Grain Craft looking at the big picture

by Josh Sosland
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For the top executives of Grain Craft, its acquisition of Cereal Food Processors, Inc. (CFP) in 2014 is not viewed as the finish line, but as yet another step in building milling’s leader. Charles B. Stout, chairman and chief executive officer, and Peter Frederick, president, have greater ambitions beyond this major step.

“This transaction was not just about growing larger,” Frederick said. “Our objective is to build on both companies’ great customer relationships to establish leadership in the flour milling industry. That’s in every facet.”

Which is not to say they take lightly the accomplishment of having purchased CFP.

“We’re humbled,” Frederick said. “The creation of Grain Craft is truly transformational. It fundamentally changed three companies and demonstrates the extraordinary commitment of our shareholders, the support of our customers and the dedication of our employees.”

Frederick and Stout described their vision for Grain Craft in an interview with Milling & Baking News, sister publication of World Grain, at the company’s Chattanooga, Tennessee, U.S. headquarters.

With the CFP acquisition, the Grain Craft executives said they not only acquired mills, but also obtained outstanding, experienced talent, especially in milling operations. This addition represents an ideal complement to the buyers’ existing commitment to investing in state-of-the-art milling technology. All are now working toward building a powerful corporate identity in flour milling.

“We bought a really good business, with solid assets and with great people,” Stout said. “They had a good customer base, and Cereal took care of them.”

Combining three businesses

In May 2014, Grain Craft was created as a combination of three businesses — Cereal Food Processors, Inc., Milner Milling Inc. and Pendleton Flour Mills LLC CFP, which was larger than the other two companies combined, was acquired by Milner and Pendleton. The transaction triples the combined size of Milner-PFM, which had been jointly managed by Milner. The new company operates 15 mills in 10 states with a daily flour milling capacity of 168,900 cwts.

How could and why would an independent, family-owned milling company buy a competitor more than twice its size? Stout said hints of what was to come appeared in an episode 15 years earlier, when Milner Milling still operated a single mill in Milner, Georgia, U.S.

The company had been created in 1990 when Southeastern Mills, Inc., Rome, Georgia, acquired the mill and established Milner Milling as a separate business. While Southeastern’s focus at the time increasingly was turning toward value-added soft wheat-based products such as mixes, breading and batters, Milner Milling was dedicated to supplying bakery flour to commercial baking companies. In the decade that followed, both companies thrived. Its shareholders, led by Vernon Grizzard, former president of Southeastern, demonstrated a willingness to invest in both to take advantage of growth opportunities. A second milling unit at Milner had been installed and plans were under way at the time to build a brand new mill in Birmingham, Alabama.

Amid those initiatives, a conversation between Stout and Grizzard underscored the potential that Milner’s owners saw in the business and the encouragement they were willing to provide management. At the time, across the country, Fisher Mills, the largest independent milling company in the Pacific Northwest, was being shopped for buyers.

“Vernon came to me one day and said, ‘Are you going to bid on Fisher Mills?’” Stout recalled.

Stout conceded that the idea of buying Fisher, a business located roughly 2,700 miles from Milner, had not occurred to him.

“I said ‘I don’t think so,’” Stout continued. “Vernon said, ‘Why not?’ I said, ‘I don’t know their customer deck real well. Don’t know how the wheat works that well. It’s a cash kind of wheat. And it’s a long way from Georgia.’ He encouraged me to explore it seriously in a way to fill in those gaps.

“We found a partner that operates in that area. That made it work — the Labbes, the owners of Pendleton Flour Mills. Milner bought half of Pendleton, and then Pendleton bought Fisher.”

In addition to its established milling presence in the Pacific Northwest, Pendleton brought full support for the growth aspirations of the new company. The combined business was integrated, upgraded and expanded in the years that followed. Each step of the way, the Labbes and the Grizzards supported Milner/Pendleton as it pursued disciplined growth, Stout said. And like the latest transaction, the company’s capacity had been more than tripled by the Milner/Pendleton/Fisher deal.

Frederick also cited important, intangible factors helping make the CFP acquisition possible.

“It goes back to when Charlie’s dad and Fred (L. Merrill, founder of CFP) were classmates at (Kansas State University),” Frederick said. “This industry is a lot different than others. It isn’t high-finance. It isn’t advertising. It isn’t commercial real estate. In the food business, relationships in family-run businesses go back generations. And they matter.”

