Mr Kipling cakes, Bisto gravy and Loyd Grossman sauces maker Premier Foods (PFD) is taking a serious pounding, its shares marked down 15.6% to 40.5p after warning full year profits will be around 10% lower than previously expected.

The food producer's second earnings alert in less than four months heaps further pressure on chief executive Gavin Darby and Premier Foods' board, whose decision to reject three premium-priced takeover offers from US spice giant McCormick & Co (MKC:NYSE) last year looks a poor one with hindsight.

SALES FALLING

In a downbeat trading statement, St. Albans-headquartered Premier downgrades this year's sales and trading profit expectations following a weak third quarter. Sales were down 1% to £251.4m, despite a strong Christmas period for brands including Batchelors, Bisto, Oxo and Ambrosia, with Premier's branded grocery sales down sharply for the quarter overall.

Beleaguered chief executive Darby points to changing promotional strategies by supermarket customers, 'notably a reduction in multi-buy promotions which has the effect of reducing category volumes', for the grocery category's poor showing and also warns trading will remain tough in the final quarter.

Also to blame for the profit warning is 'significant input cost inflation' in sugar, chocolate, dairy, wheat and palm oil. Driven higher in part by sterling depreciation, this raw material inflation is taking 'longer than originally foreseen' to recover.

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In October, indebted Premier warned first half profits would be lower year-on-year, blaming warmer weather in September for 'materially lower sales' in its grocery business. Premier Foods did leave full year profit expectations unchanged, though Shares indicated at the time there was lots to do in the second half to hit the numbers.

In light of the latest disappointment, investors will be spitting feathers, since Premier spurned a trio of offers from McCormick in the first half of 2016. Rather than a tie-up with McCormick, it instead inked a collaboration deal with Japanese instant noodles leader Nissin Foods (2897:TYO), whose near-20% stake represents a poison pill for future bidders though could prompt a new bid from Nissin itself.

Premier Foods - JAN 17

INTERNATIONAL PROGRESS

'Six out of eight of our major brands gained volume and value market share in the quarter although our categories were generally softer due to changes in retailer promotion strategies. Our International business delivered a ninth consecutive quarter of growth, up 15%,' says Darby, reaching for any crumbs of comfort he can find.

He adds: 'Against the backdrop of these headwinds, we are today initiating a new cost saving and efficiency programme which will deliver £10m from 2017/18 with equivalent further savings the following year. This programme will support the company's twin goals of delivering trading profit and free cash flow while investing in innovation and consumer marketing.'

Darby also highlights modest growth in Sweet Treats, with Cadbury cake, made under licence from US snacks and drinks giant Mondelez (MDLZ:NDQ), continuing its strong momentum from the first half. Premier Foods also says it will be distributing its first Nissin branded products within the next few weeks, with a Soba noodles pot product winging its way onto the shelves of most major retailers from February.

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Issue Date: 18 Jan 2017