Analysts concerned at growth prospects for Premier

Analysts concerned at growth prospects for Premier

After a tumultuous few years, Premier Foods claims it is now ready to focus on organic growth. The UK food group, owner of brands like Hovis, Mr Kipling and Quorn, has drawn a line under years of restructuring and now wants to use its brands to drive sales and earnings growth. However, some industry watchers remain anxious about the future of the business. Dean Best reports.

So, a new year, a new beginning for Premier Foods? The UK's largest food manufacturer would certainly hope so.

Premier has faced significant challenges in recent years. The 2006 and 2007 acquisitions of Campbell Soup Co.'s UK and Irish businesses and of UK food group RHM weighed on Premier on both an operational and on a financial level. The deals gave Premier scale but they also landed the company with a manufacturing base that needed major restructuring and with pressure on its balance sheet.

In 2008, Premier embarked on a major manufacturing review that led to 13 plants being closed. The closures meant the company's remaining facilities had to readjust to taking on more capacity, leading to short-term production inefficiencies that were still being felt throughout 2009.

The acquisitions also put financial pressure on Premier, pressure that was exacerbated by the commodity price hike of 2008 and led to a level of debt that reached GBP1.8bn, causing anxiety among investors.

Last March, the Mr Kipling and Hovis maker launched a share issue to cut that debt and struck a fresh agreement with its lenders to give the business some breathing space.

However, come this January, Premier's shares slumped when its forecast for 2009 pre-tax profits missed forecasts. Premier insisted it had made "good progress" during 2009, claiming it was "encouraged" by the growth of its brands and to the share gains it had seen in key categories.

Nevertheless, some industry watchers remained concerned. Analysts at Panmure Gordon acknowledged the "impressive" growth of Premier's brands but said the company's own-label operations and meat-free business were "weak".

Yesterday (16 February), Premier published its full 2009 results and met analysts in London to discuss the company's performance last year - and, crucially, to set out how it intends to take the business forward.

Premier CEO Robert Schofield was upbeat about the company's performance in 2009 after it posted a 4.5% rise in trading profits, with revenues growing 2.2%, and said the business was now in a shape to focus on its brands and grow.

"We've come through three phases of our development," Schofield said. "The first one - acquiiring businesses. Then we went through an extensive two-year period of transformation and integration, where we knocked the business about ... but we're through it. Where we are now is back into organic growth. The transformation is now complete and we are now running the business organically."

Schofield outlined Premier's plans to divide its portfolio into products labelled 'drive', 'core' and 'defend' brands. Premier plans to focus on five "drive" brands and categories - Hovis bread, Mr Kipling cakes, Ambrosia and Hartley's desserts, Sharwood's and Loyd Grossman cooking sauces and Quorn - all businesses in which the company believes it can outpace the market.

The Premier boss also said the company would look to encourage consumers to use its products in different ways through the launch of its "Great Little Ideas" campaign in April.

"If we get this right, we'll start to link the power of our brands across the retail universe and we'll drive consumption in a way in which we haven't before," Schofield said of the campaign.

Nonetheless, Schofield and CFO Jim Smart acknowledged the concerns over Premier's debt levels and insisted the company could drive further efficiencies in its supply chains.

The market seemed to approve of the noises coming from Premier's management. The company's shares closed up yesterday and rose again today, climbing 5% to reach 35.07p at 15:50 GMT.

The response of some industry watchers, however, has been muted. Darren Shirley, an analyst at Shore Capital, said Premier's brand strategy was "sensible" but said it harked back to 2006 when the company divided its products into 'drive', 'core' and 'classic'.

"The strategy is exactly the same as then. The concern I would have is that Premier's 'drive' brands only account for 30% of sales," Shirley said. "If you look at the volume growth of the food categories they have designated for growth, they have only been at 1%. There is very little growth in ambient."

With uncertain prospects for growth in even the categories that Premier has earmarked as driving the business forward, Shirley says there could be a threat to the company's business model and, possibly, its financial health. "If that top line starts to slow further, you get pressure on the operating model," he adds.

And pressure on Premier's business model could cause further anxiety over the company's ability to pay down debt. Disposals could be the answer.

Investec analyst Martin Deboo said he had identified around GBP1bn-worth of assets that Premier could offload, although market conditions mean the company would be unlikely to recoup that much. "If you look at the likely buyers, most have financing problems of their own [but] we're confident Premier could get GBP200-300m from asset disposals," Deboo explained.

Speaking to analysts, Smart did not rule out the prospect of disposals to pay off debt but he insisted, however, that Premier would weigh up what gains the company would get from any disposal against whether an asset could generate better returns.

However, for Deboo, the prospect of disposals is one of a number of pressing issues that investors would like to see tackled by Premier. Shareholders, he said, will want the company to be "more aggressive" on offloading non-core assets. The analyst also argued that, while Premier has done "a good job on its top line", shareholders will now want to see better profits - and those earnings turned into cash.

And, despite last year's share issue, Deboo expressed concern over Premier's debt levels, especially when the company's pension obligations are including the figure. The company yesterday forecast its recurring cash flow, which will be used to pay down debt, at GBP100m - a number that Deboo noted has  not changed from previous statements.

After its recent rocky period, there are signs of optimism for Premier but to some, with a portfolio centred on hardly the liveliest of categories, and with persistent concerns over its debt levels, the company faces some stiff challenges ahead.