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---------------------- Forwarded by V Charles Weldon/HOU/ECT on 01/29/2001
12:16 PM --------------------------- "Paul W Juneau" <Paul.W.Juneau@usa.dupont.com< on 01/29/2001 08:41:02 AM To: V.Charles.Weldon@enron.com cc: Subject: Avi Nash - Goldman Sachs - Nylon and Polyester Strategy (Embedded Kenneth W Wall image moved 01/23/2001 01:31 PM to file: (Embedded image moved to file: PIC15112.PCX) PIC01729.PCX) To: Ferdinand Bauerdick/DuPont@DuPont, Mike Estep/DuPont@DuPont, Ben D Herzog/DuPont@DuPont, Dennis W Broughton/DuPont@DuPont, Patricia S Murdock/AE/DuPont@DuPont, Hunter H Ficke/AE/DuPont@DuPont, Rick Otero/AE/DuPont@DuPont, Ignac R Matocha/DuPont@DuPont, Jeffrey Crudgington/EUR/DuPont@DuPont, Dave K Findlay/DuPont@DuPont, Charlene D Thomas/AE/DuPont@DuPont, Dilip Kumar/PO/DuPont@DuPont cc: Subject: Avi Nash - Goldman Sachs - Nylon and Polyester Strategy INTERSTING READING! ---------------------- Forwarded by Kenneth W Wall/DuPont on 01/23/2001 01:31 PM --------------------------- Below is a report written by Avi Nash of Goldman Sachs that was issued this morning: < Goldman, Sachs & Co. Investment Research < < DuPont: Nylon and Polyester Strategy Crystallizes. < < ************************************************************************** < * < * We believe there is greater clarity now on DD's strategy in nylon & < * polyester. 1)DON'T EXPECT OUTRIGHT SALE. No buyers in polyester. Nylon < * still too close to DD's heart. 2)POLYESTER SOLUTION IS MESSY. Defacto < * partial disposition via JVs i)films w/Teijin (global), ii)All other: < * Europe/ Africa w/Sabanci, iii)American staple w/Alfa, iv)American < * filament w/Unifi, v)American intermediates, resins and all Asian: still < * looking and vi)engineered plastics: will keep. 3)NYLON: KEEPER FOR NOW, < * MOSTLY? i)Getting out of 'heavy denier' nylon industrial via JV with < * Sabanci, global. ii)Keeping the rest? 4)ISSUES. Apparel & carpet mkts < * are mature & softening near term. Competitive position eroding slowly < * with time. < * < ************************************************************************** < < Avi Nash (New York) 1 212-902-9192 - Investment Research < < ==================== NOTE 9:14 AM January 23, 2001 < < Stk Latest 52 Week Mkt Cap YTD Pr Cur < Rtg Close Range (mm) Change < Yield < --- ------ ------- ------- ------ < ----- < E.I. duPont de Nemours MO 42.31 64-38 43939.1 -12% < 3.3% < < --------------Earnings Per Share--------------- < DD (US$) Mar Jun Sep Dec FY CY < 2001 FY 2.50 < 2000 FY 0.85A 0.90A 0.51A 0.41 2.68 < 1999 FY(A) 0.66 0.78 0.59 0.56 2.59 < < -Abs P/E on- -Rel P/E on-- EV/NxtFY LT EPS < Cur Nxt Cur Nxt EBITDA Growth < ----- ----- ----- ----- -------- ------ < DD FY 15.8X 16.9X 0.7X 0.8X 7.10 9% < < ========================================================================== < = < A THIRD OF DUPONT'S SALES COME FROM THE OLD 'FIBERS' BACKBONE. < < 1999 5 yr Avg < sales avg profit margin < < Spandex 1650 400 24.2% < Nylon (1) 5525 480 8.7% < Polyester (1) 3000 110 3.7% < (1)Includes engg plastics and auto fibers/plastics that are reported under < the 'Performance Coatings and Polymers' segment. The above excludes < nonwovens and Kevlar/Nomax businesses since they are more 'stand alones' < with less overlap between them and nylon/polyester. < < POLYESTER, AN IMPAIRED ASSET, IS BEING DEALT WITH PIECEMEAL. The combined < value is unlikely to exceed $2 billion. We estimate $1.5 billion. < < Revenue Americas Europe Asia < $ mn Mid East < < 1)Films 850 duPont-Teijin global joint venture < 2)Staple Alfa Sabanci ? < 920 < 3)Filament Unifi Sabanci ? < < 4)Resin ? Sabanci ? < 870 < 5)Intermediates ? Sabanci ? < < DuPont has a put option 5 years hence that can force Unifi to buy the < American filament assets within a predetermined price range. There is no < clear solution yet regarding Asian and US intermediates and PET resin. < They are making money at present, but are not industry-leading assets and the < value continues to erode with time. < < IMPLICATION: This asset was impaired enough that it could not be disposed < of in one swoop. It has ended up requiring multiple, painstakingly crafted < deals, each tiny for a company duPont's size. < < NYLON IS INTERTWINED WITH OTHER DIVISIONS: COMPLICATES SOLUTION. < Note the role of nylon in duPont's apparel/textile and in engineered < plastics businesses. < < End Markets Nylon Lycra Polyester Others DD's total < 1999 revenue $ mn for end mkt < < Intermediates 750 100 NA NA NA < Carpet 2000 0 ? - 2000 < Industrial 625 100 NA NA NA < Apparel, textile 1100 1400 920 880 4300 < Engg plastics 1050 - 300 850 2200 < < Total 5525 1600 1220 1730 NA < < DUPONT'S NYLON ACTION TO-DATE HAS BEEN MINISCULE BUT IS A CLUE TO ITS < THINKING. < < - ACTION TO-DATE: partially disposed of half of the $600 mn industrial < nylon business. But this RECENT NYLON JV (DIVESTITURE) IS TINY. DuPont has < consolidated several JVs with