Premier pleases the City as it climbs 'vertical rock face'

After two long years of declining sales, shareholders in Premier Foods finally had something to celebrate this week as the return to growth of Oxo, Bisto and Mr Kipling helped inflate the supplier’s share price more than 20%. The 1.6% jump in branded sales in the second quarter to £156.5m - pushing up half-year revenues 0.4% to £341.2m - and the corresponding leap in operating profits from a £12.8m loss to £23.3m in the black is the first real sign of a business stuck in limbo jerking back into life. CEO Gavin Darby also raised full-year revenue targets to between 1% and 2%.

The interim results significantly beat analyst expectations, which had forecast another quarter of decline. “How often have we been able to make that statement in recent years?” Clive Black of Shore Capital asks. Martin Deboo of Jefferies adds: “All in all this is a decent result from Premier, make no mistake, and bodes well for the future.”

So how has Darby managed to pull off this hard-fought turnaround? After abandoning predecessor Michael Clarke’s power brands strategy, Darby switched focus to categories and turned the investment tap back on for NPD, marketing and improving production lines in Barnsley and Stoke. It has slowly yielded results with falls in like-for-like sales in the past six quarters getting progressively better.

“We’ve grown in an environment of food price deflation thanks to the successful execution of the strategy of investing behind brands, more than doubling the rate of innovation and backing it with ad spend,” Darby says.

Although marketing spend was slightly down on a year ago at £13m, Premier is ramping up the investment in the second half, including the crucial Christmas quarter, with up to another £25m. It seems to be money well spent so far with the cake and flavourings & seasonings categories, where the group has concentrated investment in the past 12 months, recording volume, value and market share gains for each of the main brands including Bisto, Oxo and the Mr Kipling and Cadbury cakes range. Darby plans to up the spend 15% next year to advertise nine brands rather than seven in 2015.

The NPD is also about much more than just innovation. It is offering Premier ways of combating deflation and supermarket price cuts by launching new products at higher prices. The wet Oxo stock gel, Bisto Simply wet paste in a sachet, Loyd Grossman Pan Melts and snack pack Mr Kipling cakes all have a higher “pence per meal/bite” than its traditional cubes, granules and six-packs. A win win for Premier and its supermarket customers, Darby says.

Next up is premium lines for Ambrosia and Batchelors, as well as the high-profile launch of the Paul Hollywood bakery range (see p45). “The sales impact [of Hollywood] might ultimately be small, but the symbolism isn’t: Premier is demonstrating a growing ability to capitalise on consumer trends, while people with reputations to lose are showing confidence in the company,” Deboo points out. Darby adds it reflects the confidence of the new “smart, agile and innovative” Premier.

All this was made possible following the complex £1.1bn refinancing Darby successfully got away in March 2014 to free it from the debt mountain racked up in a brand-building spending spree under former chief executive Robert Schofield. Net debt, more than £900m when Darby joined in 2013, is now down to £585m, with plans to pay this down a further £55m in the second half as more cash flows into the business from higher trading profits. The pension deficit has also come down from £211m last year to £33m.

“The stability and destressing of life at Premier after the refinancing has given them so much more bandwidth to focus on the more good housekeeping stuff such as getting range reviews right and getting sensible marketing plans behind the brands,” Deboo says.

Darby also pre-empted the supermarket range reviews by cutting 40% of SKUs from the tail of the business shortly after arriving in spring 2013. He adds this is one of the reasons why Premier has been a net beneficiary of Tesco’s range reset.

However, Premier is still a long way from sitting comfortably. Its shares, trading at around 40p, are still massively down on 18 months ago - when they plunged spectacularly from 160.8p to 66p as Morrisons kicked off the latest price war. And the rise in sales is slender and against extremely weak comparatives that will now get ever tougher.

“Don’t underestimate the challenge,” Deboo warns. “Premier has a big raft of liabilities in the form of debt and pensions deficit, which are legacies of the past. There can be no complacency and no let-up. Gavin is doing a good job so far but he is climbing a vertical rock face.” He adds that the big worry is that Tesco and Sainsbury’s turn the screw again on pricing for branded suppliers in the run up to Christmas.

The surprising first-half results are a big step in the right direction for Premier but a continued turnaround will depend on convincing the big four that its brands can drive category growth and that the supplier’s success is intertwined with their own.