Premier Foods’ power brands lift sales but margins?

Sales of the key power brands – Batchelor’s, Bisto, Ambrosia, Hovis, Loyd Grossman, Mr Kipling, Oxo and Sharwood’s  – rose by 3.7%. But other sales were broadly flat.

City analysts welcomed Premier’s return to sales growth, describing it as “re-assuring” and “positive”. But the firm’s margin performance remained a hot topic.

Martin Deboo, an analyst with Investec analyst, said: “Our concern … is around what might be happening to margins, which won't be visible until the H1​ [first half results] in August. We can be confident that Premier will still be seeing a lot of agricultural commodity cost inflation and renewed crude oil inflation in what is a diesel-intensive business given bread logistics.”​

Regenerate trading profit​

Deboo concluded: “… the performance feels consistent with our buy case that Premier's new management can start to turn this business around and regenerate trading profit and cash flow.”   ​      

Graham Jones, executive director with analyst Panmure Gordon, also highlighted margins. “The statement​ [from Premier] is silent on margins, although given Associated British Food’s comments ​[about pressure] on bread margins, we believe that Premier’s margins are likely to remain under pressure.”​

Jones also worried about the firm’s debt. “We believe ceo Michael Clarke has adopted the right strategy, but investors should not under-estimate the scale of the issues, with net debt/EBITDA​ [earnings before interest, taxes, depreciation and amortisation] remaining an eye watering x 5.6.”​

Much of the group’s free cash flow over the next five years is likely to be absorbed by bank fees and pension deficit contributions, he added.

Darren Shirley and Clive Black, analysts with Shore capital, said the firm’s disposals would key to its success. “Management has reiterated it will continue to divest selected businesses to sharpen its focus on power brands.​

Operating performance​

“We believe the successful delivery of such disposal proceeds and the dilutive impact on sustainable cash flows, is important to Premier’s future and  stock performance as a recovery on the operating performance and the growth of power brands.”​

Meanwhile, Premier’s boss Michael Clarke confirmed that the firm’s priority was to “stabilise the business and invest in our recovery”.​

He added: “We are driving sustainable sales and improving market shares by focusing on investment behind our eight power brands, improving customer collaboration and reducing costs.”​

In the second quarter, the firm pledged to support its power brands with more advertising, targeted promotions and new product innovation, revealed Clarke.

Examples of the latter included: the Hovis Farmer’s Loaf with 100% British wheat, Batchellor’s Deli-Box range of convenience meals and a limited edition range of Mr Kipling cakes celebrating the Queen’s Diamond jubilee.