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June 30, 2011

UK: Premier Foods warns of lower H1 profits

Commodity cost rises and the weak economic environment have in part been blamed for a predicted fall in Premier Foods plc's first-half trading profits.

Commodity cost rises and the weak economic environment have in part been blamed for a predicted fall in Premier Foods plc’s first-half trading profits.

In a statement to the market, the UK food company said that it expects to report trading profit for the ongoing business in the first half of the year of between GBP65m (US$104m) and GBP70m 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, the UK’s largest food manufacturer, said that the decline in trading profit is due to a number of factors.

“First, commodity costs increased by 14% year on year; equivalent to a GBP150m increase in costs in a full year. Although we have successfully repriced our products to reflect this, there was an inevitable time lag before the prices took effect, which led to a one-off cost of GBP15m Q1.”

The company added: “In addition, as a direct result of our successful repricing exercise, one of our major customers delisted a significant number of our grocery lines. This cost Premier Foods around GBP10m in Q2 but the issue has now been fully resolved and the affected lines have been relisted.”

Premier also said that there was “an unprecedented decline” year-on-year in its markets, with both the grocery and bread markets falling by 5%, due to the depressed consumer environment exacerbated by unseasonably warm weather. The consequent decline in volumes reduced profit in both the grocery and Hovis businesses, the company said.

Premier said that 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.

“In total, the year-on-year decline in profit caused by these factors weighed more heavily on the earlier months of the first half. Margins in Q2 improved as the new prices came into effect and as our extensive cost efficiency programmes yielded positive results. As a consequence, we have seen a substantial improvement in trading results over Q1,” the company said.

Looking ahead, Premier said it anticipated many of the factors affecting the first half would not be repeated. “Our markets returned to more normal levels in June and were flat year on year. Although the promotional environment continues to escalate, we have secured competitive levels of promotional display for the second half.”

“Given the state of the economy and pressure on consumer spending, we expect these slow market conditions to improve on the first half but to continue to be down year on year in the second half. We also expect promotional intensity to increase year on year. Nevertheless, we have largely completed our repricing and have succeeded in obtaining a strong promotional programme which should help us resume taking market share,” the statement said.

Premier will report its first-half results on 5 August.

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