Archived Issues

Together Strong

Dimon’s Brian Harker reflects on the deal with Standard and his company’s strategy in a challenging environment.

TFQ Staff Report

The rumors had been flying for months, but in the run-up to the merger, neither Standard Commercial nor Dimon would confirm that there were even discussions. When pressed by our reporter in August, one executive simply professed ignorance about any plans to join forces. Now that the news has broken, officials at both companies are more talkative. TFQ caught up with Brian Harker, chairman and ceo of Dimon, to get his views on the landmark deal and other issues facing his company.

TFQ: Why did you choose to merge with Standard?

Brian Harker: The central rationale behind this merger is that it will help us achieve our goal of driving profitable growth and building long-term value in what is a fast-evolving industry. Combining our two companies keeps us in step with changes confronting our customer base, and with ongoing development of our customers’ most important needs. Strategically, operationally and financially, Standard Commercial is an excellent fit with Dimon.

TFQ: How do Dimon and Standard complement one another? What are the strengths of each company in terms of products, geographical presence and processing capabilities?

Harker: Both companies are very similar, and this is another benefit of the merger. From a cultural and organizational perspective, you could find no stronger fit. Standard shares the same core values that have always guided our organization—doing business with integrity, a strong commitment to our customers’ needs, being quick and responsive, keeping our business practices at leadership levels and a strong commitment to our employees’ needs.

This merger will provide enhanced global resources, greater financial strength and increased operational agility as a result of the pooling of our two companies’ resources. All of this will allow us to more effectively address the industrywide challenges that have faced us in recent years, and position ourselves for growth in the long run.

TFQ: How will your customers benefit from the merger?

Harker: There is no question that together we will be a substantially stronger and more capable global leaf tobacco supplier than either of our stand-alone companies. Our customers will benefit from our expanded capabilities in value-added services, industry-leading tobacco processing capability, information technology advancements, new product development, global agronomic programs, and—most important—a stronger, highly talented workforce.

TFQ: Does this merger make you larger than your biggest competitor, Universal?

Harker: This merger is not about size; it is about capturing economies of scale where existing operations can be streamlined, optimizing processing and realizing efficiencies throughout the value chain—from managing existing origin risk to developing new origins. Concurrent with our integration efforts, we will be conducting a total review of all the markets we operate in to ensure that they meet our strategic objectives.

TFQ: Was the timing of the merger related to the U.S. tobacco quota buyout?

Harker: No, timing had nothing to do with the U.S. buyout. Our industry has and will continue to face challenges due to consumption trends and over-capacity of processing. Our customers have challenges of their own, including profit pressures, increasing taxation and increasing government regulation. We have seen how these problems have affected us in the United States and we are now seeing these same trends emerge globally—for example, increased excise taxes in Germany have resulted in a fairly significant decline in consumption in that market alone. There are many other examples of this type that will define the new operating environment for our industry. Together, our companies are far better positioned to succeed in this new environment.

TFQ: Over the years, Dimon has gained considerable experience merging different company cultures. Based on this experience, what do you expect to be the greatest challenges bringing together these two companies, and how do you plan to overcome those challenges?

Harker: The greatest challenge is that until the merger closes, the companies will continue to operate as separate entities. This creates uncertainty in both organizations, which will have to be carefully managed. Both companies operate in most of the major tobacco markets around the globe. We are larger in some; they are larger in others.

A joint integration team, comprised of executives from both companies, will determine the best means for achieving the merger’s potential, including areas of the business where growth opportunities can be expanded, as well as plans for achieving cost savings.

What is already clearly apparent is our shared commitment to a balanced and fair process that is thoughtful in its approach and timetable, and takes into account input from across our businesses. The integration process will be thoroughly and thoughtfully executed. Detailed analysis has already been completed as part of due diligence, and we’ve identified potential savings and synergies.

This merger is based on fundamental, reasonable assumptions and a stronger combined company will create more career-enhancing opportunities for our employees over the long run.

TFQ: Switching gears, let’s discuss Dimon as a stand-alone company. Dimon has had a challenging fiscal 2004. Please comment on the factors that made it such a challenging year.

Harker: You may recall that Dimon’s year-end was changed to March 31 and fiscal 2004 covered only a nine-month period. We changed the year-end to better match the financial reporting cycle with natural global crop cycles for leaf tobacco, and to better reflect the growing importance of our international operations, particularly those in South America, contrasted against the significant decline in volumes in our operations in the United States.

The shortened period in fiscal 2004 does not have the benefit of [showing] the traditionally strong South American sales, which will now only be reflected in our next fiscal year. It has been a challenging period, and from the outset we anticipated that our financial results would be relatively weak due to the ongoing major transition in global sourcing of leaf tobacco. Specifically, we anticipated that fiscal 2004 would be negatively affected by ongoing crop declines in both the U.S. and Zimbabwe, without the offsetting benefit from much larger South American crops.

