Vertigo. That' s the feeling aroused by following Ori Yehudai's career at Frutarom Industries Ltd. (TASE: FRUT; LSE:FRUT; OTCBB:FRUTF). He conquers one peak after another, breaks one record after another, a sprinter in growth, acquisitions, profits, market cap, global deployment. And it all revolves around taste, or flavors, his more precise description of his company's business. He explains that it involves a mix of a few dozen raw materials out of some 5,000 materials available to flavors developers.
You're like an acrobat running on a huge wheel and staying at the top all the time. You're not scared?
"I am. All the time I say to myself that I have to maintain some kind of balance between proactivity and a situation in which you have a vision for the medium to long-term. That's how we run Frutarom. I think that I am scared, and that means checking all the time where things could go wrong, where the failure points could be, how to be prepared for them, and dealing all the time with the problems that arise, and they do arise all the time."
And you keep running, constantly making acquisitions.
"Yes, I need to run all the time, I always have to be on the giant wheel, because it's impossible to stop. Let's say that I stop, digest everything I've acquired, maintain the status quo and wait five years - in a public company like the one I run that's impossible. The global economy is growing, our world is undergoing rapid consolidation processes, so that in our big ocean, with the big fish and the little fish, either you swallow or you get swallowed. There's no option of staying in place."
More acquisitions on the way
Yehudai says that Frutarom sells in over 150 countries and has production facilities at 55 sites in over 40 countries. "We have more than 30,000 customers, 45,000 products, and Frutarom's sales this year will be over $1.2 billion," he says. 75% of the sales are of natural products.
"In twenty years, the company has carried out 56 acquisitions, 31 of them in the last five years: 17 since the beginning of 2015, of which six were in 2016."
We're in the middle of 2016.
"There's more to come. By the end of 2016, in the nature of things, there will be more acquisitions. I'll sharpen the picture even more: We committed to a turnover of at least $2 billion in 2020 or earlier. According to my calculations, that means we have to buy an average of $150 million sales every year, and I say that that isn't so difficult. I have done it most years, and I believe that I'll be able to do it reasonably well in the coming year as well. Since there at least 600 companies relevant for acquisition that I know about, I feel comfortable with a commitment to $2 billion by the end of the current decade, and even believe it will happen sooner. And that's no mean feat."
What do you mean?
"No-one knew of us twenty years ago, and now we're one of the biggest flavors players in the world. Then we were number 200 in the world, and now we're number six in the world. And that's in the most conservative of fields: the food we eat. Tens of thousands of manufacturers and food factories around the world depend on me 100% - for reliability, punctuality, quality, taste, whether there's a strike or not, whether something happens or not. 90% of our business is with food factories, a very small amount is in cosmetics, much more is in natural medicines."
What are the chances that because of the pressure, which is entirely from you on yourself, to buy and grow, you will make a problematic acquisition just to satisfy the giant and constantly hungry dragon?
"It sounds bad, as though, willingly or otherwise, I have built a certain image that I have to satisfy and feed."
It's not like that?
"No. Absolutely not. I say all the time, first of all to myself and also to my people: if there are no worthwhile deals at the right price, we have no need to run."
That sounds good, but what really happens?
"I'll give you an example. Within the past six months, we talked with a company that had seemed attractive to us for a very long time. It was a big acquisition, more than we had done in the past, with very positive characteristics from our point of view. I spent many nights with thoughts of why yes and thoughts of why no. We were at the 89th minute before a deal and I decided not to go through with it. I said that there was a chance that this was the kind of deal you were talking about, that the price might turn out to be too high, that it might not work for us."
How many of the 56 acquisitions you have made turned out to be unsuccessful?
"In the end, we succeeded with all of them, and I'll explain: there were times when it took us longer that we expected to reach the results we estimated and projected. I look at the statistics all the time and ask myself 'Why is this happening? Is it because we didn't have the right managers and lost key people and customers in the course of the acquisition?' That's why I say that I prefer to merge companies more slowly. I don't want to risk losing people in the merger process. I like to keep managements, not to create a situation in which key people will prefer to go because we have arrived, I don't want to lose them, because if I lose key people, I lose customers. Global statistics on mergers show that 70% of acquisitions fail. I remember that every day and every night."
And you keep running…
"It's the world that's running, we just believe that it's possible to build a world-leading company that grows twice as fast as the food industry, so that's what we do. In the past twenty years, Frutarom has grown at more than 20% annually, on average, every year, internal growth without acquisitions, double the rate of growth of the markets in which we operate. If the food industry has an internal growth rate of 2-3%, then we say we want to grow at 6%. Worldwide growth in the food industry is based on population growth, on an increasing number of consumers, particularly in the developing countries, new consumers who mainly arise because of the move from the country to the city, which in my view is the biggest macro trend in the global economy.
