Pursuing stability through change at The Andersons

by Josh Sosland
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Patrick Bowe CEO of The Andersons
Patrick E. Bowe, president and chief executive officer of The Andersons.
Photo courtesy of The Andersons.
 
MAUMEE, OHIO, U.S. — Measured by volume, the specialty grains business of The Andersons, Inc. could be viewed as a niche operation, a modest complement to the Maumee, Ohio-based company’s core segments of grain, fertilizer, ethanol and rail. To Patrick E. Bowe, president and chief executive officer, the company’s foray into specialty food grains is important to a long-term strategy aimed at generating growth while providing more stable earnings.

For decades the company has been a major supplier of wheat, corn and soybeans to flour milling and grain processing customers in the United States. Recent moves have positioned the company to become a leading supplier of organic, non-bioengineered and identity-preserved grains. In a recent interview, Bowe described The Andersons’ move into specialty grains as well as broader changes that have occurred at the company in recent years.

Those changes perhaps begin with Bowe himself, who joined The Andersons in late 2015 following a 30-year career at Cargill.

“The Andersons comes from family-owned roots, and I’m the first non-family member to be CEO, so I think we have a lot of great tradition and culture that stem from those early family values,” Bowe said.

Beyond this change at the top, The Andersons is in the midst of something of a generational change, Bowe said. About half its workforce of more than 1,800 has been at the company for less than five years. But long tenures have been the norm.

“We have several 40-year employees,” he said. “People generally stay here for most of their careers, which is something we are very proud of. We’ve had a lot of change recently, but it was a bit of a timing issue. We had eight or nine of the corporate leadership team members that have changed. It’s a bit of a natural progression that happens with companies sometimes.”

Newcomers to the leadership team include Corey Jorgenson, president of the Grain Group; Valerie Blanchett, vice-president of human resources; Jeffrey Blair, president of the Plant Nutrient Group; Joseph McNeely, president of the Rail Group; and Michael Irmen, president of the Ethanol Group. Jorgenson and Blanchett joined The Andersons from positions at Cargill. Blair came from Intrepid Potash, Inc., another fertilizer business. McNeely came from FreightCar America, Inc., a railcar manufacturer, succeeding Rasesh Shah, a 40-year veteran of The Andersons. Irmen was promoted after holding multiple positions within the company the previous 30 years.

In November 2015, Bowe succeeded as CEO Michael J. Anderson, who had been with the company since 1978 and had been CEO for 17 years.

Buoyed by a boom in the ag and ethanol markets, shares of The Andersons more than tripled between 2011 and 2013 to more than $60 a share, and then fell to a low of just over $23 in February 2016. The share price has recovered somewhat, closing recently at $32.70.

“The grain business went from a great period to a tough period, but it was not just grain for us,” he said. “It was fertilizer, grain and ethanol (that) all underperformed here in the last couple of years. So, we’re looking for how we can improve the bottom line of the company, and we are asking our leadership team to be change agents. Not that we were broken or had a catastrophe. It was just that times were tough. I imagine the other ag companies would tell you something similar. So we’ve been in more of a turnaround mode.”

The Andersons’ roots date back to the 1940s when Harold and Margaret Anderson opened a grain elevator in Maumee. The business grew initially through the addition of grain storage as well as expansion into fertilizer blending and the opening of a retail store. Additional grain handling and fertilizer facilities were added in the 1960s and 1970s. In the 1980s, outside directors joined the company’s board of directors, and in the 1990s its shares were listed on the NASDAQ exchange with the majority of the board comprised of independent directors. Also during the 1990s, the company entered the rail car leasing business, and in the 2000s, into the ethanol business.

While the overall structure of The Andersons business remains nearly the same as when Bowe became CEO in late 2015, change has been instituted across several aspects of the business.

“We have put in place something I call the 5 P’s,” he said. “Everybody reports on those every month.”

The “P’s” include Personal Safety, People, Partner of Choice, Productivity and Profitability.

“I have had lots of exposure to plant operations throughout my career and am highly focused on creating a safe workplace,” he said. “We had a 32% reduction in reportable injuries the first year, and now we’ve just finished the second year with another 46% reduction.”

A behavioral-based safety program has been implemented, and that program has helped employees identify ways to improve work processes across the company.

The company’s second P is “People,” with a stepped-up focus on succession planning and career development. The Andersons has created detailed succession plans across the company. The Andersons also has updated its development plan process for career advancement for all employees.

