Snyder's-Lance's CEO Hosts Investor Presentation (Transcript)

Feb.26.13 | About: Snyder's-Lance, Inc. (LNCE)

Snyder's-Lance, Inc. (NASDAQ:LNCE)

February 26, 2013 8:45 am ET

Executives

Mark Carter - Vice President and Investor Relations Officer

David V. Singer - Chief Executive Officer, Director, Chairman of Banking & Contracts Committee and Member of Executive Committee

Carl E. Lee - President, Chief Operating Officer and Director

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

Analysts

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Rohini Nair - Deutsche Bank AG, Research Division

Heather L. Jones - BB&T Capital Markets, Research Division

Amit Sharma - BMO Capital Markets U.S.

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division

Mark Carter

Good morning, everyone, and thank you very much for coming to be with us this morning at our 2013 Snyder's-Lance Analyst's Breakfast.

I'd like to remind everyone in the room that we are webcasting the accompanying slide show and the audio for this meeting. So when we get to the Q&A session, we'll have a microphone that we'll ask you to speak your question into there so that the people listening out in the world can hear. During today's meeting, we'd like to remind you that management may make some forward-looking statements, and I refer you to the Safe Harbor language that accompanies all of our presentations.

As you know, we held our typical quarterly call just a couple of weeks ago. So the purpose of today's meeting really centers around giving you access to management. We've been very busy, obviously, with the integration of our merger and the acquisition of Snack Factory for the past couple of years. We've done our best to get out on the road and to attend conferences and give you individual access. But today, you've got the entire management team, and we want to give you a chance to spend some time with Dave and, particularly, to get to meet Carl and to hear him and to ask questions, to get to know him a little bit better.

So during today's meeting, Dave's going to cover some recent operating accomplishments that we've had. And then, Carl will spend some time taking a look forward. He'll talk more about our strategic plan and our 2013 and beyond plans, and then we'll have time for Q&A with the entire management team.

So with that, I'm going to turn it over to Dave Singer, our CEO.

David V. Singer

Good morning, everybody. Thanks a lot for coming. What I really want to do is kind of give us introduction to what's happened over the past couple of years and position you for meeting Carl. I know you -- many of you have met Carl before, but basically, we've gone through, over the past several years, a merger integration late 2010. Merging Snyder's and Lance really changed the nature of the trajectory of both companies and positioned us for a much different future.

And so over the past several years, we've done all of the merger integration, hit a bunch of really impressive targets that we'd set for ourselves. And as we've come through the end of that, we started getting a lot more focused on the future, and I want to talk a little bit about how our focus on the future has come about. I'm going to talk about a strategic plan and how we've rolled that out. Carl is going to speak a lot more of the details about it. But -- so as we got through the integration, we made a significant acquisition, the Pretzel Crisps acquisition. I want to talk a little bit about that.

And then starting in May of this year, we're going to have a leadership change. I'm retiring from the CEO position, I'll roll off the board after -- I've had 10 years on the board, got 8 years as CEO. And Carl has been part of the merged entity since we merged in December. He and I have worked extremely closely together throughout this past couple of years, and we're really, I think, blessed to have somebody with his capability to pick up and take us to new heights.

So we think it was really a good time for us to go through what's happened since the merger, talk about really where we're headed with the strategic plan and how we're going to get into the future. And then -- so that's really what we're trying to accomplish.

So since December of 2010, we've really done quite a bit of integration. We had 2 companies that had a lot of track record of success coming into the merger, a lot of strength, and we've -- we were able to get together and really take the best of the best of the folks and to put in positions to lead us into the future.

We developed a strategic plan and communicated it, but the development of the strategic plan was something where we've had 2 companies that were working without the strengths that exist when they come together. We had 2 boards that have now come together. And as we were working on our integration, we had a general sense of where we wanted to go when we merged the companies, but we didn't have as specific a sense.

So we got together, hired a consulting firm to work with management, had people about 5 levels down and management working very hard, together with our Board of Directors and the consulting firm, to develop a strategic plan. And so I want to talk a little bit about what that plan is and how we've communicated it, and then Carl will get a lot more into the details about it.

But one of the key things when we merged the companies was this DSD system. And we have now a incredibly powerful DSD system that provides a tremendous, significant competitive advantage for us going forward. Talk a little bit about how that's set up and how that's going to help us get into our future. And then lastly, we've recently acquired the Pretzel Crisps brand. So these are some of the things that have occurred during 2010.

So as we look at what we have, the company really has got this benefit of not just one brand or one product line. It's not one department or one person. One of the things that we've really preached in our organization is teamwork, and it's been incredibly powerful to see folks come together after this merger. And one of the things we've done to help people come together is got really clear with a set of objectives that really provide a balanced set of goals that'll help us both do well in the short run, but also align everybody towards the future. And we talk about having 4 separate things from our goal and key objectives.

One is to have irresistible products, and really that make sure that everybody understands that we're going to invest against these 4 things. And so we'll talk about how those investments will go. But products are at the core and they're the heart of any consumer product company. If that's not #1, and you're not worried about quality and innovation in your products, you have no chance of being successful long term.

We want to be an outstanding partner. That relates to our retail customers. It relates to our independent operators. It relates to our suppliers. We can't do this alone. We're becoming increasingly codependent on other folks as we look at some companies that have had tremendous success in our space. They're virtual companies. So they have partners in the distribution side. They have partners in the product development side. They have partners in production. And we're increasingly moving in that direction.

We want to be an extraordinary place to work. We have 6,000 employees. And if we can't be the employer of choice, we're not going to have folks that are worried about these other things. And so that's high up on the list of things to worry about.

And then all these things together, we believe, will help us deliver excellent shareholder returns. And we've had a good track record. We'll talk about what's happened over the past couple of years. But really for the past decade, the returns here have been stellar, the returns prior to the merger and then since the merger.

So what we did is I talked about developing a strategic plan. And so not only did we work very hard at development of a plan that had shareholder return at the core, and it dealt with, how can we allocate resources effectively and make sure that where we put our time and effort led to growing the top line, growing margins and creating good returns. So what we did is we developed this strategic plan and then we converted it into a communication vehicle that we go up and down through our organization. We're going to share a little more detail about it, and Carl is going to get into the specific planks of this. But we developed this, and it's an approachable and inspiring communication for our employees, and it really helps everybody align around it.

So not only did we work during 2011 at getting this thing developed, but in 2012, we did a whole lot of work about making sure that at all levels of the company, it was totally understood. That blue bar on the right side, we've recently done an associate survey. And one of the things we've learned is that 90% of our folks understand and believe in our strategic plan. And that's a powerful, powerful statistic, and it really helps us believe that our folks understand it and it really gets everybody aligned behind it.

So one of the key things we have is as a strategic -- a real strategic benefit is our DSD network. Now this is -- this map shows really all the different warehouses that we have throughout the country. And that's where our independent operators start their week, where they stop to get their product. So from these locations, everything works its way into the market.

And we have the second-largest snack food DSD system in the country. There are very few people that can get to every store, and we can just about do that with our current system. We have 3,000 routes right now, and we continue to work on building this out. We've made several acquisitions to help build this thing out.

And we have, during 2011 and '12, we have merged the former Lance and former Snyder's systems and we've converted from indo [ph], an independent operator system, that has a lot of benefits about -- it's less capital intensive than an owned system. It provides much more incentive to the individual route sales person, and it allows us to grow more rapidly because we can add routes without a lot of capital.

So this system isn't just 3,000 independent operators that are going to stores every day and making sure the product is fresh and that we're executing our sales plan. This is supported by a team of field sales managers, account managers and management that really supports this group, helps them understand what's needed and really makes this system even more powerful than it is on its own.

The other thing we accomplished during the most recent year was Pretzel Crisps acquisition. Pretzel Crisps, you've seen some product in the back. If you're not familiar with it, you can try some of the products. But it's an incredibly fast-growing consumer product, a great snack. It's distributed primarily through delis, and that provides a lot of benefits. There's very -- the delis are one of the fastest-growing areas for snack foods, and so it has tremendous growth potential. This thing has grown at extremely high rates over the past 5 years.

We believe it can continue to grow. It's got very nice margins, so it'll help push our profit margins up. One of the things we've set as a goal is to have 10% operating margin. This helps move in that direction.

It's a great platform to innovate. So Snack Factory is the brand. Pretzel Crisps is the brand for these Pretzel Crisps. Snack Factory is an overarching trademark that allows us, over time, to expand the number of offerings that we have. And one of the things Carl's going to talk about is our investment in R&D, where we're going to invest. We've recently added a R&D center that'll come up later this year to help us to do more of that. So this is an area where we can continue to invest, come up with new innovation and drive capabilities.

The other thing is that this builds our direct sales capabilities. We have a combination of direct store delivery through an independent operator system, but we also have direct sales, where we get to other areas like club stores and dollar stores and places that are much more often delivered on a direct basis. So as we look at balancing our growth, we want to grow both through our independent operator DSD system, but also on a direct basis. And with the deli section being one of the fastest-growing areas for snacks, this gives us a great entrée that we can ultimately leverage over time. The focus initially is to continue to make this thing grow, but we believe that this will give us another entrée and help leverage our growth into the future.