"Within this picture, Frutarom says: We want to grow at double the rate of our world. First of all organic growth, without acquisitions, and then acquisitions as well, because there are very many opportunities."
Frutarom has been an independent company for twenty years. Until 1996, it was a small division , with annual turnover of $3-4 million, within Electrochemical Industries, which ceased to exist in 2003. Yehudai was VP Marketing of this division for ten years.
Yehudai has led Frutarom as CEO, president and main business manager for twenty years. The company is 37% controlled by John Farber (92), his wife Maya (80), and their daughter Sandra (60), through ICC Industries, which they own. Frutarom's shares are traded on the London Stock Exchange and the Tel Aviv Stock Exchange, and the company is in the Tel Aviv 25 Index of leading stocks. More than half the shares are owned by foreign financial institutions. 8%, for example, are owned by Fidelity. Yehudai himself owns 2%.
There are those who say: What does Yehudai care? He rushes ahead, the worst that can happen is that the company can't take it and collapses. What will happen to him? It's not his. He'll keep the tens of millions he has already made in the high salaries he received, and if, God forbid, there's a blowout, the Farber family and the shareholders will have to find a way out and lick their wounds.
"Yes, I'm aware of what people say," he acknowledges, "They don't say it to my face, but they say it. So this is what I have to say about it: What motivates me is the desire to succeed. If you want to call it ego, call it ego. I call it success. Yes, I want to succeed. I want to take calculated risks. I'm an industrialist, I started 30 years ago with a small company that didn't have any salespeople and didn't believe in itself. I came along with a fierce desire to succeed, to build a leading global company, and that's something I really don't want to miss out on. My shareholders in Israel and around the world know this, and most of them are professionals who check very carefully where to put their money.
"People come here every week and ask what to do and how to do it, and I tell them: 70% of the failures in acquisitions don't stem from wrong company strategy or inadequate due diligence; they stem from losing managers and key people in the course of the acquisition. That leads to a loss of customers, a loss of business, and it happens in the first year."
We know companies that make acquisitions and straightaway replace the CEO and the management. They want someone beholden only to them.
"I'll say something that perhaps isn't nice to say. I have resources, I have money, I have know-how, reputation, customers, technology, I have a wonderful company, I have a winning strategy at a crossroads that billions of consumers go to, taste and health and the combination of the two. You know what I'm most short of?"
Certainly not self-esteem. Time, perhaps?
"Not at all. I'm short of managers. Engaged, committed CEOs, who know how to manage global companies and local companies. In every country in the world it's hard to find this sort of manager for small-to-medium size growth companies. The fact is that I have found them. Israelis and non-Israelis. My view, and many of my friends in management get angry with me because of it, is that there aren't enough Israeli managers who know how to run global companies. The proof is that some of the biggest and best companies in Israel have foreign managers. Look at the big companies, Israel Chemicals, Tower Semiconductor, even the great Teva until the arrival of Erez Vigodman, who in my opinion is one of the most amazing managers in Israel, but also one of the few. Part of the problem is that we don't breed enough experienced Israeli global managers. That's why Tel Aviv University and I agreed to form an Israeli global managers' forum, to try to cultivate them, to learn from experience, with the intention of trying to create a cadre of Israeli managers here who know how to run global companies in the $2-6 billion bracket."
Taking ethnic taste into account
Let's get back to acquisitions. You are considered to have a rare ability to buy, absorb, integrate, create synergy. After all, it's a matter of different countries, different cultures, different currencies, widely differing tastes and customs, ranging from Brazil to China, Guatemala, Switzerland and Haifa. How is it done?
"We run a global local company. The world of flavors is much more local than global. To sell to a Guatemalan, Peruvian or Indian drinks manufacturer, I have to work with him in his own language, his taste, his culture and regulation, or he won't buy from me. I have to supply him, within 4-5days, the unique product he wants, made to measure for him. Therefore the game is local in a global world."
You buy a company in a foreign country and keep it the way it is?
"I buy and run a local company in a local market - that's the only way I have of building market share or taking market share. To create from scratch is almost impossible. And if it is possible, it could take 10-20 years create a flavor and linked flavors. In places where I have bought more than one company, such as the US and Europe, I merge, create operational synergies, a single management, one unit. In a place where I don't have several businesses, I maintain localization. Taste is taste is taste. Local, limited, different from one place to another. Coca-Cola for example, a drink I like a lot, has a very different flavor in Germany, in the US, in Israel, and in India."
We've been told it's because of the taste of the local water.
