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Lance, Inc. (NASDAQ:LNCE)

Q4 2008 Earnings Call

February 11, 2009 09:00 AM ET

Executives

Russell Allen - Director of Planning and Investor Relations

Rick D. Puckett - Executive Vice President, Chief Financial Officer, and Treasurer

David V. Singer - President and Chief Executive Officer

Analysts

Heather Jones - BB&T Capital Markets

Ann Gurkin - Davenport & Company LLC

Ben Brownlow - Morgan Keegan

Sarah Lester - Sidoti & Company

Operator

Welcome to the Lance Incorporated Conference Call. All lines will be in a listen-only mode until the question-and-answer segment. I would like to inform all participants that this call is being recorded at the request of Lance Incorporated today February 11, 2009. You may disconnect at any time.

Gentlemen, you may begin your conference. I will now turn the call over to your host Russell Allen, Director of Planning and Investor Relations for Lance Incorporated.

Russell Allen

Thank you, Stephanie and good morning everyone. With me today are Dave Singer, President and Chief Executive Officer and Rick Puckett, Executive Vice President and Chief Financial Officer.

In today's call Dave and Rick will discuss our 2008 fourth quarter and full year results as well as the outlook for the full year 2009. As a reminder we're webcasting this conference call including the supporting slide presentation on our website at www.lance.com.

Before we begin I would like to point out that during today's presentation management may make forward-looking statements about our company's performance. Actual results could differ materially from those projected in such forward-looking statements. Information concerning certain factors that could cause results to differ materially from those projected and forward-looking statements is contained in the company's recent forms 10-K and 10-Q filed with the Securities and Exchange Commission.

I'll now turn the call over to Rick Puckett, Executive Vice President and Chief Financial Officer to begin management comments.

Rick D. Puckett

Thank you, Russell and good morning everyone. Welcome to our call. Our results for the fourth quarter reflects continued strong revenue growth across our entire business. There was a 16% increase year-over-year, fiber brands grew exceptionally well, and much improved margins were reported as well. Consistent with our strategy we had solid revenue growth in our core product lines as well as our major channels of grocery and mass.

Cost of key ingredients were less variable as a result of our buying strategies. Fuel costs were at normalized levels. We also experienced significant improvement in operating margins. Continued improvement in supply chain and DSD operating efficiencies were still apparent in our results.

As you probably read in December we acquired substantially all the assets of Archway. We closed this transaction on December '08 of 2008, and if you will remember that had been closed since the beginning of October and we actually were producing products by December 16th, only about eight days after we closed the deal. So our supply chain team really came through and started producing very quickly there and lot of kudos to that team.

There was also an enhancement to employee vacation policy which I will describe in a few minutes. If we go to page 5 or slide 5 in your deck, lets go through some of the key financial summary data for the quarter as it relates to last year's fourth quarter.

As I mentioned net sales of 215.3 million was actually 16% above last year's net sale. Gross margin improved 220 basis points quarter-to-quarter and the SG&A expense percent improved 260 basis points as well. So the operating profit include -- inclusive of those things improved close to 500 basis points from quarter four to quarter four of '08. Net income of 8.8 million translates into a $0.28 per share excluding special items.

Our special items, I mentioned the vacation change, we've called that as a special item as a result of a change in our vacation policy that was $0.025 in terms of EPS. And then the cost associated with Archway was another $0.015 relative to EPS. So total of $0.04 in special items was recorded in the fourth quarter of '08. You could see the footnote at the bottom on the page and there is also a reconciliation at the back of this deck as it relates to GAAP measures.

On page 6; if we breakdown our sales, we can see the branded at $122.6 million in the fourth quarter of '08 was almost 8% above last year. Pricing on that was around 6.5% to 7%. On the non-branded side; we have strong volume growth in our private brands; 29.5% increase year-over-year, pricing at 18% of that or pricing was 18% of that growth. So, in total 16% growth year-over-year and pricing accounted for about 12% of that.

On page 7, looking at the full year we had $852.5 million in 2008 representing 12% growth over last year. Gross margin was down 390 basis points all due to commodities as we have been talking over the last 3 to 4 quarters. The SG&A expense actually improved 230 basis points from year-to-year and the operating profit margin largely a result of the gross profit shortfall was reduced by 180 basis points. The tax rate for 2008 was basically the same as it was for 2007.

