15 July 2008
Trading update for the half year ended 28 June 2008(1)
Highlights
* Group sales up 7%
* Price rises achieved to recover cost inflation
* Group Trading profit(2) in line with first half of 2007
* Hovis rejuvenation underway
* RHM and Campbell's integration accelerated
* Synergy delivery accelerated
* On course to deliver our profit expectations for the full year
Robert Schofield, Chief Executive, said:
"I am pleased to report that Premier Foods made good strategic and operational progress during the first half of the year, despite the difficult economic and trading environment that all consumer businesses are facing. Against this background we have recovered the commodity cost inflation we have seen to date and we expect pro forma Trading profit for the first half of the year to be in line with the same period last year.
"The integration of Campbell's and RHM is proceeding ahead of its original schedule. Our manufacturing rationalisation programme is progressing well with the closure of the Bristol and Droylsden factories in June. We have now closed five out of the nine factories scheduled to close through this programme with the remaining four to close over the second half of the year.
"Premier's broad portfolio of staple food products and leading brands, supplied through a wide range of customers, provides us with a resilient base as consumers' buying patterns evolve. We have good forward sight of inflationary pressures and have plans in place to mitigate them as they occur. Our expectations for the year remain unchanged with progress weighted to the second half as the benefits of synergies from the manufacturing rationalisation programme, price increases achieved to date and the rejuvenation of Hovis flow through."
Introduction
Premier's trading performance in the first half of 2008 was in line with our expectations with Group sales up by approximately 7% on the same period last year. The driver of the sales growth has been price rises to recover the significant input cost inflation, which began during the second half of 2007. Trading profit continues to be in line with our expectations with, as previously indicated, the synergies from the integration of Campbell's and RHM being broadly offset by the delay in recovering cost inflation and lower bread volumes compared to the same period in 2007.
Grocery
Sales in the first half of 2008 were approximately 2% higher than the equivalent period in 2007, principally due to pricing partly offset by lower volumes, particularly own label convenience foods. As previously indicated, promotional activity and sales volumes have been constrained in the first half by the SAP implementation and the manufacturing rationalisation programme and we anticipate that the removal of these constraints during the second half will lead to an improved volume performance.
Baking & Milling
Sales for the Baking & Milling division are approximately 16% ahead year on year for the first half, driven by pricing activity. We achieved price increases across our bread and flour ranges in the first half, reflecting continued pressure from wheat and other input costs. We have seen sales volumes of Hovis stabilise during the first half of the year albeit at lower levels than the same period in 2007. We are pleased by the response of consumers and customers to the new recipe and packaging for the Hovis white loaf and look forward to rejuvenating the whole of the Hovis range over the second half.
Following a review of our flour milling operations we entered into consultation with employees regarding the proposed closure of our Rotherham mill, which, if agreed, will be scheduled to close by the end of 2008.
Chilled & Ireland
Sales for Chilled & Ireland were approximately 2% higher during the first six months of the year. A stronger performance by Quorn was offset in part by softer sales in our retailer branded chilled business. Quorn, in particular, has benefited from growth in both its chilled and frozen categories and also internationally. We expect an improved second half from the retailer branded chilled business, which has recently won significant additional volumes.
Transformation Programme
We have accelerated the rationalisation of our manufacturing facilities and, following the closure of the Thurles factory in May and the Bristol and Droylsden factories in June, the remaining 4 factories are now due to close by the end of 2008. We remain on track to deliver the £113m of cost savings that we identified when we acquired the RHM and Campbell's businesses. The gross costs of the integration remain in line with our expectations although the net amount is likely to rise due to lower than previously anticipated property disposal proceeds.
The implementation of the critical SAP "Orders to Cash" module of the information management system proceeded according to plan in March this year. Rollout of further SAP modules will now focus on manufacturing operations and enabling a further consolidation of our "back office" operations.
Financial Position
Our unaudited net debt at 28 June 2008 was £1,820m reflecting the seasonality of the business, the acceleration of the manufacturing rationalisation programme, lower property proceeds in the first half of the year than originally anticipated and the impact of commodity cost and price inflation on our working capital.
We confirm that we met our financial covenant tests at 28 June and expect to continue to operate within them. We expect net debt to fall over the second half as we complete our manufacturing rationalisation programme and that increased Trading profit from the acceleration of synergy benefits will offset higher interest charges during the remainder of the year.
As previously indicated, we have agreed revised contribution schedules for each of our pension schemes and can confirm that the deficit reduction payments will be reduced by approximately £25m per annum to £30m, £32m and £34m for 2008, 2009 and 2010 respectively.
Trading Outlook
Premier's broad portfolio of staple food products and leading brands, supplied through a wide range of customers, provides us with a resilient base as consumers' buying patterns evolve. We have good forward sight of inflationary pressures and have plans in place to mitigate them as they occur. Our expectations for the year remain unchanged with progress weighted to the second half as the benefits of synergies from the manufacturing rationalisation programme, price increases achieved to date and the rejuvenation of Hovis flow through.