Premier Foods margins hit by product discounting

Britain's biggest food manufacturer Premier Foods said its full-year pretax profit would be at the lower end of market expectations after its margins were hit by price cutting, sending its shares lower.

Premier, which makes Hovis bread, Branston pickle and Bisto gravy, said on Thursday it expected to make a pretax profit of £165m ($268.8 million) in 2009.

Market expectations had ranged between £161m and £175m, with the consensus at £168m, according to a Thomson Reuters I/B/E/S poll of 11 analysts.

Shares in the company, which have lost nearly 80 percent of their value over the last two years on the back of debt concerns, were down 7.1 per cent to 34.7 pence at 1225GMT.

Premier said sales of its branded products, which account for nearly two-thirds of its revenue, increased by 8.2 per cent in the fourth quarter, showing an improving trend, with sales across the full-year up by 5.3 per cent.

Hovis performed particularly strongly, with sales rising by 13.3 per cent during the year, boosted by a an increase in market share of 3 percentage points, the company said.

However, Premier added that promotional costs had risen as it reacted to price cuts by competitors. That, together with rising input costs, had left gross margin down year-on-year.

As a result, Premier said trading profit at its grocery division would be flat year-on-year.

"A strong improvement in Hovis profitability has been partly offset by higher-than-expected grocery promotional costs, leaving 2009 profit towards the bottom end of market expectations," said RBS analyst Julian Hardwick.

Premier said Ambrosia desserts, Loyd Grossman sauces and Batchelors soup and noodles were strong performers while sales were also boosted by new product launches such as Mr Kipling Christmas puddings and Loyd Grossman pizzas.

The company has benefited from Britain's supermarkets enjoying a bumper Christmas.

Tesco, the world's fourth-biggest retailer, smashed Christmas sales growth forecasts in its main British market while J Sainsbury also posted strong growth.

Premier, whose products were bought by more than 99 per cent of British households last year, said it expected to report a trading profit of around 320 million pounds, up 3.5 per cent on the previous year.

The company, which renegotiated its banking facilities and raised £379m in an equity fundraising last March, said its net debt stood at £1.375bn at the year end, down from £1.48bn at the end of June.

Rival Northern Foods, which is Britain's biggest maker of Christmas puddings, supplying own-label products for supermarkets as well as producing the Matthew Walker brand, said on Thursday trading over Christmas had been "solid" and in line with expectations.

However, the launch of Mr Kipling Christmas puddings had impacted sales volumes in its bakery division.

Northern, which makes Goodfella's pizza and Fox's biscuits, said sales at its chilled division were up 5.4 per cent, with bakery up 1.4 per cent but frozen sales down 10.5 per cent.

Shares in Northern were unchanged at 66.85 pence.