So on a net income basis $19 million was reported in 2008, again excluding special items and 2007 was $23.8 million, for an earnings per share of $0.60 for 2008 compared to $0.76 for last year.

On page 8, if you look at the sale summary between branded and non-branded, branded products represent $513 million in 2008 which was a 7% increase over year 2007. Pricing there was about 4%. On the non-branded side $339.5 million of revenue in 2008 was a 20% increase over last year, and the price component there was about 13%. So, overall 12% increase in sales of which about 7.5% of that was pricing.

On page 9, looking at some other key statistics, our EBITDA was lower slightly than last year. As well as on the percentage basis net debt was increased year-over-year. And actually the net debt increased about $56 million and as a matter of fact that happened to equal exactly what we paid for the two acquisitions that we made in 2008. So the rest of the cash requirements were paid out of our cash from operations and working capital. So actually a pretty good year as it relates to cash.

You can see also that the leverage on our debt is still quite low at 1.5 times and that's compared to a market of about 2.4. But it is higher than last year, as a result of the acquisitions that we made.

Looking at the charts, starting on page 10, you can see the great trend on our net revenue growth and as I mentioned, 16.2% in the fourth quarter of which 12 points was price, is very amazing kind of growth for a snack-food company. So I think that we continued to see strong growth there as we mentioned before.

On page 11, we start to see a turnaround in the decline of the gross margin trend; not only in terms of the quarter-over-quarter but also in terms of a rolling 12 which is represented by the red line. So it's a good turn upward; our goal here is somewhere between 40% and 41%, with the current mix and that's incorporated in our guidance that I'll talk about in a few minutes.

As it relates to SG&A percent of the net sales, we continue the downward trend here. If you look at comparisons just quarter four of 2008 versus quarter four of 2007, there is a 260 basis point improvement year-over-year. If you look at it over two years; it's 450 basis points over two years. So, again very good progress on the SG&A front.

From an operating profit margin trend perspective, this was really the best quarter four that we've had for a very long time as it relates to operating margin at 6.4%. And this excludes special items again. The supply-chain and the infrastructure investments are really paying for... they're paying off their investments as we go forward and continue to realize good savings out of those initiatives. So, 6.4% in the fourth quarter, if you look back over this chart, you don't see another 6.4%. So we feel very comfortable that we are recovering our margins.

If we look at page 14, the certain selected cash flow items and again, before I go to this, if you'll notice on the balance sheet on the press release, most of the changes on the balance sheet are related to the acquisitions. So, all of the intangibles are pretty much related to the acquisitions and the increases in AR and inventory are all pretty much associated with the acquisitions that we've made during the year.

On page 14, cash flow from operating activities at 54.9 million was actually greater than it was last year and CapEx was about the same and we'll talk about guidance in a few minutes. So the free cash flow before dividends was about $3 million better than it was last year, still not a positive free cash flow at the end of 2008, when you consider dividend.

On page 15, there is the guidance for 2009. We're expecting our range of sales to be $900 million to $920 million. We expect the diluted earnings per share to be between $1 and $1.15. It's important to note that due to the current economic climate, our range is wider than normal. External influences continue to be uncertain as we go into 2009. Our guidance also includes incremental investment in marketing and advertising as we have talked in the past.

So our range for EPS is $1 to $1.15. You can see also our capital spending guidance is reduced from previous year's CapEx levels. We're looking at $36 million to $41 million. This is largely a result of the fact that we have completed a large number of the infrastructural investments that we had to make over the last two or three years.

We do also expect a positive free cash flow after dividends in 2009 and our dividend projection is consistent with that, that we paid in 2008. So we have not changed that. So a very positive outlook as it relates to 2009. I'll now turn it over to Dave Singer for further comments.

David V. Singer

Thanks, Rick. Now that Rick's taken you through the details on the quarter, I'd like to spend a couple of minutes talking about my perspective of 2008 and give you my perspective on our outlook for 2009.

Like a lot of food companies, most of the significant issues we faced in 2008 related to the unprecedented run-up in the cost of ingredients and energy. We raised selling prices on several occasions during 2008 to offset these escalating costs but our profit margins were really squeezed during the first three quarters.

As we anticipated our pricing actions have restored our margins in the fourth quarter and although commodity costs and pricing actions were really a large part of the focus for investors this year, in my mind 2008 was a lot more than that. It was really a pivotal year for Lance and in our transformation into what I consider a truly effective competitor in the snack food market.

