May 6, 2015
Dear Fellow Stockholders:
With DuPont’s May 13th Annual Meeting just around the corner, we would like to thank you for your consideration in this very important election. In a few days, stockholders will have the opportunity to rejuvenate the DuPont Board with new directors who will work constructively with management to build DuPont into a stronger, more transparent and more valuable company.
TRIAN ADDS VALUE IN THE BOARDROOM AND BRINGS THE OWNERSHIP
MENTALITY NECESSARY TO DRIVE LONG-TERM VALUE CREATION
Trian has a track record of adding value in the boardroom, and we believe our four highly qualified nominees have the experience, skills, passion, and independent insight needed to help make DuPont GREATagain. All three leading proxy advisory firms, ISS, Glass Lewis, and Egan-Jones, agree with us that change is needed at DuPont and that Trian brings the ownership mentality necessary to drive meaningful change and long-term value creation.
Trian’s core competency is our ability to be a catalyst for significant operating improvements and increased stockholder value at the companies in which we invest. As ISS noted in its recent report: “the extensive preparation of the Trian method—providing its executives who go on boards with extensive analytic support throughout their tenures—may not be simply desirable, but necessary to drive the appropriate change.”
The Trian portfolio companies at which Nelson Peltz has previously served on the board have OUTPERFORMED the S&P 500 Index by an average of 8.4% annually from the date of Trian’s initial investment through the present.1 If elected, all four Trian nominees will bring relevant skill sets and operating experience to the DuPont boardroom, along with strong track records leading high-performance organizations, fresh perspectives, and an openness to exploring ideas to create long-term value:
- Nelson Peltz is CEO and a founding partner of Trian. Mr. Peltz is a director of The Wendy’s Company and serves as its non-executive Chairman. He is also a director of Mondel�“z International, Inc. and The Madison Square Garden Company, and has previously served on the boards of directors of Ingersoll-Rand plc, H.J. Heinz Company and Legg Mason Inc., where he was Chairman of the Nominating and Corporate Governance Committee. Mr. Peltz has 40 years of experience in investing, turning around and building companies at both the management and board level.
- John H. Myers is the former President and CEO of GE Asset Management, where he was responsible for growing the business from $58 billion to $200 billion in assets under management over a decade. Mr. Myers, who also spent over a decade working on the industrial side of General Electric with Jack Welch, has experience balancing the power between division management and the parent company within a conglomerate.
- Arthur B. Winkleblack is the former Executive Vice President and CFO of H.J. Heinz Company, where he helped lead strategic initiatives that transformed a 100+ year old iconic company by streamlining operations and returning it to consistent and profitable growth.
- Robert J. Zatta is the former acting CEO and longtime CFO of Rockwood Holdings, Inc., a specialty chemicals company, where he led the turnaround and transformation of Rockwood. Mr. Zatta helped Rockwood achieve best-in-class margins by empowering division management, running a decentralized model with minimal corporate overhead and optimizing the value of the portfolio through M&A.
We greatly appreciate the support we have received from so many of you and urge all stockholders to vote for our FOUR nominees on the GOLD proxy card TODAY so that, together, we can make DuPont GREAT again.
Trian believes DuPont has tremendous potential, as evidenced by our significant investment in DuPont of approximately 24.6 million shares valued at approximately $1.8 billion, and the fact that even after we issued our White Paper in September 2014, we continued to acquire DuPont stock. We believe DuPont’s implied target value per share could be in excess of $120 per share by the end of 2017.2 By contrast, DuPont’s CEO has sold 54% of her stock since Trian invested in 2013, all at prices of $72 or less.3 While DuPont’s CEO speaks of her vision for DuPont, we believe the sales of her DuPont stock reveal her lack of confidence in the future of the Company. We grant stock to our senior executives in order to ensure that their incentives are aligned with stockholders, not so they can sell prematurely.
We believe that our nominees will bring a far greater level of engagement to the DuPont Board than the current DuPont directors who do not have a significant ownership interest in the Company. In our view, these directors do not have an ownership mentality, have been reactive in overseeing DuPont, and have tolerated consistent operational underperformance.
IT IS TIME TO ADDRESS THE ROOT CAUSE OF UNDERPERFORMANCE:
DUPONT’S BUREAUCRATIC AND BLOATED CORPORATE STRUCTURE
If elected, our director nominees will work with the other board members and management to address DuPont’s failure to grow earnings, its inability to deliver best-in-class financial metrics, and its failed portfolio strategies, which have led to long-term underperformance.
Failure to grow earnings: Operating earnings in each of 2012, 2013, 2014 and, according to management’s own guidance, 2015, all will be below earnings in 2011.4Had DuPont met its previously announced financial targets since 2011, EPS would be 51% higher than it actually was in 2014.5
Failure to deliver best-in-class operating metrics: DuPont is underperforming its peers in revenue growth and margins in five of its seven operating segments. Returning DuPont to greatness will require a commitment to achieving best-in-class metrics across all business units. Trian believes there is an opportunity to eliminate $2 to $4 billion of excess corporate costs.6Given DuPont’s current EBITDA multiple of approximately 10x,7 we believe DuPont could deliver approximately $20 to $40 billion of additional value to stockholders by delivering on Trian’s savings targets, but only if cost-cutting plans are well executed and the resulting savings hit the bottom line.