“Partner of Choice” has been a third area of focus at The Andersons. While Bowe said the company had a long history of serving the customer, he is seeking to build on this heritage with more advanced tools. On the grain side, as an example, the company looks to become the Partner of Choice through enhancing the services provided through The Andersons Freedom Pricing Tools, which offer a wide range of grain marketing services for grower customers.

“Productivity” is the fourth area of focus. The company launched a productivity initiative in 2016 to reduce run rate costs by $20 million by the end of 2018. That goal was reached a year early in December 2017. A new goal was added to capture an additional $7.5 million in run rate cost savings by the end of 2018, Bowe said.

The company completed the end-to-end implementation of SAP in its Grain Group in 2017 and has begun implementing it in its Plant Nutrient Group.

Regarding the company’s portfolio, Bowe said one of the difficult decisions was the closing of its remaining four Ohio retail stores in 2017. Since the stores were fixtures for years in the state, the closings were tough given the loyal customer following and dedicated workforce. However, the retail stores had been unprofitable for many years and accounted for only 3% of annual sales.

Portfolio optimizing has included the sale of other assets on a highly selective basis, including grain elevators in northwest Iowa, fertilizer locations in Florida and grain elevators in Tennessee.

“We took a hard look at the company’s assets and what we wanted to keep and what didn’t fit for us in the long term,” Bowe said.

Wrapping up the lineup of P’s is “Profitability,” Bowe said. The company experienced a couple of difficult years, largely in line with the grain industry more broadly, but conditions have improved.

“Our grain business really turned around in ’17 from ’16, almost a $25 million dollar improvement for our core business,” Bowe said. “While grain has made a strong recovery, the fertilizer business has underperformed. We continue to be optimistic about all four business groups.”

Each of the company’s four businesses is among the top 10 in the United States, beginning with its grain business.

“We’re primarily an eastern grain belt company,” he said. “We have some assets outside of that, but when you talk about Michigan, Ohio, Indiana, Illinois, that is where are main key assets are. Many of them are longstanding assets, but we’ve kept them in good shape, and they’re key storage and distribution points in the eastern Corn Belt.”

The Andersons grain storage capacity totals 144,306,000 bushels, according to the 2018 Grain & Milling Annual published by Sosland Publishing Company. The total makes The Andersons the ninth largest U.S. grain company. About two-thirds of its storage capacity is concentrated in the states of Ohio, Michigan and Indiana. According to the company’s fiscal 2018 10K filing, 92% of the company’s 2017 grain sales went to U.S. grain processors and feeders, and 8% were exported.

The Andersons strength in the grain business is complemented by its 33% stake in Lansing Trade Group, based in Overland Park, Kansas, U.S. Lansing operates completely independently of The Andersons.

“Lansing Trade Group has been a very good investment for The Andersons over the years,” Bowe said. “They are in the core grain merchandising business like us, but have some differences with more merchandizing in the hard red wheat market, DDG trading, feed ingredients, pet food ingredients and frac sand supply chain business. Lansing and The Andersons are also partners in an Ontario, Canada, business called Thompsons Ltd.”

He described Thompsons (acquired in 2013) as a “smaller, Canadian version of The Andersons” with fertilizer and grain just across the border.

The Grain Group has been headed since 2016 by Jorgenson, who earlier spent 20 years at Cargill.

“I think we’re positioned well for the future,” Bowe said. “Corey brings a lot of energy into the group, and we’ve really focused on growing the food ingredient space, improving our trading, expanding our Freedom business and keeping our grain handling assets strong.”

The Andersons’ food ingredient business is “small but fast growing,” Bowe said. It supplies consumer packaged foods companies with oats and food grade corn.

The Andersons also sees this market as one with the potential to provide higher profit margins and less volatility than its other businesses.

In oats, the company has expanded its long-term position as commodity oats supplier to a company focused on identify preservation. To support this objective, the company recently purchased two elevators in western Canada.

The food grade corn business principally involves contract growing, cleaning, sorting, handling and shipping to chip manufacturers.

“There are several new varieties of corn being introduced to market, and we work with farmers to produce them,” Bowe said. “We have three regional facilities — one in Nebraska, one in Illinois and one in Texas that supply U.S. chip manufacturers. And those businesses have been growing, adding organic and other new varieties.”

