Premier Foods getting to grips with debt

15th Feb 2011 07:45

Heavily indebted foods group Premier Foods took a break from selling off parts of its business to announce it fell into the red in 2010, though there was some good news on the debt reduction front. Total sales in 2010 eased to £2,567m from £2,661m in 2009, a fall of 3.5%. Sales volumes fell 2.7% over the year after rising 1.8% in 2009. Branded sales fell 0.3% to £1,673m from £1,678m a year earlier with volumes growth slowing to 3.1% from 9.2%.Branded market share by volume grew to 22.3% from 21.8% at the end of 2009, but by value it fell to 23.9% from 24.3%.The company, which owns a host of well known brands such as Hovis, Mr. Kipling and Sharwood's, made a loss before tax from continuing businesses of £98m, versus a profit of £42m in 2009. The plunge into the red was as a result of a £125m goodwill impairment charge taken on its Brookes Avana chilled ready meals business. The Brookes Avana business, which has Marks & Spencer as its main customer, saw a substantial dip in trading performance, with sales down 4.7% to £203m from £214m a year earlier owing to contract losses and lower volumes on existing contracts. The £15m profit seen in 2009 disappeared in 2010, as lower volumes were accompanied by lower margins."Despite this severe downturn in profitability, we believe the Brookes Avana business continues to produce excellent quality products and that it has innovation credentials. We are in constructive dialogue with the main customer, Marks and Spencer, with regard to revised product ranges, pricing and supply arrangements which we believe will return the business to profitability in 2011," the company said.Trading profit edged up 0.6% to £311m from £309m a year earlier. Gross profit fell 1.9% to £789m from £804m the year before, owing to the reduction in sales revenue. The gross margin improved by half a percentage point to 30.7%, however, thanks to changes in the sales mix, which saw branded sales form a larger percentage of total sales at 65.2%.Net debt fell £103m over the course of the year to £1,261m. The company has recently offloaded its Canning and Meat-Free assets, as a result of which pro-forma net debt will be below £900m, the company said. Interest paid out in 2010 slipped to £131m from £152m in 2009. Net regular interest cost fell to £145m from £155m in 2009 with the effect of lower debt levels. Bank interest was payable at LIBOR (London inter-bank offered rate) plus 2.88 percentage points in the year. The company cleared its end-year covenant tests though the interest cover test "headroom" slipped to 19% from 35% in 2009; the leverage test headroom improved to 24% from 23%. "Although each will become tighter in 2011, we expect to continue to have adequate headroom," the company said.The company's pensions scheme continues to show a shortfall, though the net deficit reduced to £232m from £310m at the end of 2009. Deficit contributions and improved hedging should mean that the medium term trend should improve things and reduce volatility."Our business has proved resilient, with branded volume market share growth, increased margin from procurement and manufacturing efficiency and lower operating expenses. There is more to do in each of these areas and we have aligned the organisational structure behind the strategy of growing our brands. We would expect our focus to enable the group to show progress from our new base after the disposals without a further deterioration in the consumer environment," said chief executive officer, Robert Schofield.