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July 1, 2011

In the spotlight: Premier Foods’ credibility hit by profit downgrade

Premier Foods plc seems to have lost what little credibility it had remaining among industry watchers this week as it issued yet another profit warning.

Premier Foods plc seems to have lost what little credibility it had remaining among industry watchers this week as it issued yet another profit warning.

The UK manufacturer yesterday (30 June) said it expects to report trading profit for its ongoing business of between GBP65m (US$104m) and GBP70m in the first half of 2011 versus GBP94m in the equivalent period in 2010. The 2011 result includes a GBP10m credit arising from reduced liabilities as a consequence of closing the pension schemes.

Premier attributed the decline in trading profits to increased commodity costs, delisting by one of its major customers over a pricing increase, and an “unprecedented decline” year-on-year within the grocery and bread markets.

Shore Capital analyst Clive Black described the announcement as one of the “most surprising and disappointing updates for even this body-battered venture”.

“We have had ten downgrades from it since the questionable acquisition, to our minds, of RHM,” he said. “This update reignites old demons about the fundamental nature and state of this company.”

In recent years, there have been concerns over Premier’s financial position. The 2006 and 2007 acquisitions of RHM and Campbell’s UK and Irish business loaded debt onto Premier’s balance sheet and the company was then hit by the 2008 commodity cost spike.

Just last week, Premier’s marketing director Jon Goldstone was upbeat as he told just-food that the company had managed to ally investor concerns regarding its high debt levels.

Goldstone said the manufacturer was getting close to reaching the hallowed 3.2x debt to earnings ratio after debt levels had spiralled to GBP1.8bn in recent years some 6x earnings. He also said that the investor meeting in May and the press briefing on Friday ushered a new “more open” era of communication for the manufacturer.

However, MF Global analyst Andy Smith suggested that the conflicting messages from May to now will mean that Premier’s management team’s credibility will take a further battering.

“Whilst the CEO’s credibility was already fairly poor, management credibility will have taken another blow so soon after the company held an upbeat investor day and commented earlier this year that they had taken sufficient pricing to cover the worst of the input cost headwinds,” he said.

Pricing, and the manufacturer’s relationships with its major customers, seems to be one element of the issues faced by Premier. The business seems to have underestimated the lengths manufacturers will go to in order to keep prices down in what remains a market where consumer confidence continues to fall.

It’s surprising that Premier did not see the signs after Tesco delisted its Hovis products in October last year when it tried to pass on price increases. Sainsbury’s chief executive Justin King had also warned that suppliers would have to “work very hard” to justify price increases in January this year.

The manufacturer said that as a “direct result” of what it termed a “successful repricing exercise”, one of its major customers, understood to be Tesco, delisted a significant number of its grocery lines. The move cost Premier some GBP10m in the second quarter. Premier said the issue has now been successfully resolved and the affected lines have been relisted.

“What a failed re-pricing initiative would have been the Lord only knows,” Black said, commenting on the repricing exercise. “However, there is a serious point here to our minds about how in-touch Premier Foods in particular is with the consumer and its customers with respect to pricing in this and prior pressurised times.”

Premier also said its Brookes Avana own-label unit will record a GBP10m decline in profit year-on-year in the first half. This includes a GBP5m charge for restructuring at its Leicester site following the decision from Marks and Spencer to remove a significant pie contract in stages over the next year.

Speaking last Friday, Goldstone told just-food that Premier had put in place a new management team to run the convenience food business. However, speculation rumbles on that Brookes Avana, which last year saw profits slump, could be up for sale.

As pressure continues to mount on the group’s profits, it seems unlikely that Premier will be able to issue further stock to raise cash, especially considering the 10.2% hit the company’s share price has taken since yesterday morning, down to 17.08p a share at the market’s close today.

So, further disposals could be in the offing after the recent deals to sell its meat-free and canned food operations. While it would be less surprising for the manufacturer to dispose of loss-making businesses like Brookes Avana, just-food has heard whispers that it might be looking to dispose of the Sharwoods brand, one of its more successful “drive brands”.

The continuing issues faced by the manufacturer could be compounded by the departures chief executive Robert Schofield who is set to step down before the end of April next year. With the company facing such severe issues, who is likely to want to take on the challenge?

With the company’s credibility hit so heavily in recent years, an internal promotion is unlikely to put to rest investor concerns about it’s ability to improve its performance.

With Premier set to release its half-year results in just over a month, industry watchers will be keen to see an honest appraisal of its situation and the measures it is taking to improve its returns.

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