Six weeks into Premier Foods’ new fiscal year, the UK manufacturer’s branded growth model is again proving resilient to cost pressures.

UK government figures this morning (18 May) showed the country’s inflation rate accelerated to 9% in April, the highest in 40 years. Prior to that announcement, Bank of England Governor Andrew Bailey this week sounded an “apocalyptic” warning over rising global food costs, as he envisaged domestic inflation could reach 10% before the year is out.

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Premier Foods’ CEO Alex Whitehouse, presenting the Sharwood’s sauces maker’s annual results, which generally beat market expectations but not by a mile, was asked on a media call today for his views on Bailey’s comments.

“I don’t recognise the word apocalyptic, really, in this. On the other hand, I think you really do realise that food inflation is pretty significant. And for some families, sadly, that’s going to be really, really tough. The best we can do is work really hard to offset as much of the inflationary pressures as we can and help people as best we can by trying to keep prices down.”

Many food manufacturers have sought to pass on multiple price increases to retailers to offset costs, mainly from commodity inputs and transport due to fuel. Whitehouse, however, suggested Premier Foods had been more conservative in its approach.

“When we went into the financial year that’s just finished, I said at the beginning we expected to see high-single-digit inflation. I’d probably say that was about right,” Whitehouse said. “We also said we would deal with that through offsetting efficiency measures, and essentially an annual price increase, and that’s pretty much how it all played out.”

He added: “This year, we’re probably looking at a little higher, low double-digit and we intend to deal with that again with offsetting efficiencies and a price increase that will play out over the first half of this year.”

Pricing with confidence

Despite increasing its prices, Premier Foods said it gained market share across its categories in the 12 months ended 2 April with no real downside to volumes, with demand holding up in the opening six weeks of the new fiscal year.

Martin Deboo, a managing director at investment bank Jefferies, gave his take on the confidence exuded by Whitehouse in the current challenging operating environment as the CEO said Premier Foods is “in a strong position to deliver another year of significant strategic and financial progress”.

Deboo wrote in a research note: “What appears to be underpinning confidence is what is described as ‘encouraging’ initial trading, resultant confidence on pricing, and the presence of strong growth plans and cost-saving measures.”

Whitehouse alluded to many of Premier Foods’ products falling into the low-cost area, such as Sharwood’s and Homepride sauces incorporated into meals, for the resilience, while he said the company had not yet experienced any threat from discounted private label.

“Over the last year, we again saw market-share gains across both our grocery and sweet treats businesses versus two years ago and, in recent weeks, we’ve actually seen those market share gains strengthen further,” the CEO noted in his presentation. “That suggests that as people face into the uncertainty around prices in the wider economy, many are actually switching into our brands and this is actually consistent with what we’ve seen before during difficult economic periods.”

Whitehouse added the “economic pressures” are playing out, as they did during the pandemic, in more people cooking at home rather than going out to restaurants or ordering takeaways. While Deboo said there’s some “downside” risk to continued in-home consumption, “good underlying competitiveness should keep Premier Foods in an advantaged position”

Meanwhile, Whitehouse said “Homepride delivered strong growth over the last few years, with an acceleration taking place in the last six months, which coincides with the inflationary increases,” noting Premier Foods’ branded revenues have grown by almost 10% since 2020. Cake brand Mr. Kipling “again had its best-ever year” with sales growth of 8%, he said.

Volume preservation

Volumes and value were equal contributors to Premier Foods’ GBP900.5m (US$1.1bn) in revenues in the 52 weeks to 2 April, the lowest level in two years as a consequence of elevated demand comparisons from pandemic-related lockdowns. Sales were down 3.6% from the previous 12 months but were up 6.3% over a two-year horizon.

“I think it’s a bit early to say to be honest,” Whitehouse responded to a question fielded on the price impact to volumes. “Obviously, there’s some price elasticity on these things, but at the same time, we’ve got our branded growth model working away in the background, which has been consistently driving growth for us for a number of years.

“If I look at last year’s performance, volume and value were about 50-50 contributors to our overall growth performance. At the moment, we’re not seeing any broad spread shift away from brands into private label.”

