Patricia Woertz, the Outsider
To be its CEO, famously insular ADM picked not only a woman but a newcomer. What is Patricia Woertz's plan for the agribusiness giant? A big part of it will be ethanol.
NEW YORK (Fortune Magazine) -- Auto-racing legend Mario Andretti has met his share of corporate bigwigs over the years - though none, he says, quite as memorable as Patricia Woertz. The suits usually ask him the same questions as the fans: What was your scariest wreck? What's it like to be one of only two drivers to win both the Daytona 500 and the Indianapolis 500? And just how frustrating were all those losses at Le Mans?
But when Andretti first met Woertz - now the CEO of food and ethanol giant Archer Daniels Midland, then a senior executive with Andretti Racing sponsor Chevron - she peppered him with question after question about aerodynamics, engine technology, and other auto-racing nitty-gritty. "Some things I didn't even know myself," Andretti recalls.
Such a grilling could have grown tedious. But as Andretti would discover, Woertz has an uncanny ability to make whoever is on the receiving end of her many queries feel like the most interesting person in the room. Andretti now counts Woertz as a close friend and raves about everything from her brains to her talents on the dance floor. "She's just a great lady," he says.
Woertz's smarts and people skills will be put to the test at Archer Daniels Midland (Charts), based in Decatur, Ill. Still probably best known for the old "Supermarket to the World" spots on the Sunday morning talk shows, ADM is a $37 billion food-processing company that, on account of also being the nation's top ethanol producer, has evolved into one of Wall Street's hottest alternative-energy plays (just, we might add, as Fortune predicted last December).
Ethanol fuels rise
Becoming ADM's chief executive today is a bit like taking over a technology highflier in 1998: Conditions are almost too good. Ethanol sales are booming (more on that later). The food market is strong - the price of high-fructose corn syrup, an ADM staple, is up 23% over the past year. And alternative-energy crazed investors have bid up ADM stock - 55% through late September. With the stock at $38 a share, ADM trades at 19 times trailing earnings, up from 12 in 2000.
Problem is, alternative- energy boom or not, ADM is still in the commodities business. A continued drop in the price of oil (which helps set the price for ADM ethanol in the U.S. and biodiesel in Europe), combined with a sharp rise in corn or soy (raw ingredients for a myriad of ADM products), would put a quick end to Woertz's corner-office honeymoon.
Woertz faces internal challenges as well. Much of the attention on her hiring focused on corporate America's increasingly porous glass ceiling. Yes, ADM is now the biggest company run by a woman (No. 56 in the Fortune 500), but within ADM, Woertz's pedigree raised more eyebrows than her gender. Namely, she's an outsider at a company that's never had an outsider in charge in the 104 years since George Archer and John Daniels began crushing flaxseed into linseed oil. Compounding the insularity: ADM has been run by the Andreas family for the past 35 years - often with an iron fist and not always with the best results.
Indeed, G. Allen Andreas - Woertz's predecessor and ADM's leader since succeeding his uncle Dwayne O. Andreas in 1997 in the wake of an infamous price-fixing scandal - made it known that he wanted one of his deputies to succeed him upon retirement. "By God, if you only knew the culture there," says one recently departed ADM manager. "Bringing an outsider, a woman no less, into a company that's a bastion of lifers and good ol' boys - I can't tell you how huge a change that is." Glenn Person, a food industry headhunter, says Woertz's hiring wasn't popular with ADM executives initially, but the grumbling has abated. "She's very dynamic, I'm told," says Person, president of AGRI-associates.
In her first major ADM job in May, Woertz tells Fortune that she doesn't view ADM as a company in need of a big fix. Nor was she offended when, on her first day, a vice president pointedly asked her, "Well, what do you bring us?" "I thought that was an honest question," says Woertz. "My objectives in my first 100 days have been to listen and learn and build trust. I've met with over 4,000 employees, been to 32 ADM locations. I want to get to a lot of people early on and find out what we do very well and where we can improve."
The low-key approach seems to be working. Just ask Steven Mills, ADM's controller and the man who put Woertz on the spot her first day. "I tell people you only get one chance to make a first impression," Mills says, "and Pat made a great one." As for Allen Andreas, Woertz says her relationship with him is fine - a view seconded by longtime ADM board member O. Glenn Webb. That's good, considering that Andreas remains ADM's chairman. (Andreas did not respond to requests for an interview.)
Talk to folks who worked with Pat Woertz at Chevron, and one of the few negatives they'll mention is her hyperambition. Kenneth Derr, Chevron's CEO from 1989 to 1999, recalls asking Woertz early in her career about her goals. Her response? "She told me she wanted to be chairman," says Derr. Woertz's drive - she knew at a young age she wanted to be a CEO - was so matter-of-fact that co-workers didn't seem to mind. "Some people spend more time worrying about the next job than doing the one they've got," Derr explains. "That wasn't Pat."
