Will Premier Foods restructure boost its share price?

Premier Foods has taken a number of positive steps in the past three years to turn around its historically woeful performance.

It’s sold off several assets, kicked out bad apples, rationalised its management structure, and focused on a core of ‘power brands’. And the appointment of Gavin Darby 18 months ago has further stabilised the business, while accelerating the turnaround.

Promoting commercial director Ian Deste, the former Coca-Cola Enterprises exec introduced a more category management-led approach on the sales side, and rebuilt relations with key customers, enabling Darby to focus on securing a £1.1bn refinance package (with a simpler, smaller consortium of bank creditors), halving the number of suppliers it uses, and spinning off its Hovis bakery business and specialist powder operations into joint ventures.

Yet, despite all this work, the share price, after steadily climbing to a year-high of 121p, has slumped, falling to 38p at the start of this week – a four-year low and close to its all-time low of 3p (effectively 30p in today’s money as the share price was rebased on a 10x basis).

So why is the share price stuck in the doldrums? And how will the restructure announced this week make a difference?

An unusually mild weather this year didn’t help. And NPD has been backloaded into the second half. But the key catalyst for the fall has been the tumultuous market conditions Premier’s key customers are experiencing, and in particular, the Morrisons profits warning in March. And Premier’s sales have unquestionably been hit, with a 6.1% decline reported in its H1 results on 30 June. But with no revised guidance on profits, and a NPD calendar geared towards Premier’s all-important second half, analysts have expressed frustration that despite several buy recommendations, with target prices of up to 80p, the share price refuses to budge. As Jeffries analyst Martin Deboo wrote: “Investors deserve better than this.”

With every share option scheme Premier seems to issue to motivate senior execs quickly trading underwater Darby is quite sanguine about the current situation, acknowledging “unprecedented and accelerating structural change” among its customers.

“Every listed share price is down. supermarket share prices are down 30%-40%. And FTSE250 companies have been disproportionately weaker. There’s a sectoral issue at play.”

At the same time, raising more than £350m in equity last March soaked up a lot of demand. “We raised more than our market cap. When you do that it’s a huge vote of confidence but soaked up a lot of capital.”

Indeed, he is pleased with the progress. “It’s an incredibly different Premier Foods from the business I inherited 20 months ago.” It’s also ahead of plan.

The £1.1bn refinance in March was achieved a year earlier than Darby had anticipated. And after giving himself two years to take out 40% of Premier’s SKUs – from 1,700 lines to 1,000 – it’s hit that target already.

Transformational phase

Of course, there are other financial metrics Darby would like to improve – including further reductions in debt/equity ratios. But with this week’s restructure the focus now is primarily on taking Premier Foods from a turnaround phase to a transformational phase.

Setting up the remaining £850m-sales operation into three specialist business units (SBUs), the idea is to align commercial, manufacturing and logistics within the same P&L, Darby explains.

“The winners in this environment must be fast, focused and agile. It’s my passionate belief that sometimes tighter, smaller operating units grow faster. I have already seen some traction from spinning off Hovis and the powders business units, freeing management up to express themselves. With the SBUs, I can hold a number of people more tightly accountable. Ian was responsible for all commercial, but each of the new BU leaders has P&L responsibilities.”

Darby is keen to credit Deste for the turnaround. “Under Ian’s leadership, we’ve moved from a trading organisation to a category-led one. We used that as the premise for the refinance. He’s also transformed our key customer relationships.”

Slow cake

As well as speeding up the decision making process through the restructure, Darby knows that a flexible supply chain will be key to achieve the “fast-focused and agile” business he wants to create. To date, Premier’s focus purely on scale has at times prevented this. For example, the cakes business currently offers almost zero flexibility in terms of pack and pallet sizes. A £20m investment in its ‘Sweet’ (ie cake) division will change that. And again, Darby credits Deste for creating the business case.

“He’s been the architect on the commercial side for the line. When it comes on stream in the first quarter next year it will increase capacity at our Carlton bakery two-and-a-half times. But as our big customers focus disproportionately on convenience, we need more variety, more agility. This is one of the first times, with a new line, where we’ve engineered the commercial strategy into the fundamental design of an industrial cake baking production line.”

The other possibility that excites Darby is the possibilities on the international side. With less than 5% of its £850m revenue derived from exports, Premier plans to move from an export push model to partnership deal like the one recently signed with Swire in China, with exploratory talks kicking off in North America, Australia and New Zealand.

“We think that brands like Ambrosia, Mr Kipling, Cadbury and Sharwood’s can have strong traction.”

The other option, of course, is to align itself more closely to the discounters. Any plans in that regard? Darby insists not. “Our strategy is focused on brands. But discounters aren’t the only growth opportunities. Our brands overindex in convenience, online. Those are helpful. What we need to do is maximise the opportunity.”