We've affectively completed the operational turnaround in our business. As we discussed previously, our key priorities around this turnaround have been organizational development, focused sales growth and then the development of a solid foundation to support profitable growth in the future. And we really made great progress on these priorities in 2008.

From an organizational development perspective, during the year we enhanced and re-aligned our sales teams to help improve our focus on key customers and drive profitable growth. We enhanced our vacation policy to be more competitive. We continued to build a more team oriented performance driven and adaptive culture where innovation and continuous improvement becomes second nature. I really believe this culture will be a cornerstone of our ability to execute our strategies going forward.

Our initiatives around focused sales growth resulted in double-digit growth in our key branded product lines which include Lance home pack sandwich crackers and Cape Cod potato chips.

We also delivered growth in our private brand sales of more than 20%, which included both solid volume growth and a significant price increase to cover the cost of ingredients that really jumped this year.

While we drove these sales gains, we developed a pipeline of new branded products that will be launched in 2009. We also updated our Lance brand logo and updated packaging for Lance and Tom's product-line to really freshen our look and appeal more to our target customers.

We created new advertising campaigns for Lance branded sandwich crackers that we'll launch in the second quarter of 2009 and this represents a significant investment in our brand relative to the past year's... the amount of money we spend on advertising. We also added a new brand to our portfolio with the acquisition of Archway. This will help strengthen our relationship with customers and really provide a great platform for growth.

We grew our product brands cookie and cracker business, which historically is consisted largely of value oriented products. In 2008, we broadened our private brands product offerings with the acquisitions of Brent & Sam which adds an established premium private label cookie-line to our product portfolio.

We also developed an excellent line of mid-tier or main stream private label cookies and crackers that are being launched in 2009. And with this broadened line-up of value mainstream and premium products, we're very well positioned to profitably meet our private label customers need.

Our initiatives to improve our operational foundation were really successful in 2008 and that'll play a very important role in our ability to drive margin improvement in the future.

In our supply chain, we increase the operating leverage of our sugar wafer plants in Ontario with a consolidation of three plants down to two, and we increased the efficiency of our distribution network more than enough to offset the increase in diesel fuel during the year.

Our ERP implementation continued to move along nicely through 2008 with a successful implementation of our finance, manufacturing, shipping, and procurement modules of our oracle system. In early 2009, we implemented the modules that directly touch our customers without any problem. We're on track with the timeline that will have us completing the rollout to all of our locations with this oracle system by the end of 2009.

We drove improvements in our DSD operations with solid gains in sales per route, which we believe will continue to improve as we move through 2009 and beyond. Our Archway acquisition will play an important role in driving sales gains and margin expansion beyond 2008.

In addition to the Archway branded products, we intend to leverage the Ashland, Ohio facility to support growth for our private brands and our contract manufacturing products. Furthermore, the Ashland, Ohio location is ideal for a cost effective logistic center for our private brands business.

Despite the decline in earnings in 2008 which was driven primarily by the temporary margin squeeze which related to input cost, our many accomplishments in 2008 position us really well for the future.

Earlier I mentioned the next phase of transformation for Lance. If you look at slide number 20, I'll explain what I mean. From 2006 to 2008 we've been focused on developing strategies and improving the foundation of our company. So, we're having a solid base that we can grow both top-line and expand our margin.

In the next stage which really begins in 2009, we'll be focused on the continued execution of those strategies, continuous improvement in our base operation and strategic sales growth. From an organizational development standpoint, our focus will shift from reshaping the corporate structure and culture to driving a high performance adaptive culture with a continuous improvement mindset. Our focus on operational efficiencies will begin to shift from fixing the foundation to driving continuous improvements and leveraging the existing assets to improve our returns. Our focused sales growth will now expand beyond our existing core products to include a focus on strategic growth through both innovation and acquisition.

As we enter 2009, we remained focused on our goals of sales growth, margin expansion, and earnings per share growth as evidenced by our guidance. With our prices not aligned with our input cost and a solid foundation for growth and margin expansion in place, we are confident that 2009 will be a successful year. However, there are certainly risks in the near term. The current economic conditions as worrisome as it relates to top-line growth. Commodity and energy markets are uncertain and we have exposure on some of our ingredients for later in 2009.

In addition there is also uncertainty around how this peanut butter recall will ultimately impact our sandwich crackers there. Although our sandwich crackers are not part of the recall with all the media coverage of this situation consumers remained confused.

