Premier Foods boss Robert Schofield believes the UK food group is on-track, despite its recent travails. This week, however, when Premier published its first-half figures, the market signalled its concern by sending the company's shares tumbling. Dean Best reports. 

Robert Schofield, the chief executive of Premier Foods, the UK's largest food manufacturer, is in something of a pickle.

Yesterday (28 August), the company, which owns household favourites including Hovis, Mr Kipling and Branston, posted first-half profits in line with City expectations. Adjusted pre-tax profit was up 4% to GBP60m (US$109.2m) and after months of fighting with soaring costs, particularly on wheat, Schofield said Premier had fully passed on the costs it had seen to date along to its retail customers.

"Despite the challenging consumer environment that we find ourselves in, we have delivered our profit target. At the same time we have continued to lay down the foundations for Premier's transformation into a modern, integrated and very competitive UK food group. Our vision remains on track," Schofield emphasised.

The market, however, raised a collective eyebrow at the continuing high level of Premier's debt, a hangover from the company's recent acquisitions of Campbell Soup Co.'s UK and Irish businesses, plus UK food group RHM. That debt stands at GBP1.8bn and concern over the company's ability to reduce that - plus what it means for the business strategically - led to the company shares tumbling by more than 7% in early trading yesterday.

For some industry watchers, the company's balance sheet is holding the business back and, what's more any moves to reduce that debt could hurt investors already wincing from a recent cut in the company's dividend. Premier, says Clive Black, a analyst at Shore Capital, is a "very strategically-constrained business". He explains: "They could raise cash through issuing more shares but that would have an impact on earnings per share and, of course, looking at the exit multiples for business disposals, they would get less money than they would a year or two ago. It's a tough situation."

And, of course, more debt means less cash for acquisitions. Premier may have some of the best-known brands in the UK but there is the suspicion that the company is operating in the more mature parts of the country's grocery business and needs to expand into more buoyant categories. Three years ago, Premier boosted its healthy-eating credentials with the acquisition of Cauldron Foods but the company has been slow to expand further.

Premier, of course, is putting a lot of effort behind breathing fresh life into flagship brand Hovis, which according to the company's 2007 annual report, generates more than double the sales of its next biggest brand, Mr Kipling. The company is launching additions to the Hovis range, revamping its packaging and give fresh marketing support to the brand in the hoping of boosting sales. Black says Premier needs to knuckle down and try to revive a brand that has lost market share and profits in recent years. "They should just focus on doing it, rather than telling us about it," he insists.

For Schofield, then, there seems much hard work ahead. "It will be one hard slog," Black adds.