So just how does a girl growing up in western Pennsylvania settle on captain of industry as her life goal? Credit Vi and Chuck Woertz, Woertz's parents. While other families were spending summer vacations at the beach or the Grand Canyon, Vi and Chuck took Pat and her brother, Chuck Jr., on educational tours of corporate America. No joke.
"Mom worked as a school librarian, and she felt summers were for education," says Woertz. One year the family toured a Heinz ketchup plant; another, a U.S. Steel mill. There were trips to an oil refinery and a window factory, as well as to the headquarters of Gulf Oil and of Mellon Bank.
Touring a window factory in August is not most kids' idea of summer fun, but Woertz says her memories are fond ones. The odd excursions also made her feel at home in industrial environments - an unusual trait, to say the least, for a schoolgirl. "Definitely there was a seed of inspiration sown there," she says. "I've always enjoyed seeing how things are made."
Woertz stayed close to home for college, graduating from Penn State in 1974 with a degree in accounting. One of her accounting professors remembers her as a star pupil - and a charismatic one. "She got job offers from everywhere she interviewed," says Bob Koehler. "That was rare." Ultimately she accepted an offer with the Pittsburgh office of Ernst & Young. An early client was Gulf Oil, and after three years at E&Y, she jumped ship to Gulf. It was an ideal time to make such a move. Gulf had just cleaned house after an investigation by a special prosecutor found executives had used off-the-books slush funds to distribute millions in illegal campaign contributions. As part of the shakeup, Gulf pledged to beef up its internal auditing department.
History intervened in Woertz's career again in the early 1980s when corporate raider T. Boone Pickens launched a bid for Gulf. The takeover ultimately failed, but it prodded Gulf to accept a $13 billion merger with Chevron in 1984. It was the biggest corporate merger ever at the time, and under terms demanded by the Federal Trade Commission, the merged company had to divest itself of a refinery, a pipeline company, and 4,000 gas stations.
Woertz was assigned to the "clean team" charged with handling those divestitures as well as other sales needed to pay down debt. "It was a kind of turning point in my career," she says. "I learned about M&A and how to value assets and work with investment bankers." She also got to know a lot of Chevron folks, who invited her to join them in San Francisco.
Woertz was married with three young children, so relocating again - she'd already made one move with Gulf from Pittsburgh to Houston - was not easy. Before she had kids, a knuckle-dragging boss actually advised her to "get yourself fixed -- and expense it." Woertz obviously ignored him, but she admits her home career balance has tilted toward career.
Woertz went right back to work after her oldest daughter, now 25, was born. When she had her twins, now 23, she drove herself to the hospital from a meeting.
Woertz credits her ex-husband, a logistics consultant, for making the sacrifices that allowed her to keep climbing the corporate ladder. "At one point, we sort of said to each other, 'Gee, somebody's career is going to have to take priority,' " she says. They chose hers.
What started out as a headquarters job in strategic planning eventually segued into Woertz's first field assignment, a stint running Chevron Canada, a refining and marketing subsidiary in Vancouver. The post was considered a proving ground for up-and coming Chevron execs, and Woertz nailed it. She was promoted to president of Chevron International in 1995, and six years later she was put in charge of Chevron's entire "downstream" operation -- encompassing all of refining, marketing, and trading.
That last promotion solidified Woertz's status as a CEO prospect. It was also almost her undoing. The division performed poorly after Chevron's 2001 merger with Texaco. During the first half of 2002, downstream earnings plummeted from $1.1 billion to $43 million. Part of the problem was market related - refining margins were terrible as a weak economy sank gas prices - but accidents and other operational glitches played a role too.
Woertz ended up replacing her entire senior management team. One ex-Chevron executive who lost his job thinks there were instances where Woertz's ambition and lack of engineering expertise caused her to fault people for what were really equipment problems. "But overall I liked what I saw of her," he says. "Chevron was stuck in the mud in terms of our [downstream] operations, and there was no question we had to improve our reliability."
As part of the reorganization, Woertz aimed to save $500 million by trimming operating expenses, reducing refinery downtime - with a heavy emphasis on improved safety - and getting better oil deals for her refineries. She met the goal a year ahead of schedule. Asked about Woertz during a recent interview with Fortune, current Chevron CEO David O'Reilly singled out the job she did reorganizing downstream operations. His conclusion: "Pat's a good leader."
Had Woertz stuck around, she probably would have been a contender to succeed O'Reilly. But at age 60, he is presumably several years from retirement, and Woertz, who is 53, felt ready. She stepped down from Chevron (Charts) in February in part to pursue a CEO post.