Recent news reports suggest that consumers are pulling back on their purchases of all peanut butter products. We've seen some impact and we're working very aggressively to correct this misconception and we're using a variety of means including posting information on our website, direct advertising, communication with media outlet, radio and TV interviews, an email campaign, an YouTube video, and we are also putting up point of sale information.

On guidance incorporates the expected cost of this informational campaign as well as some modest volume softness in the first quarter. We are assuming that most of this softness will be behind us by the second quarter.

Now I'll turn the call over to our moderator to start the Q&A.

Question-and-Answer Session

Operator: (Operator Instructions). And your first question comes from the line of Heather Jones from BB&T Capital Markets, go ahead.

Heather Jones - BB&T Capital Markets

Good morning.

David Singer

Good morning Heather.

Rick Puckett

Good morning Heather.

Heather Jones - BB&T Capital Markets

Hi. Congratulations on the quarter, it was good to see.

David Singer

Thanks.

Heather Jones - BB&T Capital Markets

I had a couple of questions about your guidance. I was wondering you mentioned in the press release that it's going to be impacted by Archway higher promotional advertising expense and then other operational initiatives. I was wondering if you could walk us through that to get a sense of the magnitude of each of those?

David Singer

Yes, on the Archway side, as we integrate Archway we expect that to be dilutive in the first half of the year and then become accretive in the last half of the year. So the impact on our total guidance is not necessarily neutral. But it's not dilutive either, it's slightly accretive. As it relates to the DSD transformation, was that the other part of your question?

Heather Jones - BB&T Capital Markets

Right. So... because your commentary said negatively impacted by Archway, so it's not negatively impacted. It's just --

David Singer

In the first half. Yes.

Heather Jones - BB&T Capital Markets

But full year basis, it will be roughly neutral?

David Singer

Roughly neutral.

Heather Jones - BB&T Capital Markets

Okay. And then the promotional advertising and these operational initiatives?

Rick Puckett

From an operational initiative side, we... it's a continuous improvement piece. But as it relates to DSD transformation, that's a program that is very large and we're going to be rolling that out over the entire year. So, there will be some adjustments to our revenue as we look at and just going back to what DSD transformation is, just for a minute, its looking at customers in a very profitable way or with a profitable mindset. And there are certainly some customers that we are servicing today that are not large enough to be profitable.

So, we maybe eliminating some of those customers and moving them to other means of delivery, which could include distributors or it could include online, our Direct Connect online service. So that process will have some negative impacts on most of the year and we'll start to pay dividends in 2010.

David Singer

The other issue that was... she was asking about promotional out-cuts?

Rick Puckett

Yeah. On the promotional advertising side, as we've been saying over the last two or three quarters; we expect when we restore our margins that we will start investing back into our brands which we've not done over the last several years.

So, our guidance includes... we've also said that we spend very less than 1% on our branded revenue on advertising. So, we're expecting to spend somewhere between 1% and 2% on branded revenue in 2009, and that's included in our guidance.

Heather Jones - BB&T Capital Markets

Okay. And then going to back to your gross margin commentary of 40% to 41%, do you think you all are going to able to keep that stable in that range? I mean, assuming no further hick-ups from the cost side but stable in that range going forward, so into 2010 or is this just --

Rick Puckett

Heather that's really a mix issue as much as anything else. Our non-branded business has much lower gross margins, had solid operating margins but has much lower gross margins than our branded business. It has recently grown at an accelerated rate relative to private brands.

We believe that our margins at the gross margin line will be able to maintain those by business line but even within our branded business, we have several different components. Our gross margin on our DSD business, for example, is larger than our gross margin with our Direct Ship business or our gross margin with distributors.

So depending on how they all grow, there could be shift. What we believe is that we will maintain our margins at the gross margin line among those and we have solid operating profit margins in all business lines.

So as the business grows, we anticipate continued growth in our operating margin. But our gross margin, it's really a little bit hard to predict. We can... what I believe is that we will continue to contract a little, mostly due to mix that is shifting to solidly profitable businesses but with slightly lower gross margin.

Heather Jones - BB&T Capital Markets

Well, I remember about a year and half ago or so, the private brands or non-brands, whatever, on a EBIT margin basis were comparable if not better than branded and I understand that you had these cost issues but now that pricing is in place to cover input cost, is that still a fair statement? Are they comparable on an EBIT margin line?