As the year progressed, that situation was aggravated by weather-related declines in prior-year crops in both Brazil and Malawi. Our financial results also suffered from the effect of the profoundly weak U.S. dollar, which inflated our reported selling, administrative and general expenses and depressed gross profits on our largely U.S.-dollar-denominated
global sales.

TFQ: Please comment on some of the measures you have taken and will be taking to improve performance? When do you expect them to start paying off?

Harker: As a consequence of this ongoing transition in global sourcing of leaf tobacco, we implemented a restructuring plan during fiscal 2004 to adjust our production capacity and organization to better match current requirements. This plan encompassed restructuring actions in the United States, Europe and Zimbabwe. The decision to implement this restructuring plan, especially the closure of our Danville processing facility, was a difficult one and we regret the dislocation it inevitably caused our employees.

However, consolidating our U.S. production into a single facility will enable Dimon to continue to compete effectively while serving our customers. In Europe, the expected reduction or elimination of EU subsidies to tobacco growers will make these markets extremely challenging, and we are exiting those that show insufficient growth and profitability opportunities.

Finally, although we remain committed to Zimbabwe as a major source of good-quality, reasonably priced leaf tobacco, diminished crop sizes necessitated streamlining of operations in that country. We are already benefiting from the actions we have taken combined with the programs already in place and are optimistic about the longer-term effects that we anticipate as a result of our restructuring actions.

In fiscal 2005, we also begin to recognize the anticipated benefits from the large South American crops, particularly from Brazil, but bear in mind that some of the costs associated with the restructuring plans implemented in fiscal 2004 carry over into fiscal 2005.

TFQ: Are you happy with the U.S. buyout?

Harker: To put the U.S. tobacco quota buyout in perspective, it repeals the federal tobacco price support and quota programs beginning with the 2005 crops and levies user fees on tobacco manufacturers and importers of consumer tobacco products to finance compensation payments to tobacco quota owners and growers over 10 years. In addition, it provides for the disposal of existing stabilization and pool inventories and contains no safety net or production control provisions.

As we speak, there are many details of the legislation to be worked out. Several regulations were repealed with the buyout legislation, and services such as USDA grading of imported leaf, assessments on imported leaf, pesticide testing of U.S. and imported leaf, and the basis of disposition of loan association inventories still have to be worked out.

Are we happy with the buyout? In all honesty, it is probably too early to tell. It presents a new dynamic in the industry in the U.S. and certainly changes the risk profile of our business significantly. The quotaholders and producers are the major beneficiaries in the short term. In the longer term, the legislation will make U.S. leaf more competitive in world markets and could ultimately stabilize production levels. With most of the major U.S. domestic manufacturers already procuring their U.S. leaf requirements through direct contracting with growers, our business in North America has already shifted to more third-party processing and less full-service business.

Traditionally, most export customers have not purchased U.S. leaf “across the stalk” but are more selective in terms of stalk position and quality. The likely loss of the auction system would eliminate the ability to source specific styles or qualities of leaf to supplement what is being sourced under contract, and this will likely alter future contracts with growers.

U.S. flue-cured and burley growers have a reputation for producing top-quality leaf and the buyout provides an opportunity to remove the non-value-added costs from the supply chain, and with this comes an opportunity to attract both new and old export customers. As U.S. production levels stabilize, it should provide continuity
of leaf supply for customers of full-
flavor flue-cured and burley tobaccos.

TFQ: Also last year, Dimon em-barked on a process labeled “Re-defining Dimon.” What was the purpose of that initiative; how do you measure progress; and are you seeing any tangible results?

Harker: “Dimon Redefining” is our branding initiative that we embarked on last year, recognizing that because of the mergers of the past we had a rich heritage and strong diversity of culture, but [we] lacked unity. We have taken the best qualities of our past and are forging them into a single, global culture with shared core values. We have made it our mission to excel in customer service and to demonstrate this through attitude and performance, or customer focus.

We recognize that our success depends entirely on how well we serve our customers. The Dimon brand is not about tobacco. It is about Dimon people. It takes time to change a culture, but we have made excellent progress, acting together to create the perception and the reality of one company, one brand, totally customer-focused. Progress is measured on attitude and performance and judged on feedback from customers. The majority of feedback has been positive and we are seeing tangible results. We will not get complacent.

TFQ: Dimon and other tobacco-related companies continue to face a challenging business environment. In such an environment, are there reasons to be optimistic about the future?

Harker: There are many reasons to remain optimistic about the future of our industry. It is true the environment is challenging and there are major changes taking place within our global industry. With change comes opportunity; leaf tobacco remains in demand and we are confident that our customer-focused strategy will strengthen our already strong relationships and permit us to grow alongside our customers.

Our attention and resources are focused on those origins that are growing in market importance, and on delivering outstanding customer service. We are confident that the actions we have taken in combination with our strategies give us every reason to be optimistic. As I said earlier, the Dimon brand is not about tobacco; it is about our people. Anyone who has recently dealt with Team Dimon anywhere in the world can attest to our attitude and optimism!