Dial's chief of cleanup: Herb Baum has the soap maker looking shiny and new. Now he needs to find a buyer. (Turnaround).

As a Dial Corp. board member, Herb Baum was not surprised to learn in August 2000 that the board was planing to oust CEO Malcolm Jozoff. Jozoff made numerous acquisitions that saddled the company with nearly $660 million in debt, not exactly pocket change for a company with $1.6 billion in revenues. Those acquisitions combied with a stock buyback program--in which the company purchased $190 million of its own shares at an average price of $19, while the stock had dwindled to $11--put Dial's debt-to-cap ratio at a whopping 67 percent. Jozoff had also started up cash-burning businesses in Latin America and Mexico that never really fit in with the company's overall strategy. Worse, in an effort to make its sales numbers look better, Dial had been "stuffing the channel," or using promotions to encourage retailers to stock up on Dial products, which led to an earnings shortfall in 2000.

By the time Dial announced it would miss earnings expectations for a third consecutive quarter, the board had had it. But when they asked Baum to save the foundering consumer products company, they caught him a bit off guard. He was in the middle of a three-year contract as president and COO of Pawtucket, R.I.-based Hasbro, helping its CEO Alan Hassenfeld cope with the toy company's troubles, and hadn't planned to change jobs so soon.

But Baum was a natural fit. He boasted lengthy consumer goods experience during his 15 years at Campbell Soup. And he had proven his turnaround talents as CEO of Quaker, where sales more than doubled and operating earnings grew seven-fold before he sold the company to Penzoil for a tidy profit to shareholders.

Having been a director at Dial for the previous three years, Baum knew he'd have to untangle a financial mess and somehow restore investor confidence, which Dial's former management had depleted along with its cash reserves. The company's stock price had plummeted 64 percent over the previous year, as had employee morale.

But like other turnaround adventure-seekers, Baum saw opportunity where more conventional CEOs might have seen a prescription for failure. He also saw a chance to leave the unpredictable world of toy marketing--and a position as Hassenfeld's No. 2 -- and return to his first love, consumer packaged goods, this time as CEO.

Hasbro was not as eager to release Baum from his three-year contract. "There was a big fight," recalls the soft-spoken CEO, which his lawyers finally won. Baum and his wife Karen -- who had coincidentally just sold their Scottsdale vacation home located just a few blocks from Dial's headquarters -- found an apartment nearby and Baum moved into Dial's corner office.

The plan for rebuilding

His two-part mission: To spruce up the 52-year-old soap maker enough to make it attractive to potential buyers -- and to help it survive as an independent company in the event that no suitors emerge. He introduced a four-part plan, known by the acronym SFX01, to make that happen. It called for stabilizing Dial's core businesses--soap, laundry detergent, air freshener and canned meat divisions -- fixing marginal businesses or jettisoning them, exploring all options, and completing an evaluation for shareholders and analysts in 2001. to ensure the company was on track.

He recruited trusted advisors, including his former CFO at Quaker, Rad Conrad. They did not need to look far to find Dial's top three underperformers: the specialty/personal care product business, which it has since sold, and its operations in Mexico--part of a joint venture with German company Henkel--and in Argentina. All three combined to lose 40 cents a share in the first six months of 2000. Baum was able to dissolve the Henkel partnership, but the climate in Argentina has kept buyers away, forcing the company to consolidate operations there instead.

Jozoff's plan to expand into new territories to offset slowing growth in the U.S. market was not inherently flawed, Baum says, but in general, U.S. companies without experience in international markets tend to have too myopic a perspective when it comes to local economies, cultures and consumer buying habits. Baum learned that lesson as an executive with Campbell, which tried to market its canned condensed soup lines in countries that were unlikely to warm to them. "I remember the year they had an annual report that showed Campbell's soup being served on a street in China," says Baum. "There's no way the Chinese were going to eat our canned soup."

So when Jozoff suggested starting up business in Argentina, Baum, then a director, was the lone dissenting "voice in the wilderness," he says. "It's a difficult country to do business in because it's kind of a Latin dance--you take one step forward and two steps back," says Baum. "I said, 'everything you make you'll lose back'--and that's exactly what happened."

Shedding the unprofitable businesses has helped address the issue of Dial's massive debt, which has been whittled down to $445 million since Baum moved into the corner office. And cash flow from operations was up 26 percent in 2001 over the previous year.

But hoarding all its free cash to pay down debt did not further part two of the original plan, which was to grow the business enough to survive on its own. With no acquisition resources, Dial has had to forgo opportunities to buy potentially synergistic brands from P&G and Colgate. "How do you stay competitive if you don't acquire?" asks Baum, rhetorically.

