Fifteen months after becoming CFO of the company that’s been his employer for 31 years, Jack Fortnum is well settled into a role that synthesizes his long experience in both finance and operations.
The company, Ingredion, is hardly a household name, despite its 2014 revenue of almost $6 billion, putting it in the Fortune 500. For the most part that’s not because it adopted its name only three years ago, before which it was Corn Products International, but rather because it’s a business-to-business enterprise.
The name change was made because the company, especially after its acquisition of National Starch in 2010, was not just a maker of corn products. It’s in the ingredients business, selling thousands of different formulations to food and beverage makers.
Fortnum rose to corporate controller, as well as finance vice president in both Argentina and Canada, back in the 1990s. But after his CEO asked him for recommendations on how to boost the performance of the company’s North America business and liked what he came up with, he was appointed in 2002 as president of the unit. He stayed in that role for 10 years.
“It was exciting to get back in finance because of my strong background there,” he says, “but all the operational people know that I know the business well too, so I can challenge them on their hypotheses.”
Ingredion’s 2014 revenue was actually down about $1 billion from 2012, yet the business is actually growing from a product-volume perspective, and its profit margin has held steady. The reason for the topline falloff was a decline in the prices of commodities like corn and tapioca that the company uses in producing its products. “When corn goes up we pass those costs through to our customers, and when it goes down we pass that through too,” Fortnum says.
Still, as for any company that buys large quantities of commodities, hedging against price volatility is an important finance function. Ingredion does that in a couple of ways. For one, it allows customers to select what are called “grain-related” contracts, under which they take on the price-volatility risk. “We say, ‘We’re going to charge you this much excluding the corn,’ which includes processing fees and the value associated with the products we create,” he says. For the raw materials, the customer pays whatever Ingredion paid.
Generally it’s the larger, more sophisticated customers, which are better able than lower-level competitors to pass on cost fluctuations to their own customers, that choose grain-related pricing, Fortnum says. Others get fixed-price contracts that are at a higher price point, since Ingredion retains the commodity risk, but it lays off some of that risk by buying commodity futures contracts. “To a large extent we lock in our margin in both cases,” he says.
Ingredion also has successfully passed currency volatility to its customers, according to Fortnum. “From a global perspective, most of the commodities we deal with are priced in U.S. dollars around the world,” he says. “Our expectation is that if the price of anything from corn to energy to fixed assets goes up or down, our costs should pass through to our customers very quickly around the world, say within three to six months. We’ve been in unusual times where almost every currency is devalued versus the dollar, but we can usually price through the devaluations.”
The company’s size and global coverage help enable the cost shifting. In many markets it is the leading food ingredients provider, or in some cases the only one. “It’s not like there’s a product readily substitutable for us in all the local marketplaces,” Fortnum says. Where competition does exist, the competitors’ commodity costs move in the same direction as Ingredion’s.
Working Capital Diligence
Fortnum’s dual finance and operating backgrounds are a good fit with the company’s vigilance on controlling working capital. In fact, 15 to 20% of all corporate managers’ variable compensation is tied to hitting working capital targets. There’s also a quarterly incentive program for workers at Ingredion’s plants and warehouses, where the time from input (receiving raw materials in the case of plants, receiving products in the case of warehouses) to output (sending finished product to warehouses, and shipping product to customers, respectively) is minutely tracked.
The incentive program isn’t in place everywhere in the world, because of local restrictions on compensation programs, but where it’s allowed, it applies to virtually every employee. “The program has changed our whole working capital picture,” says Fortnum.
Meanwhile, with Ingredion’s latest acquisition, of specialty ingredient maker Penford Corp., the share of the company’s revenue that comes from high fructose corn syrup has dwindled to about 10%. A debate has been raging for some time over whether the sweetener, which is present in a huge number of sweetened drinks and processed foods, is even less healthy than sugar.
Fortnum steers clear of the healthfulness debate, but given society’s bent toward healthy eating, it’s clear that demand for high fructose corn syrup is slowly waning. “Some products have a long life cycle,” he says. “I hate to use the term ‘cash cow,’ but that’s almost what it is. We manage it not necessarily for growth, but to continue to deliver a product to our customers and return cash to us from our facilities. Our growth is primarily directed toward our specialty-products portfolio.”