Talk about returns. We've had a great track record up through the merger, and since the merger, it's gotten even better. We can say on a 1-year basis, we were up about 21% total shareholder return, about double the S&P 500. For the 2 years, 32%, which is about 50% higher. So not only have we been successful in executing against our integration goals and driving growth, we've -- really, it's paid off for shareholders. So we're very proud of this.

And this is something that is at the core of our incentive programs, our -- we have hundreds of people who are incented to grow the business and who will benefit from driving shareholder value. We have restricted stock. We have stock options. It's some of the largest component of the compensation system for our top management. So there's tremendous focus on this measure.

So during 2012, the company grew at about 40% in terms of operating profits -- or in terms of earnings versus 2011. We had great growth in our core brands. It was 7.5% or 8% of the combination of our key core brands, of Snyder's of Hanover pretzels, Lance sandwich crackers and Cape Cod.

As we look at our strategic plan, the core product lines are where we're going to put our emphasis. It's where we put our emphasis last year. Carl's going to get a little bit more into the details, but this growth was supported in our core brands by product innovation, by expanded distribution. By having this new fully national DSD system, we're able to take and increase our ACV for our core products. We had significant increase in ACV in our core products last year.

We've improved our marketing campaigns. One of the things we did soon after we merged was we upgraded the talent. We had some good folks, but we've upgraded, gone to the outside, upgraded the talent in our marketing area and we've ramped up our investment in our marketing programs, in our advertising, as well as our product development. And that has really helped drive the results in 2012 and positions us for great growth going forward.

So as we take a look at where we've been, we're incredibly proud as a team for all accomplishments since the merger. We've really got a great foundation now on which to grow that's got a cornerstone of a lot of good people. But we have this great plan that's fully understood, that's aligning our resources and our focus and our efforts.

And it's a perfect time, I believe, to have a transition at the CEO level. We're really in good hands. You're going to get a great chance to hear Carl talk in more detail about these things and about where we're headed and how we're going to get there. And then you're going to have some opportunities to ask questions, more specific questions after we get through this.

So we've got a great Board of Directors, who've come together very well. The board's aligned around its strategic plan. And with the great products and the distribution system and the leadership, we're in really good shape.

So with that, I'd like to introduce Carl, who's going to get into this stuff a little more detail, and then we're going to have an opportunity for Q&A. Thank you.

Carl E. Lee

Thank you, Dave. Well, it's real exciting for me to be here with you today. I really appreciate your attendance. I know a lot of you got very busy calendars and busy schedules, and for you to take time to spend with us is a privilege on my part. And we're certainly very grateful for that. I also want to thank NASDAQ for hosting our convention or -- and hosting our event to get here together as well.

And I just have to take time to just really thank Dave. Dave has been an incredible partner for the last 7 years. We worked together for a long time on distribution ventures, expanding the distribution of Cape Cod and Lance sandwich crackers through our network at Snyder's for many years, and Dave has just been an incredible partner and also a great coach and a very, very, very good leader. And so we're going to miss Dave. He's going to be very busy and doing a lot of other things. But the good news is he's still there for those phone calls when I occasionally have a question and need a little bit advice, so he's going to be right there to continue to help us.

So I'm excited to be here. I am blessed to work for a very good company, and we have got incredible associates. And each of them put in extra effort every day to make this a little bit better place for us to work and for us to serve our community, our stockholders and, certainly, our customers.

I'm going to walk you through, as Dave talked, a little bit more about our strategic plan. Because if I'm sitting in your shoes, one of the questions will be, well, there's the transition with Carl and Dave, does that really mean anything different for the company? And the answer clearly is no. Because long before we got to the point that we're at today, we really worked hard on our strategic plan to really nail down exactly where we're going, how we're going to get there and make sure that we communicate to our associates what we're asking them to do every day and then us step up as leaders to support them in getting that accomplished.

Now a lot of companies have strategic plans. We're probably not that unusual. But I think the amount of effort that went into developing the plan and really keeping the plan current and refreshed is probably a little unique even in our industry. We basically started developing the plan back in the fall of 2011. So just roughly 16 months ago, we were busy developing a plan. As Dave talked about, we went very deep in our organization, at least 5 levels deep, asking for people for input, ideas, criticisms where it was important and constructive input on what we needed to put in our strategic plan. So that was just 16 months ago.

We took in very next step, because a lot of people will build their plan and kind of refresh it every 3 years. We went through a very deep refresh process just this past fall. So just one year into our new strategic plan, we were asking the board and others to participate in a complete reevaluation to make sure we were still on the right path. And here are some of the things that we've done to both build the plan and make sure we keep the plan current.

One thing that was very important to Dave and very important for me, we work for good companies, and we took a lot of effort to make sure we brought the best of the best together and leveraged what was really unique and quality capabilities in the Lance organization and then also in the Snyder's organization, to really build a completely new company, a new culture and one that really leveraged all of the good things that both companies were doing.

We also dealt with a lot of critical questions and had some very lengthy, healthy debate about how do we see it -- succeed against our competitors, what brands do we really focus on, what was the role of private brands, what's the role of our partner brands and how we're really going to be successful in leveraging our manufacturing systems and leveraging our overall business. And through that debate came some very clear observations on where we should be headed and, more importantly, how we're going to get there, because we really took time to consider all our alternatives before we laid out our kind of next steps and next direction.

We then moved on with aligning senior management. It was relatively easy to do because most have participated in the development of the plan. And then we clearly made sure we were aligned against performance measures, and we were going to hold ourselves accountable for results. So the good news again, even though there's a transition with management, it's a very smooth and easy transition between 2 long-standing partners and 2 with very great respect for each other, what we have got is a strategic plan in place that allows that to be very seamless and very transparent for you and for everyone who's counting on our company.

Defining a little bit more, you heard us share some of this in the past, but who is Snyder's-Lance, and what are we really focused on as an organization that set us uniquely apart from all of our competitors and all the others snack opportunities that are out there? Clearly, differentiated is what is a key word for us. We have to be unique and we have to be different. No need to compete head-on with our competitors day in and day out. Let's provide value and uniqueness for our competitors -- or for our consumers and for our customers.

Nationally branded player in very focused categories. We're very selective on when we're play. Because when we play, we want to win. Supported by a national sales network. We worked very diligently over the years to build up our DSD organization, and we think, as Dave said, we've got a very strong competitive advantage there. Aligned on our core brands. We get busy optimizing our noncore products, they're important. They're profitable. They can grow, but they fall behind a little bit when we come to managing our core and investing. And then obviously, mobilize our very talented team around accomplishing the objectives that we've set out.

This one page here is something you saw a little bit earlier with Dave. Now this is by no means our strategic plan in great detail. But it's a simple one pager that we allow to get all of our 6,000 associates on board every day and also our 3,000 IBOs. So there's one page that allows us all of us to come together as an organization, and it kind of summarizes what's really behind the strategic plan. So this is almost our elevator speech. It allows all of us to know exactly where we're headed, allows all of us to be united in our approach, but obviously, our strategic plan goes much deeper than this and the deck is a lot bigger than this.

So if you take a look at what it's got there, let me draw your attention to that top headline. Win as a provider of premium, differentiated snacks, driven by a national sales network. Clearly, that's our destination, and we're leveraging our assets and our resources to continue to be very premium and very value added with our products and then our great sales force carries out the execution day in and day out.

But jump from there all the way down to the bottom of the page, and what you see as our foundation really is our values. And this is another way for us to link into all of our associates. We talk about teamwork. We talk about optimism. We talk about respect. We talk about accountability and performance. That's the DNA of our organization, and that's that gray box at the very bottom of the page. That, ultimately, is important to us. That's how we get the work done day in and day out.

And moving back up, our 5 building blocks there. Lead with quality. And you're probably thinking, Carl, you compete with quality companies. You compete against quality brands. There's no doubt that we do, and we respect the quality that our competitors have out there. But we're going one step further. We continue to fine-tune and develop our products every day. We spent millions of dollars last year to improve quality of select products. We got plans in place this year to spend millions more to continue and enhance other products. But what sets us a little bit apart, we're building that into our organization, our structure and our culture, because we not only want to be quality in a bag or quality in a box. It's quality in the way we interact with our customers. It's quality in the way people call our organization and ask for support or help. It goes beyond the product into our service and our mentality and our overall approach to the business.

Growing the core. Absolutely critical, and we're very fortunate now to have a fourth core brand with Pretzel Crisps. But obviously, pretzels with Snyder's of Hanover continues to have a long runway ahead of it. Our Lance sandwich crackers have a long runway ahead. So we're very happy with our Cape Cod performance and see that really, truly as a platform. And then obviously, Pretzel Crisps rounds out those 4 core items that get our R&D investment, our marketing investment and all of our manufacturing care and nurturing every day.

Reaching more consumers. That's all about leveraging our distribution business to get into more and more outlets, more and more retailers and to really cover the market, where, if anyone's hungry, they're going to be able to reach out and grab one of our snacks. So it's all about expanding our distribution and expanding the reach of our products. The good news is we have very successful brands, but we still have relatively low household penetration. So as that continues to grow, both from new outlets, but also with new pantries. We're going to continue to expand the brand and expand our market share and our growth.

Finally, Fund the Future. Absolutely critical, because while we get efficient and more efficient every day, we've got to continue to look for ways to fine-tune our operation, our delivery and also our selling systems to make sure we're getting there in the most cost-efficient way possible. And that has been something we've used to really energize our organization, where we've got people in our shop floors and running our routes really offering up ideas every day to take cost out of the system, can be reapplied to marketing. It can also be reapplied to our R&D and a lot of other efforts that will create future revenue.