The answer, he says, is to build what you can't buy. To that end, Baum renamed the company's R&D facility the Dial Center for Innovation, and gave each of the center's 80 scientists a quota of two new patent ideas per year.

Baum also put the former head of the specialty products unit in charge of the innovation center and told him to reduce his list of 145 projects to just three. "I said, 'I want you do three things well,"' he recalls. "I thought that was manageable and affordable. Because when you go to market, you have to spend $20 million or $30 million to introduce a new product." Dial has one new product scheduled to launch in July and another by the end of the year.

Employees are also being invited to pitch in with idea creation, though an ideas exchange Web site called Dial Tomorrow and monthly Chew on This lunches. A recent companywide Innovation Week produced 3,800 concepts in 22 minutes, all of which the innovation group is evaluating.

Infusing the workforce with a competitive spirit was a must for Baum; as a David amid Goliaths, Dial's strength would have to come from its people. "It sounds cliche, but we need to be guerrilla marketers. We can't compete toe-to-toe with P&G, Unilever and Colgate. They're very good and they're very strong. We just need to be faster and look at niches that may be too small for them."

It wasn't easy to get employees interested, though. "This company had not been a nice place to work," Baum reports, offering as an example the former practice of charging employees for covered parking spaces-hardly a luxury in the sweltering summer months. "Why would we charge people to come to work? It didn't make sense." Baum also abandoned the former executive practice of speaking to employees from atop a balcony, which had become known informally as the "papal balcony." Instead he holds town hall-style meetings, walking around with a microphone. "And I have lunch almost every chance I get with 15 employees," he says. "We call it 'Hotdogs with Herb,' because I love hotdogs." Baum also had his department heads sign a Dial Cultural Contract, designed to improve relations between management and employees.

In an effort to boost integrity, Baum immediately outlawed the practice of "loading," or overstocking warehouses with months' worth of inventory. "We were recording those as sales, obviously, because the customers had bought them," says Baum. "It's legitimate and all companies do it, but for us, that's not high-integrity." Being high-integrity, he adds, "is what gets you back in balance not only with your shareowners but with the financial community."

That also means being very conservative in terms of estimates, he says. So far, Dial has managed to meet or exceed Street estimates every quarter -- a relief to the financial community. "One of the big securities analysts told us, 'You're boring,'" Baum reports. "'You say you're going to do something and you do it.'"

Prudential analyst and Senior Vice President Connie Maneaty approves. "They've been doing very well," she says. "I would attribute that to Herb and to the management team he brought with him and [the way he's] energized operating management within Dial. It's a question of leadership, really, and the leadership has been good." Still, she adds that long-term, Dial's brands will likely end up as part of other companies.

Buying the sum or its parts

Finding the right buyer, however, may be as challenging as the cleanup. Few would challenge the value of Dial's brands, all either No. 1 or No. 2 in their categories. And some, like value brand Purex, have been doing better since the economy turned sour.

For tax reasons, though, Dial would much rather sell the company whole than parcel it out piecemeal. But companies interested in Dial's laundry, soap and air freshener products find its Armour brand canned meat business incompatible. "There aren't many companies out there that can use all of those," admits Baum, who has received "a number of inquiries," from companies interested in individual pieces. But even they could face regulatory hurdles. Procter & Gamble, for example, if it chose to expand into the value product line, would likely not get approval to buy Purex detergent, because it already owns 50 percent of the market with Tide, says Maneaty.

For the moment, Dial appears to have the luxury of waiting, now that it's in far better financial shape. The success has earned Baum attention, and at least one other job offer if Dial is sold quickly, he reports, although that isn't likely to make him sell. Still, some wonder whether Dial's drawn-out for-sale period will make it seem less attractive or have buyers thinking they can snatch it for a song. "When the phone rings and somebody's interested, their argument is usually, 'You don't have a lot of takers, so here's a very low price we'll give you for your business,"' Baum says. "My opinion is, we haven't begun to fight."

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BUILDING BACK UP

REVENUE GROWTH

$MILLIONS

1998                    $1,525
1999                    $1,722
2000                    $1,639
2001 [pounds sterling]  $1,725

SOURCE: COMPANY REPORTS

Note: Table made from bar graph
CLOSING THE GAP

                   2000    2001

CASH FLOW RISES   $125.6  $159.4
TO PAY DOWN DEBT  $595.0  $445.3

SOURCE: COMPANY REPORTS

Note: Table made from line graph