"Not at all. It's because they adapt the flavor to the consumer's palate. Israeli taste, by the way, is more American, less European. It's true of the giant Coca-Cola, of Unilever's ice cream. Consumer taste differs, and it's our job to supply it.
"We make acquisitions and connections in territories that are right for us and worthwhile for us. We don't have a religion of acquisitions. Our acquisitions have mechanisms for consideration to be paid in the future. It's important for us not to revolutionize things. Most of our acquisitions derive from relationships we have built, I have built, over ten-twenty years. I came, I invited to dinner, I talked."
You came and said "I want to buy you"?
"They also ask 'Why did you come?', and I answer: I came and I'll come again because I want to ensure that the moment you decide to sell, you'll know that I'm the best buyer. And it has happened. There were several instances I in which I was the first call that the family or the manager or the owner made, at 11 pm. And then there was a deal within two weeks, because they were looking for the right family to adopt their enterprise, and they already knew us from years of occasional dinners. We build mechanisms whereby they remain 20%, 30% or 40% partners for a few years. It's good for them and excellent for us because I gain a management, a stable workforce, and customers, and I'm able to build through evolution and not revolution.
"I have competitors who make acquisitions, fire the management, send a manager from somewhere else, shut down, transfer, and in that way make a lot of savings. I don't know who's better, but we have a different policy and so far we have a good track record. I keep the management in place, keep the owners, the workers, the spirit of the company and its ways. I don't need them to sing Hatikva in Switzerland, China, Peru and Chile. Everyone can sing his own anthem, and produce his own flavor."
And why is it good for them to stay with you?
"I give them more know-how, more technology, global procurement, operational efficiencies, construction of new products and flavors. That's my role in this global band. I don't want to manage from here anything at this or that end of the world. I want the CEOs to manage the businesses. Often it's a case of a small to medium-size family business in which the manager is the owner. I offer a deal in which he remains a shareholder and manages the jointly owned business, with a written option that he can exit after a few years. We set the future consideration mechanism from the start. In that way, I create huge advantages for me and for him: committed managers who know how to run the business and know the language and the taste."
Industry and agriculture are disappearing
"The main thing for me is that we have built an Israeli, Zionist, global company," Yehudai declares without a trace of cynicism. "I know words like these can irritate, chiefly the media, but I believe in it, and I say it again: both Zionist and global. I had a revered teacher, Eli Hurvitz, I had dozens of conversations with him. He said that Teva could double itself every four to five years, and that's what Frutarom is doing."
In what sense exactly is Frutarom Israeli?
"Its management is here. It has employees here, it has development centers here, it pays a lot of tax here, and it contributes to Israeli GDP here. If it isn't that way, I don't see an economy in Israel, I don't see a society in Israel, and I also don't see a state in Israel. That's my personal view. You in the media can say what you like."
You're being provocative. Why?
"Because I'm very fearful, and I'm not sure that you understand it. Ten years ago, 64 factories were built in Israeli in a year. Two years ago, it was ten. Last year, four new factories were built. Worse than that, many more factories are closing than are opening. Many of the medium-size and large businesses are being sold to foreign companies, and within a fairly short time, in the nature of things, their center of gravity - their management, and their identity - is liable to move elsewhere in the world. Perhaps the odd factory will remain here, perhaps not."
Why do you think this is happening?
"It starts with a lack of consistent government policy for encouraging industry. I'm convinced that the battle over the global economy is a battle between countries, not between the center and the periphery, not between Herzliya and Kiryat Shemonah, Dimona and Ofakim, but between Israel and Ireland, Singapore, Romania and other countries. And I say this as someone who manages a global company most of whose production is outside Israel. Certainly most of the sales are outside Israel."
Are you saying that Israel should forego taxes?
"No. I'm saying that Israel must be made attractive for investment, both local and from overseas. We have to stop the hue and cry against businesspeople. I'm fearful because of the fact that many business owners and industrialists, friends of mine, who have sold industrial companies, are not prepared to invest in Israel anymore."
"Frutarom is not open to acquisition offers"
The players on Yehudai's flavors playing field are four giant companies with turnovers ranging between $2.5 billion and $5.5 billion, seven more large companies, and some 800 small and medium-size companies with turnovers in the tens of millions of dollars, "most of which are relevant for acquisition", as he says.
This means you have more good years of acquisitions ahead.
"Yes, that describes it exactly. I'm interested in those 800. I'm familiar with much more than half of them. I know the owners. Half of my time running Frutarom is spent on acquisitions, and acquisitions mean looking, getting to know, preparing, contacting, forging mutual trust."
You keep 400 companies around the world on a back burner?
