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DuPont CEO Ellen Kullmans Big Test Will Come

The surging U.S. dollar, economic tumult in markets such as Brazil and Russia, and a bitter proxy battle with activist hedge fund Trian Management have created headaches for DuPont CEO Ellen Kullman as she tries to transform the chemical conglomerate into a materials, biosciences, agriculture and nutrition powerhouse. But Kullman’s big test will start in the second half of 2015, a time when proxy battles and sharp currency moves are likely to have cooled.

Assuming DuPont relents in its fight against Trian Management given the hedge fund’s somewhat scatter-shot activist campaign, Kullman will have a lot to prove starting in July when she spins the company’s performance chemicals division, Chemours. If the spin goes as planned, DuPont is expected to quickly return $4 billion return of capital to investors. It will also put a spotlight on the businesses Kullman has staked DuPont’s future on.

Kullman believes spinning Chemours will be the most significant step in DuPont’s transformation away from low-margin businesses and its investment in markets such as industrial biosciences, crop protection, biofuels and high-tech materials with better growth and margin prospects. Its called the ‘next generation DuPont,’ according to Kullman, and already the company’s made significant progress, both through the integration of large acquisitions such as Danisco and a recently outlined push find over $1 billion in corporate cost savings annually.

But, Kullman’s so-called ‘next generation DuPont’ isn’t what’s currently driving headlines.

Currency moves weighed on the company’s revenue and earnings growth in the first quarter, as did a prolongedslump in the TiO2 market, which is the linchpin of its soon-to-be spun performance chemicals unit. Trian Management, meanwhile, is seeking to air all of DuPont’s apparent failures under Kullman.

The hedge fund wants four seats on DuPont’s board so it can police Kullman. But Trian knows calling for Kullman’s ouster would be a non-starter given investors’ support of her performance since taking the company’s reins in 2009. Its criticisms therefore span a wide range of topics including CEO stock sales, the company’s corporate structure, the magnitude of expense cuts and finicky governance issues, but its plans for a different future are somewhat murky.

For instance, Trian criticizes DuPont’s earnings and operating margins, in addition to its under-leveraged balance sheet, but it is yet to firmly commit to proposing a wider corporate breakup or any specific operational improvements. Much of Trian’s case rests on nebulous improvements such as eliminating management’s rhetoric and its informational advantages. “Trian believes it already has had a significant impact, but there is more value to be unlocked,” the fund states. “We have a strong track record of creating value,” it adds.

DuPont’s earnings profile is the best illustration of both the noise impacting Kullman’s work, and her opportunity to put controversy to rest.

Since launching its activist campaign this fall, Trian’s argued that DuPont’s earnings per share are below 2011 levels, a disappointment. Its a striking contrast to Kullman’s communications with investors. She made the case on Tuesday that DuPont’s ongoing businesses have grown adjusted operating EPS by 19% annually since 2008, while operating margins have improved from 9.5% to 16.9%. Since 2011, ongoing earnings have increased over 56% according to DuPont’s calculations.