Selling the CEO
Once headhunter Tom Neff of Spencer Stuart called about ADM, Woertz turned getting hired into a full-time job. She was named ADM's CEO in April. Kelvin Westbrook, the ADM board member who led the search, says he and his fellow directors were impressed by Woertz's leadership skills, her track record at Chevron, and also by "how well she understood our business."
According to an ADM SEC filing, the board awarded her a $4.2 million first-year pay package, plus another $6.5 million in long-term stock grants.
At meetings with employees, Woertz has tried to convey how well positioned she thinks ADM is for growth. She has allayed (sort of) concerns about her commitment to Decatur by saying a headquarters move "is not my priority." When asked if she's as enthusiastic about the food and feed businesses as she is about biofuels, she insists she is. She touts the thriving vegetable oil business (part of which is driven by biodiesel demand) as well as demand for healthier food ingredients like Novalipid, a no-transfat cooking oil, and maltodextrin, an additive for low-fat foods.
Still, Woertz does dodge when pressed on her priorities, indicating she'll have more to say after ADM's November board meeting. Dave Edwards, an analyst with ThinkEquity Partners, believes Woertz's biggest challenge will be deciding how to allocate spending among food, feed, and fuel. Edwards's own view: "Biofuels is the better opportunity." Woertz's plans might not be revealed until there's a crisis. In a 2005 speech at Wharton Business School, she talked about how the positives from Chevron's downstream reorganization wouldn't have been possible without wrenching personnel decisions. "It underscores the shadow side of creativity," she said. "Nothing is created without something being destroyed."
So far, other than killing a fertilizer project in Brazil, Woertz's most notable course change at ADM has been instructing the head of the Washington, D.C., office to register as a lobbyist. Despite ADM's legendary political clout, it has never officially done any lobbying. The emphasis is on "officially." Dwayne Andreas was close friends with Bob Dole when the Kansas Republican (and ethanol supporter) was Senate Majority Leader. ADM still wields influence via personal contacts or organizations like the Renewable Fuels Association, a pro-ethanol group ADM helps fund.
Former U.S. Senator Peter Fitzgerald, a pro-ethanol Republican who represented ADM's home state of Illinois from 1999 to 2005, says the company "never once contacted me about ethanol" during his term in the Senate. "They didn't have to," he adds, "because every month there would be 20 or 30 people from the Corn Growers Association or the Farm Bureau in my office." The RFA also called on Fitzgerald, and on top of all of the groups' lists, he says, was ethanol. To her credit, Woertz wants ADM to stop hiding behind proxies.
But it still hides specifics about ethanol - namely, how much money it makes from it. By Fortune's estimates, ADM earned a minimum of $610 million pretax - and probably more - from ethanol production during the 2006 fiscal year that ended in June. ADM declined comment. We arrived at our figure by analyzing the SEC filings of Little Sioux Corn Processors, a small ethanol plant in Marcus, Iowa; ADM holds a 40% stake in it, and the plant's ethanol prices are tied to ADM's own through a marketing agreement. During ADM's fiscal year, Little Sioux recorded 61 cents in profit for each gallon of ethanol it sold. (Between June 2005 and June 2006, the price of ethanol ballooned from $1.30 to $4 a gallon.) ADM itself produces one billion gallons of ethanol a year, which means ethanol production probably accounted for at least 30% of ADM's $2.1 billion in operating profit in fiscal 2006.
Because ADM sells ethanol through long-term contracts, "the prices they're getting now probably haven't yet peaked," adds Ken Gau, a money manager with mutual fund company Waddell & Reed, an ADM shareholder.
Government subsidies prop profitability
Why has ethanol been so lucrative? The simple answer is that its price is inflated by a 51-cent federal tax credit refiners receive for each gallon they blend with gasoline. There are also hefty tariffs on imported ethanol - stymieing foreign competition - as well as a mandate in the 2005 energy bill that refiners blend a minimum of 4.7 billion gallons of ethanol with gas per year in 2007.That requirement rises to 7.5 billion gallons in 2012.
On the topic of ethanol subsidies, Woertz treads carefully: "I have always supported free trade and commerce. Having said that, there are subsidies in many industries," she says. "And you live within the rules of the game." That sounds reasonable - until you remember those rules were written by ADM's friends in Congress. Woertz strikes a more persuasive chord with her other prosubsidy argument. Ethanol is "a here and now," she says, whereas other energy alternatives "are a lot longer down the road."
There's been much back-and-forth over ethanol subsidies. The debate often boils down to competing scientific claims over whether ethanol provides more energy than the fossil fuels required to produce it. ADM and the farm lobby cite the findings of the U.S. Department of Agriculture, which concluded in 2004 that every unit of fossil fuel energy invested in ethanol production produces 1.67 units of energy from ethanol.
