On the money: Premier looks to further savings, not disposal to drive growth

By Michelle Russell | 21 February 2013

Premier said it is “encouraged” that the strategies laid down by the company last year are beginning to work

Premier said it is “encouraged” that the strategies laid down by the company last year are beginning to work

Premier Foods plc has said it will not actively look to divest any more brands and will instead seek further cost saving  in order to accelerate investment in the business.

The Hovis maker this morning (21 February) reported an 18% drop in continuing trading profit to GBP154.7m (US$235.5m) for the 12 months to the end of December. Ongoing efforts to refocus and restructure the business, however, meant the underlying result was up by 10.6% to GBP123.4m.

In the last year, the company has undertaken a disposal of a swathe of non-core assets in a bid to pay down the group's high debt levels as part agreements to restructure the firm's loan covenants. Premier also saw CEO Michael Clarke step down in January to be replaced by Gavin Darby who has been in the role for three weeks.

Speaking on the firm's earnings call today, Darby said he was "encouraged" that the strategies laid down by the company last year are beginning to work.

"2012 was an extremely important year in establishing a strong foundation for our future growth. We have delivered significant savings in our overheads."

He noted that Premier had reduced its net debt from GBP12.3bn to GBP951m at year end.

He added: "There will be changes in terms of strategy, more about my focus and the way we work. The number one priority is to up the pace and energy in terms of execution and that is very much the world I come from."

Darby said the company would look at "further cost saving opportunities" over the year to increase investment behind its its brands.

"[We have a] clear roadmap and our focus is all about growth in grocery and rebuilding value in bread. I will focus and lead from the front in terms of execution and the company will feel the pace from the top where we will look at more reductions in savings to accelerate investment.

"This year is not about structural cost savings," he told journalists. "Most businesses I come to have too much complexity and lots of SKUs, different flavours and formulas.

"Typically, what you find is some of those are the fast growing, more profitable brands. We will look to take out some of the complexity in the organisation. We have a huge number of, for instance, recipes for sometimes very similar products and when you take that kind of complexity out, you take money out and reduce inventory and that creates resources to put back into the brands."

Analysts have suggested in the past that Premier could look at divesting more of its brands in order to "significantly improve the balance sheet".

This, Darby said, was not his "primary focus", adding that disposals were on the "A+ list" of his predecessor and a "fundamental part of the refinancing".

"We are through that now. It's not on my A list or my B list. I'm into growing the business with the big brands we've got. That is very clear. If somebody decides that one of our non-power brands is significantly more valuable to them than it is to us then you're never going to say absolutely no, we won't look at it. But the key thing is, it's not on my agenda. My agenda is all about growing the business we've got."

Instead, Darby said Premier would look at "rebuilding value in bread" and "keeping our foot on the gas" in terms of marketing in grocery in order to drive momentum. "We can successfully handle the loss of the previously announced bread contract and come out at the end of the year with a strong Hovis power brand and a better, stronger bread business."

Indeed, sales for the bakery division, excluding milling, declined 0.7% to GBP497.1m for the year, while total sales for the unit dropped 0.7% to GBP688.5m. Changes to customer and product mix, contract losses and poor wheat quality also had an impact on divisional contribution, which was down by GBP24.8m to GBP26.9m for the year.

Darby suggested the key to improving profitability will be investment behind its power brands in 2013.

The CEO said Premier will continue its "significant marketing investment" this year, potentially "at even higher levels", in addition to working closer with its big customers, and putting more energy into "interesting growth markets" such as discounters and convenience stores.

He added: "Finally, something that will take time to work through, we are strongly investing in innovation but I think we can do more. We will put more money and focus on new products and initiatives and bring them to market faster."

Darby said Premier is set to launch a range of new products in the next three months, including Ambrosia Devon Dream: an alternative to full cream but with 80% less fat. In addition, the group is re-launching its Bachelors brand with new products and the first advertising campaign for the brand in five years.

Darby finished on an upbeat note on the year ahead. He conceded that he expects the market will "remain challenging" in 2013, but said the company has the "right strategies in place to make further progress this year".

Investec analyst Martin Deboo agreed that "plenty of challenges remain" for Premier.

"The trading environment is tough and marketing investment remains low by peer standards. And despite good work on disposals, leverage (inc. pensions) remains stubbornly high," he noted.

Nonetheless, Darby said: "I am looking forward to driving the business through 2013. I'm aware the environment we're working in is a challenging one but there are interesting opportunities in that challenging environment. I feel confident on the future."

Sectors: Bakery, Canned food, Chilled foods, Condiments, dressings & sauces, Dried foods, Financials, World foods

Companies: Premier Foods plc

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