And finally, something that we hold very dear is simply go the extra mile. We should be the organization, as we're out there servicing our retailers, that will go beyond the call of duty. If the expection [ph] -- if they expect us to do X, we should do X plus 1. Because I really think there's a competitive advantage in service today, and it's really a competitive advantage in going the extra mile. The good news is we've got scale to operate efficiently, but we're also small enough to be very agile so that we can respond to customer trends, consumer trends or customer requests a lot quicker than most of our competition.

Moving on to accomplishments. Now we rolled out the strategic plan, basically, in January of last year, and you should be looking at us and saying, "Okay, you're accountable for results last year 2012. It's great to have a plan, but are you living it, and are you delivering it?" And that's something that we hold ourselves really high on accountability for.

We drove significant growth in our core brands last year. Each of our core brands gained market share. While the categories performed well, we were performing better than the categories and growing faster than our competition. So we're proud of the growth that we've had on our core brands.

Acquiring Snack Factory was a very important milestone for our company. It's not only a great brand and a great location in the store. It's a great platform, as Dave said, that allows us to open up the doors to other growth, leveraging this new selling system and also this new platform.

Referring back to the strategic plan for a second and using Snack Factory as an example. While a lot of people have a strategic plan and they're really focused on the execution, we go a little bit beyond that. We use our strategic plan to evaluate every opportunity that comes in the door. There were lots of possible acquisitions for us last year. There were a number of brands for us to take a look at. But as we send that through the filters, as I call it, in our strategic plan, it became very clear that there was only one that met all of our criteria. And when we discovered it, we went after it very, very aggressively, and that was a very competitive launch for us to be able to win that brand. But it's another way that we use our strategic plan, our analytical skills and our category knowledge to make sure we're only acquiring and investing where it really pays out.

We invested in significant innovation last year, achieved the results we expected in all of our core brands. The new R&D center will be opening next week, and we're very excited about what's that going to continue to fund our innovation and fuel our innovation for the future.

And we really stepped forward and made some fundamental changes in the way we market our brands last year. The movie tie-in with Lance was very successful, the first time that we have done that. We'll be repeating that this year on a bigger, broader scale. Enhancing our overall Lance logo, you see the before and after there, an incredible job of just enhancing our image and our -- basically, our way to reach our consumers. And then obviously, the Cape Cod commercial has done very well for us also.

Looking beyond those and saying, "Okay. What else did you accomplish?" Completing the overall IBO integration at the fast pace the organization did. I'm very proud of everyone who worked on it, very excited about how well they did it, quality, first; speed, second. And the fact that we basically touched 2,000 routes, most of those being converted to IBO for the first time and basically being able to do that in 18 months, it just doesn't happen in this industry. And I've been in DSD for a very, very long time. We've got a very powerful team that can get big things done, get them done right, get them done quickly.

Beyond even completing the DSD integration, the ability to go out and continue to acquire additional distributors to build and enhance our DSD system is something that we'll continue to work on, and we'll continue to look at acquisitions that build out distribution.

Some significant changes in our product supply and also our -- just our supply chain, Vision Stream and Fund the Future is the way we get ideas from the shop floor that allows us to become more efficient and make better products, really exciting, really energizing to our organization.

Executing some major capital projects. We've undergone major changes in several of our plants. All are really driven by the ROIC. And we're really focused on the return, and those are being executed superbly.

And then finally, it all boils down to our people. Are we really listening and learning from them, are we really tying them into the performance, both helping them let us set the expectations and then deliver against them.

I'm very proud of the accomplishments last year. They were all achieved by a great organization working very hard, and that's the team that we've got in place on the floor [ph] working towards '13 and '14 as we grow our business.

Taking a look now at just our core brands. We're very proud of our portfolio, and we'll continue to add to it. And we're excited about the addition last year with Pretzel Crisps. Snyder's of Hanover pretzels is a very competitive category. We're fortunate to be the leader in that category, and we fight some multinationals day in and day out. But through innovation, through quality, through marketing, through branding, we really built an advantage there, one that we need to earn every day and stay on top of it.

Lance sandwich crackers, an absolutely incredible item. So that's probably the platform I'm the most excited about because of its future potential. If you take a look at what sandwich crackers did last year, phenomenal, phenomenal category growth. But as far as the potential to really make this a meal replacement. It really goes beyond anything that we can really imagine. And our innovation pipeline to take this platform and carry it forward is the strongest I've seen, and I've worked in many categories and many geographies over the years.

Our Cape Cod did phenomenally well last year. And we focused on quality, and we focused on the uniqueness of the product. The waffle cut has done very well for us, the very first to market. When you think of Cape Cod, really the very first to have reduced fat and build it into part of the portfolio in a very substantial way. Many have come behind us and copied it. First with the waffle cut, many will probably come behind that. But we've got to just continue to innovate and really have a value-added premium kettle chip to compete with the overall larger potato chip category.

And then Pretzel Crisps. It's a platform, much greater than just a single brand, very excited about that one, and it's performing very well.

Here's an example of really leveraging our heritage as we really move forward into the future. Our 100th anniversary is this year. Thanks to the Lance family starting the brand in 1913, we now have the chance to celebrate 100 years. But it's not 100 years of age. It's 100 years of skill [ph]. 100 years of heritage and a whole bright future of where we can take it.

The Xtra Fulls were on a slide earlier here that Dave shared with you, a chance to have twice the peanut butter in your overall sandwich cracker, a chance to really enhance what people really look for and that's more peanut butter. That's just one example of some true innovation that's coming to this platform over time.

We'll be online. We'll be out sampling. We'll be out marketing and advertising, leveraging our 100th anniversary to really remind people of the value in the product and also show them where we're going, as we take this as a chance to really market our brand aggressively.

Talking about our core brands, we have to obviously talk about the balance of our portfolio. 35% of our business is kind of what we call noncore. It's getting attention to, it's getting plenty of support. A couple of these areas are private brands. We're proud of the performance our private brand team has turned in the past couple of years. They've really worked to optimize the business, maximize the profitability and have been more than willing to make sure that we improve our margins and make tough decisions when margins were not where they needed to be. And so that's a good business and a good platform for us for the future. And what's unique about us? It's in categories we do not have core brands. It's not in categories that we compete with DSD day in and day out. So it's a nice incremental business that's performing well that I see a lot of growth potential in it.

Our partner brands are absolutely important to us. It allows us to be able to serve them and their needs, getting them to the shelf. It also allows us to get to some more stores and more frequently with our DSD system, another key part of our business.

And in contract manufacturing, also excited about what we're doing there, a chance of leveraging our manufacturing assets to really carry some of our overhead cost [ph] and allow us to put more pounds through the door to be more efficient as an operator.

Moving on, 2013 initiatives. Here's just some of the innovation that we've got going out of this year. You see innovation on each of our key brands, nice new products that reach new consumers and stretch the franchise for us to really be able to continue to build growth and market share and profits on these brands.

Just looking at a little bit of a staircase of where we've been. 2011, absolutely the year of integration. We started our heavy lifting. We've got a lot of it completed. 2012, we wrapped up the biggest project, which was the DSD integration. But where are you going from here, Carl? David, where are you going with the business from here?

Look at 2013, it's really about continuing to build on performance and continuing to leverage this great new company that we built. So we're taking our strategic plan, and we're fine-tuning the message in one area. It's one very important area. And our associates and ourselves are really lined up against our shareholder value and making sure we're talking more about our ROIC and our return on investment. And that if we got a dollar to spend, where's the best place to spend it and then are you disciplined to go back and track the return on that dollar. And we're allowing that to be rolled out into our organizations and rolled down pretty deep. So everyone's really tied into, are you creating shareholder value and are you really delivering improved returns for everything you're spending, everything you're working on. Also enhancing our analytics throughout the organization, so we've got good accountability and good measures before we make a decision.

And then one of the things I'm most excited about, and it's really beginning to pay off, is listening to our associates while we develop them. I had the good fortune of being able to work my way through college at a large regional bakery, and I basically did everything from receiving all the way through to selling. And one of the things that I always kind of miss was there wasn't a lot of people asking for ideas. And the people on the shop floors really know best, the people who are responsible for shipping, the people who are running our IBO routes everyday. They have very, very good ideas. They're not bashful about telling management when management's wrong. They're not bashful holding us accountable for better performance. And so we take great care in listening and learning, and then we better get out there and lead some of these changes. And that's one thing I'm most excited about.

As far as '13 focus, we got the good fortune of a great DSD system. If you go back to 7 years, Snyder's had about 800 routes; Lance had about 1,200 routes. Both organizations were not proud of their ROIC on those DSD organizations. We needed them. They were important. They were critical, but they were not fine-tuned. They were not perfected. They were not running as efficient as we liked to.

Today, we've got 3,000 routes out there, and I'm proud of our returns. I'm proud of the efficiency, the probability and support we get out of our DSD system. We have built a very quality system. A lot of people deserve a lot of credit for having a DSD system we could be proud of, not only for its growth potential, but, more importantly, for its return to our shoulders.

But you can't sit still and say we've got a great DSD system, we're done, let's just continue to expand it. DSD gets to a lot of places. It provides in-store muscle, as I call it, to build displays, improve merchandising, to work on shelf placements and to really grab the attention of the consumers when they're shopping.