Ethanol foes embrace the work of David Pimental, a Cornell University professor who, along with research partner Tad Patzek of the University of California at Berkeley, contends there's less than a one-to-one relationship between ethanol's energy output and the natural gas, coal, and petroleum consumed by growing corn and distilling it. (The USDA gets more favorable results by including the distillers' grain byproduct in its energy calculations.)
Pimental and Patzek's critics tend to portray them either as lackeys of the oil industry - a suggestion Don Endres, CEO of ethanol company VeraSun, made recently to Fortune - or incompetents whose conclusions are based on 20-year-old data - the charge of Tim Burrack, former president of the Iowa Corn Growers Association. Pimental counters that he uses the latest figures on crop yields and the like - many straight from the USDA itself - and insists he's never gotten a dime from oil companies.
Patzek isn't above a little name-calling himself, dubbing the USDA "a wholly owned subsidiary of ADM." Woertz's own take on the debate is unsurprising: "It's clear there is an energy positive in producing ethanol," she says. However, even if one assumes ethanol's energy balance is positive, there's still a limit to how much ethanol will reduce U.S. dependence on foreign oil.
Chevron's O'Reilly argues that growing corn to produce ethanol is misguided, potentially resulting in higher food prices. (Such concerns are shared by cattle and poultry farmers, who use corn for feed.) "The math just doesn't work," says O'Reilly, who sees more potential in cellulosic ethanol, which is produced from grass or agricultural waste. "Fifteen percent of the corn crop right now goes into ethanol, but ethanol is only 2% of our fuel," says O'Reilly. "Do the math, and figure out how practical that is for the long term." Asked whether he's ever discussed this with Woertz, he laughs. "No," he says, "but she knows it too."
Woertz is diplomatic when told of O'Reilly's remarks, saying she and her ex-boss agree that U.S. fuel needs cannot be satisfied by corn ethanol alone. She says ADM is putting R&D dollars into cellulosic ethanol. And she isn't jumping on the E-85 bandwagon, even as the farm lobby pushes for wider production of "flex-fuel" vehicles that can run on this 85% ethanol, 15% gasoline blend.
Woertz's goals for ethanol skew toward the practical. She thinks the U.S. market can triple to 15 billion gallons a year, effectively meaning every gallon of gas would be a 10% ethanol and 90% gasoline mix, a blend any car can use. There's also little dropoff in gas mileage, and service stations wouldn't be forced to install special pumps - both problems with E-85. Pointing to advances in corn-seed technology, Woertz thinks 15 billion gallons is achievable without adding much acreage or affecting the food supply. "We're getting more yield per acre than ever before," she says.
Those rising crop yields combined with fat ethanol profits have the Midwest buzzing with new ethanol-plant construction. ADM has broken ground on new plants in Cedar Rapids, Iowa, and Columbus, Neb., that will add 550 million gallons in yearly production. The company has also begun work on a bioplastics plant in Clinton, Iowa. (Woertz calls corn-derived, biodegradable plastics "one of our most interesting long-term ventures.")
Overall, there are 25 ethanol plants operating in Iowa alone, with another 22 on the drawing board. Many of the new ones are farmer-owned cooperatives, and they've taken a bite out of ADM's market share, down from 70% in the mid-1990s to 20% today. ADM will regain some share once Cedar Rapids and Columbus go online, but all the new capacity poses problems. Iowa State University economist Robert Wisner says if all the proposed plants were built, ethanol would consume Iowa's entire corn crop. At the least, there would be a steep rise in corn prices, now $2 a bushel.
For the farmers who have invested in ethanol plants, high corn prices are nothing to be scared of. Another benefit: Farmland prices in Iowa counties with ethanol plants are appreciating much faster than those without them, according to the Iowa Land Sales Report. But in this instance, what's good for farmers isn't good for ADM. A rise in corn prices, combined with a continued fall in gasoline prices, would effectively be a repeat of the margin collapse that afflicted oil refiners in 2002.
Woertz sees the parallel. "I come from an industry that understands margins can be the jaws of life or the jaws of death," she says. "Any industry building capacity as rapidly as the ethanol industry has to ask itself whether margins are going to fluctuate." Her answer: They will. "ADM's strength is we're building these big plants that are very cost-competitive." Given the likelihood of a margin squeeze, Woertz's decision to stand by food and feed makes perfect sense.
"If you're a pure ethanol company and the ethanol market goes bad, you have nothing to fall back on," says Waddell's Gau. ADM can take the corn and soy it had been turning into fuel, and process it into in-demand food products instead. "When one product doesn't have very good margins, another does," says Woertz. "Think about a tree with apples on it, with all the apples ripening at different times."
The question is, If gas prices keep falling, will Wall Street still care about ADM's other apples?