Uniq chief executive Geoff Eaton was upbeat about future of business

Uniq chief executive Geoff Eaton was upbeat about future of business

For a company called Uniq, it is perhaps pretty apt that things are rarely conventional at the business.

The UK convenience food firm, which makes sandwiches and desserts for Marks and Spencer and salads for The Co-operative Group has undergone a tumultuous 12 months.

In the last year, Uniq has decided to sell off its European operations, focus on the UK and attempt to sort out a pension deficit that dwarfs the value of the business.

There was optimism in April that Uniq could be set to find a solution to the pension deficit, which at the end of 2009 stood at GBP436m (by comparison, Uniq's annual turnover in 2009 stood at GBP287.2m and its trading operating profit at GBP4.4m).

Chief executive Geoff Eaton said Uniq had managed to strike an "innovative, long-term framework" with its pension trustees that would put off any company contributions to the scheme for the next three years.

The "innovative" nature of the deal, however, meant there was some uncertainty over whether the package would be supported by the UK's pensions regulator and, last Monday, Uniq announced the scheme had been blocked by the watchdog.

The news sent Uniq's shares spiralling and although the company said it would re-start talks with the pension trustees, it admitted that the outcome of the discussions - be it positive or negative - would have a "fundamental impact on shareholder value".

On Thursday, Uniq posted its results for the first half of 2010, figures that included higher turnover, smaller pre-tax losses and an operating profit. The company's shares improved and, talking to just-food, Eaton was in an upbeat mood about the "momentum" of the business and the prospect for a solution to that eye-watering pension deficit.

"We're building the quality and the value of the business at the same time as seeking a satisfactory outcome for the pension scheme," Eaton said. "It's a real credit to all our people in Uniq that they have done such a good job in delivering these better results with that uncertainty that surrounds the business and the headlines that they do have to read."

Those headlines have centred around that pension deficit. The scheme encompasses around 21,000 former milkmen from Uniq's days as former dairy company Unigate. Uniq closed the scheme to new members in 2005 and to existing savers last year but, despite the operational progress Eaton and the management team is making at the business, the deficit is critical to the future of the company.

Eaton said it "was not that surprising" that Uniq's proposal for the deficit was rejected, given the "very innovative" nature of the plan to try to solve "a very large problem over a very long period of time".

"We're talking about a period of 30-50 years to build the business and fill the pension funding. The regulator is looking to weigh up the benefit of securing benefits perhaps at a lower level today compared with the risks associated with trying to secure full benefits over a long period. It's a very complicated challenge," Eaton explained.

"We were obliged to make an announcement on Monday because clearly it was important information in judging the price of the shares but is it part of an ongoing process. We remain fully engaged with the trustee and the regulator and we're very confident that we're going to find an appropriate solution that weighs up all those different issues."

One of those solutions could be a possible re-capitalisation of the company. Eaton, however, refused to be drawn on what he thought would be the best solution to the deficit.

"My ideal solution would be one that all the experts around [us] believe is in the best interest of the members and also preserves the value of the business. I'm very confident that with the process running, with the experts we have around the table, the determination of the regulator and the trustees to find the right solution, that we would get there."

He added: "We have a business that has net cash in the balance sheet that is enough to fund our investment plans. Whatever happens, we will be continuing to build the business. The results we have shown today show that we're on a much better path now. If we're building value in the business, it improves the option for the pension trustee. The trustee may decide it's better to realise that value today in order to secure benefits, rather than take the risk that markets may move in the future in a way that is adverse to the members. Everyone is weighing up all these things. We will continue with our investment plan."

After the disposal of businesses on the Continent, Uniq is a company now focused squarely on the UK and the private label supplier is seeing progress across all three of its categories - food-to-go, salads and desserts.

Uniq's food-to-go and salads operations were boosted in the first half of 2010 by new contracts at M&S and the Co-op, while in desserts, the company launched 87 products during the last two months, moves that Eaton claimed are driving sales.

"In the second quarter, our desserts business grew by 4.6%, so it's really as a result of that successful new product development that the business is starting to grow," Eaton said. "That's very exciting because we think that trend will continue into the second half."

The desserts side of Uniq's business traditionally enjoys a stronger second half due to the seasonal effect of the Christmas trading period and, combining that with the impact of the recently-launched lines, should be enough to offset the loss of volumes in its small cottage-cheese operation. That part of the business is going under "strategic review" after "a major dairy processor" entered the category.

"Cottage cheese is very much a by-product of the dairy process and therefore their economics are pretty good. We will see a reduction in volume," Eaton said.

Uniq is also facing the soaring cost of cream, a key raw material for the company. There could be a risk that Uniq loses some volume as it looks to pass on the higher cost to its customers, but Eaton insists the company has to look for price increases.

"Cream is a big input cost for us and we're in the process of putting through price increases with our customers. The cost increases in cream are so large - around 80% - that we have absolutely no choice but to pass on that cost to our customers and that's what we're doing. It's critical that we do that," Eaton affirmed.

But how critical is it for Uniq to diversify its customer base? Half of Uniq's business is with M&S, a retailer that has faced challenges of its own in the UK grocery sector. Earlier this month, M&S said its food business was "outperforming" the market but, in a fragile consumer climate, the retailer is facing fierce competition from across the spectrum, not just from a buoyant Waitrose.

Eaton said Uniq wanted to grow its business - with new and existing customers.

"We're keen to grow our business," Eaton said. "In the first half, for example, we won business with Costa Coffee. We are absolutely focused on growing all of our customers' business, very much including our largest customer Marks and Spencer. As far as we're concerned, it's more important focusing on delivering the right products for all customers, so if we can win new customers that's great, as long as that doesn't take away from the focus we have on our existing customers."

It is the kind of pragmatic answer one expects from the Uniq chief executive. Even asking Eaton whether he was frustrated that the company was attracting headlines on its pension deficit, rather than its operational progress, leads to a considered response.

"[The pension deficit] is a difficult and a big issue to deal with - I wouldn't say we're frustrated - we're actually quite encouraged that we've come through five years of pretty hard restructuring activity and we're reaching a point where we can deliver the right solution for the pension members and that the business will continue to grow and prosper. We're feeling confident that we're doing the right thing."