Premier Foods’ results were greeted with applause by the financial community – on the back of the first half’s lap of honour – with trading profit and adjusted profit before tax beating the company’s own guidance provided in January and many analysts’ forecasts.

“Premier Foods has once again delivered a very good operating performance, which continues a sustained period of robust operational delivery, which rests alongside a progressive improvement in the group’s financial constitution,” analysts led by Clive Black, a director at investment group Shore Capital, wrote in a research note.

The Batchelor’s soups and Nissin noodles maker delivered a flat trading profit performance of GBP148.3m (Premier Foods’ outlook was GBP145m) for the year, but the metric was up 11.9% over a two-year period. Investment banks Jefferies and Peel Hunt had priced in respective prints of GBP146m and GBP145m. Peel Hunt upped its 2022-23 estimate for the metric by 2% to GBP152m.

Meanwhile, adjusted profit before tax, climbed 11.4% on a one-year basis and was up 37.6% over two years at GBP128.5m (Premier Foods’ GBP125m; Jefferies GBP126m).

Premier Foods “is in very good shape”, the Shore Capital analysts wrote, as the bank raised its forecast for the current fiscal year by 2% to GBP133.9m.

Inroads continued to be made in reducing debt too, with a GBP47.7m cut to GBP285m, putting Premier Foods on course to achieve its longer-term EBITDA leverage target of 1.5 times, from 1.7 times last year.

Icing on the cake

However, it was Premier Foods’ announcement of a second dividend payment – building on last year’s first in 13 years – and progress on pensions reform that drew attention, described by Jefferies as the “icing on the Kipling cake”.

The Ambrosia and Angel Delight maker proposed a dividend of 1.2 pence a share, a 20% increase to the prior payment.

In 2020, Premier Foods moved to simplify its pension set-up with the merger of its own two schemes with the RHM fund, removing a long-term financial impediment with the aim of turning a pension deficit into a surplus, and freeing up cash for investment.

Premier Foods CFO Duncan Leggett explained the deficit in the two pension schemes has been cut by GBP125m since 2019, and so the company has “agreed with the trustees to reduce the length of the current deficit contribution schedule by two years – this is really how we view our pension debt as reduced by 20% or about GBP60m”.

Shore Capital said Premier Foods now has a net pension surplus of GBP944.9m on an IAS19 basis, comprising a GBP1.14bn RHM surplus and a GBP193.9m deficit in the other funds.

“We see the rising surplus as increasing the probability of the mooted buyout and cash injection, should Premier Foods and the trustees wish to avail themselves of it,” Deboo at Jefferies wrote.

Black at Shore Capital commended the margin preservation in the face of rising input costs as Premier Foods saw its trading profit margin increase 60 basis points last year and 80 points over two years to 16.5%.

“Looking into FY-23, Premier Foods is in very good shape, in our view,” Black continued. “The trading environment is evolving and remains competitive. Inbound inflation is a particular current challenge, running within the 10-15% range, we would suggest. However, ongoing productivity programmes and carefully managed cost recovery means that Premier continues to innovate and support product and so gain share whilst protecting margins”.

Outside of the UK, Premier Foods also grew its international revenues in its US and Canada, Europe, Ireland and Australia markets over the past two years. Sales outside the UK now comprise 6% of the group total.

Whitehouse also reiterated intentions to seek out bolt-on acquisitions but once again remained coy on revealing specific details. Presenting first-half results in November, he explained such deals would “give us a broader base in the UK, get us into new categories in the UK, all of which could accelerate that ramp-up to critical mass in some of our key focus overseas markets”.

He added this morning: “We continue to assess the options there. We’ve appointed a corporate development director to provide focus in this area but, obviously, you won’t be too surprised to hear me say, beyond that, there’s nothing more I can add at this stage.”

Deboo at Jefferies, wrote: “‘Modest’ M&A is on the agenda, a positive development in our view.”

Whitehouse wrapped up his objectives over the next 12 months: “We’ll continue to execute our root strategy, underpinned by our branded-growth model with lots of exciting plans ahead of new product innovation, further investment in our brands, operations and of course, further building our overseas businesses.

“We remain confident in meeting both our full-year expectations and also our longer-term strategic objectives.”