Premier Foods expects to deliver cost savings a whole year early

It was good news for Premier Foods investors on Tuesday, when the company announced it now expects to hits its cost saving target a year early.

The group has set out to reduce its annual cost base by £40m and so so by the end of this year rather than the end of 2013 will, as Panmure points out, help to offset the dilution from further disposals.

The company has experienced a great deal of trouble over the past couple of years so it was no surprise the firm's shares got a boost following the news.

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The firm overhauled its capital structure, which resulted in the conversion of higher rate interest swaps into an additional term loan, which lowered the interest for the first half of 2012 by 28% from a year ago to £42.3m.

In addition, Premier has achieved some success in narrowing its brands to focus on just eight so-called "power brands", which saw a 2.0% rise in sales, owing to strong performances by the Loyd Grossman, Batchelor's and Mr Kipling businesses. As a result of the sale of its Vinegar & Sour Pickles business the group trousered £41m, while £34m was pocketed from the sale of Elephant Atta Ethnic Flour. The Power Brands sales mix increased by half a percentage point to 55.3% of total sales.

However, the half year report did not entirely smell of roses, with net finance expenses for the six months coming in at £60.9m compared to £45.5m in the same period in 2011. This was partly due to an exceptional write-off of financing costs amounting to £10.8m, as well as an adverse movement in the fair valuation of interest rate derivatives in the period of £12.5m, compared to a positive movement of £7.9m in the same period in 2011.

Marketing costs were also significantly higher, up 40% to £24.8m, largely as a result of greater exposure to increased television advertising.

Marketing investment in the Grocery division increased by £8.0m in the period to £20.0m, reflecting higher levels of consumer marketing activity across the Power Brands.

What's more, the company's much need restructuring came at a price, which pushed the firm into a reported loss before tax for the period, at £27.3m (2011: £11.2m), including debt servicing of £60.9m, up from £45.5m in the prior year.

The company's troubles arose from a spate of acquisitions, including the purchase of the Mr Kipling brand, which led to debts of around £1.2bn. Since 2007 the stock has fallen 97% in value.

During the half-year period revenue from continuing operations fell, coming in at £852.8m, a decrease of £151.9m compared to the prior year. The major driver of the decline was the disposal of the canned grocery business in July 2011.

For the Investor Chronicle (IC), the improvements haven't been enough and the stock is "no better than a hold".

"Despite some signs of stabilisation, the bottom line is costs savings have been protecting profits as contributions from grocery and bread were down by over 4.0% and 27%, respectively. Faced with a weak consumer environment, intense competition from rivals and weighed down by an over-geared balance sheet, Premier Foods has few attractions," the IC said.

Looking ahead, Credit Suisse forecasts 2012 adjusted pre-tax profits of £100m and earnings per share of 31p (from £72m and 21.9p in 2011).

Michael Clarke, Chief Executive Officer, said: "I'm pleased with the progress we are making to stabilise the business, re-focus the portfolio and invest in our future growth. Our strategy of focusing on our Power Brands is starting to gain traction. Power Brand sales were up 2% and sales of Grocery Power Brands increased by a healthy 4.9%, reflecting consistent improvement in market shares. Trading profit increased 3.2%, in line with our expectations.

"Plans to simplify the business and drive further efficiency and effectiveness are proceeding ahead of plan and we will now deliver the previously announced £40 million savings by the end of 2012. As we continue our divestment programme, we plan to take further costs out of the business.

"We remain cautious given the current economic and trading environment and our full year expectations remain unchanged."

NR