But as great as it is and having worked on a route a long time myself, as proud as I am of our DSD system, it doesn't always get to every location. And getting to the deli with our direct sales force with Snack Factory opens up a whole new opportunity for us and using a direct sales organization to get to clubs [ph] and to other accounts that we can't get to with DSD allows us to continue to build out and be progressive in our distribution drive to really move forward in the way we're going to continue to expand distribution.

We're going to invest in our DSD. We're going to build our DSD. We're going to look for ways to expand it into new markets, build our infrastructure every chance we get. But we're always going to supplement it by getting to accounts that are not DSD-friendly through a direct sales organization, and we're aggressively working with that today.

So we're going to have the advantage of both worlds. Most organizations see distribution and DSD as a cost center. We see it as a return on investment center. And we're willing to invest, but we're also very accountable for the return, and we're proud of both.

Taking a look at growth in our core brands for next year. We've got exciting news on all 4 of our core brands. We're focused on category growth, but we want to make sure we're growing a little faster than the category and that we're racking up some market share gains as well. We want to make sure that we're kind of managing it also for the profitability return and the overall shareholder value creation. And again, Snack Factory's performing well, and we continue to want to build out that brand and reach more consumers with it. Allied brands, we're expecting better performance this year after going through the optimization as part of our strategic plan last year.

Marketing and innovation, also very excited about that. New TV advertising is scheduled for SOH, Snyder's of Hanover pretzels, beginning this spring. I'm very excited about taking something like Pretzel Pizzas [ph] and reaching new consumers with it. Also very excited about our 100th anniversary with Lance sandwich crackers and then also excited about the advertising that we've got ready for Cape Cod.

As far as some of the key launches, all 4 of our core brands have innovation this year. Sometimes it's in packaging, sometimes it's in flavors, sometimes it's a whole new platform or a whole new area to continue to develop it, and then the R&D center will continue to support all of those brands as we go forward. And from an R&D standpoint, we're focused on fewer, bigger ideas that we can really leverage our capabilities to get to market in the most appropriate way possible.

Strengthening our IBO network. I shared earlier, we're going to continue to develop this, continue to fine-tune it. We're enhancing our HHC, or our handheld capabilities. We're enhancing our service through our IBOs. We truly see our IBOs as partners. They're very informed business leaders who run a great business model individually. And when you take time to listen, they have great ideas, and they're good partners. And we're going to enhance our service to them because we see them as a customer, and we see them as someone that we're going to support and continue to enhance our relationship with them and help them become more profitable and bigger over time.

As far as our overall supply chain, very thrilled with our supply chain leaders and all the great things that they're doing. I mentioned Fund the Future earlier, a way to energize our overall organization around looking for ways to improve and bringing those ideas forward and those ideas getting attention and support, that's really helping us. That idea of continuous improvement is all-important, especially in supply chain.

Executing some major capital projects. They get -- go through a very deep evaluation process before we decide to invest capital. We have a very scrutinized effort with our board to get approval for it. We have the ROI out there from the very beginning, and then we get very busy on the execution of capital projects. And we've had lots of projects already completed and other major projects underway today. And just, overall, continue to improve our overall cost base and our efficiency, our pounds per hour, our service to our customer, service to sales, they're all key measures of where we're headed.

Our M&A framework. I think we're very fortunate to have the ability to continue to look at deals. We're involved in every deal that's out there as far as being able to review them and just scrutinize them. They do go through that strategic filter to make sure they're appropriate for us, and we're very quick to scrutinize what's appropriate and what's not.

So besides that, we've got some really important strategic assets that we can leverage. Number one, a differentiated core brand status. We can look for things that we can add on to our brands. We can look for whole new core brands. We can look for new categories and new areas to go into. Having a direct sales force and a DSD sales force opens us up to cater to a lot more snacks than we did about a year ago.

The national DSD network is very important, leveraging our overall manufacturing capability, which is even broader than what we leverage today is important. And then we're really kind of beginning to target areas in the store that we need to get to with our great brands to reach more consumers. So while we're careful, we always got our antenna up looking for other opportunities that we want to go after.

In summary, very proud of our team, very grateful for them. We count our blessings every day for the quality of people that we've got working in our company, from our plants to our shipping, to our sales force. And we've got a lot of accomplished over the past 2 years during the merger. We've got a significant amount accomplished in 2012 leveraging our strategic plan to make sure we stay very focused. We've made good progress on that throughout the year. We've got big plans for this year as well. We continue to have great plans for 2013, and we're really, really excited about where we're going. And we're going to build this organization and build this company brick by brick. There's no instant coffee here. But there's going to be a fundamental, this -- and continuous drive to continue to make our company a little bit better every day and build our capabilities and build our ability and assets and leverage them as best we can.

So with that, we're very grateful. I'm going to turn it over to Mark and open up some time for Q&A. And we'll invite Rick and Dave and Mark to join us up here. Thanks again for being here.

Mark Carter

Okay. Once again, just to remind everyone, we are webcasting this event this morning. So we have microphones available for anyone who would like to ask a question. And I'll just ask Dave, Rick, Carl, if you want to have a seat or stand, your choice.

Carl E. Lee

Dave's got a bad foot, so he will sit.

Question-and-Answer Session

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Akshay Jagdale, KeyBanc. I'm just trying to understand how you think of your core brands in the context of the categories. So maybe you can give us some color on how big are the categories for each of those core brands, the way you see them, what are the growth prospects for those categories, what are your market shares. I mean, just -- because they are somewhat niche-y, right? So I'm sure you look at each of those categories as a subset of a larger category. So you've laid out some growth targets for your core brands. What does that imply for market share, category growth? Because there's been some slowdown, let's say, in kettle chips recently. So just trying to understand, strategically, how you're thinking of each of your core categories.

Carl E. Lee

I'll take that, I think, and thanks for the question. I think, first of all, we like niche. We find it very important to be there. Niche being though, still very big categories. If you look at the size of overall pretzels, a very substantial category. If you take a look at sandwich crackers, again, a very substantial category. It may not be as big as salty snacks. It may not be as big as cookies. But they're very sizable, scalable categories that we feel are very important for us. By being leaders in those categories, we're going to be able to maximize our investment in innovation, maximize our investment in marketing and maximize our return on those brands. So we like niche. We like playing in these smaller categories, albeit ones with very significant scale. And we feel that gives us an advantage. So as we're competing day in and day out with some very large multinationals and feel again we've got scale to compete, but we're going to a little bit more agile and a little bit quicker to respond. We would prefer to play in categories this size than really try to go after and be a smaller player in bigger categories.

David V. Singer

And if you take a look at just the nature of the way we tend to think about consumer products and categories, we tend to define the size of a category and then think about market share within that category. One of the benefits of this niche strategy is that if you look at sandwich crackers or Pretzel Crisps, what you have is this great opportunity. You can expand the household penetration. You can expand the frequency of purchase. The ability to drive the size of that category is really large. It's not like you're in the potato chip category that is already in 90-some-odd percent of all households. There's this great opportunity with innovation and marketing that with our niche strategy, we can actually drive, not only have a better margins, but can really redefine the potential size of a category.

Rohini Nair - Deutsche Bank AG, Research Division

Rohini Nair, Deutsche Bank. I guess we've heard a lot about the core brands. Pretzel Crisps being added as a fourth core platform. A lot of marketing, advertising innovation that's going to go behind these. I wanted to hear a little bit more about the allied brands, because it seems that those are -- as the plan decrease [ph] the past year. But it seems like with so much focus going towards the core, especially M&A now, it seems like you're indicating we'll also be going to support the core. What's the vision around the allied brands going forward?

Carl E. Lee

I think the key thing is we're supporting our allied brands. They're still very important to us. They're profitable. They've got growth potential. They play in other categories that we don't necessarily play in with our core brands. So they're absolutely important. We worked on price points. We worked on packaging. We worked on flavors. We worked on some other ways to enhance those brands and, again, continue to expand their reach. But, they really do have a very important, strategic place in our overall portfolio. So they get attention, and they get support. But when it comes to our marketing money, we're going to put that against our core. And we enjoy the benefit of those brands because it allows us to get to more stores more frequently with our distribution system. So they really do kind of play into our scale. They allow us to leverage our manufacturing. It allow us to leverage our overall selling system. So they really got an important place to play and they are indeed getting attention. So we're going to continue to support those, but just at a different support level versus our core.

David V. Singer

And just for folks that aren't as familiar, most of our allied brands are brands that have some strength in a region, that within a set of consumers, they're very well accepted. And so we're able to generate, over time, pretty decent margins. We're just not going to take those regional items and try to expand them. They're not the ones that we want to put our money behind.

Heather L. Jones - BB&T Capital Markets, Research Division

Heather Jones, BB&T Capital Markets. Going back to your EBIT margin target of 10%, to get there from where you exited 2012, can you give us a sense of how much that relies upon sales growth, and how much is reliant upon further cost reductions? And what kind of sales growth do you have in mind to need to achieve that over the next, I guess, 1.5 years, 2 years is the goal?

David V. Singer

We haven't stated the...

