Premier Foods cuts profit forecast, shares tumble

(Reuters) - Premier Foods Plc PFD.L, the maker of Mr Kipling cakes and Bisto gravy, cuts its profit forecasts and said it was taking longer than expected to agree supply deals with food retailers, sending its shares down as much as 16 percent.

A Mr Kipling Cherry Bakewell is seen in this illustration taken March 30, 2016. REUTERS/Phil Noble/Illustration

Food manufacturers are battling to agree price increases with British retailers like Tesco TSCO.L and Sainsbury SBRY.L because the fall in the pound since the Brexit vote in June has pushed up the cost of imports like sugar, chocolate and wheat.

Premier said it was working with its customers to agree changes, including some limited price increases, but the “recovery” of these higher input costs in certain areas was taking longer than expected.

Premier's much bigger rival Unilever ULVR.L got into a pricing dispute with Tesco last year which halted the online sales of some of Unilever's products, including Marmite - a brown yeast-extract spread. The two companies ultimately settled the pricing row.

Premier said last week it was in talks with big retailers, including Tesco and Sainsbury, about price increases.

Premier, which rejected a 65 pence per share takeover approach from U.S. food maker McCormick MKC.N last April, now expects profit for the year to be about 10 percent below previous expectations. The company's shares fell more than 16 percent to 40 pence each.

“PFD (Premier) is in intense negotiations with retailers on pricing and promotion, but there is no certainty around the outcome,” Jefferies analysts Martin Deboo and James Letten said in a note. “Cost recovery lags now seem inevitable.” Jefferies has a “hold” rating on the stock.

The group also said its grocery products had been affected in the third quarter by changes to retailers’ promotional activity, including a reduction in multi-buy offers.

Britain’s major supermarkets significantly cut the level of their promotions last year, particularly multi-buy deals, as they looked to focus instead on lower regular prices to compete more effectively with discounters.

Market researcher Kantar Worldpanel said the level of promotional activity in the sector fell to 37 percent in the Christmas quarter, the lowest level since 2009.

Shore Capital analysts said Premier had revealed a further period of disappointing trading which, coupled with input cost-driven margin pressure, resulted in a profits warning.

“We are now seeing input cost pressure and retailers’ trading strategies holding the group back,” they said in a note. Shore Capital has a “sell” recommendation on Premier.

Premier said it would begin a cost-saving and efficiency programme aimed at delivering annual savings of 10 million pounds from 2017/18.

In April, U.S. spice maker McCormick Foods had made a 1.5 billion pound takeover proposal for Premier, but then walked away after talks with Premier failed to produce a deal.

McCormick said at the time it could not make a takeover proposal that would produce sufficient returns for its shareholders and that Premier Foods’ board would recommend.

A number of Premier Foods biggest shareholders questioned the company’s decision to reject the approach.

Paulson & Co, a significant shareholder in Premier, went public to criticise the food company’s board for rejecting McCormick’s offer.

Japanese noodle maker Nissin Foods 2897.T is the company's largest shareholder with a stake of around 19.7 percent. Premier said it would roll out the first Nissin branded products in the next few weeks.

Premier’s group sales in the quarter to Dec. 31 fell 1 percent to 251.4 million pounds ($310.43 million) while volumes increased 3.4 percent, the company said.

Premier Foods has sold off a number of assets during a restructuring aimed at reshaping its business, cutting costs and reducing debt built up after an acquisition spree.

In 2014, it gave up control of its Hovis bread business, but has kept brands such as Ambrosia rice pudding, OXO stock cubes and Batchelors soups.

The company sees net debt to be at around 525 million pounds ($646.43 million) on April 1. It has managed to cut its debt pile from 830.8 million pounds in 2013 to 585.1 million at the close of 2015.

Reporting by Rahul B in Bengaluru; editing by Jason Neely and Jane Merriman