Investec Securities analyst Martin Deboo told FoodManufacture.co.uk that reducing its £1.3bn raw materials bill by just 2% could save Premier more than twice as much as reducing operational costs in grocery by 4% (the target set out in its annual results in February).
He added: “Clearly Premier can save money on driving further efficiencies following the restructuring of the manufacturing footprint, but in my view there are far bigger savings to be made through more efficient procurement.”
Supplier rationalisation programme
Although Premier had established a centralised purchasing division after it acquired RHM, it had yet to reap the full benefits, he claimed. “We know that about 80% of purchasing now goes through this team, but Premier’s supply base remains diverse and fragmented. It has more or less quadrupled in size since the middle of 2006 and the focus has been firmly on manufacturing integration. We doubt very much that there has been a lot of time to tackle the complexities of procurement.”
And that complexity was “mind-boggling”, he claimed. Premier had more than 10,000 suppliers immediately after it acquired RHM and Campbell UK, and has since whittled that number down to 7,500, he noted. But the ultimate aim was to get down to about 5,000. “Premier is still at the very top of the ski slope on supplier rationalisation.”
While savings made by manufacturers supplying supermarkets were frequently hard to retain, Premier had more chance than many of keeping hold of them as it was primarily a branded supplier, claimed Deboo. “Premier can still avoid some of the more aggressive and transparent open-book negotiations that the own-label sector is subjected to, so while supermarkets will have good visibility of the market price of its inputs, Premier will have some ability to camouflage the real prices it is paying.”
Paying off the debt
As for improving its balance sheet, Premier probably needed to sell something, said Deboo. “Premier’s history as a quoted company has broadly speaking been that of an acquisitions frenzy followed by a financing crisis. Our view remains that it needs to target asset disposals to impact the balance sheet fundamentally.”
Premier’s finance director Jim Smart has told the City he remains “open minded” about disposals provided that they do not diminish the capacity of the remaining business to repay debts and service the pension deficit, said Deboo. While this might seem like a high hurdle, he said, any business unit sold at a multiple of more than 4.7 times EBITDA (earnings before interest, tax, depreciation and amortisation) should meet this criterion.
Disposals
As for which businesses Premier might sell, meat-free was probably the only one likely to interest multinationals such as Nestlé, while others such as Rank Hovis, RF Brookes, Avana Bakeries and Charnwood (pizza bases) might be of interest to more UK-focused firms or private equity players, he speculated. “I think Premier has been too scrupulous in the past as regards disposals.”
Panure Gordon analyst Graham Jones added: “In an ideal world, people would have liked to see Premier pay down its debt faster.”
‘Project Margaret’ – Premier’s complex rationalisation programme to consolidate production into fewer, better-invested sites following its recent acquisition spree - had gone to plan, said Jones. However, Premier had yet to prove that it had delivered on the detailed operational efficiencies targeted from this programme.