Carl E. Lee

Let me go for it. Coming out of last year, we were kind of at run rate of 8%, which is exactly what we said and kind of exactly what we expected. Going into 2013, if you do the math, you'll find that we're sort of, again, going through the year, improving our margins each quarter as we move out of 2013. It won't be through a double-digit margin by the end of 2013 in terms of the run rate, but we'll certainly be one step closer than we were coming out of 2012. So number one, we'll have a full year of synergies to take advantage of, as well as a full year of Pretzel Crisps, which is also going to help the margin. So I think you'll see a good, steady decline in 2013, much as you did in 2012 with -- we've -- we started out at a number that was much lower than we came out of the year with. So having those kinds of cost-reduction activities, a full year's benefit of that not having to potentially fight commodities in the private brands business will certainly be beneficial. So I think this is the first year that we sort of come into the year with, let's run the business because we're not involved in integration, we're not involved in a big commodity confrontation and we're running the business to improve the margins and to optimize all of our products, whether it be core products or the noncore products. The work that we did last year on private brands, as it relates to kind of paring out the revenue that was not quite as profitable, has -- is starting to pay dividend. So we'll see benefits from private brands being -- contributing to our margins as well in 2013.

Heather L. Jones - BB&T Capital Markets, Research Division

When you all first put out the 10%, wasn't it like late '11 or early '12 and you all said within 2 to 3 years? So I realize you weren't going to exit '13 at that run rate. But isn't the goal to sort of exit '14 and going into '15 and just it's half dependent upon cost savings and half is sales growth, or how should we be thinking about it?

David V. Singer

Yes. I mean, my belief, Heather, is that, yes, that's consistent with what we've said and that the volume will be the biggest driver of that as we move forward. We've been working very hard on cost reduction in 2012. That will add probably half of where we need to be. So it is almost half and half as you think about it.

Heather L. Jones - BB&T Capital Markets, Research Division

Okay. And then could you update us on the environment right now with the consumer? Some peers have talked about current sluggish consumer, and how do you expect your sales growth to track through the year? Is it going to be a steady ramp, or how should we be thinking about that?

David V. Singer

Carl, go ahead.

Carl E. Lee

I think we've all -- to Heather's point, we've all heard the comments about consumers -- just appetite to continue to purchase maybe at the rates that they were in 2012. I mean, there's no doubt that we're seeing a little bit of a slowdown. We're seeing a little bit of sluggishness. It's across the entire retail channel. So it is not in a category. It's not in a retail or it's not in a geography. I think it's just general. I think we're just beginning to kind of accept the new norm. And I think that once we do that, we'll be in very good shape. So I think, while for us is to just stick to our knitting, rely on innovation, rely on our marketing, rely on the value of our products. We continue to focus on our growth and drive it. So in spite of the things that are out there, just dealing with those and addressing those are important. But what we've got to do is also, remember, that we've got a plan that says, over the course of time, here's where we're going. So don't adjust your price points, don't make short-term decisions, stick in there and kind of weather the storm if there is one and just continue to stay focused on kind of executing our plan.

Heather L. Jones - BB&T Capital Markets, Research Division

And should sales growth accelerate throughout the year as these new products kick in? Is that how should we be thinking about the cadence?

Carl E. Lee

Well, you always expect, as you're thinking new products, that products should be -- a vast majority of it should be incremental. There may be some small cannibalization. We take that into account with the new product. But as we ramp out our new products and they begin to roll out, some going February, some going March, we kind of go by channel, by brand that we roll out, and then naturally, we should see growth on those. And we've also got some positive overlap on brands we launched last year or products we launched last year.

Unknown Analyst

I have 2 questions, one topic is M&A, if you could just review your parameters for acquisitions. What debt level you're willing to take? Are there opportunities out there currently? Would you use stock to make acquisitions? Can you start with that topic?

David V. Singer

Yes. I think that all of that's possible. And as we think about the potential acquisitions in the future, I mean, our debt levels right now are high because we just have owned Pretzel Crisps for only 3 or 2.5 months, I guess. So we haven't had a chance to pay down that debt yet, but we expect to do that significantly during 2013. Our covenants at the banks, our loan documents, they're around 3.5% in terms of leverage. We're right at 3% today coming out of 2012. So I think that we still are involved. And the deal flow, as Carl mentioned before, we see pretty much everything that's out there. And we have said no to a lot of things during 2012 that did not fit and fall through the filters that we have in our strategic plan, which includes return on investment and expected kinds of accretion that we would get from an acquisition. So we'll continue to monitor those opportunities. It appears that 2013 is going to be a pretty significant year. It, certainly, has started out that way so far, with some very large acquisitions being announced. So I do expect this year to be pretty busy. We'll have to be prepared to take advantage of those things that fit for -- within our strategic plan. So as it relates to using equity, we haven't had the -- approached that subject yet. But it's certainly something that our board has been -- they're aware of, obviously.

Unknown Analyst

And then regarding the slide you put up about the DSD network. I thought that was interesting, the map across the U.S., and you talked about it a little bit, Carl. Would you be willing to make acquisitions? Or are there any opportunities to acquire routes as you move west to help fill out that picture? Or is it all made kind of either organically through building out current DSD or using direct store?

Carl E. Lee

I think that we are national in scope with our DSD model. We're in virtually every market with our own company managed IBO network. There are a few markets where we would leverage somebody else as our distributor. A lot of times that's reciprocal, because we'll distribute them in another market for -- so it's a good partnership there. But we're always looking for some additional ways to expand the scope of our DSD system. So sometimes it may be on our fringe market, where we just want to put more critical mass into play. It may be in a large market, large metropolitan market, where we just get more critical mass by expanding our DSD system. So we're as eager on DSD acquisitions and DSD expansion as we ever have been. So that'll be another area for us to look in for acquisition candidates.

David V. Singer

And just one thing to add, the good thing about DSD kinds of acquisitions is they tend to be not that expensive and have a pretty good and quick return.

Amit Sharma - BMO Capital Markets U.S.

Amit Sharma, BMO Capital Market. Carl, one of the slides showed your sales mix today at 35% non-branded and 65% branded. If we look like maybe 2 years down the road, what do you think that sales mix is? And as we talk about the 10%-margin goal, what is the relative contribution from the non-branded part of the portfolio?

Carl E. Lee

Thanks for the question. I think that we don't really have any expectations on what that sales mix is going to be over time. I think the key is maximizing both appropriately, so we deliver shareholder value growth. So I think if you do look historically though, we have trended more towards a higher percentage of the mix overall with our core brands. So that has adjusted a little bit over time. It will gradually continue to adjust. But the key is we're proud of our private brands business. It's performing quite well. It's been contributing nicely to the company. We'll continue to expect growth there. Partner brands, strategically, are very important relationship we have with key partners, key retailers, a great service we provide. We're going to expect that to continue to grow well. And then contract manufacturing, something in unique situations where we can leverage our manufacturing capabilities. So there's no plan to optimize one over the other. It's making sure that both performed quite well, and I think that we will see some gradual shift as we do that over time.

Amit Sharma - BMO Capital Markets U.S.

All right. Another one for Dave. You mentioned the virtualization model has worked well for some companies in this segment. Is that just your reference to the IBO, DSD model or were you looking at outsourcing some of your manufacturing as well?

David V. Singer

Well, I don't know so much that we'll outsource manufacturing, but we'll include that in the mix of tools that we have at our disposal. The vast majority of our business that is branded has been produced in our own manufacturing centers. Our R&D takes place and really deals with that section. If you look at what some other companies that have grown nicely have done, and Pretzel Crisps is a great example, all of its manufacturing is outsourced. So as part of the relationships that -- as part of that acquisition, we developed a relationship with the company in which they outsource. That really has helped. Although we've done a little bit in our pretzel area of outsourcing production, that really has helped open our eyes to an opportunity to maybe ramp up some innovation and leverage that relationship and other relationships like that. So as we look at how some people have been very successful, that's just an area that's just a new, well, not new, but it opens our eyes to some opportunity.

Unknown Analyst

You talked about the strength of the deli as a place to sell Pretzel Crisps. I was wondering if you maybe could walk us through some of the differences between the selling environment in the deli versus the rest of the store and the rest of your channels. And when you think about innovation in the Snack Factory brand and product lineup, is there any reason why you wouldn't consider bringing that into the DSD network? And I guess if you could maybe give us some sort of timeframe about when you think that could happen?

David V. Singer

That's a good question. Carl, why don't you give your response?

Carl E. Lee

I think -- to the first part of your question, I think the deli is a very unique location in the store. More and more consumers are almost going to that as their sole destination in the store. So a lot of people worry about what's for dinner tonight, and the deli becomes a great solution for that. So being in the deli and being very visible with a great brand like we have with Pretzel Crisps allows us to reach consumers in snacking opportunities that we probably wouldn't reach otherwise. So we really like that location. It's -- it is direct friendly, because they've got their own buying organization in place. They kind of manage their section of the store within the store. So having a relationship with deli managers is very important. So that location and our product mix there really plays very favorably. We do see Snack Factory as a platform that probably can play in other areas, both in the store and the retailers over time. But there's no immediate plan to do that. We're selling everything we can make, and they've got more capacity coming online, which is very, very good. So we're going to be in great shape to continue to grow the brands, but we really need to understand what we've got, fine-tune it there, development it more, nurture it more, market it a little bit [ph], additional than what we're doing now and really play that out over time.

