Premier Foods market-beating results were greeted with a “lap of honour” as the Mr Kipling owner navigates through sales distortions caused by the pandemic and industry challenges.

While the Covid-related impacts were evident in the comparative first-half numbers to last year, when consumers stockpiled and ate more at home due to lockdowns, attention was focused on some impressive figures compared to pre-pandemic levels in 2019. And the branded model is paying dividends at the expense of London-listed Premier Foods’ own-label business, where finance chief Duncan Leggett said it exited some contracts last year at the height of the virus outbreak.

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“We’re no longer chasing after very margin-thin private-label contracts because, obviously, the focus of the business is on continuing to build the brands,” Leggett said this morning (16 November) on a call with analysts.

On an earlier media call, Leggett noted “the success of the business over the last few years has been really all about us building brands and bringing new products to market from those strong brands”. He added: “Our non-branded business is very much a secondary element where we’re essentially filling spare capacity online.”

CEO Alex Whitehouse outlined how Premier is dealing with the challenges around rising input costs, most notably by pushing up prices, and industry-wide labour shortages that have raised concerns over Christmas supply.

Whitehouse said the Bisto gravy maker had employed hedging “cost savings” and price increases, which were initiated in the last financial year and with more in the pipeline.

“We planned for inflation this year, and we put in place some activity in order to offset that,” he said, adding that further inflationary pressures are anticipated. “Obviously we’re putting in place plans now to cover that and you’ll see similar techniques being used. They’ll become effective later this year. It’s certainly overall a challenging environment, but one in which I think we’re navigating very well.”

Whitehouse said Premier was less exposed to the labour crisis hitting the food sector and other industries because of its “highly automated” plants requiring skilled staff to run the lines, making staff shortages “less of an issue for us as it might be for some more manual operations”.

“Businesses across the industry have been affected by the shortage of HGV drivers, general labour shortages and an increasingly inflationary environment. These are obviously industry-wide issues and as you can see from today’s numbers, we’re successfully navigating our way through them. Looking forward, we’ve got the plans in place to continue to do so during the second part of the year,” the CEO explained.

Tale of two halves

It was almost a tale of two halves in today’s reported numbers for the six months to 2 October due to last year’s demand distortions from Covid evidenced in the year-earlier comparisons, when Leggett said volumes were “exceptional”.

Group revenue climbed 7.5% from 2019 to GBP394.1m (GBP528.8m). Branded sales rose 11.4% to GBP345m, while non-branded fell 14% to GBP49m.

Two-year trading profit increased 13.1% to GBP57.8m. Adjusted profit before tax was up 46.3% at GBP46.4m and rose more than 100% on a non-adjusted basis to GBP30.7m.

From the year-ago period, it was all declines. Revenue was down 6.5% (branded -6.1%, non-branded -9.4%), trading profit by 12.2%, adjusted profit before tax by 2.9%, which in non-adjusted terms was 39.2% lower.

Jefferies analyst Martin Deboo headed up his early morning report today describing a “lap of honour” for Premier, pointing to the two-year sales growth of 8.5% in the second quarter alone, when branded revenue climbed 13.3%. But the US-headquartered investment bank had a note of caution.

“Broad-based progress continues to be made, driven by innovation and careful management of both input inflation and supply chain challenges. We will want to review the moving parts in more detail but note that the 8.5% two-year momentum at H1 compares to Jefferies’ FY-22 of +6.1%, with trading profit at H1 GBP3m ahead. Much remains uncertain in H2, with winter supply chain interruptions the principal risk.”

Deboo followed up with a later note addressing the sell-off in Premier’s shares. “The shares closed down 4%, having been down 6% in the early open. We struggle to rationalise the response, given that H1 was a solid beat to Jefferies.

“The presumption must be that the shares were priced for an upgrade; one that we don’t yet feel confident to put through. But little seems to have changed to us around the improved fundamentals.”

With other well-established brands in its portfolio such as Batchelors soups and Sharwood’s sauces, Premier is leaning on innovation in existing and new categories as the “group enters the second half of the year with strong momentum”, on track “to deliver against its profit expectations”, the company said today.

Ice cream entry

Premier revealed it has entered new categories in ice cream and biscuits, with the former encompassing the Ambrosia and Mr Kipling brands – traditionally centred on custard and cakes – now on sale in the UK at retailer Iceland, and Angel Delight ice cream set to follow. And a “signature range” of Mr Kipling biscuits has also gone on sale in undisclosed stores.

Whitehouse said: “What we love to do, when we look to extend out into new categories, is look at where our brand equity gives us permission to play. Both of those categories were identified through research where consumers were saying ‘Yeah, you know what, a biscuit for Mr Kipling, and particularly a premium-end biscuit would make a lot of sense and be really credible.’ We’ll see how they go, and if they’re successful, then over time we’ll look to expand the ranges and roll-out to other retailers.”

Whitehouse and his innovation team are honing in on healthier “high-nutrition” options, where Premier disclosed in October it aims to double sales by 2030, and also in plant-based amid a target to increase sales from GBP78m to GBP250m over the same threshold. Paxo is being expanded from traditional roast stuffings into veggie fillers featuring peppers and mushrooms, while meat-free Oxo cubes have been launched.

Whitehouse discounted the possibility of driving Premier’s plant-based ambitions through M&A but reiterated acquisitions could play a part in the company’s further internalisation strategy where it serves markets in Europe, the US and Canada, and Australia.

“That is an organic target calculated based on us expanding our range of plant-based offerings across our existing brands, but not necessarily limited to our existing categories. There’s no M&A assumption behind that number,” the CEO explained.

He added: “In terms of international strategy, we’ve got a very clear expansion strategy based on our existing brand portfolio. But, as I’ve mentioned before, we will be looking at acquisitions – what we describe as modest bolt-on acquisitions that would either 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.”

Whitehouse would not be drawn on specific categories other than to say, “we’re looking at a wide range of options and evaluating what, where might make sense”.

Shore Capital analyst Clive Black wrote that today’s results were “very reassuring” as Premier enters the Christmas trading period, pointing ahead to what he called “key messages” revolving around brand evolution, internationalisation, its recently announced ESG goals and de-leveraging.

Premier’s net debt stood at GBP345m, compared to GBP403m in the first half of last year and north of GBP500m in 2017. Its medium-term target of around 1.5 times EBITDA remains unchanged.

“We see this as a good out-turn, with the business well set for the key Q3 trading period, noting high service levels and management’s confidence about future prospects,” Black wrote. “We see this operating performance as resilient and reassuring for investors. In H1, Premier also launched its updated ESG strategy, which will be increasingly important to its brand reputation.”

Snack pots from the likes of Batchelors, where a meat-free ‘facon’ meal variety is about to hit the market, and Nissin soba noodles are growth areas for Premier, with the latter now commanding a 45% market share in the category.

Whitehouse said Nissin is expected to deliver a turnover this year of around GBP16m compared to GBP3m in 2017-18 when it entered a distribution deal with Japan’s Nissin Foods Holdings. And Premier also expects to pick up GBP10m in sales this year from “brand extensions”.

“We’ve had a very strong first half of the year and we carry a lot of positive momentum into the second half,” Whitehouse said. “We’ve got some very strong plans in place, so, on that basis, we remain firmly on track to deliver our full-year profit expectations.”