David Singer

Yes, we believe that, at the... with our pricing caught up with input costs, they will be comparable on the EBIT margin side. And even as we improve our margins on the branded business we will be reinvesting some on that on advertising so that will stay the case for the next couple of years.

Heather Jones - BB&T Capital Markets

Okay. So then my final question is looking at the mid point of your guidance and I understand the uncertainty on the top line and all, I just wanted to walk through this with you, the mid point of your revenue and your EPS guidance implies an EBIT margin of low sixes which is I know roughly 50 basis points better than it was in '05 which had a bad quarter in there related to Tom's. And so you clearly have done a number of operational improvements in the ensuing three years, you are going to do more this year. So I am trying to get a feel for is this just given the uncertainty you just want to put earnings estimates out there that are very achievable because given what you all have done in the past three years I would assume that your EBIT margin should be -- especially now that you are caught up on price should be meaningfully better than where it was in '05 especially given that that was impacted by dilution from Tom's. So, just wondering if that's really where I am driving?

Rick Puckett

Well, keep in mind that advertising that we mentioned a few minutes ago is a big piece of the difference between '08 and 09. It could be as much as 100 basis points on the bottom-line. So, that is where we are reinvesting in the brand because our strategic focus is to continue to grow this business on the branded side. And we still want to drive the bottom-line margin at the same time. So, we have incorporated in our guidance some conservatism as it relates to the economic environment that we are in as well. Because we are not risk free on the commodity side yet, we're not risk free on the financial -- the current economic climate. So, we debated on giving guidance at all as you know...

Heather Jones - BB&T Capital Markets

Right.

Rick Puckett

And we decided to go ahead and give some guidance and our guidance we believe is broad enough to work in.

But I do think that your perspective is appropriate. The margins should be better than they have historically been. Partly we've got advertising, partly we have just added another plant without a lot of sales initially so there is some overhead absorption issues. I think what your fee is that as we work our way through 2009 we've got a base now where we don't have to add anymore G&A cost to grow pretty significantly, we don't have to add a lot of assets to grow. So as we work our way through 2009 we should be able to leverage our operating margin as sales grow at a pretty good cliff for a couple of years to really see the growth that we've been talking about.

Heather Jones - BB&T Capital Markets

Okay. So nothing has fundamentally changed in your business, we should expect significantly higher EBIT margins than what you did in '05?

Rick Puckett

Overtime yes. I believe that '05, yes, compared to '05 we should be driving higher EBIT margins overtime. You're right.

Heather Jones - BB&T Capital Markets

Okay. Thank you very much and congratulations again.

Rick Puckett

Thanks Heather.

Operator: And the next question is from Mitch Pinheiro from Janney Montgomery Scott. Go ahead.

Unidentified Analyst

Good morning everyone. This is Brian for Mitch.

Rick Puckett

Hi Brian.

Unidentified Analyst

Few question for you here; first of all can you define the peanut butter recall impact on your peanut butter crackers?

Rick Puckett

You know it's a little bit hard to tell at this point. There are so many moving parts. We had a very affective promotion early in the year that was; where our sales were very strong given the fact that the number two and the number three crackers were recalled and pulled off the shelves. We filled those shelves in many cases, we picked up new customers. So the ongoing impact of this is really hard to tell. Our expectation is we've seen some Neilson data that suggest that the butter cracker business is getting hit even harder than the overall peanut butter business has been hit in this short burst. But a lot of that has been offset by those types of issues. So, the impact on Lance is a little bit uncertain. I believe that this will ultimately get behind this but until it's on the news everyday, until it is behind us it's still a risk and we're are not sure about the quantification.

Unidentified Analyst

Okay, alright. Fair enough. How many routes did you guys end the year with and how many do you anticipate ending 2009 with?

David Singer

We ended the year, Brian at around a little bit more than 1300 routes. We started the year at 1400. And we really and in terms what we anticipate ending, are you talking about where we anticipate ending next year?

Unidentified Analyst

Yes, yes I am sorry.

David Singer

That's not, something that we have got. That's a function of a variety of different things and that's not something that we're comfortable...

Rick Puckett

I mean still in the works and going through the process.

Unidentified Analyst

Okay. Moving over to Archway, can you give us an idea at all how much is that to sales right now and what's the run rate right now?