When DuPont sells businesses, buyers prosper: The same businesses that decline under DuPont ownership have prospered once free from DuPont’s corporate structure. When DuPont announced the sale of its coatings business (Axalta) in 2012 to a private equity buyer, Axalta’s revenue and profits were declining and management viewed the business as mature and no longer core.8 Under new ownership, however, Axalta quickly reduced overhead, invested in growth and more than doubled EBITDA.9 A business that was sold for net proceeds of $4 billion is now valued as a public company at approximately $11 billion.10 Warren Buffett’s Berkshire Hathaway recently became Axalta’s second largest shareholder and the company now trades at 30x forward earnings, a nearly 60% premium to DuPont,11 which is reflective of Axalta’s strong growth and margin profile. We believe what transpired at Axalta illustrates the value creation potential across DuPont’s portfolio.
When DuPont acquires businesses, stockholders suffer: DuPont acquired Danisco in 2011 for $7 billion. Since the acquisition, Danisco’s organic revenue growth has slowed to 3%,12 compared to the company’s 5%13 growth rate from 2006-2011 when Danisco was standalone and the 8-10% growth target set by DuPont.14 Under DuPont ownership, the operating margin is down by approximately 33% from 2010 (pre-transaction).15Stockholders should not tolerate flawed M&A execution like the acquisition of Danisco.
Long-term underperformance: DuPont’s management and Board argue that performance has been strong as evidenced by the total shareholder return (TSR) generated under Ellen Kullman. Such analysis ignores the fact that DuPont’s stock price when she took office in January 2009 was down more than 50% from the prior year’s high.16 It also ignores the fact that the stock is up significantly despite earnings being down since 2011. Every investor knows that sooner or later a company’s shares will trade based on earnings. DuPont’s shares have not traded based on fundamentals, but rather, in our view, on the expectation that Trian will be a positive agent of change.17 Disturbingly, despite the recent share price rally, DuPont’s stock price still remains below where it traded at the time of the Conoco separation in 1998.
THE MARKET HAS SPOKEN
The three days of greatest stock price outperformance versus the S&P 500 Index during CEO Ellen Kullman’s tenure occurred when:
1) Trian’s stake was first publicly reported by CNBC
2) Trian released its initial White Paper last fall
3) ISS last week recommended changes to the DuPont Board and that DuPont stockholders vote the GOLD proxy card for Nelson Peltz and John H. Myers18
Meanwhile, the cumulative change in share price over all 32 earnings and guidance events since Ellen Kullman became CEO is a drop of approximately $12 per share.19 In fact, the share price has declined in response to seven of the last nine earnings and guidance events,20 which we believe suggests that trends are worsening.
DO NOT BE DECEIVED BY DUPONT’S SCARE TACTICS
AND MISLEADING STATEMENTS REGARDING TRIAN
DuPont has resorted to scare tactics and misleading statements regarding Trian’s position on key issues. DuPont characterizes Trian’s plan as “a high risk, value destructive plan to break up DuPont” that would add “excessive debt.”21 Trian is not dogmatic as to the best path forward regarding corporate structure. Our main objective is to ensure the operating segments that comprise DuPont achieve best-in-class operating metrics, including revenue growth and margins.
As previously mentioned, five of DuPont’s operating segments underperform peers today. We believe that Trian’s nominees, working as a minority of the Board together with DuPont’s other board members, will be able to assess the corporate structure to determine if management is capable of achieving best-in-class operating metrics with the existing portfolio or whether further portfolio changes are required. Regarding leverage, we are committed to maintaining DuPont’s investment grade credit rating. We find it ironic that we had proposed to DuPont in 2014 that Chemours remain investment grade,22 and DuPont management subsequently chose to make Chemours non-investment grade.23
NOW IS THE TIME TO BRING CHANGE TO DUPONT’S BOARDROOM
We have been owners of DuPont for over two years and believe the company has tremendous long-term potential. Unfortunately, in our view, the DuPont Board has not been an effective fiduciary for stockholders. As ISS’s recent report noted: “[o]perating efficiency is not what it should be, yet instead of addressing the core issues, the board and management, at least in their communications with shareholders, are more inclined to obfuscation than accountability.”
In addition, consider the following:
- Earnings guidance has been missed three years in a row from 2012-201424 – and management has already lowered 2015 guidance to the low end of the previously announced range after only one quarter.25
- Last year, financial metrics drove a “zero” payout for the corporate performance portion of the Company’s executive bonus plan, and yet the Board’s Compensation Committee awarded 80-100% payouts for individual performance – sending conflicting and irreconcilable messages: according to the Committee, the Company performed poorly but management as individuals performed well.26
- Axalta’s EBITDA and value more than doubled within two years of being sold.27 In fact, when Trian met with the Lead Director and CEO in December 2013, it was clear to Trian that the Lead Director was unaware of Axalta’s vastly improved performance since the sale. In our view, this was because management holds an “information advantage” over the Board.
DuPont’s Board, in our view, has been reactive and not proactive. Why did DuPont wait until it knew Trian had taken a position to announce a strategic alternatives study of Performance Chemicals (i.e. Chemours)? Why did DuPont wait until one year after Trian shared its White Paper and management once again lowered guidance before announcing the “Fresh Start” cost reduction plan? Why did DuPont wait until Trian filed a slate to upgrade talent on its board (i.e., Messrs. Breen and Gallogly)? Why should stockholders assume the Board will make the best long-term decisions for stockholders going forward once pressure from the proxy contest ceases?
It is time for change at DuPont. We need a Board that is committed to promoting transparency, holding management accountable for poor operating performance, eliminating management’s information advantage over directors, linking management compensation and performance, and helping create value for the benefit of all stockholders.
ENHANCE YOUR INVESTMENT—VOTE GOLD TODAY
Help make DuPont GREATagain. We urge you to vote the GOLD proxy card today to elect Nelson Peltz, John H. Myers, Arthur B. Winkleblack and Robert J. Zatta. Your vote is important, no matter how many or how few shares you own.