Unknown Analyst

Actually, Rich Glass [ph], can we talk a little bit more about the private brands? What kind of returns -- what kind of margins and then what kind of returns that you need to make justify their existence? Obviously, they've been a source of volatility over time, negative volatility, I should say, where you guys don't have as much control over your destiny, you don't have the ability to raise prices. You're a price taker as opposed to the other core businesses, and you can make an argument that they should need to earn greater profitability in some senses, which doesn't look likely, given that their a source of volatility to the overall earnings stream. The second part of that question is what set of circumstances would have to come together to want to do something strategic with that part of your business. Is it, well, we want to get them to a certain level of profitability, or maybe we have an acquisition staring us in the face and we need a better source of funds that might make more financial sense to use that as opposed to stock or some other source of funds?

David V. Singer

Rick, do you want to take that?

Rick D. Puckett

Sure.

Unknown Analyst

Just one question, broken in 2 parts [ph].

Rick D. Puckett

Thank you very much. Of the -- the first part of your question is, certainly, we look at our private brands business on a peer basis with other private brand businesses. And we do believe that with the changes that were made during 2012, that we are going to be very comparable to the profitability type of profile that you'll see at other private brands food companies. And we're seeing that already. So we're going to be fine in 2013 relative to our profitability comparisons to the peer group that we would compare ourselves against. So we've done a lot of work during 2012 to optimize that and to make sure that what we -- the actions that we've taken will allow us to continue to grow the business as well, because there's room for growth in that business. And as Carl mentioned before, we're not competing against any of our branded business, with our private brand business, so it's okay to grow both of those segments of our -- or parts of our business. So with that being said, as it relates to the strategic thinking around private brands, I think that we're always looking at our strategic plan as a whole and how do we optimize our portfolio of all the parts of our business that will add the most shareholder value. And again, we've talked about focusing our resources on the core brands, and we've shown some activity lately of investing in high-growth core brands. So as we move forward, we'll continue to do it in that fashion. Will there be a point in time when private brands is not part of our portfolio? Potentially, but it'll have to be for the right reasons, and it'll have to be consistent with our strategy.

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division

Bill Chappell with SunTrust. A few questions. First, kind of going back to the Snack Factory in which you're talking about the capacity expansions. I know it already has high margins. But can you take them meaningfully higher? And can you give us some more color on what you're doing to add capacity? And will that actually help on the margin side, or is that just more to facilitate some of the sales growth?

Carl E. Lee

As Dave mentioned, we've got an outstanding partner with the manufacturing side, people that we've known for a long time, worked with for a long time. Obviously, the relationship expanded dramatically when we acquired Snack Factory. They've been investing in capacity, been able to keep up with the fast growth that we had that brand and we've seen over the past few years, also predicting the growth that we expect for the future and then building capacity around that. So we've got a very stable partner who's willing to invest in capacity, and that we're willing to continue to leverage them to grow the brand, both for uniqueness, maybe with some R&D ideas, I mean, product ideas and expand it there. So it's a great high-margin item. It does extremely well where it's at in the deli. It's not as price sensitive as you would expect when you [indiscernible] salty snack aisle by being in a deli. So I think just expanding our distribution, expanding our consumer reach and kind of protecting the high margin we've already got is just going to allow that to continue to generate a very nice return. So we see it as a platform, and we see it as one with just growth right where it's at. And we're going to continue to try and maximize it in every way we can.

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division

And just to make sure I understand, is the thought that Snack Factory is primarily going to be the brand for the deli, or will there ever be a chance to bring Cape Cod or something else into the deli?

David V. Singer

That's clearly an option. I mean, because there's other items sold in the deli. There's people going in for a quick snack, and then they have a kettle chip to go with that quick snack, just going in to buy dinner or having a party and they pick up the Snack Factory. So that's just a good location to be there, but there's multiple snack opportunities.

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division

Last one for me. Can you just give us a little more color on the Snack Factory business and how you see it as a meal replacement, how you see it growing, what type of market opportunity there is? I mean obviously being the leader, it's less of a market share gain but you're taking maybe market share from other categories. And will we see something in the new product pipeline that kind of points us in that direction in the next 12 to 24 months?

David V. Singer

Uniqueness with Snack Factory, it really performs as a cracker. It performs as something that you either dip, you add an hors d'oeuvre to, carry cheese, meat or other items so it is really perfect for an hors d'oeuvre. So it's really a very unique product, it's great out of the bag, it's great eating with some of the flavors that we have, but it's also a great, an accompaniment for other ways that you may eat at a party. So it really truly is a substitute for a lot of other things. So that means we probably haven't figured out all the ways that you possibly can consume and leverage the Snack Factory as a meal substitute, as a snack, as an indulgent opportunity. Our enrobing this past year performed incredibly well with our dark chocolate. We'll be back next year with the expanded distribution on that. Our season holiday enrobed items also worked very well. So there's still a lot of potential ways to enhance that product and again, expand the consumers who are picking it up.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

A follow-up, Akshay Jagdale, KeyBanc. So, Carl, all the information on advertising and focus on core brands, encouraging to see. But just to play devil's advocate for a second, your ad-to-sales percentage is well below what your peers spend. You, as a company, didn't really start advertising until literally 3 years ago. So should I think of all those initiatives as strengthening the base branded business such that there's not going to be any major negative tailwinds that's in -- with upward trajectory. But the value creation opportunities here, especially where your stock trades today from a multiple standpoint, still is as an M&A platform. Is that -- I mean, is that the right way to think about it? Or what am I missing? I mean, when you put up all these numbers on, A, we're going to market more, we're going to do more R&D, we're going to innovate more. But compared to your competition, you still have a long way to go in my opinion. So is that the right way to think about the company as an equity? And then, is the value creation opportunity still an M&A before you get to a stage where the base is big enough that you can really move the needle?

Carl E. Lee

I think -- let me comment on that a little bit. I think that from a value creation perspective, there's a variety of things that can do that. I think when you look at the fact that we spend less, you mentioned advertising relative to peers, I think we spent less than advertising than peers as a percentage of overall branded sales. But I think if you take a look at the categories in which we compete, we spend very heavily compared to the peers in those categories. Most folks spend more money on other parts of their portfolio than the categories in which they compete against us. So I think that can really help drive that. The margins on our core items tend to be pretty solid margins so that as we grow that business faster than the rest of the business, it'll help leverage our overall profit margin up. We've been investing heavily in some things that are going to help return -- increase returns. So that I think our core business, as it grows, it's going to generate some nice returns and increase cash flow. So I think, that alone is a pretty good story as it relates to shareholder value. On top of that, we do have a platform for M&A and we've proven that we are willing to use it and we, as part of our strategic plan, it's an important component. So all those things I think work together. I don't think you can dismiss the value creation out of our core branded business. I think that it would be easy to do it if you don't dig into the cash flow characteristics. But I think if you look at the future cash flows that come from improved margins, and frankly, I mean with Pretzel Crisps, for example, it's a virtual company as it relates to -- as we grow we're not investing capital. And with the nature of the acquisition that it's very tax efficient, so it generates a lot of cash flow. And so I think it's a balance. It's not just about M&A.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

And just as a follow-up, again, I think today is a good example of a transition of the company, right? I mean, you're moving along the path. When might we expect to see, maybe, long-term targets on some of the initiatives that you're talking about, whether it's organic growth? I know you've given some numbers. You've talked a lot about ROIC and, perhaps, EPS growth. Is that something you've thought about internally? Are we a couple of years out? I mean, you have this nice strategic plan that you're giving some insights into. But for shareholders to really get confidence, right, love to see some long-term targets around some of the initiatives.

Carl E. Lee

Yes, I think that we -- at this point, Akshay, we have put out a long-term target for a 10% operating margin, which is, as Heather brought up a few minutes ago, sort of in the 2015, 2014 time frame. That is our target, right? And because we have a strategic plan that involves both organic growth, and I agree with Dave, I think it's a very balanced kind of approach, as well as M&A growth. We haven't set necessarily long-term growth targets on the top line other than growing at a 3% to 5% kind of organic growth kind of rate, which we believe will exceed the industry growth rates and everything we compete in. So those are the kinds of things today we're doing. We're not looking at necessarily saying that ACV will grow from 60 to 90 in 5 years or 3 years at this point because we're just getting into that process and we're just now flexing that muscle, if you will, having just finished the integration of the routes. So we will have more comfort, I think, as we move forward in getting a little bit more specific about those kinds of targets.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

One last one on acquisitions. Can you just hypothetically, I mean, without talking about the specifics, but you obviously made this Pretzel Crisps acquisition. So can you compare it to what -- other things that you saw? I mean clearly, it looks like it was higher growth then, perhaps, most branded things that came down the pipeline. But can you just talk a little bit more about the filter and the trade-offs where everywhere you had a checkmark for Pretzel Crisps? Because when I thought of acquisition and accretion, I always thought DSD product. And so surprised a little bit to see something in the deli side. So can you just help walk us through that filter a little bit?