From this base of business in food ingredients, The Andersons also has shifted into specialty milling. In April 2017, the company acquired Purity Foods, a Hudson, Michigan, U.S., ancient grains supplier, specializing in spelt.

“It’s our first foray into milling,” Bowe said.

Bowe spent the majority of his career in the corn wet milling industry. He had exposure to flour milling while working as a corporate vice-president for Cargill’s food ingredients platform. In that role, he oversaw part of a vast global portfolio of food ingredient businesses, from corn and flour milling to vegetable oils to cocoa and chocolate.

Bowe was the point person for Cargill as the company negotiated the creation of the joint venture between Cargill, CHS and ConAgra Foods, Inc. (now Conagra Brands) that became Ardent Mills L.L.C. He served on the Ardent Mills board of directors and was chairman before leaving for The Andersons.

“Specialty mills are very different in size and scope from traditional wheat and corn milling as you are making small batch volumes, but still you have all the good manufacturing process requirements,” he said. “In the end, it’s about giving the customer choice, someone they can rely on.

“Our food corn business is made up of contract growing, sorting and cleaning. From a solid base, we think there’s potential for us on the specialty side. What we bring to the table is the farmer contract growing. This allows us to work at the source of origin with farmers for the raw material.”

Low farm net incomes have factored importantly in the difficulties faced by The Andersons’ Plant Nutrient Group.

“We are a wholesale distributor primarily, mostly in the eastern region, and we’re also a manufacturer of specialty fertilizers distributed nationwide,” he said. “We have 11 retail farm centers — mostly at our grain facilities here in the eastern Corn Belt. Our wholesale assets are really strong like our grain assets. We have key regional distribution points for NPK and other fertilizer products. Fertilizer has been a really good business for us for many years and we anticipate a strong recovery.”

Also subject to cycles and volatility is the ethanol business, which The Andersons also continues to view with optimism. The company has ownership interests in four ethanol limited liability companies with plants in Iowa, Indiana, Michigan and Ohio. In each of the company’s LLC agreements, The Andersons runs day-to-day operations of the plants and handles administrative functions.

In early March, the company said it is partnering with ICM, Inc. to establish Element, LLC, a joint venture that will build and operate an ethanol production facility featuring ICM’s equipment and process technologies. Element will build a 70-million-gallon-per-year bio-refinery located in Colwich, Kansas, U.S., adjacent to ICM’s headquarters.

“ICM has been a technology provider and partner for us for many years,” Bowe said. “They have been involved in the building of all of our plants, and they built almost half the plants in the United States. So what makes this unique? This is not just another ethanol plant. This will be the greenest and one of the most unique plants because we’ll have a front end that will burn waste wood and use other advanced technology. We will have a very low carbon score as an energy footprint in the plant. We will be using all the latest technologies developed by ICM, including cellulosic technology that uses the corn fiber from the dry mill process and converts the residual starch to ethanol. We will have additional advanced technologies when it comes to feed and co-products.

“This plant will specifically target the California market. We will ship from Kansas via unit trains to California qualifying for the state’s low carb standard.”

Asked why The Andersons is in the rail business, its fourth segment, Bowe said the business emerged from the company repairing its own leased railcars with a fabrication shop in Maumee.

“The rail business was started in the 1990s by Rasesh Shah, who built it up to a top 10 U.S. railcar leasing company with more than 23,000 cars,” Bowe said. “We also operate 23 rail shops scattered around the U.S. where we do repairs. We are uniquely positioned in this business because we have a strong insight into the ag industry, so a lot of our fleet is grain, ethanol and fertilizer cars.”

The segment operates differently than grain, commodity or milling businesses and more like a banking or financial company, Bowe said.

“This business is more driven by GDP, so when the economy is strong and all these goods are needed and rail traffic gets busy, that’s when utilization rates get higher,” Bowe said.

Because of the range of its businesses, The Andersons has a wide span of customers, including farmers, grain handlers and millers. By moving deeper into food grains, The Andersons is growing its presence with food customers.

“The return of volatility in the ag commodity markets creates opportunities for The Andersons and the industry as a whole,” Bowe said. “Some conditions like weather, total farm income and fuel prices are outside of our control. What we can control though is the productivity and efficiency at our facilities along with the training and customer service our salespeople and merchants provide. So, while the company has a strong legacy and stability over the years, the recent changes we have put in place will position us well for the future.”

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