Balancing the need to invest against a fragile balance sheet has resulted in some "creative" business engineering at Premier Foods

Balancing the need to invest against a fragile balance sheet has resulted in some "creative" business engineering at Premier Foods

Premier Foods plc is emerging from the long shadow of its debt burden with a new refinancing package and a clear mandate to grow its categories and brands. But, in the tough UK operating environment, growth is proving hard to come by. Premier CEO Gavin Darby speaks to just-food about balancing the need to invest in Premier's stable of well-known brands - as well as some of the more neglected areas of its business - while also managing a fragile balance sheet.

Gavin Darby took the helm of Premier Foods plc 18 months ago during a difficult time in the group's history. The UK company was struggling with the legacy of the debt-fuelled acquisition spree it undertook during the heady days of the previous decade.

By the time Darby joined the group in early 2013, a swathe of non-core disposals to deleverage Premier's balance sheet meant questions were no longer being asked about whether the group would actually sink under its massive debt burden.

But Premier was not out of the woods. The challenge the maker of Mr Kipling cakes and Bisto gravy faced had evolved. Premier needed to develop a strategy that would put it back onto a sound financial footing and also return it to sales and earnings growth.

Darby rolled up his sleeves and set to work with a series of moves aimed at returning Premier to the straight and narrow.

In March, the group announced plans to raise capital. The company issued GBP353m (US$588.7m) in new shares alongside bonds that aimed to raise proceeds of GBP475m. Additionally, Premier secured a new GBP300m revolving credit facility. At the time, Darby said the new financial structure would "liberate Premier Foods from its past" and enable it to execute on its category-based strategy. 

The company also span off two problem areas of the business - its Hovis baking and milling unit and its powdered dessert production - into stand-alone joint ventures during the first six months of the year.  

Speaking to just-food after Premier detailed its first-half results this week, Darby says the joint ventures were "creative" solutions to the problem the company faced. It had two business units that required a significant level of investment to turn them around and very limited cash resources at its disposal.  

"Most people are looking at these two saying, they are certainly high on creativity. We are addressing two businesses - one big one, Hovis baking and milling, one small one, powders and desserts - that had big question marks over their future. Question marks over profitability. We have structured [the joint venture agreements] in an innovative way to allow them to recover and grow without impacting on the parent company," Darby says.

"We span our large baking and milling business off into a private entity that we own 49% of and a private-equity group, the Gores Group, own 51%. We can now invest in the business. I think collectively, based on the money we raised in that joint venture and the two shareholders put in, we have a pool of around GBP200m for capital, marketing and innovation over the next five years. That was one that the City liked very much because Hovis is a fabulous business but it needs to be rebuilt. It is better to rebuild it in a private world. Premier owns 49% of that world so we will stay part of it in the future."

Darby says the desserts joint venture enabled Premier to address the issue that its powders production facility in Knighton was "really only running at half capacity".

In teaming with Specialty Powders, a privately-owned UK firm, the site is able to improve its capacity utilisation and therefore remain financially viable. "They are going to put all their volume into our factory and we will have a joint venture and share the profits with them in the future, which is a way of making sure that the 200 people who work there have jobs," Darby says.

"As part of that, we are taking one or two of our bigger products out of that factory and putting them into another Premier factory, which gives us some big cost recovery there."

Cost recovery in its own supply chain has been a major focus for Premier. The company has worked to strip complexity out of its business in order to boost returns, Darby says.

"We have been careful in terms of our costs. We have announced a number of initiatives in recent years to reduce the complexity of our business. We have taken a lot of our SKUs out. We are halving our number of suppliers. We are buying from many fewer companies... We are working very hard on our costs, which smart companies do in uncertain times."

Premier's efforts to trim down its supply base in the first half have come in ahead of the curve and the group nudged up its target to cut suppliers by 52% by the end of the year. For Darby, giving more business to fewer suppliers is about more than lowering costs. Forging "strategic partnerships" also supports innovation, he suggests.

And innovation will be an important lever for Premier in its bid to grow in the mature categories in which it operates.

During the first half of the year, the value of Premier's five key categories dropped by around 4%. While UK consumers may have enjoyed the warm spring, the higher temperatures - and their massive impact on purchase volumes in categories like soup and gravy - were less welcome at Premier. "We like the winter more," Darby jokes.

Premier saw a 4.1% drop in its so-called "power brands", which encompass Batchelors, Oxo, Sharwood's and Ambrosia.

However, Darby stresses there were some bright spots in the performance of its first-tier brands. "Despite the general environment being very tough we had some of our brands going really quite nicely. Mr Kipling grew market share, as did Loyd Grossman, Bisto."

Premier intends to drive growth in the remaining six months of the year by stepping up its investment in marketing. According to Darby, the group has "close to" twice the marketing budget in the second half.

Premier is preparing to relaunch its biggest brand, Mr Kipling, with a GBP10m marketing campaign that includes a GBP1m digital spend. Packaging across the 74 Mr Kipling SKUs is being refreshed and the relaunch is being supported by a "big PR campaign".

Premier has also rolled out new products in the savoury category, including Oxo herb pots, two new Bisto SKUs and an expansion of the Batchelors Deli Box range. The company expects this recent NPD to start feeding through to the top line in the remainder if the year.  

However, there is little doubt the trading outlook will remain challenging in 2014. Premier is likely to continue to feel the squeeze of wider factors impacting the UK grocery scene, such as the rise of the discounters. But, as shopping patterns evolve, Premier also sees room to capitalise.

For Darby's evaluation of trends in UK grocery and how these can be tapped check back for part two of the just-food interview.