David V. Singer

We'd be glad to, but albeit at a very high level. I think the very first question we have in the filter is, what's the long-term return for the shareholders? How are we going to be able to leverage this new product, platform, DSD acquisition, whatever it may be, for true shareholder value creation. And we look for that -- first and foremost, we look for, is it going to be accretive? We're looking at the return on the overall investment, we're looking to see, is it beyond just kind of a single? The good thing about Snack Factory was great brand, you can check that box; great new location in the store, you can check that box; ability to get additional products into that location, you can check that box, okay? So there's multiple ways to look at each acquisition and say, does it strengthen our overall company? It may give us a growth mechanism all by itself, but does it really cater to other areas of the company that we can create some leverage and some value? And I think as you look at the filter, and we referred to that a number of times, we're looking for something that's really going to check a lot of different boxes, not just check the obvious ones.

Unknown Analyst

I just was wondering if you could talk about -- you talked in the presentation about sales growth, cost savings, return on invested capital. What are you doing to incent your people consistency with those goals? And just to elaborate a little bit more, you got this new R&D center, you talked about some marketing and advertising initiatives, just wondering if you could even talk to kind of core competencies and how maybe you incent those people to drive what you're going for?

David V. Singer

Let me start with that. I'll start at the highest level and then work down from there. But at the highest level, our incentive plans are set up that on our annual basis, it's really about earnings per share and sales growth. We've got targets and we set those based on those things. There are hundreds and hundreds and hundreds of people that are connected to that goal. There are probably 200 people that are connected to our long-term incentive plan goal. And what that does is it provides -- it actually provide shares to them. And the shares and we also have a long-term incentive plan cash component that is based on return on invested -- return on invested capital and total return to shareholders. So the amount that people get relate to those 2 things. And so as we look at how we communicate with levels in our company, we start with the cornerstone of return on invested capital, sales growth and earnings and then link it back to a total return to shareholders. And the fact that those are the things that drive how much people make and then that is actually -- since the currency, a lot of this currency is in stock, it really relates to those things. So then, we work from there into KPIs that we work from the board level all the way down through the organization that Carl and Rick have been working very hard on getting implemented through the organization, so we start talking about our strategic plan. We connect it to these incentive plans and these stock plans and the long-term incentive programs and then link to individual as to how they connect back up. So to these plans from a financial perspective and to the various pillars in our strategic plan, either a Fund the Future initiative or grow the core initiative. So with that, Carl, you may want to be more specific about how we connect some of these things.

Carl E. Lee

So I think Dave did a very good job of talking about it. I mean, they're clearly our financial incentives and they're linked to ultimately to what we're doing for our shareholders. Both our short-term plan ties back to that, our annual incentive plan and then our long-term incentive plan. And the nice thing about long-term incentive plan, it's really not only benchmarked against our returns. There's another criteria which is very important, how are we doing versus our peer group? Are we outperforming shareholder value creation for a lot of our peer companies? So there's multiple ways to really make sure that management is held accountable, the team is held accountable and then we're rewarded for the right performance. But I think it goes deeper than that because I think the fact that we are really engaging our associates, the fact that we're really asking them for advice and input, and we're listening to some of the very best ideas, again, come off of the shop room floor. We've got some really neat new products that are in the hopper right now, they didn't come from a very elaborate R&D system. They came from people with good ideas on the shop room floor. You talk about energizing an organization and getting people excited when their idea ends up in the marketplace. Now naturally it goes through the quality review, it goes through the R&D review, it gets really scrutinized before we ever or you'd be willing to take it to market. But people get energized when they're listened to, they get energized when their ideas really come to fruition. And so we can reward people with incentives and it works quite effectively. But we can also reward our people by the way we engage with them and we encourage them to participate in the company. So there's multiple ways to really make sure we're linking performance to returns.

Unknown Analyst

Just a quick follow-up. So when you think about a new R&D center, marketing initiatives, how do you think about how to -- where to put money and the returns that you're going to get [ph]. I realize there's no crystal ball, but at least evaluating it to determine where to put those resources?

David V. Singer

I think that first of all, it's a very robust process. We've got the resources. We're grateful for those. We're blessed to have those resources. But the key is, are we putting them against the very best opportunity we've got. And Rick has done a phenomenal job of putting together a very structured process. The number one phase is [ph] to look at that return versus the other returns for ideas and then we basically measure out that ROIC to make sure that we're really going to get the return for that initiative that we expect. And we go back year after year evaluating that return and making sure that, that was indeed a good decision. And in all cases, they are, but we're looking for those ones that we may learn from something and adjust later. But we've got a robust process in place there and we leverage the infrastructure that Rick's got in place to make sure that we're: Number one, prioritizing; and then number two, when we do sign up, are we getting the return that we promised ourselves that we would deliver.

Carl E. Lee

And so we do start with -- the fact is that we're going to focus on our core brands. And so they are the largest ones. So if you move a percentage growth on a core brand, it's going to add more value. And it's also, as we grow those business, they start with the higher margins and they generate better returns. So that filter alone really gets us -- where at the R&D center, that's where we're going to focus our efforts.

Unknown Analyst

My last question is just on, when you first merged, there was some big opportunity to sell, I guess, Snyder's in convenience stores and really expand Lance geographically. I just wonder if you could somehow either quantify or give kind of maybe where we are in terms of that process? Maybe has that been successful? Or what have been the impediments to being successful there, just if you could elaborate on those issues?

David V. Singer

As Rick alluded to earlier, we're not in the position to share our ABC (sic) [ACV] results, all commodity volume and our gains there. But we've seen significant ACV gains on Cape Cod because being able to put into the Snyder's system on a bigger, broader basis. We've seen significant gains with ACV on our sandwich crackers. We're seeing improvement with our SOH going to get into C stores with our new broader DSD system. So we're pleased with what we're seeing so far as far as being able to take great brands with a broader distribution system into new locations. So while we've made lots of progress, the good news is there's still a long road ahead and we're just continuing to knock it down day in and day out. So we're gaining space with leading retailers, we're adding new items to the leading retailers, we're taking core brands to new locations. And more importantly, we're making sure we've got support behind them. So it's a methodical, gradual approach to make sure when we get there, this product's going to turn on the shelf and it's not sitting there. But we're pleased with the ACV expansion we've seen so far.

Unknown Analyst

Carl, I really agree with you the turning around of the IBO to 18 months, certainly, a very, very good team. But looking forward, apart from your ability to extend that infrastructure, when you look at the operating efficiencies within the DSD network and then you benchmark yourself against some of your competitors in the baking and snack industry, where are we in terms of sales throughput? Where are we in terms of operating efficiency through this? And where are we in terms of operating efficiency to support this structure? So a little bit of a quantitative analysis on that will be really appreciated.

Carl E. Lee

I think, first and foremost, the IBO model has been around for a very long time and a lot of very leading snack companies have an IBO model. So it's proven itself over time. You go back 30, even 40 years, the IBO model continues to really be a preferred way to go to market. And so we're very committed to that model, very pleased with it. We see them as partners. We leverage their input and their ideas. And but to your point, you got to go beyond that and you got to look at what's the weekly route average, what's the drop size, what's the service frequency, what's the distribution of your products, what's the merchandising and the space you're get in stores with the IBO model. So to your point, we do have a very rigid process or scorecards, we call it, that really benchmarks internally how is our model performing in the Northeast versus Southeast, versus L.A. and then looking for ways to fine-tune it and bring those best practices across the system. So we have a very in-depth scorecarding process that looks at warehouse efficiency and IBO efficiency and we strive to improve it every day. So...

Unknown Analyst

Can you share some of the details where are we with some of your peers on that scorecard?

Carl E. Lee

It's a little hard to really get peer information. I mean, having grown up with the DSD system, I have a good idea of where we're at. We do have some limited information. I would say overall, we're comfortable where we are versus the other major IBO networks that are out there.

Unknown Analyst

Let me give it another shot. So where you were 2 years ago, where are we today?

Carl E. Lee

I'm sorry?

Unknown Analyst

Where are you today with the 2 years [indiscernible]?

David V. Singer

We're seeing our route averages continue to improve, we're seeing our overall service frequency up. We're seeing the number of items that we stock per store, which is a key measure, that's up. So we're seeing the expectations for us, the gain there.

Carl E. Lee

But there still is opportunities to improve, but we look at our best versus our less strong territories on these -- there's opportunities to improve. So it's not like someone has got their system as good as can ever be. We've got -- we're going to continue to see improvements in that area over the next couple of years.

Unknown Analyst

Jeff Cantor [ph] UBS O'Connor. I know about your 10% operating margin goal. Carl, where do you want to be in 5 years?

Carl E. Lee

I didn't hear that...

David V. Singer

Where are we going to be in 10 years or 5 years. He said you got a 10% operating margin goal.

Unknown Analyst

You have a 10% operating margin goal, but where do you want to be in 5 years?

Carl E. Lee

Well, our strategic plan actually goes out 5 years.

Unknown Analyst

Well, what does it say?

Carl E. Lee

It says we'll be higher, but it's not going to say, and because we still have a portfolio of a lot of different kinds of products, right? We still have a portfolio of branded and private brands and Allied brands and core brands. So we'll continue to enhance that and to optimize margins as we move forward. So we have anticipated a higher margin kind of achievement as we move forward through this strategic plan. Now I wouldn't say that we're in a position right now to tell you that we're going to be at 15% in 5 years because that's not where we are in our development. I mean this company is only about 2 years old, if you kind of think about it, right? So 2 years ago, we merged into this brand new company and now we have this new platform, and we're not -- we haven't defined everything it can do yet. There's a lot of stuff that's in front of us that we haven't thought about yet that we will be able to. So we're somewhat conservative at this point in terms of our projection as it relates to where we can go from an operating margin perspective, but we do believe there's a lot of opportunity.

