Blog: Katy AskewPremier Foods pension news offers cheer but challenges remain

Katy Askew | 28 March 2017

Premier Foods plc revealed today (28 March) it has secured a deal with its pension scheme trustees that will see the UK food maker reduce its pension burden.

In a regulatory filing, Premier said it will pay GBP32m (US$39.9m) less in pension liabilities over the next three years. Between 2021 and 2023, the Mr Kipling maker will increase its payments by GMP13m, therefore realising a net benefit of GBP19m to the company.

Alastair Murray, Premier's CFO, said the news will enable the business to “focus on maximising the company's free cash flow generation and debt reduction”.

Premier has struggled to right its balance sheet for the best part of a decade. The group's high levels of debt meant it was squeezed during the 2008 credit crunch and it has worked to re-engineer its balance sheet through a rights issue in 2014 and the spin-off of its Hovis bread brand. Progress has been made.

However, as Shore Capital analyst Clive Black noted today, there is still a long way to go before Premier is returned to a sound financial footing. “Whilst a benefit is a benefit, so to speak, and so it is welcome to our minds, such reduction provide a dent into the heavily indebted panel of Premier Foods rather than coming anywhere near to fixing it completely,” he wrote in a note to investors.

The maker of brands including Bisto gravy and Ambrosia custard faces another persistent problem. The group operates in low growth areas of the grocery aisle, meaning its top line trends are weak and its brands are failing to deliver in the challenging UK grocery market.

In particular, Premier's performance has been hit by changing promotional strategies at its major retail customers. The UK market has seen a fall in multi-buy promotions as the country's Big Four have sought to counter discounters Aldi and Lidl, which focus more on every-day-low-pricing. Premier has reacted by using "reduced price deals" more but has admitted those types of promotions are "more costly" than multi-buys and led to reduced sales per unit.

This, coupled with issues hampering Premier's margins such as its ability to offset currency-related cost increases, is placing the company's management under an increasing amount of pressure to pull a rabbit out of a hat.

As just-food's managing editor, Dean Best, argued in a recent column, having turned down last year's takeover approach from McCormick & Co., it would not be a surprise if Premier's board - and therefore management - is feeling the heat from its investor base.

For a full analysis of the challenges facing Premier Foods, click here.

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