors today:

Strong dollar hurt more than cost cuts helped: Fanandakis says DuPont prospered from more "cost reductions" plus "lower performance-based compensation," compared to last year. But weak Brazil pesticide sales and a strong dollar that cut the value of foreign profits "more than offset gains." These pressures "increase our resolve" to cut costs more, Fanandakis said: "Ed and I are working closely" with business managers "on our plan to accelerate and expand our targeted cost saving committments."

Aging plants: DuPont's LaPorte plant, Texas plant, shut after four workers died in an accident, has cost the company $90 million so far this year. The Chambers Works, on the Delaware in Salem County, N.J., has also suffered "operating" problems.

Breen told investors: "I am honored to have been selected to lead this great company during this period. My immediate priority is to guide DuPont successfully through the current challenging time" to "our next phase of growth and innovation... "My immediate priority is to guide DuPont successfully through this period."

More soon: Since he took over as interim chair and CEO Oct. 16, "we have been taking a hard look at our structure, our working capital performance and capital spending.... We see opportunities for further improvement in all three areas... It is too early in our process to share a specific plan in metrics... We will finalize these plans in the fourth quarter."

To enrich DuPont shareholders: "There is more than one route... Each situation is unique. I have always looked at each situation with an open mind and a commitment to effective decision making...

"At General Instruments I drove an organic growth strategy over many years.

"Tyco was a very different situation that required a focus on cost efficiencies, restructuring and divestitutres.

What DuPont does right: "I have been struck by how seriously the entire team takes its responsibilities to our shareholders and how much this team wants to win. That's why I am confident we will deliver."

Q&A:  JPMorgan's Jeff Zekauskas: Are you a candidate to be (permanent) CEO?
Breen: "The board is going throug a process as we speak. I don't think that process will be much longer... The Board knows I am fully engaged...

"I've been working seven days a week on DuPont. I just talked to the Board at the end of the week and told them how excited I am, that I see more opportunity than when I arrived just three weeks ago, and we're going to get to where we start getting some things done."

Citi Securities' PJ Jukevar: Is the industrial economy in the U.S. in a recession?
Breen: "Well, things have clearly softened up... It's just a low-growth to no-growth environment... That's fine. We can operate well in that environment, if we do the right things... I don't see the disaster out there by any means, but I think we are in a kind of zero growth environment when you put all the pieces together.

Goldman Sachs' Robert Andrew Koort: A lot of pushback I hear from investors is around the returns on your overall R&D. (What are your) strategies?
Breen: That's one of the three key areas I've been digging into very significantly... We can have a better rigor around our return metrics across all of our products and platforms and programs... (not just) R&D (also) CapEx across the board. .. R&D is one of the great strengths of this company" but it needs to be measured better.

Wells Fargo Securities' Frank Mitsch: Your appointment might be signaling that the company would be broken up... 
Breen: "Well, that's why I highlighted my prior career. I've had two very distinct paths, that we created significant value in both, but one happened to be split up (Tyco). Obviously it worked very well. The other was not a split up at all (General Instrument). It was a growth strategy... That worked extremely well. I come in with a very open mind. (General Instruments was later split into three companies; corrected).

Misch also asked: will Breen sell Dupont's ag businesses?
Breen: "I'm not naïve about what's going on in the ag space right now... At some point there's consolidation here... We will do what's right for our shareholders no matter what... If we have something that will create significant value for our shareholders moving forward, we will be seriously looking at it."

Deutsche Bank's David I. Begleiter: What does DuPont do well?
Breen: "We're really working off a very solid foundation... The employees are really dedicated... They want to win.. A great spirit here and a great drive, and you can't make up for that. I've been in other situations where that is not the case.

"Two other pillars (are) R&D (and) this extensive global sales force that really is very impressive.

Where DuPont should cut costs: "The areas where I think there is improvement needed are more operational... There's a nice opportunity on the cost side. This company has an overhead structure, all costs from everything, is about $7 billion (including sales, R&D, general selling and administrative, and corporate costs.) That's a big number. There's ways to strategically reduce that, it's GS&A expense, it's corporate expense."

He's reluctant to cut R&D or field sales reps (before measuring returns more closely): "We don't want to hurt all our growth potential and volume potential."

More likely to cut financing: "Our capital expenditure is about $1.5 billion a year... that's too high... Clearly needs improvement." Could save $500 million a year and more.

Pesticide deals? "Everyone is talking to everyone. I am personally talking to the CEOs of some of the other companies... Something will give here on the ag side...A consolidation should happen... if there's anything that makes great sense for our shareholders."

Breen also noted that "ag and nutrition are half the company." Ag "is at the bottom of a down cycle."

What won't (and will) get cut: All DuPont businesses have "great growth plans. We are funding them. We are not blocking and stopping the projects at all that will be part of our future to grow the business."

For cuts, "we are looking much more surgical and strategic, where we can get a little bit of slop out of the system. ..In the board meeting (last week), we spent lot of time on strategy.... (I spent) half a day in the middle of October at the R&D lab, the Experimental Station (just outside Wilmington, it is shared with some of DuPont's spin-off companies)... There is a lot of work going on, I'd say it's cross pollinating (between different businesses).. It's a great thing... You just never know where there's opportunity to create value." (Which needs to be measured, he added again.)

Susquehanna Investments' Don Carson noted that DuPont spun off its Chemours chemicals business with "an unsustainable dividend" of $400 million a year, which Chemours promptly cut in half amid losses and pollution-cost pressures. Carson asked if Breen plans "to rectify Chemours dividend cut?"
Breen: Nope: "We will make our own independent decision. We are two separate companies."

How soon the next round of cuts? "In the fourth quarter we will be communicating with you about our future plans in cost reduction... It won't be multiyear." General, selling and administrative costs are "clearly an area we need to streamline in the company."