FDBusiness.com

Premier Foods has warned that its expected first half trading profit of £65m to £70m will be below the £94m achieved in the corresponding period of 2010. The UK’s leading domestic food processor has blamed a number of factors for the decline in trading profit.

First, commodity costs increased by 14% year on year; equivalent to a £150m increase in costs in a full year. Although Premier successfully repriced its products to reflect this, there was an inevitable time lag before the prices took effect, which led to a one-off cost of £15 million in the first quarter. In addition, as a direct result of the repricing exercise, a major customers delisted a significant number of Premier’s grocery lines. This cost Premier around £10m in the second quarter but the issue has now been fully resolved and the affected lines have been relisted.

Second, there was an unprecedented decline year on year in Premier’s markets, with both the grocery and bread markets falling by 5%, due to the depressed consumer environment exacerbated by unseasonably warm weather. The consequent decline in volumes reduced profit in both the grocery and Hovis bread businesses.

A third factor is that Brookes Avana will record a £10m decline in profit year on year in the first half. This includes a £5m charge for restructuring at the Leicester site following the decision from Marks and Spencer to remove a significant pie contract in stages over the next year.

In total, the year on year decline in profit caused by these factors weighed more heavily on the earlier months of the first half. Margins in the second quarter have improved as the new prices came into effect and as the group’s extensive cost efficiency programmes yielded positive results.