Succeeding in a Tough Market
In today's meat industry, nothing comes easy. Trade disputes and overproduction have hammered
prices; earnings have fallen; and regulatory pressures have increased.
Meanwhile, the war in Iraq and the ongoing threat of terrorism have
added to the general economic uncertainty.
ContiGroup CEO Paul Fribourg notes that these difficulties pose significant challenges and will
require a very disciplined approach from both the businesses and CGC management.
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ContiGroup CEO Paul Fribourg |
At the same time, he stresses that the company continues to have good
prospects and strong, well-managed operations; it has also been able to
weather the downturn better than most competitors, even without the
recent vitamin settlement.
Wayne Farms, for example, has remained profitable during a period of substantial losses for the
poultry industry as a whole, and ContiBeef has returned to
profitability after a series of negative quarters. ContiLatin has also
had a good year, despite difficult economic and political conditions in
much of South America.
In addition, ContiGroup has continued to pay down debt, which is now at its lowest level in 20
years. This reduced leverage is particularly important in the current
environment, says Paul, who notes that many large firms have been hurt
by a combination of high debt and falling earnings.
"One common theme is that many of these companies tried to expand too rapidly and got
overleveraged, and in today's world that's something you just can't
afford." By contrast, ContiGroup has been able to lower its interest
expense and strengthen its balance sheet during a difficult economic
period.
As a result, the company has also gained more flexibility to expand and build its businesses. This
is especially useful at a time when lower earnings have spurred
consolidation, driven down asset prices, and created new opportunities
for investment.
In the case of ContiGroup,these opportunities could include additional poultry facilities, which
would be integrated into Wayne Farms. They might also include additions
to pork or beef operations, partnerships in larger businesses, or
smaller limited-risk investments in the US or overseas.
"We've looked at a range of possible investments over the last year, but we've also been very
selective," says Paul, noting that most of these failed to meet Conti's
financial criteria.
At the same time, the company has moved ahead with the College Park acquisition and the
expansion at Decatur--two steps that have helped Wayne Farms build
further processing capacity and develop the higher margin side of its
business. "We're moving in the right direction," he notes, "and have
actually invested more in poultry this year than in any of the previous
five years."
Improving Profitability, Enhancing Reputation
In addition to coping with a tough economy, the meat industry has also faced growing pressure to improve
its practices in such areas as food safety, environmental affairs, and
the treatment of livestock. Paul notes that these issues have become
increasingly important for consumers, and will have a significant
impact on the industry's reputation and profitability. For this reason,
he believes that companies should take a proactive approach and make
every reasonable effort to improve their operations.
However, he stresses that firms should not be saddled with unnecessary regulation--such as the
proposed ban on packer ownership of livestock, recently reintroduced in
Congress, or the new law requiring country-of-origin labeling on meat
products.
"These actions hurt companies financially and can even end up destroying entire industries," says Paul. "They reduce efficiency without providing any benefit either to consumers or small producers."
Regulatory pressure aside,Paul believes that ContiGroup and its businesses have made progress in
a number of important areas. PSF, for example, has implemented carbon
dioxide stunning in its North Carolina as well as its Missouri
operations--thus reducing stress on the animals and resulting in a
higher quality product. PSF has also pursued the use of advanced
environmental technology, including new methods for controlling odor,
reducing nutrients in waste, and improving monitoring and analysis.
In addition, PSF and ContiGroup have explored the construction of plants for transforming
waste into energy--an effort also being pursued by a number of other
firms. "We've spent a lot of time looking at these [waste conversion]
technologies," says Paul, "but we haven't answered all the
questions--especially questions about cost-effectiveness and ROI. The
technology is promising, but we have to be sure it makes business sense
as well as environmental sense."
Accountability and Governance
Looking at ContiGroup today, Paul notes
that the company has benefitted from the creation of LLCs and done a
good job balancing stand-alone operations with oversight from New York.
This structure recognizes that the businesses have very different
operations, products, and markets, and thus need a high degree of
flexibility and independence. At the same time, they remain accountable
to senior management and work closely with the New York office in a
variety of functional areas.
Paul adds that senior management is itself accountable to the company's Board, which must
review ContiGroup's overall strategy and performance. Established by
Michel Fribourg in the early 1970's, the Board includes a majority of
independent directors and is thus relatively unusual in a privately
held firm. And as Paul makes clear, it has never just accepted the
decisions of management.
"I can tell you that the Board has been very very tough on me and on the entire management team,
and very aggressive in challenging our thinking and assumptions," he
says, noting that Board members must represent the interests of all
shareholders. "As CEO, I need to have their support for any major
decision."
Not surprisingly, Paul sees
the growing concern with corporate governance, including the recent
Sarbanes-Oxley Act, as basic common sense. "Sarbanes-Oxley is really
about practices that all companies should have been following all
along. Unfortunately, many were not."
He adds that ContiGroup has long tried to operate according to the standards of publicly held
firms, and has a good record in this area. "We're not perfect and have
a lot we could improve on. However, we have a very solid system of
governance that goes beyond that of most private as well as public
companies."
Opportunities Going Forward
Looking ahead to fiscal 2004, Paul says
without hesitation that conditions will be difficult. Economic
uncertainty is likely to continue, even with a prompt resolution in
Iraq, and equity markets are likely to remain depressed. In addition,
meat prices will remain under pressure as a result of domestic
overproduction and the unending poultry dispute with Russia, which has
now entered its second year and already cost US producers more than $1
billion. Restrictions by other countries, such as Mexico and Japan, may
squeeze margins still further.
"I wish the outlook were rosier, but it's not," says Paul, "and there's no question that this
makes our work much tougher." At the same time, he stresses that a
difficult environment can also set the stage for growth.
"We have to remember that the difficulties facing the industry today are also going to provide
opportunities. We're in a good position, despite the current market,
and I believe we'll have unique opportunities over the next two years
to grow and develop our businesses."