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Lessons from a Twinkie

As Seen in CFO Studio Magazine 2015 Q3 Issue

The miraculous resurrection of Hostess Brands is proof positive that, if acquired at the right price, and approached with the right vision, almost any business has the potential for rehabilitation. Billionaire C. Dean Metropoulos and Apollo Global’s Andy Jhawar performed just such a corporate miracle. How? Forbes reports that it was a scorched-earth approach involving a complete liquidation of the former company, unbundling brands, severing ties with dead-weight subsidiaries, and washing away a staggering debt load. However, Metropoulos made the important decision to remain sensitive to the history of the Hostess brand.

By nurturing top assets, pruning away dead ones, and modernizing manufacturing and distribution, Metropoulos streamlined and transformed Hostess into one of the most efficient food companies in the business. Now, two years after its acquisition, Metropoulos and Apollo are poised to make $2 billion on a $180 million equity investment.

Forbes quotes one banker saying, “What they’ve done at Hostess should be a Harvard Business School case study on how to turn around a business.” Call the class Twinkie 101.

In The Pressure Cooker

As Seen in CFO Studio Magazine Q3 2015 Issue Cover Story

A SUCCESSFUL IPO, AN UNSOLICITED TAKEOVER OFFER, AND A $163 MILLION WINDFALL YIELDED A VERY MEMORABLE YEAR FOR PINNACLE FOODS’ CFO

-BY JULIE BARKER — PHOTOGRAPHY BY MATT FURMAN-

For anyone who works at Pinnacle Foods, the six weeks that began on May 12, 2014, are unforgettable. During this stretch, the future of the company hung in the balance, as the fate of the Parsippany, NJ–based producer, marketer, and distributor of such American dining staples as Birds Eye frozen vegetables, Duncan Hines baking products, and Log Cabin syrup was kicked around far off in Chicago. It started with an unsolicited offer from Hillshire Brands, a Chicago-based food company, to acquire Pinnacle. “That was a really dark day in Pinnacle history,” says Craig Steeneck, Pinnacle’s 57-year-old chief financial officer. Fourteen months earlier, Steeneck and his finance team had borne the lead role in taking Pinnacle public. The takeover news ate at his sense of accomplishment. “It felt a bit like being a victim of our own success,” he says.

Now asked to lead the integration with Hillshire (whose brands include Jimmy Dean sausage and Ball Park franks), Steeneck believed that would be his last act for Pinnacle Foods. Conventional wisdom has it that CEOs and CFOs don’t usually hang around after an acquisition. “The prospect of leaving behind all that the Pinnacle team built was unsettling,” he says. For nine years, he’d put his considerable talent into helping shape, grow, and define the business. Disheartened, he made the trip to Chicago to “lay out the shell of what the integration plan would look like.”

Two weeks later, everything changed. Pilgrim’s Pride (a chicken producer, processor, marketer, and distributor) announced a bid to buy Hillshire. A couple of days after that, another shift occurred, when Tyson Foods (a global chicken, beef, and pork producer) topped Pilgrim’s offer for Hillshire—and a bidding war ensued. It soon became clear that the sausage maker, Hillshire, would be bought out by the highest bidder, which ended up being Tyson, and that Hillshire would not acquire Pinnacle.

Still, Pinnacle had accepted a legally binding offer that had not been officially withdrawn by the Hillshire Board, so the company was bound to the deal and continued to play along, so as not to jeopardize a significant break-up fee. “It was very disruptive,” says Steeneck. “We had to keep people focused on continuing to deliver the business. We carved out all the Hillshire activity and noise to a small group of people, so we weren’t distracting the rest of the team.” But the Wall Street Journal, the Star-Ledger, and CNBC, not to mention online news sources, kept the story alive throughout the six-week period.

Steeneck says that it wasn’t until July 1, 2014, when the Hillshire board voted in favor of taking the Tyson offer, and jettisoned plans to pursue acquiring Pinnacle, that the over 4,000 employees could raise a cheer for their independence and return to business as usual. Also, Pinnacle could then collect the $163 million break-up fee.

Why Pinnacle Was a Target

Pinnacle Foods manufactures products at 13 plants that it owns. Its brands hold the No. 1 or No. 2 market position in 10 of the 14 major categories where they compete. And, Pinnacle generates significant cash flow. “Our cash-to-earnings ratio is enormously high,” says Steeneck: 90 percent at year-end 2014. “That’s one of the characteristics of the Pinnacle portfolio that differentiates us from our peers. We’re able to convert earnings into cash at a very high percentage,” he says.

The Pinnacle business was created from a number of acquisitions (see Sidebar, this page). And the company continued to grow by buying brands that the nation’s large food companies deemed to be non-strategic. As a mid-cap company, with lower overhead, Pinnacle was able to put more attention into the brands it acquired, says Steeneck. Importantly, the brands were charged lower overhead than they’d been saddled with under prior owners.

