Darby upbeat on growth plans now capital structure "normalised"

Darby upbeat on growth plans now capital structure "normalised"

Now Premier Foods plc has emerged from the shadow its its debt burden with a refinancing package that includes a "landmark" deal with its pension trustees, the UK food group plans to use its stable of brands in growth categories to drive top-line expansion.

The company today (4 March) detailed a series of agreements that management insisted will "transform" its balance sheet.

Premier announced plans to issue GBP353m (US$588.7m) in new shares to raise capital. The Ambrosia custard and Bisto gravy maker is also set to issue bonds it says will raise proceeds of GBP475m. The group has also secured a GBP300m revolving credit facility.

This manoeuvring will enable Premier to reduce its net debt-to-EBITDA ratio to a "normalised" level of 3.3x, management said this morning in an analyst presentation in London. "We are stating a medium-term ambition that we want to continue to deleverage the company and our ambition is to move down over time to 2.5x," CFO Alastair Murray said.

Premier has also negotiated a deal with its pension trustees to bring payments down to more manageable levels.

"We have a very good relationship with trustees of the pension funds. They have worked with us very constructively to come to a sensible set of pension contributions," Murray said. Payments will be reduced by GBP156m in the first three years and a total of GBP161m over a six-year period, he added.

Shore Capital analyst Clive Black said the refinancing will enable Premier to concentrate on building its brands. Premier's portfolio contains a stable of what it calls "power brands", including Bisto and Mr Kipling.

"Premier Foods has announced a fundamental and transformational balance sheet restructuring in our view, which we warmly welcome," Black said. "Post the re-engineering of the balance sheet Premier Foods' senior management can now press on with focusing upon developing its grocery business to our minds."

Looking to 2014, Premier was somewhat cautious in its outlook. "Our medium-term guidance for power brand sales of 2-3% is also guidance in 2014," Murray revealed. The company expects sales trends to be "slightly negative" in the first quarter, which has been impacted by weather, the late Easter and the timing of NPD, which is back-half weighted. Nevertheless, Murray added Premier is "confident" of hitting its guidance for its power brands to see sales rise 2-3% this year.

Management was, however, quick to emphasise its longer-term growth plans and investment case.

"We have a new capital structure and we are leaving the past in the past... As we have unburdened the business we need to think about how we are going to grow the business," chief executive Gavin Darby told analysts. "Our strategy is to use our seven power brands... to drive [growth] disproportionately in the five ambient grocery categories in which we operate."

According to Darby, ambient grocery is expanding ahead of the overall UK grocery market. Ambient value sales are rising at 2.3%, ahead of the sector's 1.7% growth total, he said, citing IRI data. Ambient also represents the largest market segment, accounting for 57% of total sales, he continued.

The brands Premier has started to rejuvenate - particularly Oxo, Bisto and Ambrosia - are market-leading businesses that are also performing ahead of their categories, he continued. Ambrosia, for example, was the group's "star performer" and booked sales growth of 10.7% in 2013.

"If you can expand the categories you work in, the profit you make is more sustainable," Darby claimed.

He also stressed that driving category growth makes Premier a more valued supplier to its retail customers. "In an environment where many of our retail parters are growing slower than they did in the past... it forms a very powerful partnership with our customers if we, Premier Foods, can transform our categories," he said.

"We have three categories that we have been investing in for 18 months and... we can demonstrate that we are growing the category much faster than overall growth."

Premier's formula has been simple but effective, Darby suggested. The group has invested in marketing, introduced new pack formats to increase consumer appeal and expanded the way it defines a brand or category - a move that has opened up new avenues for Premier's innovation efforts.

The coming year will see Premier turn its attention to its largest brand - Mr Kipling.

Darby observed Premier has invested "next to nothing" in Mr Kipling for the past five years and is now "paying the price" in a category that is "moving sideways".

This is about to change, Darby predicted. "2014 is very much the year of cake... For far too long we have thought of Kipling as a cake brand. It is not a cake brand, it is a brand competing with confectionery and biscuits. It is a snack brand - this is a fundamental change in the way we think about the brand, the opportunity and how we can grow and innovate."

Premier said it intends to improve capacity in its cake unit, including the investment of approximately GBP20m in a new snack-pack cake slice line at the company's manufacturing site in Carlton in Barnsley.

To date, the company has been "rationing" snack-pack distribution, Darby said. The investment in a new production line, which will double capacity, will allow Premier to "take the cake category and the Kipling brand into smaller stores, into convenience and impulse".

Premier also plans to expand into new channels with its "support" brands, which generate revenues of GBP200m but many of which are no longer listed at the UK's multiples. Darby said: "We also are seeing a new role for our lesser and hitherto declining support brands... we see opportunities for these brands selling in the high street discount channel."

Meanwhile, the Cadbury cakes and Homepride baking support brands will benefit from an elevated level of marketing to support growth in mainstream channels.

A final area of growth identified by Premier management is international expansion. With just 5% of group sales generated overseas, Darby said that the firm is "under-represented" internationally. "Clearly that number should be much higher... the constraint on funds has held us back in the future and therefore it is an opportunity going forward."

Last autumn, Premier signed an agreement that will see Chinese food distributor Swire sell its Ambrosia brand in the market. Darby said the brand would be launched in 200 test supermarkets in the second quarter in a bid to gauge demand.

While Premier has an ambitious growth agenda, the company believes that it can bankroll the necessary investment without denting margins. The group is focused on cutting costs out of the business by reducing SKUs, which will be cut from 1,700 at the start of last year to 1,000 this year, and halving its supplier base.

Darby said: "We have liberated what we believe is a very strong grocery business. Management has also been liberated from as much as 50% of our time focused on capital restructuring... to get on with running our company, focusing on our brands and our customers."