WINNIPEG – Brian Hayward knows how bad it feels to hit the wall.
He also knows how good it feels to break through and finish the race.
A dedicated runner, the chief executive officer of Agricore United has
conquered the so-called “wall” at numerous marathons around the world.
Now he’s drawing on that experience as he guides AU into its second
year of existence.
Created by the November 2001 merger of Agricore and United Grain
Growers, AU has encountered a wall of sorts, in the form of a
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drought-reduced crop, reduced spending by cash-strapped farmers, shaky
financial markets and nervous lenders.
“Right now, in a 26-mile race we’re at mile 20, and it’s not very much
fun for anyone,” Hayward said.
The key to getting through the wall in a marathon is staying focused on
the finish line, he said. For AU, that means staying focused on the
company’s goal of being the dominant player in Western Canada’s grain
industry.
“We will get there and I know it will feel damn good at the end,”
Hayward said in a recent interview in his 28th-floor office overlooking
Winnipeg’s famous intersection of Portage and Main.
This year’s drought is hitting all grain companies hard. Grain handlers
depend on volume for their earnings and that volume simply isn’t going
to be there this year.
Hayward said AU will handle four to five million tonnes less in 2002-03
than it would with normal production. That translates into roughly $80
to $100 million of lost potential gross profit, which in turn would
generate $50 million in net income.
The drought will also lower farm supply sales by $100 million, which
based on current margins, works out to another $15 million hit on the
company’s net profit.
An outside observer might conclude there couldn’t have been a worse
time for a new company to get up and running.
But paradoxically, that’s not the case.
“You couldn’t have picked a worse year, but you couldn’t have picked a
better year,” Hayward said.
As bad as this year is going to be for AU, it would have been much
worse for Agricore and UGG on their own.
For example, if UGG’s grain volumes had been cut in half by drought it
would have faced a $40 million reduction in gross profits this year,
which would have presented big problems.
“UGG was being run tight enough already that we just wouldn’t have had
the ability to go and find $40 million in savings,” said the former UGG
CEO.
For Agricore, the loss of revenue would have been an even more daunting
$60 million, which the company would have had an extremely difficult
time dealing with.
But Agricore United was able to cut the combined operating costs of the
two companies by $65 million as of July 2002 and expects to reach $80
million by July 2003.
“If you didn’t have the merger, we would not have that opportunity to
reduce expenses,” said Hayward. “We would have both been looking at our
individual situations and doing what we could, but the potential would
not have been there.”
For example, AU has been able to combine two human resources
departments into one and two computer systems into one, big money
savers that could only have happened with the merger.
“There is no way Agricore or UGG as a stand alone entity could have
simply jettisoned a computer system,” he said.
The merger has also enabled the company to save money by slashing its
country elevator network to 90 facilities from 154 at the time of the
merger and by eliminating more than 500 jobs.
The savings are well above what had been forecast in documents filed
with regulatory agencies before the merger. At that time, the company
had projected savings of $12.2 million by July 2002, $25 million by
October 2002 and $50 million by July 2003.
Hayward said a senior banking industry executive recently told him that
of more than 100 mergers with which he was familiar, AU was only the
second in which actual savings exceeded projections.
The company decided at the beginning of the merger process that speed
was crucial, so rather than setting up committees or hiring
consultants, it turned the responsibility over to the people who were
most directly involved in the company’s operations.
“The people making the decisions had to live with the results,” Hayward
said.
“The people in the trenches see all sorts of opportunities for savings
that I wouldn’t see here.”
David Schroeder, grain industry analyst for Dominion Bond Rating
Service, said AU has done better than expected in its first year of
operation in terms of cost controls, grain volumes and balance sheet.
“A lot of people said there was no way they were going to get $50
million in synergies,” he said. “Now they’ve almost doubled that.”
He’s also impressed that the company has managed to secure a 35 percent
share of the prairie grain market in its first year of business.
“I thought there would have been more pressure on their market share,”
he said.
Hayward said the company knew its competitors would be “sharpening
their knives” to take advantage of any confusion or distractions
encountered by AU during the early days of the merger, so it made a big
effort to counter that.
“There’s no question we put our customers through some difficult
situations, but we tried hard to communicate to people what we were
doing and keep them on side.”
Schroeder said one of the biggest factors working in AU’s favour with
financiers and investors is the involvement of Archer Daniels Midland
Co.
Through its subsidiary ADM Agri-Industries Ltd., the giant U.S. food
company is AU’s biggest single shareholder at 19.9 percent.
That was reinforced in recent weeks when ADM bought $45 million worth
of a $100 million convertible debenture offering by AU.
“That reassures people that ADM is committed and that’s another big
plus,” Schroeder said.
If the entire debenture is eventually converted to shares, which may or
may not happen, it would boost ADM’s ownership stake to 25.5 percent.
Hayward said the point of the merger was to create a new company that
could do twice as much business as either of its parents without a
significant increase in overhead costs, thus boosting profits.
A company handling more grain is also better able to enter into
alliances and partnerships with other players further along the supply
chain.
While this is far from a typical year, Hayward said the merger has gone
more smoothly than expected and AU is well-positioned to come through
the tough times and prosper down the road.
“If there is one thing that’s consistent in our industry, it’s that we
tend to get too pessimistic at the bottom of the cycle and too
optimistic at the top of the cycle,” he said.
“Our job is to manage through those cycles.”