In order to make those acquisitions and get solid returns from them, Pinnacle relied on tight financial controls and Steeneck’s oversight. In 2007, Pinnacle was acquired by The Blackstone Group and the focus shifted to building a company that could someday go public. Toward that end, in 2009 Pinnacle recruited Bob Gamgort as CEO and made its most significant acquisition, purchasing Birds Eye Foods. “That transaction was transformative for Pinnacle, as it virtually doubled our size,” says Steeneck.

When Pinnacle Foods created the prospectus, the S-1, that was filed with the SEC in connection with its March 2013 IPO, it was Steeneck’s finance team that took the lead, coordinating the efforts of in-house counsel and outside banking and legal advisors, to navigate the organization through this process. This grueling effort included compiling “a 250-page document containing extensive financial data, along with strategic and operational information that needed to be cleared by the SEC,” says Steeneck. Once cleared and with a compelling investor presentation in hand, he, Gamgort and Maria Sceppaguercio, who was brought in at that time to head up a new Investor Relations function, then articulated the story for investors during a 10-day investor road show.

Creating value by “Reinvigorating Iconic Brands” became the company’s mission, with a focus on prioritizing investment spending across the portfolio, expanding margins through productivity, maintaining a lean and efficient organization structure, and driving strong cash flow to create significant shareholder returns. Pinnacle emphasized during the IPO that acquisitions represented upside to the value creation the base business would generate.

“We operate in an industry and categories that are low-growth, but we’re able to create value by investing differentially in the highest-return brands in our portfolio, continuing to reduce our supply chain costs, and maintaining very lean SG&A overhead that minimizes the tax on our brands,” says Steeneck.

Investors responded well. The company priced the IPO at $20 per share. On March 28, 2013, the first day of trading, the stock (NYSE: PF) opened above that price and ended the day up more than 11 percent. Blackstone didn’t sell any of its shares at the IPO, instead choosing to hold for the significant value-creation potential it believed the company would — and ultimately did — realize.

A CFO With Good Chops

Until Blackstone became Pinnacle’s owner in 2007, Steeneck had spent considerable time fixing non-performing areas of the company with better systems and talent. In 2007, the focus changed to investing in the business so as to build a world-class food company.

His prior experience was extremely useful. Early in his career, he worked 13 years at Reckitt & Colman (now Reckitt Benckiser), becoming CFO of its North American operations. There he was involved in acquisitions of such brands as Woolite and Lysol to grow the company’s portfolio (and it was there that he met his wife, Sandra). He held his first public company CFO position at International Home Foods (Chef Boyardee, Gulden’s Mustard, Bumble Bee) and later joined Pinnacle Foods as executive vice president of finance, overseeing supply chain and IT.

Pinnacle had bought Aurora Foods a year prior, and was experiencing problems with customer service. Also, the logistics network was costing significantly more than industry benchmarks indicated necessary. “We had to put much better tools and processes in place, which we ultimately did,” he says. These tools and processes were critical in 2009 as the company embarked on the integration of the Birds Eye Foods acquisition, and in 2013 integrating the Wish-Bone business. “We fully integrated Birds Eye within six months and exceeded the acquisition plan on all key metrics. We had similar success with Wish-Bone.”

Today, two years after proving the company’s value with its successful IPO, Steeneck is still excited by the position he holds and the issues that come up. “I think the best part of my job is being a trusted advisor to the management team and having to be on my game day in and day out,” he says. “We are fighting for market share, we’re fighting for share of shelf, we’re fighting for quality employees, and we’re fighting for investor dollars. So there’s not much room for error. But we’re faster, we’re nimbler, we’re less bureaucratic. By making decisions faster in this world, we’re able to outmaneuver our competition.”

Looking Forward

When Pinnacle received the $163 million break-up fee, the company used most of that money to pay down debt. It also needed to ensure retention, so the company sweetened its bonus plan for the year and granted stock to all salaried employees who did not receive equity as part of their compensation. “One important lesson from the Hillshire event was how important it is for employees to be owners and have a direct stake in the company’s future,” says Steeneck.

The acquisitions that defined Pinnacle Foods’ growth over the course of the company’s first decade are harder to come by now. But it’s possible to improve margins by reinvigorating, for example, the male-focused TV dinner Hungry-Man with new flavors and combinations that can raise the price point: Fried Chicken and Waffles, anyone?

Steeneck’s finance team plays an active role in this sort of product innovation. Senior-level finance staff members are integrated into the business units in sales, marketing, and supply chain, with dual reporting responsibilities. Beyond costing out and evaluating new products, says Steeneck, “They’re involved in the development of the marketing and sales plans, and linking those plans to the supply chain.”

Finance team members are thus in a position to influence the brand teams to make better decisions, whether it’s forecasting sales or determining a future path. “You don’t want your finance team just looking in the rearview mirror. You want them working as cross-functional business partners to support better decision-making,” he says.

And Steeneck’s choice of people to support the commercial side of the business and help in the decision-making process gives him a maestro’s role in Reinvigorating Iconic Brands.