"Yes. Out of these 400, I believe that more than 200 will be ready for a deal in the next two-three years. Not that I'll buy 200 - that's just the number of companies that we have identified, that we know about. One day… we'll see."
How many people like you in the flavors industry go around having dinner with people who might one day sell them their companies?"
"I'm not sure there are any. I don't think there are. There are competing companies that want to buy certain companies, but I'm not aware of a company that has this in its DNA, in the DNA of its CEO, that has an elite commando unit of people who deal in business development. But if I don't make a telephone call, go to a first dinner, make contact and maintain it, invite his daughter when she's on a visit to Israel, look into his eyes as he looks in mine, it will be different. Not as good."
And how many people come to dinner with you to buy you, your company?
"I'm not free for dinners like that at this stage."
You know the fat, lethal, evil worm - we're big, strong, clever, successful - and then you fall on your face.
"Every morning I say it to myself. Every morning and every night. I to myself. The sin of arrogance, the sin of pride, the thought that what has been always will be - those are the most frightening things. Those are the things I think about every night, that I go to bed with and wake up with. In the desert, at sea, in bed, on a plane, walking and driving."
Frutarom has got onto the health wave. The wealthy Western market is going in the direction of fewer additives, less processed. How do flavors companies like Frutarom fit into this trend?
In one of Frutarom's most recent official statements you wrote: "Bio-technological production methods for producing natural nutrition raw materials with scientifically proven health value…" Does that translate as: "Guys, we know what you're thinking"?
"Several processes are taking place in the world. The biggest is the move from the country to the city, and that means that every year a huge number of people are added to those who consume processed food, because that's an urban characteristic throughout the world. At the same time, the Western world wants healthier food. It wants a tomato to look like a tomato and not a paste. It's commonly said that people don't have time to cook, and I say, it's not a question of time; 80% don't know how to cook."
They don't want to learn either.
"Therefore the switch to processed food and the demand for it continue and will continue. You see this in fast food chains as well, where there are 17-year old kids and not a chef who cooks the order every minute. They need companies like ours to provide the flavor solution, but the public and the chains don't want to see chemicals, all kinds of E additives with numbers, and preservatives. They don't want to see synthetic colors, and they also want to reduce the quantity of sugar and the quantity of salt. The world wants healthier food, but is not prepared to give up on flavor, and that's exactly the direction we have been going in for the past ten years. That's the basis of our future growth. All the acquisitions we have made have been in this field, that's where we are taking the company, both in the developed and in the developing world. In the past two years we have bought natural coloring companies."
What are natural colorings
"Natural colorings are made from carrots, beetroot, from all kinds of materials that replace all kinds of E additives and their numbers. Food protection is our field. Three of our acquisitions are intended to replace synthetic preservatives with products based on rosemary and oregano, more natural flavors that protect the food and extend its shelf-life. Just in the past eighteen months we have bought five plant extract facilities.
"Our acquisitions are in the direction of fruit and vegetable processing, where flavor and texture are becoming more important. That's the trend that the consumer wants. That's the direction in which the global industry is going. That has been our central concern for years."
Salt and sugar are the public's horror and its desire.
"These are the tastiest flavors, the most easily available, and not expensive. We want to consume less but on no account to give up the salty and sweet flavors to which we are accustomed. How is that to be done? In our case, because of Zionism and Israel's strength in citrus fruits, we are developing flavors in Israel on the basis of technology involving citrus-based natural products. We are producing a material that gives a sweet taste, that is being put into beverages by the biggest manufacturers in the world, with zero calories, natural, but without sugar, at half the quantity of the sugar. To reduce the amount of sugar and the amount of salt we are playing with the taste receptors that we have on the tongue, and as we play with them, we look for solutions that are completely natural, and that are not very costly."
So why is the food industry, here and around the world, fighting these development?
"Because sugar and salt are the cheapest raw materials, they are available, and they are the most flavorsome. To replace them is costly, complicated, difficult, and also changes the flavor somewhat. That's my business. I'm not in the sugar and salt business. I'm in the business of natural developments, at a reasonable price, with accurate and full content reporting, and that you will all want to eat."
You talk about natural medicines as well.
"We're talking about natural anti-oxidants in products based on rosemary, ginger, ginseng, and other plants. We sell the extracts to the large pharmaceuticals companies that are producing more and more natural medicines."
Is Frutarom now part of the natural wellness movement?
"Completely."
What's comes after Frutarom?
"Sea and desert."
What about setting up a private equity firm like your cousin Ishay Davidi with FIMI?
"Sea and desert," he responds.
Published by Globes [online], Israel business news - www.globes-online.com - on October 6, 2016
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