Premier confident of no financial impact from Sudan 1

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Premier Foods, the company at the centre of the UK's biggest food
product recall, said it was confident of suffering little or no
financial impact as a result of the food scare as it reported
figures for 2004 already affected by the result of a fire at one of
its production facilities. With recent acquisitions expected to
contribute to good growth in 2005, the company will be keeping its
fingers crossed for a swift and inexpensive conclusion to the
recall, writes Chris Jones.

Premier Foods has had something of a turbulent time since its floatation in July 2004. A fire at its Bury St Edmonds plant in October led to massive shortages of one of its most popular (and profitable) brands, Branston Pickle, a product which was also partly affected by the recent product recall after traces of the banned carcinogen Sudan 1 were found in a number of lots.

The fire alone shaved an estimated £8.2 million off the company's sales for 2004, which reached £842 million, up 8.8 per cent thanks in large part to the acquisition of the Ambrosia brand in 2003. Excluding Ambrosia, like-for-like sales would have been some 1.9 per cent higher.

The company added another iconic British brand, Bird's Custard, to its portfolio during the year, and expects to see further strong growth in 2005 as a result of the acquisition - again assuming the financial impact of the recall remains within its current expectations - taking turnover from the company's dessert business to over £200 million.

Premier's good showing was not solely down to additional revenues from acquisitions. The company has been steadily shifting the focus of its business away from the high volume but low margin own label sector and towards the much more profitable branded food business.

Branded sales now account for 55 per cent of the total, up from 50 per cent a year earlier, and Premier's expertise at handling branded products in a wide variety of product categories is underlined by the strong performance of Ambrosia, which posted like-for-like sales growth of 7 per cent in 2004, the first gain after several years of decline under former owner Unilever.

This growth has not come without a cost to the company, which increased its marketing expenditure by 5 per cent to £30 million in 2004, but should at least be happy with the return on its investment: sales of its Loyd Grossman branded foods rose 18 per cent (despite the fire) and the Hartley's jam range showed organic growth of 19 per cent. Sales of Branston rose 2 per cent (again, despite the fire) and Typhoo tea sales rose 3 per cent.

Operating profits, including exceptional items, nonetheless remained strong at £73.9 million, some 8.5 per cent higher than in the previous year.

Assuming that the claims from Premier's customers following the Sudan 1 incident can be covered by the company's insurance, Premier said it remained confident of meeting its own ambitious growth targets for 2005, driven by continued cost cutting measures as it merges production and marketing operations for its disparate portfolio of brands, and by new product development and further investment in its branded business.

Further acquisitions cannot be ruled out, especially in the current climate of portfolio rationalisation by the major food groups such as Unilever, but Premier's shareholders will undoubtedly be wary of adding to the company's already substantial debt burden. Despite reducing its debts by some £323 million in 2004 - helped by income from disposals - the company still has a pretty hefty £370 million to pay off.

However, Premier's acquisition track record speaks for itself, and the company's management has a knack for picking up brands with a strong following and squeezing even more out of them than their, usually larger, former owners.

Weetabix, itself recently acquired by buyout specialists Hicks Muse, has been mentioned as one potential acquisitions, but with little in the way of other cereal assets, the company may be wary of moving into yet another area of business before realising all the synergies from its existing operations.

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