Cast In A Different Mold

As Seen in CFO Studio Magazine Q4 2015 Issue

SCHOOLED IN CHEMICAL ENGINEERING, BURKHARD ZOLLER LEARNED TECHNICAL CONTROLLING ON THE JOB AND LIKED IT

BY JULIE BARKER

Perfectly at home discussing methacrylates and performance polymers, Burkhard Zoller, CFO for Evonik Corp. – North America, has spent 30 years with the chemical company based in Essen, Germany, starting right out of college as a plant engineer. Three decades and 11 jobs later, he is experienced at running plants and business units. He has also run finance and strategic projects, and was controller for two different business units for about seven years. All this serves him well day-to-day in his current job.

And when he scrutinizes acquisition targets, he gives them the once-over in two ways. He examines the financials and the balance sheets, as all CFOs do, but he also evaluates the firm’s technology to ensure that it’s not only capable of what the target company claims, but is also a good fit with Evonik’s extraordinarily broad portfolio of applications. Zoller, whose master’s degree is in chemical engineering, is a different type of CFO for our times. But he’s not unique in this particular regard. According to a Bank of America report titled “Evolving Role of the CFO,” 63 percent of CFOs are taking on strategic responsibility for technological advances.

For Zoller, having such a skill set is useful with the Board of Directors when presenting the reasons for a proposed acquisition. “You can only put so much information into a paper and present it to the chairman, or in our case, chairwoman. In the meeting, additional questions pop up and I’m in a good position to know about the environmental issues, about the technical issues, about the market access, about the competition, and so on. And that way, I’m very helpful in the decision-making process.”

Diverse Products and Skills

With historic roots dating from the beginning of German industrialization in the first half of the 19th century, the contemporary Evonik Industries was established in 2007 from a lineage of predecessor specialty-chemical companies. Its products, says Zoller, “are in everybody’s life.” Its chemicals are in consumer products like toothpaste and soap. Its polymers are in pill coatings for delayed release of the drug as well as taste masking and moisture protection to make pharmaceuticals more palatable and long acting. Evonik products also make spices more free-flowing and make airplane wings more lightweight.

To keep the inventions coming and to tap into megatrends, R&D is essential. “We spend more than 3 percent of our revenue on R&D,” says Zoller. “We always have projects in the innovation pipeline. Evonik has an intellectual property department here in North America because we had too many ideas to have it done in the central patent department in Germany.” As CFO, one of his focuses, he says, will be to keep money flowing to innovation.

Prior to stepping into his CFO job in 2014 — overseeing finance, tax, IT, and several service units, including energy management, for Evonik’s U.S., Canada, and Mexico operations from offices in Parsippany, NJ —Zoller had several notable shifts in responsibility and title. One of the most important was when he became vice president and controller for the Methacrylates business unit of Degussa AG (an Evonik predecessor). For the first time his job was to look at numbers and think of probabilities. “Accounting is describing what happened last year, putting it in a financial statement. But controlling is looking forward,” he says. “That’s an important part of today’s business. You can’t wait until it’s too late. You have to correct the direction the company’s going, and that’s what controlling is about.”

In that role, he also headed up strategy, and in consultation with the business unit’s head, contributed to decision-making and business development. He advised pursuing acquisition of a company that is still a major part of Evonik’s U.S. business, Evonik Cyro. The acquisition was completed in 2005. “We were on a growth path,” he says. “From then on, we grew.”The methacrylates business expanded from a largely European one to North America and Asia. “It was a very interesting time. We were touring, doing the roadshow to get the approval for this big expansion course, and we actually succeeded. When I started as the controller in that unit we had 270 million euros in revenue, and when I left seven years later, we had 1.4 billion.”

Deeply Involved

Besides his dual background in chemistry and finance, Zoller is an atypical CFO in other ways, as well. To clear his head, he might take off on a motorcycle trip for several days. In early summer, he and a friend rode touring bikes from New Jersey, where he lives, to the White Mountains of New Hampshire, and up Mount Washington for the view. “I’ve driven motorcycles all my life,” he says. “It’s my way to get a fresh mind. You can’t think of anything else when riding a motorcycle.”

One might guess there’s a bit of a risk-taker in such a personality, but he is certainly not that. Asked about the most beneficial contribution a CFO can make to his company, he says, “Keep the company out of financial trouble. That’s the core. The old traditional CFO tasks are still the most important.”

He says the most exciting part about his job is “being involved in everything. Having this broad knowledge about the company, and being able to talk to everybody in the company and outside.” Recently, he says, he enjoyed a lengthy conversation with a major tire manufacturer’s head of innovation and was able to speak knowledgeably about a green tire ingredient Evonik makes.

In July, a new Evonik innovation hub opened in Richmond, VA. “We’ll create new jobs there — and I also want to bring more manufacturing to North America. The United States has an advantage in raw material, in energy costs, and it is a steady, growing market, one of the biggest in the world,” says Zoller. “I’ll try to get more investment over here.”