Stout added, “The spirit at Milner-Pendleton and the spirit at Cereal were similar. Shareholders committed to the business and willing to support it are our hallmark. You had customers committed and willing to support it, and you had employees committed. All three created a circular dynamic.”

Retaining small company culture

With its larger scale, Grain Craft is dedicated to retaining a small company culture. While acknowledging most companies tout their large company resources and small company touch, Frederick insisted the description has substance at Grain Craft.

“We did this very well as Milner-Pendleton,” he said. “We had a good model. We needed the resources but didn’t want to act like a big company.

“Our management structure is a little more flat than at other companies. We really give a lot of authority. Plant managers have a tremendous amount of autonomy in running their business. We expect them to run their operations. We don’t want them saying, ‘Here is my issue, what should I do?’ We want them saying, ‘Here is my issue, here’s what I’ve done,’ because we trust and rely on them. They’re the experts.’”

As a practical matter, Frederick said customers have access to the executive leadership of the company.

“It’s very real,” Frederick said. “Charlie always has been involved with customers. I’m involved. Our ops folks are involved. Everyone is involved with customers. It’s all about the customer, and you need to give them access to those who are making the decisions.”

The company’s ownership structure also sets Grain Craft apart within the milling industry, Frederick said.

“We have shareholders who are committed to this business,” he said. “They are committed to putting capital into this business. They are generationally committed. We’re not going anywhere.”

Western U.S. presence

More than half of Grain Craft’s mills are located west of the Rockies. While the company has considerable milling capacity in the West, in Kansas and the Southeast, it operates only one mill in the northeastern quadrant of the United States — in Cleveland.

While there once was a time that milling companies pursued industry leadership by building new mills to fill out their geographic footprint, Frederick said the milling business environment today demands a more thoughtful approach to expansion.

“Milner and Pendleton grew in a decade in which there was a lot of rightsizing of capacity,” Frederick said. “What made Milner-Pendleton special was the very strategic way the company went to market, where assets were placed, when it was expanded. Everything we did was tied to the customer. Historically, the milling industry took a ‘build it and they will come’ mentality.”

Stout agreed, saying, “You can’t build a ‘Field of Dreams’ mill. You have to have business in that mill the day you crank it up. It’s a lot easier to say, ‘This market is growing. We are going to follow the customer base. We’re going to invest in them, and we are going to bring value to both of us by doing that.’”

Emblematic of this model is the only mill built by Milner — the company’s flour mill in Birmingham. A material advantage in the mill’s inbound wheat transportation capabilities together with preexisting commitments from customers created a formula for success at the mill, Stout said.

“When we built Birmingham, that was a new model — 110-car trains,” he said. “That brought value to everyone — customers and us. It matched up with what that market needed based on a lot of things.”

While examples of this kind of partnering between millers and customers predate the Birmingham mill, the model hardly had been universally adopted in 2002 when the Alabama mill was built, Frederick said.

This model has been a successful one for Milner-PFM in many ways and helped give the company and its shareholders the confidence to pursue CFP, he said. Even with the addition of considerable new capacity since 2000, the company has been able to operate at rates well above the milling industry average that hovers between 85% and 90%, Frederick said.

The decision to seek the acquisition of Cereal Food Processors was a considered one, Frederick said. Even though overlap existed between 8 of the top 10 customers of Milner and CFP, he said the combination of the companies presents opportunities for considerable growth. As one of the largest milling companies in the United States now, he said Grain Craft must meet heightened expectations from customers.

“What’s a base reason for putting these companies together?” he asked in explaining the thinking behind the acquisition. “It’s to build out the scale and scope of this new organization. Now you have boosted size and broadened coverage nationally. We are the largest independent miller and the third largest milling company in the country. What that does is bring us into different conversations. The expectations change because you are a bigger company. That’s what we wanted to achieve. As the number of players gets smaller, customers’ expectations grow. We’re doing more of their business, so they should expect more.”

Stout added, “It’s also a better model to match up with the new baking industry model, which is also changing. There will always be logistics that need addressing and change. Rightsizing mills as markets change need constant attention. Some markets get bigger. Some get smaller. Rail rates and service change. All of this allows us to build with our bakery customers the most efficient model.”

Management team

Grain Craft has a broad, experienced management team, Frederick said. Between the two of them, he and Stout have been in milling for 68 years.

