The new management team at Premier Foods can certainly talk the talk. During the firm’s full-year conference call with analysts this morning (19 March) we heard much that was designed to inspire confidence in the company’s turnaround plans. However, as always, the devil is in the detail and some of the details of the company’s current situation leave some cause for concern, Katy Askew suggests.
Under its newly-created management team, Premier Foods plc is looking to “draw a line” beneath the self-proclaimed “awful” set of results the company unveiled for 2011.
Speaking following the firm’s preliminary update, CEO Mike Clarke, who took the helm at the Sharwoods maker last summer, was candid about what went wrong.
According to Clarke, Premier had attempted to pass higher input costs on to its retail customers, which soured relationships and lost shelf space. This in turn led to a decline in sales volume and, in a misjudged attempt to make up the numbers, Premier’s former management cut back on advertising and investments behind its brands.
So, the message as Premier booked a 29% drop in full-year profit was clear: things are pretty grim, but they are going to get better.
Premier has a clear strategy that management hopes will result in improved profitability.

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By GlobalDataThe company plans to reduce the complexity in its business. This will be achieved on two fronts. Premier will streamline the supply chain, generating targeted cost savings of GBP40m by the end of 2013, as well as divesting non-core brands.
At the same time, the group intends to invest heavily behind its eight power brands. These brands are without doubt all icons of the UK’s grocery categories and include the likes of Hovis, Mr Kipling and Bisto.
Premier said that it is significantly increasing its marketing levels, raising its marketing spend by 50% to GBP50m in the next 12 months. And, indeed, management highlighted that this strategy is already paying off as Premier was able to gain market share in March, with seven of its power brands airing on TV simultaneously.
Management also revealed that product development will play its role in the growth of the business. Premier’s power brands are currently being extended into neighbouring categories with the aim of making them umbrella brands.
It is fairly clear that over the past year or so Premier’s relationship with its customers has been pretty battered, with obvious implications for the firm’s sales and profits. As Panmure Gordon analyst Graham Jones wrote: “A GBP37m write off of ‘commercial provisions’ also hints, we believe, at how far relationships with UK supermarkets had deteriorated.”
The concern then, is how quickly Premier management can right the situation.
By strengthening the position of its brands, Premier hopes that it will be able to build some bridges with its disenchanted retail customers, some of whom have taken the drastic step of de-listing Premier brands. In order to win shelf space, Premier must show its customers that it can drive value in the categories in which it operates.
Another plank in its scheme to improve its offer to retail customers is a “new” approach to supply contracts, which Clarke said have come to resemble a joint plan to collaboratively grow both businesses.
“Clearly we work with a number of retailers across different sectors of the market,” Clarke commented. “A one size fits all strategy does not work. Instead we must create a joint business plan to grow our businesses together and expand the category while we meet a consumer need.”
This, Clarke continued, requires “collaboration with the retailer” as well as “being very clear how you as a leader in the category can grow the category” and providing quantitative metrics to create a “real” joint business plan.
Clarke added that he hopes to use Premier’s own-label business to further strengthen the company’s relationships with retailers.
In the fickle world of commercial agreements, if Premier can do a good job convincing retailers that it can make them money, it seems likely that any damage done to the firm’s reputation with its business partners will be far from irreparable.
However, another dark cloud remains over Premier’s turnaround plans in the form of the size and scale of its debt burden.
Premier has received backing from its banks and pension scheme partners for a four-and-a-half year re-financing package, which will extend its bank facilities of GBP1.4bn until June 2016. The company has also been granted a two year grace period from its pension fund owner to defer defect contributions until 2014.
This, Clarke said, would provide the “breathing space” needed to turn Premier’s fortunes around and insisted that the deal was a signal of the faith that Premier’s lenders had in the company’s ability to improve profits.
However, the refinancing deal is not exactly catch-free.
“The refinancing will be coming at a cost, as we anticipated. After a couple of year’s breathing space, the financing costs start to ratchet up and Premier will be under bank-imposed pressure to realised disposals,” Invbestec analyst Martin Deboo observed.
“In addition to the existing deferred fee of 0.5% payable on existing bank facilities in December 2013, Premier will pay a deferred fee on its new facilities rising from 2% on the March 2013-March 2014 facility to 3% on 2015/16. We would expect these to equate to some GBP tens of millions of deferred fees payable in those years,” Deboo warned.
Premier must also realise GBP330m of disposals by end-June 2014, with 80% of this target to be achieved by end-December 2013 and 90% by 31 March 2014. The group realised net disposal proceeds of GBP400m in 2011.
In spite of these deadlines, Clarke insisted that this is “not a fire sale”. According to him, Premier has the time to find the “right buyer” for any business at the “right price”.
Nevertheless, Premier management also made it clear that the group wants to reduce its level of debt as quickly as possible in order to cut the cost of borrowing.
According to ShoreCap analyst Clive Black, it is imperative that the food firm is able to juggle the need to invest to drive future profit growth with the necessity of reducing debts.
“Trading conditions remain tough and suitably cautious management speak of the priority to ‘stabilise its operational performance’. This is essential because without stable and rising cash profits Premier will still not break-out of its debt-bind,” Black warns.
For a company that has allowed its brands to suffer declining market share due to underinvestment – whilst allowing its relationship with key retail cusomers to detiriorate – this will be no mean feat. Add to the pot, the difficult economic conditions that have caused consumers to cut spending and it becomes clear that Premier faces some choppy water on its route to recovery.