BERKSHIRE HATHAWAY’S TOBACCO HISTORY PART VII - CONWOOD: A REMARKABLE COMPANY

Warren Buffett and Charlie Munger did not buy it. The Pritzger family bought it in 1986 and sold it to Reynolds American in 2006. Conwood was, and still is an unusual company. It’s management style suited its product, and management had the right corporate culture.

REYNOLDS AMERICAN GETS A JEWEL

In 2006, Reynolds American (RAI) purchased Conwood for $3.5 Billion. Through the merger with Brown & Williamson in 2003, RAI owned Lane Limited. Lane’s pipe tobaccos included Captain Black, Sir Walter Raleigh, Half &Half, and 20 more of the world’s most iconic pipe tobacco brands. It also made Winchester (little) Cigars.

Conwood’s office and plant was in Memphis, with a storage and processing plant in Clarksville, Tennessee. Conwood also owned Taylor Brothers Tobacco in Winston-Salem, NC.

RAI combined Lane and Conwood into American Stuff Co. the original name when the tobacco trust was dissolved in 1907. In 2011, RAI sold Lane to Scandinavian Tobacco Company. American Snuff (Conwood) continued to grow.

DEDICATED MANAGEMENT

Martin Condon III began at Conwood in 1933, with Richard Harwood, and rose to president in 1949. He graduated from Princeton and Penn’s Graduate School of Business. He became the board chairman until his death in 1977. Condon had close ties to R. J. Reynolds management. His daughter married Bowman Gray III, son and grandson of two successful CEOs of Reynolds Tobacco.[i]

Leadership passed to William Rosson Sr., a native Tennesseean. He graduated from Columbia Military Academy in 1940 and attended Vanderbilt University. He was a gunnery officer in the U.S.

Navy in World War II. He earned a degree in Physics from the Tennessee Polytech in 1946.

Beginning 1947, Rosson worked in the tobacco and construction business. In 1955, he joined Conwood, and worked there until he retired in 2007, 85 years old. He advanced from tobacco buyer to Chief Executive Officer and then to Chairman Emeritus. His family tenure with Conwood, including his father and his son, was 127 years.

A versatile man, he could quote the Bible and Shakespeare, and read extensively on physics and quantum mechanics. He enjoyed finding novel solutions, whether the problem was a manufacturing process or lawn mower repair.

Rosson Sr. talked to Munger (probably 1973-77). He wanted the buyer to leave the management in place. Berkshire decided not to buy. But in 1984, the Pritzger family bought Conwood for $406 million, agreeing to keep the management. Rosson stayed until after the RAI buyout in 2006.

Following his father, William Rosson Jr. became CEO. He had been with Conwood since 1975. He headed the company until 2009, retiring at age 60.

The Pritzgers agreed that 5% of operating earnings would go to the management group. In 2005, the last year of independent operations, Conwood reported pretax earnings of $250 million. The management team’s “operating bonus” was $13 million. Rosson Sr. (whose salary was $50,000), with his bonus, reportedly had higher income than the $2.6 million paid to the CEO of the acquiring Reynolds American.

Altria (Philip Morris) was also a suitor for Conwood and offered a higher price than RAI. But Conwood feared that Philip Morris would move operations to Richmond. They wanted to lead the company from Memphis.

UNIQUE CULTURE

The culture was a throwback to the tobacco industry of the early 1900s. Everyone in management chewed tobacco or dipped snuff. (Some carried the ubiquitous paper cup for their tobacco juice.)  Every office had a brass spittoon.

Conwood was a product driven company, not a marketing company. Management religiously controlled costs and operating assets. The RAI purchase allocated only 4.7%, $167 million, to working capital and property, plant, and equipment. Conwood generated $163 million of net earnings an unheard-of return on operating capital employed (ROCE) of 97%. The Pritzgers had clearly given Conwood management the right incentive to make money for all concerned.

Wet snuff is 60% water; cigarettes are 14% water. So, snuff has only 47% of the tobacco content of cigarettes per pound of finished product. Snuff has a far higher profit margin than cigarettes because so much of the product is water.

This is the kind of company Warren Buffett loves – simple, pricing power, growing volume, limited competition. Also, a management team dedicated to quality and cost control.

Conwood exceeded even the traditional high returns of cigarette companies. And while cigarette volume declined, the oral tobacco segment grew. From 1985 to 2016, sales grew 5.0 % annually compared to RAI’s 2.7%. Conwood’s profits grew 8.4%annually. Industry analysts project oral tobacco to grow 4.7% a year until 2030.

MYSTER SOLVED

Conwood brands Kodiak, Grizzly, and Cougar come in pouches and with different cuts of tobacco. Competitor UST has the Copenhagen brand. The purchase of Conwood solved a mystery that had long puzzled RJR/RAI – how were the “dipping tobaccos” made?

Dipping tobacco leaf, a type of Burley called “dark-fired tobacco,”  is grown in 20 counties in western Kentucky and northwestern Tennessee. It is cured by smoking over gentle fires for up to 30 days. It has a pungent aroma and flavor, and  the leaf is exceptionally dark. After curing, the tobacco is stored in hogsheads (wooden barrels) for three years. Workers periodically check that the tobacco is fermenting properly to assure its quality.

[i] Bowman Gray IV shared a story about the Conwood purchase of Taylor Brothers Tobacco in Winston-Salem. His mother recalls that in 1953, her father was hosting Archie Taylor to close the deal. She attended the dinner at the Memphis Country Club.  After dinner, Taylor took out a plug of tobacco and cut off a chew for himself. He then offered Miss Condon, who was 14, a cut of his plug – which she presumably declined. Clearly, Taylor fit the Conwood culture, devoted to the product.