David Singer

Well, the run-rate initially is zero. This thing -- the Archway has been off the shelves since October and we really had to reestablish the distribution system as well as reestablish shelf space. So, our anticipation is that it will be a slow build, relatively modest, almost no sales in the first quarter not quite that low but almost building to a reasonable run-rate by the fourth quarter. We think when we look at Neilson Data, this business was well in excess of 50 million several years ago. We think that it will take up several years to build back to that level. If we could get to a run-rate of half of that by the fourth quarter, we'd pretty happy. And now we have upside beyond that but that's kind of the run-rate that we're looking at. So, the impact on the first year may only be a couple of points of sales.

Unidentified Analyst

Moving onto the non-branded business quickly. Do you see any possibility for pricing declines in that side of your business, especially looking forward to the second half of the year?

Rick Puckett

I think there is always risk that that happens. I think that the margin structure in that business has kind of got to the point where it's worthwhile to consider investing in the business for a while; the margins on that business were really light. And... but at this point, we don't anticipate pricing actions but it's certainly possible.

Unidentified Analyst

Okay. Last question, new products, what kind of contribution do you see on a percentage basis in 2009?

Rick Puckett

Yes, we're looking at actually a pretty significant impact. Although we've got some cannibalization build in, we think it could be as much as a couple of three points, two to three points of sales.

Unidentified Analyst

Okay. Great. Thank you for your time.

Rick Puckett

Thank you.

Operator

Your next question is from the line of Ann Gurkin from Davenport. Go ahead.

Ann Gurkin - Davenport & Company LLC

Good morning.

Rick Puckett

Good morning.

Ann Gurkin - Davenport & Company LLC

You all put out your sales target, 900 to 920 within that, can you comment on what you're forecasting for branded sales growth and non-branded, in other words, can branded sales accelerate from the high single-digit pace we've seen?

Rick Puckett

Well, a lot of the new product that Dave just mentioned are in the branded category. So we'll see some growth on the branded side from that perspective.

We've not broken out specifically in our guidance nor do we expect to the branded sales versus non-branded. However, we expect growth in both the categories and there are certainly innovations and new products in both categories. But, most of the growth on the branded side is going to come from new products and continued success in the grocery and mass channel.

David Singer

And Archway.

Rick Puckett

And Archway. Sorry.

Ann Gurkin - Davenport & Company LLC

So high single-digit pace is still reasonable to assume for branded?

David Singer

When you consider all those things together, I think that's... with all of those things together, I think the answer is yes.

Ann Gurkin - Davenport & Company LLC

Okay, great. Great and then I have seen your product in Dollar Stores in different package types and I was just curious, if you can update us to how that's going?

David Singer

The Dollar Store business has been a solid business for us. We... it's been growing nicely and we, at one point had converted the Lance product to a Tom's product to a large degree, a lot of that is converted back to Lance in a configuration that actually is a... is good for the customer and good for us.

Ann Gurkin - Davenport & Company LLC

Right. And with the acquisitions and with the addition of production facilities, can I just get an update on capacity utilization either by geography or by product type right now where your business stands?

David Singer

We are in pretty good shape from a capacity perspective. We are not really looking at any capacity additions in the near term. There are certain product lines, Saltines is an example where it's been really solid growth. I think it's a function of consumers eating at home more. So there's been good solid growth in Saltines, the capacity is a little tight there. But beyond that, we are really in good shape. We don't have a specific utilization rate there to provide by category.

Ann Gurkin - Davenport & Company LLC

Okay. And last, I wondered if you'd comment on your expected use of cash over the next several years. I think you talked about maybe your under (ph) an acquisition, looking on the current economic environment, financial challenges, kind of where you are in terms of comfort level when using that cash to make acquisitions as they came along?

Rick Puckett

We have a comfortable amount of liquidity currently and our leverage ratio as you saw is pretty low. We have credit facilities that go through pretty much, the end of 2011. Those are still intact and adequate for us. We expect to be... continue to be acquisitive going forward and maybe that we use something other than cash. But, as we look at each acquisition, it will lead us to a particular decision as it relates to how to finance that.

Our relationships with our bank group is still very, very good and our bank group is pretty much unaffected by all the recent mergers and combinations. So we have a good strong group there that we feel very constable with. The way we're going to be using cash and at least in 2009 is obviously we're paying dividends and CapEx and then we'll pay down debt after that.

Ann Gurkin - Davenport & Company LLC

Okay, great, thank you.

Operator: Your next question is from the line of Ben Brownlow from Morgan Keegan. Go ahead.