Sabanci in a tiny part of nylon: heavy < denier industrial nylon. This was barely over $300 mn in revenue. The inclusion < of Sabanci's assets raises the revenue but net-net this is a tiny business. < DuPont is actually divesting part ownership since Sabanci's contribution < is smaller. < < - CLUES A)DuPont is reluctant to part with the bulk of the nylon business. < It doesn't seem ready to let this business go . . . yet. It may want to < unload the carpet spinning or apparel fiber business . . . but not the < associated intermediates production. < < NYLON'S WEAK LINKS ARE INDUSTRIAL (PART) AND APPAREL: THE LATTER HAS NO < EASY FIX. < < 1)IN OUR VIEW, STAYING IN APPAREL nylon will be painful. DD HAS SAID IT < WILL RELATIVELY DE-EMPHASIZE THE BUSINESS (in the long run such a strategy < is tough to implement without impairing the business . . . better to < exit). Witness what happened to the polyester chain where disposition is coming a < decade late in the minds of some . . . at little value. Meanwhile, < competitive advantage is eroding slowly. i)Maturity allows others to close < the gap. ii)Customers have gotten stronger, especially in carpet (45% of < div revenue). Several years can go buy waiting for recovery. Unfavorable < volume and raw material costs are hurting near term. Growth slowed down < some time back. Its unlikely to resume. Industry mix continues to shift < slowly towards Nylon 6 in which DD is a tiny regional player, vs Nylon 66. < Further, growth is in Asia, not a DuPont strong hold. < < 2)BACKING OUT OF APPAREL (OR CARPET) WILL BE TRICKY. (It's not even clear < DuPont is serous about this option). In any event, it will be difficult to < find buyers for just the fiber SPINNING operation, if they will need to < buy raw materials from duPont. Further, nylon does provide critical mass to < the large apparel effort, picking up cost allocations that otherwise may need < to be shouldered by Lycra! Another problem: All nylon producers seem to < want to exit the fiber spinning step . . . Solutia, Honeywell, DuPont. < Makes one wonder about the potential disposition value! < < 3)SHUTTING DOWN IS NOT AN OPTION: There is incremental profit in the < intermediate step and that would be lost. A)Apparel is nearly 25% of the < nylon polymer outlet and without it the scale of operations is hurt. < B)Apparel nylon is a very large part of duPont's apparel business, which, < after automotive, is the largest end market. < < Likewise, engineered polymers make up a large part of the nylon family < (though DD books revenue and profit for these under its coatings/polymers) < segment. Shrinking 'the rest of nylon' would hurt profitability of the < engineered plastics area. The rest of nylon picks up overhead! < < DuPont seems to be forced to keep a large chunk of nylon because of its < presence in Engineered plastics and Lycra. < < i)Lycra is largely an apparel business. The $1.65 bn Lycra has been a high < margin business. It's growth has slowed and competitive position is < slipping. Yet DD is increasing its commitment to Lycra. The problem is < that the Lycra franchise encourages a greater commitment to apparel nylon than < otherwise. Apparel nylon is 25% of the nylon div revenue. < < ii)The $2 bn engineered plastics business has nylon resin as its flagship. < This is NOT included in the nylon division. (Likewise, polyester < engineered plastic is not included in the polyester div). Part of the competitive < advantage in the plastic comes from a low cost position in raw materials, < in turn partly based on scale. < < iii)DD seems to like its nylon ingredients business. (In our view it's ok, < not a growth vehicle). The combination of the interest in Lycra, nylon < intermediates and engineered plastics means DD is forced to keep nylon < carpet (45% of div) and apparel (25%). These end markets don't make as < much money and are more vulnerable. But they provide over 60% of the outlet for < the intermediates and their sheer volume helps provide greater scale and < lower cost. < < SO THE NYLON PROBLEM IS NOT SOLVED. < 1)ROC has been poor. How will that improve? Asset monetization has been < small. 2)Growth has been low. How will that change? If anything, US < consumer spending is slowing. 3)The competitive edge is not increasing . . < it could actually be slipping just a bit as a powerful new competitor, GE, < takes shape assuming GE's acquisition of Honeywell goes through. < < Important Disclosures (code definitions attached or available upon < request) < DD : CF, CP < < < ______________________________________________ < Goldman, Sachs & Co. < One New York Plaza | New York, NY 10004 < Tel: 212-902-9193 | Fax: 212-346-3703 < email: sandra.vizzacchero@gs.com < < Sandra Vizzacchero Goldman < Executive Assistant to Avi Nash Sachs < Chemicals Equity Research Team < ______________________________________________ - PIC15112.PCX - PIC01729.PCX
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