Premier Foods: power brands up but bread stale

By Mike Stones

- Last updated on GMT

Premier Foods' bread division reported a 48% drop in contribution to £26.9M
Premier Foods' bread division reported a 48% drop in contribution to £26.9M

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Britain’s biggest food manufacturer Premier Foods has reported growth in power and grocery brands but tough going for its bread division, in its full year financial results for the year to December 31 2012 published yesterday (February 21).

Power brand sales were 2.1% up and grocery brand sales were 4% up, representing four successive quarters of growth.

Underlying sales, excluding milling, were 3.2% up, while operating profit was £96.3M compared with a loss of £176.3M in 2011.

Its cost reduction programme had delivered £48M savings so far, ahead of plan.

The planned disposal target had been exceeded by £40M – 20 months early, said the firm. Net debt was reduced to £950.7M.

The company said the results showed its “continued delivery against the strategic priorities it set out at the beginning of the year”.

‘Adverse customer mix’

But the firm’s bread business reported tough going. The contribution from its bread division fell by 48% to £26.9M. The firm attributed the fall to “an adverse customer mix, wheat quality affecting manufacturing efficiencies and higher costs to serve”.

Hovis maintained its market share in a competitive market where promotional activity remained high, said the company.

But adverse wheat quality​ after the worst harvest in 35 years reduced the division’s contribution in the second half of the year. Premier said it remained committed to supporting British farming, despite its decision to diversify its source of wheat in the short term, after dropping its pledge to buy solely British grain.

Another blow was the loss of a branded and non-branded bread contract with a retail customer - reported to be the Co-operative - in the second half of this year, representing about £75M of annual sales. Premier repeated its claim that the lost volume and margin from this contract would be offset by manufacturing and distribution cost savings from the previously announced closures of the Birmingham, Greenford and Eastleigh bakeries and distribution centres at Mendlesham and Plymouth.

Cash costs

The firm also recently announced the proposed closure of its Glasgow Mill. The cash costs associated with this restructuring are expected to be about £28M this year.

Gavin Darby, the firm’s new ceo, said: “Premier Foods has many strengths and great potential. The management team did a great job in 2012 to lay the foundations for future growth and I am very excited to be working with them to develop and grow our Power Brands in the coming years.”

Darby added that the manufacturer’s priority was now to “maintain continuity and focus” ​on its strategies to build further momentum in grocery while “re-building value in bread”.

Mark Moran, chief financial officer, claimed: “We delivered against all of our strategic priorities − reducing net debt levels, significantly reducing costs, building more collaborative customer partnerships and generating growth in our power brands.

“While it's clear that markets will remain challenging in 2013, we believe we have the right strategies in place, including the delivery of further overhead cost savings, to make further progress this year.”

City analysts gave a mixed reception to the results, highlighting the debt mountain still facing the manufacturing. Shore Capital expressed its doubts under the headline "Still not for Granny​."

Meanwhile, earlier this week, one analyst predicted that the firm may be forced to sell​ some of its power brands. Premier Foods denied the claim.

Premier results – at a glance

  • Underlying sales, excluding milling, up 3.2%
  • Power brand sales up 2.1%
  • Grocery brand sales up 4%
  • Operating profit £396.3M
  • Net debt reduced to £950.7M.

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