David V. Singer

And there's a lot of complexity in terms of trying to develop a forward projection, not -- we have, for example, partner brands. Partner brands has a very low operating profit margin percentage. However, the returns are good because it's a distribution business. So depending on how fast that business grows or relative to everything else, it will change what the overall headline operating profit as a percentage of total is. But if you measure return on invested capital like we're doing and return on invested capital will continue to grow, whether that grows as a total -- a percentage of the total or not. So it's really, I know you want to say, well, in 2015, our profit margin is going to be x. That's really not how we're looking at it. Our plan is really build up on the segments. We're looking at trying to drive sales and margins in the segments and make sure that we get good returns on those segments. So it's not as -- I'd love to be able to say, well, the plan says x. We do have a plan and it does say x, but frankly, I think, the way it will grow over the next 5 years, the outcome as it relates to what actual operating profit margin percent will be is a little -- it depends. But I think, what we're going to see is continued growth in free cash flow generation and returns.

Unknown Analyst

Same question in a different, a slightly different way. Does the platform now that you have with distribution, manufacturing, et cetera, if you look out 5 years, is it big enough, is it scalable enough where you could double your revenues? I'm making that number up. It's my number, not yours. Are the capabilities in place for Snyder's-Lance to be a significantly bigger company down the road?

Carl E. Lee

I think the answer is absolutely yes. I mean, that's why we put these companies together to begin with is to make it a significantly larger company -- with 2 individual companies. But -- and I said this on a couple of calls over the last several quarters, and Dave brought this up, is that if you look at partner brands as a distribution piece of our business with normal operating margins of 2% to 3% on that piece, if you take that out, even coming out of last year, we were at 10% operating margins on the rest of our business. So we're not necessarily that far behind some of the peer groups that you might think that we should measure ourselves against, which we do. And then if you put into that also the equation of having things like private brands, as well as branded, I think it stacks up pretty well against our peer group in each one of those kinds of categories.

Unknown Analyst

And finally, DSD is a pretty valuable asset and all the companies that I've studied over the years will attest to that. As you build out this platform, you might be more valuable to somebody else than a standalone. But you do have a very large shareholder. Should opportunities come down -- come present themselves, that could be structured in such a way, is your largest shareholder, is the family willing to take a smaller stake in a larger company?

David V. Singer

Well, a couple of things. One, we really can't speak for any individual how they think about things. But I'll tell you, our Board of Directors is focused on driving value. And I can tell you that the largest shareholder is focused on driving value. And so as long as something that makes sense for the business drives value, I can tell you that my experience is there will be people will line up behind that idea. So if you take a look at -- at the merger time, the ownership percentages of the former Snyder's owner -- shareholders were cut in half at merger time. So kind of by definition, the comfort level of reducing percentage ownership was there. So I don't see that to really be a problem. And so that kind of gets back to, would we consider issuing equity for acquisitions. I think the answer is, it if it's the right answer, we would consider it. If it drives value, if it makes us stronger and more profitable, so I don't have -- my experience is that's not going to get in our way.

Carl E. Lee

If I can just add a little bit to the comments that have already made by both Dave and Rick. I think getting our margin up, priority #1. Achieving a 10% operating income, we're clearly driving towards that. But I think in addition, we've got to keep in mind, and the point was made earlier about, you've got to spend more on marketing. So we are spending more on marketing this year, we're spending money on the R&D center. So while getting margins up is important, we've got to really need to build the overall business, we got to continue to build the company. So kind of brick by brick, we've got to pull off [ph] some of our additional returns and put it into marketing. We got to pull some of it off and put it back into new products. We've got to fund the expansion like the R&D system. So while we're focused on that overall return, we're also focused on the long term, and that is how do we really fundamentally build great brands that contribute and grow year after year after year. And so we've got great platforms within our brands, but they need some nurturing, they need some support. And so we're going to spend on those while we also drive towards improving our returns.

Unknown Analyst

You just outlined in your presentation a focus on increasing your C store sales. I was wondering if you could give us a sense of what your exposure and your footprint as far as what proportion of the C stores in your footprint you're in? And more importantly, the large ones, the Sheetz, the Wawas, the ones that are growing? Because I know in my experience going into Wawas and all, I don't see a lot of Snyder's-Lance products and I don't know if that's an issue with direct versus DSD and just how you all are addressing that?

David V. Singer

I think that the leading retailers that you're talking about, we're in, okay, and we're growing every day. Do we have a long runway still ahead of us? Absolutely. But I think the key question, are you growing with the retailers that are growing the fastest? And the answer is yes. And are we expanding our distribution beyond that, leveraging DSD and even in certain cases, maybe directed when we don't have DSD ramped up to the point that we needed to be in an area out west. So C stores, absolutely a critical channel for us. The advantage of the merger was we improved our portfolio to get there, we improved our DSD system to get there. And we've got some very high objectives set this year for expanding the distribution. And then we're also working on the some very unique items to get there. One of the most successful new items that we had last year was not a brand new product, but it was a brand new package, and it was our pretzel pieces in that, too, for $0.99. It has done incredibly well. And that's a friendly item for C stores that we're opening up doors to get into new accounts and to expand our brand at the same time. So C stores continue to expect a lot from us as far as our ability to grow that channel and expand that channel.

Unknown Analyst

And typically, C stores carry a meaningfully higher gross margin. First is that still the case? And secondly, have you all been able to get this distribution down to the point of the logistic sense [ph] to the point that it's carrying a meaningfully higher EBIT margin for you guys?

Carl E. Lee

It is. Typically, the channel is -- operates on higher margins, higher margins for the retailer because of them covering their expense, higher retailers for the food suppliers that go in there. What you would expect is exactly what we see. And the way we gear it in our IBO network is to make sure we're providing good service and good merchandising in-store, but doing it in a way to make sure that we've got some good returns. So we're pleased with our model. We'll continue to fine-tune it. We'll continue to expect more from it. But that's an all-important channel for us.

Unknown Analyst

So Carl, earlier, you talked about Lance as, I guess, the brand that you're most excited about in terms of innovation pipeline. I was wondering if that's a 10 out of 10, how would you kind of scale Cape Cod, Snyder's and Pretzel Crisps in terms of kind of where that pipeline is? And maybe, if you could just talk about it from the standpoint of maybe where we were a year or 2 years ago in terms of pipeline versus where we are now?

Carl E. Lee

That's a good question. I think that, clearly, as I said earlier, I'm excited about all my brands, okay? We've got -- we've seen Snyder's continue to expand over the past 4, 5 years with great innovation, reaching the right flavor mix and the right overall variety and value for our consumers. So that brand's been growing and doing quite well, fueled by innovation, fueled by distribution. Cape Cod's the same thing. The recent waffle cut addition has done phenomenally well there, some of the new flavors has done well, new sizings, new shapes, new different things that we can do there is also working. Pretzel Crisps has been an innovative brand for a long time. So 3 of our brands have really been nurtured a lot over the recent years. Lance has also been nurtured, but Lance is really at a point now where it's a highly successful product in a very fast-growing category. It's the one that we probably see the greatest innovation pipeline available for us. Taking sandwich crackers into different eating occasions is a real opportunity for us. Can you position it for other than just kind of a meal replacement or a snack? Can you really replace it as a meal for breakfast? Can you position it for something in the evening? I see that platform of the cracker base and the nutrition that you can add through the filler as really something that really creates a longer runway than anything else we may have right now. But high expectations for all 4, investing and working on all 4, but we've got one that's probably got a little bit more of an immediate runway if we get aggressively after it.

Unknown Analyst

So you wouldn't characterize any of them as mature or close to mature, there's still lots of growth in a way?

Carl E. Lee

Absolutely not. No, these are good healthy categories that we expect to continue to grow. We expect to continue to fuel a lot of the category growth. We expect to get more than our fair share of that growth. And I think all categories are great places to play. We may refer to them as niche, but they're still very large scalable categories that are clearly expandable and all of them are on kind of recent consumer trends and foreseeable consumer trends.

Unknown Analyst

Maybe one more quick follow-up. The new R&D center, does that change anything about the way that you're going about this kind of innovation pipeline?

David V. Singer

It does. I think that we've had a very disciplined approach. And for me, just in general, as you've seen today, discipline is a very important way -- of the way at which we can operate our business. So when it comes to our stage gate process to make sure only the very best new ideas get through that R&D development pipeline, it's clearly what we're doing. And with our R&D system, it's more about fewer but really bigger ideas get the time and attention. We've got great scientists. We've got great new product developers. We've got a great marketing research plan in place to find those new items. But really just the very best ones with the best shareholder return are the ones that are getting through there. And so we've got the scale and the capability now to develop products probably faster but better than we ever have before.

Mark Carter

Okay, I believe we're coming up on 10:30 so we're at about the end of our Q&A session. We want to thank everyone, certainly, for coming today. I hope you found it informative. I hope you see that we've got a lot of great things going on with the organization, with our great company and we're certainly focused on growing our company, growing our business and shareholder returns. And as always, please feel free to reach out to the Investor Relations team at Snyder's-Lance if we can help in any way. So thank you again for coming, and I believe this will conclude the webcast also. Thank you.

David V. Singer

Grateful for you to be here.

Carl E. Lee

Thank you very much.

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