Aurora Foods Cobbles Together Ingredients to Restructure

By Thomas Lee
Of The Post Dispatch

St. Louis Post Dispatch
Sunday, November 11, 2001
Business Section

Aurora Foods Inc. might be the only $1 billion company that didn't have time to become a company.

Truth is, the St. Louis-based food manufacturer was cobbled together in 1998 by a group of investors who purchased castaway brands such as Duncan Hines and Aunt Jemima, but the pieces -- literally -- never came together.

Several of Aurora's top executives at the time, including the chief executive officer, reported inflated profits to shareholders, leading to a flurry of criminal investigations, indictments and lawsuits that nearly destroyed the company at its infancy.

So, when Jim Smith became president and chief executive last year, the veteran food executive had to begin from scratch.

"We had trouble just figuring where the data was," he said. "We were not sure the numbers that we did have were real."

One plus: "We knew we had great brands," he said.

For Smith and his senior management team, the trick was to find the right strategy to complement the brands. Now, 18 months later, Aurora Foods slowly is building itself back to profitability and respectability.

For the quarter ended Sept. 30, Aurora reported a $3.2 million loss, compared with a $15.3 million loss in the same period a year ago. The company would have posted a profit if it had not taken a $6.4 million charge related to an unsuccessful interest-rate hedge.

The company again is attracting the notice of Wall Street analysts, who dropped their coverage because of Aurora's legal and financial problems. Aurora stock, which late last year traded as low as $1.90 a share, is hovering around $5 now.

To be sure, Aurora is not out of the woods yet. It still is a relatively small player in an increasingly consolidated industry that favors giant food companies with the money and the scale to dominate supermarket and retail shelves, experts say. Aurora's market capitalization, $343 million, is minuscule compared with the Sara Lee Corp. of Chicago, valued at nearly $18 billion.

And despite a year of wooing back the financial community, Aurora has yet to win any coverage from analysts, who say the company's stock price must first improve further. Without analyst coverage, many investors are unlikely to purchase the stock.

Nevertheless, Aurora seems to be on the right track, a dramatic improvement for the company once considered the financial pariah of the food industry.

Company's Beginnings
Aurora Foods' origins go back to 1995 when Ian Wilson, a food-industry executive, and a consortium of three investment firms led by Fenway Partners of New York began to assemble a company that would purchase and revitalize orphan brands that larger food and consumer-products companies, including Procter & Gamble and Kraft, no longer wanted. Where those companies, which owned enormous product portfolios, neglected certain brands, Aurora would be small and nimble enough to make them winners, breathing life into a stagnant industry growing at 1 percent or 2 percent a year.

A profitable brand, however, requires a significant investment in marketing support, experts say. So, a company must be careful not to pay too much for a new acquisition, said Tim Swanson, a former food and beverage analyst for St. Louis-based A.G. Edwards and Sons Inc. who now works for Argent Capital Management.

Aurora went on a spree, buying several brands in two years, including paying $445 million for Duncan Hines, $125 million for Mrs. Butterworth's syrup, and $275 million for Lender's Bagels. By focusing so much on acquisitions, Aurora neglected the revitalization of those brands, Smith said. Aurora never took the time to integrate its portfolio by searching for synergies between the products, he said.

"I never believed in the orphan-brand strategy," said Smith, who once ran the frozen-foods division at ConAgra Foods. "It's almost impossible for one isolated business to do well. We had five unrelated businesses. It's like having five different companies."

Aurora's Problems
Investigators from the Securities and Exchange Commission and the Justice Department this year accused Wilson and three other top Aurora executives of hiding Aurora's expenses and inflating profits. All four resigned and later pleaded guilty in federal court in connection with the charges. As the stock began to tumble, the company was hit with several shareholder lawsuits, which pushed Aurora to the edge of bankruptcy, Smith said.

So, why would Smith, a respected food-industry veteran, want to take over such a troubled company? Aurora still possessed top-performing brands, he said. Despite the company's problems, brands such as Duncan Hines baking products, Mrs. Butterworth's syrup, and Van de Kamp's and Mrs. Paul's fish still commanded top market share in their categories. That's an important asset because supermarkets and retail outlets devote their limited shelf space to only a few top-selling brands and private labels.

Moving Forward
Smith also won a sweeping mandate from Aurora's board of directors to do whatever was necessary to get the company running smoothly.

Before taking the job, he said, he called people in the financial community who knew the board to determine their integrity. Otherwise, he said, "There was no way I was going to touch that job."

Smith launched a multipronged strategy to reverse the company's fortunes. The first goal is to reduce costs and to eliminate inefficiencies. To that end, the company closed its Cincinnati production plant and folded its San Francisco corporate offices into its headquarters office in St. Louis.

Smith also looked to create synergies between brands, in manufacturing and marketing. Most of the company's products involve baking and use many of the same ingredients, he said. The company hopes to leverage the similarities to get better prices on the ingredients it buys from suppliers.

Smith says there are plenty of opportunities to co-market products. For example, Aurora found that consumers who purchased Duncan Hines cake mix also bought Betty Crocker cake frosting. Why not stick a coupon for a Duncan Hines frosting product in a Duncan Hines cake mix box? Done.

Since the company does not have the financial resources of Sara Lee, Smith said, the company must devote its cost savings toward brand building. In February, the company said it would spend four times as much as it spent in 2000 on new advertising and marketing campaigns for Lender's, Mrs. Paul's and Van de Kamp's. Over the past year, the company has introduced a slew of new products, such as Duncan Hines vanilla- and lemon-flavored cake frosting and Mrs. Paul's shrimp and stir-fry dinners.

Getting new products to supermarkets and retailers is crucial for food companies to maintain market share and shelf space, said John Hauptman , vice president of Willard Bishop, a grocery-consulting firm in Minnesota.

Smith also reorganized Aurora's sales force to serve big clients better, such as Wal-Mart Stores Inc. and Schnuck Markets. Instead of assigning sales teams to geographic areas, the company devotes a team of people to each large client. Before, the company neglected so many accounts that it was in danger of losing them, said Smith, including Wal-Mart, which makes up 12 percent of Aurora's annual sales.

Regaining Credibility
But perhaps most importantly, Aurora needed to regain credibility in the financial community and to repair its reputation. He named Paul Graven, another ConAgra veteran, as senior vice president of human resources and corporate compliance officer, a position meant to protect the company's accounting procedures.

Smith talks candidly about Aurora's past -- a smart move, experts say.

Smith has spent the better part of this year courting Wall Street analysts, trying to regain coverage. It won't be easy. Many of them had based their stock recommendations on Aurora's fraudulent earnings reports.

"Some of them were really made to look like fools," Smith said. "(Aurora) compromised their ability to do business. It's not surprising they would stop their coverage. If I were them, I wouldn't cover the company either."

Smith said he has made a special effort to regain their trust by making himself accessible.

"You have to be open and honest," he said. "You don't play games with them. I talk to these people all of the time. Some of them I have known for a long time."

Smith has brought credibility to the company, said John McMillin, an analyst with Prudential Securities Research. "He has made the right strategic moves. They are doing all of the right things."

But in the long run, analysts say, they will base their decisions about whether to cover the company again on Aurora's financial performance.

"I don't like to spend my time following $3 stocks," McMillin said.

It's fine to court analysts, said Juli Niemann, an analyst with RT Jones Capital Equities. "There's no way you can regain credibility without putting up some numbers."

"There's no shortage of stocks out there. Why waste your time with someone short on credibility? Analysts are rational people. They want to make good, decent money."

Reporter Thomas Lee
E-mail: tlee@post-dispatch.com
Phone: 314-340-8209