Ben Brownlow - Morgan Keegan

Good morning. I was hoping -- I know in the past you have kind of stated that you are not trying to time the market on the six months forward buys but given where commodities are right now, have you changed that strategy at all?

David Singer

We actually in some areas, minor areas we have extended further. We've got most of our first half locked in, we've got a portion number of second half locked on certain commodities. And on certain things that are less related to how competitors might act. We have actually locked in further than that certain natural gas, things like that. We have gone out even further. But one of the things that we have to be careful of is no one expected the level of movement in commodities that we experienced in the past twelve months and so as we look at what could happen we don't want to be priced too far forward in case commodities would drop significantly further even though they seem very attractive. If we go too far and they drop much further we could be in a competitive disadvantage.

So we are balancing all of those issues as we look to buy forward but we have locked in like I believe many of our competitors and many other food companies locked in a lot of next year already at prices that are higher than some of the current I am sorry 2009, at prices that are higher than the current stock market.

Ben Brownlow - Morgan Keegan

Okay and then looking out does your guidance account I mean you're obviously cautious in this environment but does your current guidance account for a deflationary environment in some categories. I mean are you already anticipating giving back some of those price increases that you have taken over the past 12 to 18 months?

David Singer

Our guidance incorporates a lot of different things. I think one thing is important to understand, a one point margin change in our business is about $0.16 or $0.18 a share. So, when you start to think about how difficult it is in the environment we are in to provide a narrow range for guidance and to kind of describe exactly what's in it. There is lot of potential volatility. We feel really good about the things we've done, we feel good about our business, and we think that the guidance range we've put out there is an effective reasonable range for us.

Ben Brownlow - Morgan Keegan

Okay. Then one last house keeping, sales per route?

David Singer

Our sales per route is up pretty solidly in 2008. It's not a number that we publish.

Rick Puckett

We have made improvements of about 10% year-over-year.

Ben Brownlow - Morgan Keegan

Okay.

David Singer

We think that that will continue for the next couple of years.

Ben Brownlow - Morgan Keegan

Q4 is similar run-rate?

David Singer

At least Q4; yes.

Ben Brownlow - Morgan Keegan

Great, thank you very much.

Operator: And the next question is from the line of Larry Allen Linhof (ph) from Ironworks Capital. Go ahead.

Unidentified Analyst

Thank you. You've answered almost all my questions, just a clarification. The gross margin, can you share with us Rick you talked about the target being 40% to 41% what is the range of assumptions you have used in providing your '09 guidance?

Rick Puckett

Well that is the range of assumptions in the guidance.

Unidentified Analyst

40% to 41% for fiscal '09?

Rick Puckett

That's right.

Unidentified Analyst

Great, thanks very much.

Operator: And your next question is from the line of Sarah Lester from Sidoti & Company. Go ahead.

Sarah Lester - Sidoti & Company

Good morning.

David Singer

Hi Sarah.

Sarah Lester - Sidoti & Company

I wanted to ask about raw materials cost in the fourth quarter. I might have missed it, how much higher were they than last year?

Rick Puckett

Actually fourth quarter of this past year versus '07 were not that much different in the major commodity.

Sarah Lester - Sidoti & Company

Okay.

Rick Puckett

And we're very confident on a fourth quarter the last year and we're relatively comparable to the third quarter. Its actually -- it had grown significantly into the third quarter, it has leveled out into the fourth, and that was comparable to prior year. So we have cycled the big increase.

Sarah Lester - Sidoti & Company

Okay great, and than I think Dave you mentioned modest volume softness in the first quarter and I wanted to get a little bit more detail on that?

David Singer

Modest line, well what I said was I said that I thought we would be -- our guidance assumed some modest impact of this peanut butter recall in the first quarter. We are not anticipating this peanut butter recall will hurt our business long-term, we believe it's a temporary thing. And so we've build in to our guidance some softness in our first quarter. That's really, we haven't specified it but the kind of the growth rate we've had and we're not presuming it is going to continue through the first quarter. We think we'll get hit with some softness there.

Sarah Lester - Sidoti & Company

Right, okay. That's all. Thank you.

Operator

And there are no other questions at this time.

Rick Puckett

Okay. Well, thanks for everybody for coming. We are very happy with our quarter and look forward to updating you after the first quarter of this year.

Operator

Thank you for participating in today's conference. You may now disconnect.

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Source: Lance Q4 2008 Earnings Call Transcript
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