The market reacted positively to Premier Foods’ announcement on 4 March of its financial results for 2007. Investors and analysts breathed a collective sigh of relief when the doomsayers’ predictions of a rights issue, possible sell-offs and breached banking covenants were not realised.

The overall feeling of investors, analysts and industry watchers was that Premier had stilled the worst fears, done a reasonable job of turning things around in a very difficult trading environment and, while not coming up smelling entirely of roses, was not the basket case that some had predicted.

And while nobody is pretending that Premier is out of the woods yet ? much will depend on the price of wheat this year ? the company was thought to have made an honest breast of things with regard to last year’s difficulties and was talking realistically about its hopes and plans for 2008.

Yes, there are still huge debts: the company’s market capitalisation of £830m is dwarfed by net debt of £1.62bn, plus a pension deficit of £123m. But the company has negotiated more financial headroom with its bankers, which will enable it to continue its programme of investment and the integration of RHM and Campbell’s, the companies it bought.

The dividend was halved in a move regarded as prudent, because it would save Premier £50-60m. Even shareholders appeared to approve of the decision, preferring to take a longer-term view. In fact the main shareholders have been very supportive of the company and have bought more shares when the price was low, said a company spokeswoman.

== Underlying performance ==

Now the worst fears have not been realised, investors are looking at the underlying trading performance.

Martin Deboo, an analyst at Investec, said: "The market has re-focused itself on trading and is finding the news mixed." By contrast, a company spokes-woman claimed: "The underlying performance of the business is pretty good."

It rather depends which bits of the business you are looking at. Premier is home to at least 45 major brands. Fray Bentos, Oxo and Bachelor’s, all acquired with the purchase of Campbell’s, are doing well, as is Sharwood’s, part of RHM Foodservice.

The picture is less rosy when looking at the bread bakeries side of the business, which has been kept as a separate entity due to the huge fixed costs associated with bread factories. It has its own management.

Robert Schofield, Premier Foods chief executive, remains bullish about Hovis and clearly regards it as a brand with great potential, despite the loss of Hovis white bread market share. The recipe has been changed and it will re-emerge on to the shelves healthier than before and backed by a new advertising campaign, even though Premier has announced a halt to promotional activity in the first part of this year. Hovis is also looking at making a 400g loaf.

Seeds Sensation, a seeded loaf, was launched under the Hovis brand and is expected to have annual sales of £20m. Premier is investing £6m in new processing equipment and also reducing the cost base.

But the message is that there is no quick fix. It may take 12-18 months to turn the bread-making business around, said a company spokeswoman. "It will take longer than the first or second quarter," she said.

== Scaling back ==

Premier has closed depots in Plymouth and Telford - not selling them, decommissioning them or flattening them, but taking them temporarily out of production as a cost-saving measure until such time as demand picks up and they may be dusted off and returned to a productive existence. Much will depend on the market, on wheat prices and on the success of the marketing campaigns.

The day after the 2007 figures were released, Premier’s shares had risen 5%, and have held up since. Investec’s Martin Deboo described the mood in the City as "moderately positive". An occasionally stern critic of Premier, Deboo was in a mood to give credit where credit was due: "They have bought themselves some breathing space on their balance sheet, through cutting dividends and increasing their borrowing headroom. They have recovered 80% of their losses from higher commodity prices. We ought to applaud them for it! It’s like standing on a beach watching a large wave approach and trying to surf over it."

== The translatlantic battle for wheat ==

How Premier fares in the battle with Warburtons and Kingsmill may have as much to do with wheat prices on opposite sides of the Atlantic as it does with new Hovis initiatives and the companies’ respective advertising and marketing campaigns.

Premier’s wheat is mainly UK-grown, Warburton’s is Canadian. After record highs on the commodity markets, on 5 March, Minneapolis wheat was down 30%, Chicago wheat was down 16% and the European market was down just 3% (it doesn’t follow North American trends and had consequently risen less and dropped back less than the excitable American exchanges).

A further price rise for bread is inevitable, says Schofield. But the supermarkets will be doing their best to resist that and will be expecting their suppliers to take the pain.

A standard loaf of Hovis has risen over 16% to £1.15 from 99p a year ago. What price will it reach a year from now? And will Schofield still be excited about the brand? n