Stout was an original employee of Milner Milling. He had been a vice-president of sales at Dixie-Portland Flour Mills, the company that built the mill and was long associated with the Stout family. Charlie Stout joined Milner Milling in 1990 when the mill was acquired by Southeastern Mills and was promoted to president of Milner Milling in 1993 and became CEO of Pendleton Flour Mills in 2002.

Frederick joined Milner in 2004 as vice-president of sales. He was promoted to president in 2012. Before coming to Pendleton/Milner, Frederick spent his entire career, beginning in 1986, at Cargill. He was eastern regional sales manager for Horizon Milling, a Cargill joint venture, when he left the company.

The deep experience in milling of the two top executives and their colleagues paid dividends with the integration of CFP, Stout said.

While the term “disruptive” often is used as a positive to describe how a business implements valuable change, Frederick said the term has been used at Grain Craft in the opposite way.

“That’s not the case here,” he said. “We didn’t want to be disruptive. So we coined the phrase ‘least disruptive to the customer’ in terms of putting Grain Craft together. The customers have told us, they haven’t felt disruption. Customers have been very positive, from the minute they heard about the acquisition, through the first year of Grain Craft. We’ve worked hard to give them reasons to feel positive about it. We don’t take anything for granted.”

As independent flour milling companies competing with far larger corporations, many commonalities existed between Milner-PFM and Cereal Food Processors. At the same time, Frederick described different operating models between the two companies. Most notably, CFP operated older mills with more employees and Milner-PFM operated newer mills with fewer employees and more technology.

“But both models work,” he said.

In recent years, CFP had increased capital spending on its mills, and Grain Craft will ratchet up this spending further, Stout said.

“We will have essentially an unlimited budget for projects that meet our return objectives,” he said. “Projects are going to be multi-year in their approach. By that I mean we’re not going to replace the rollstands if we need to replace the whole mill. It takes time to develop a truly forward looking plan. Long term, we believe in what technology can do. We have projects under way already.”

KSU connection

Stout said the acquisition and integration of Cereal Food Processors did not bring surprises, with one possible exception. Even as a Kansas State University alumnus himself and the son of another, Stout said the connection between CFP and Kansas State was deeper than he had understood and offers Grain Craft tremendous benefits.

“Fred went to school there, went into the milling industry, started a company with an entrepreneurial spirit and then became such a big booster of the school,” he said. “We had ties, but not as strong. It’s helped reenergize our company.

“They had a great pipeline of talent coming into their flour mills, and they had twice as many mills as we had. Acquiring Cereal, we made some changes to the operational group. Those ties to Kansas State allowed us to do some things we wanted to do — to promote some folks, put them in new jobs, give them opportunities. That’s why they went to school — to run a flour mill.”

Stout added, “We are definitely benefiting from their (Cereal Food Processors’) deep bench. This is an area of operations where we were not of size to have those resources.”

Indicative of the heightened importance of Kansas State milling graduates, Stout noted the company’s two regional operations managers are KSU graduates — Jeff Hole in the East and Tim Carroll in the West.

Other top executives came from KSU as well, but Stout said a KSU degree is not a prerequisite for advancement at Grain Craft.

“Wade Blalock, our vice-president of operations, is not a KSU graduate,” he said. “And Wade is one of the best millers in the country.” Overall, he estimated that two-thirds of the individuals promoted since the Cereal Food acquisition had been CFP, rather than Milner-PFM, employees.

“That was one of the nice surprises,” Stout said. “To discover this amazing talent pool was great.”

The decision to select Grain Craft as the corporate name for the combined business followed a process in which more than 200 names were reviewed. Customers, employees and an advertising agency were sources of ideas.

“We made a considered decision not to put flour milling in the name,” Frederick said. “We don’t want to limit ourselves for the future. We don’t know what the future will bring.”

In terms of establishing a brand identity, Frederick acknowledged the company still has work to do.

“We were in the process of bringing together two companies with Milner and Pendleton,” Frederick said. “Now it’s three. How do you tell people you’re bigger than they think? We aren’t just a mill in Barnesville.”

Stout said, “When we speak to customers, they still refer back to Milner, Pendleton and Cereal. It will take some time. But we’re taking the long view.”

Josh Sosland is editor of Milling & Baking News, sister publication of World Grain. He can be reached at jsosland@sosland.com.

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