Snyder's-Lance Management Discusses Q1 2013 Results - Earnings Call Transcript

May. 7.13 | About: Snyder's-Lance, Inc. (LNCE)

Snyder's-Lance (NASDAQ:LNCE)

Q1 2013 Earnings Call

May 07, 2013 9:00 am ET

Executives

Mark Carter - Vice President and Investor Relations Officer

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

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

Analysts

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

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

Thilo Wrede - Jefferies & Company, Inc., Research Division

Rohini Nair - Deutsche Bank AG, Research Division

Ann H. Gurkin - Davenport & Company, LLC, Research Division

Amit Sharma - BMO Capital Markets U.S.

Michael W. Gallo - CL King & Associates, Inc., Research Division

Operator

Good morning. My name is Kyle, I'll be your conference operator today. At this time, I'd like to welcome everyone to the first quarter 2013 earnings call. [Operator Instructions]

Thank you. I would now like to turn the call over to Mr. Mark Carter, Vice President and Investor Relations Officer. Sir, you may begin your conference.

Mark Carter

Thank you very much, Kyle, and good morning, everyone. With me today are Carl Lee, our President and Chief Executive Officer; as well as Rick Puckett, our Executive Vice President and Chief Financial Officer.

During today's call, we will discuss our 2013 first quarter results, as well as estimates for the full year. As a reminder, we're webcasting this conference call, including a supporting slide presentation, on our website at www.snyderslance.com. Before I begin, I'd like to point out that during today's presentation, management may make forward-looking statements about our company's performance. Please refer to the Safe Harbor language that's included in all of our presentations.

And I'll now turn the call over to Carl Lee, President and Chief Executive Officer, to begin management's comments.

Carl E. Lee

Good morning, and thanks for joining our call this morning. As we begin, I want to acknowledge Dave Singer and the great progress our company made under his leadership. Thanks to his dedication and vision, we have a very bright future ahead of us.

We are pleased with our overall performance in the first quarter 2013, and are proud of the progress our team is making as we build our company. Everyone is diligently working to make sure Snyder's-Lance is a premium, differentiated leader in snacks supported by our growing national distribution network. Today, we're going to review a number of slides that have been made available online, as we review the progress we've made against our priorities in Q1. If you want to follow along, I would invite you now to turn to Slide #4, and we'll pause for a second to let you pull that up.

As we look at Slide #4, our first quarter overview. During the first quarter 2013, we focused on several strategic areas that have helped us get off to a very good start with our solid EPS performance for the quarter. Our team grew our core branded sales, driving volume and revenue growth ahead of category and food industry trends.

During Q1, we implemented a number of retail price improvements on selected brands to offset commodity inflation, while improving our ACV coverage and retail execution. Consistent with our actions from last year, we also continued to increase the margins on non-branded and allied branded products as we improved our price points and product mix to improve profitability.

Our manufacturing, operations and sales team delivered great results across our supply chain driving down our cost of goods sold and our operating expenses. And of course, we had a great deal focus on our Snack Factory, Pretzel Crisps business in Q1 to ensure we get off to a great start during our first full year of ownership.

The Pretzel Crisps brand is proving to be a real positive for Snyder's-Lance and our team has done a great job of supporting this exciting new core brand. Pretzel Crisps has raised the bar on innovation and product quality, is helping us drive increased branded revenue, while positively impacting our profits. Our Snack Factory leaders are off to a great start for 2013 and we're excited about the progress and their future plans.

Finally, our team improved the effectiveness of our trade spend dollars to deliver sales growth on all of our core brands.

Now if you'll turn to Page 5. Our growth continues to be driven by our core brands, which together was up over 23% for the quarter, excluding the impact of last year's IBO conversion. If we exclude the acquisition of Snack Factory, as well as the IBO impact, our core brand revenue would still be up 6.3%. Each of our core brands delivered solid growth year-over-year.

Our sales team delivered solid results according to ACNielsen, and that our core brands improved both their non-promoted and promoted retails. You may remember from previous earning calls that we implemented a new custom promotion management system last year. We're seeing the benefits of that system as we drive category growth and returns for our retailers and our company.

Now turning to Slide #6 and reporting on Q1 progress. Brand new sales growth continues to be a top priority and we gained market share in all 4 of our core brands. Snyder's of Hanover, Lance sandwich crackers, Cape Cod and Pretzel Crisps, outpaced their respective categories delivering both volume and revenue gains for the quarter. Our non-branded sales were down over 1% in the first quarter, as we continue to work on expanding our margins and improving our profitability.

We also saw additional gross margin expansion as our supply chain team continues to perform well, delivering efficiencies and savings in our plants, as well as logistics and our central distribution centers. With our teams' focus, operating margins expanded, driven by retail execution improvements,

[Audio Gap]

as we all strive to operate more efficiently.

Now turning to Slide #7, as we look at some additional highlights. As you will know, we invested at a higher than normal rate of capital projects for 2012, and we're investing at a similar level for 2013. I'm happy to say that all of our major capital initiatives are on schedule and on budget, and are progressing on a pace that we would expect as we strive to expand our capacity on core brands and also enhance our innovation and our automation.

Our supply chain team turned in a great first quarter, not only at delivering cost savings as I mentioned before, they also improve their service to sales in our retailers. We are very proud of the great job they're doing as they go the extra mile to serve our customers. I'm also proud to say that during first quarter we continue to invest in our people, as we extended our educational and engagement opportunities, encouraging our people to share their ideas and recommendations on ways to improve our sales and operations.

In addition, our private brand sales and manufacturing teams delivered a great quarter. They have revamped their portfolio, customer and product mix to drive long-term top line growth, while optimizing their contribution. In particular, I like to recognize our Burlington team as they did a great job of driving cost savings and operating improvements across their entire supply chain.

Now turning to Page #8. We have a very robust pipeline of product innovations in 2013 for our core brands. Beginning, first of all, with Pretzel Crisps. Our new products continue to perform well as they reached new consumers and drive incremental eating occasions. It's much more than a brand, it works very well as a platform today and for future growth. As you travel, in business stores, you should see firsthand our expanded distribution, visibility and availability.

Now turning to Lance sandwich crackers. As we asked our loyal and new consumers for product ideas, their very first suggestion is always more peanut butter. And we've answered that with a request with our new Xtra Full line of sandwich crackers, that's performing quite well. We also expanded our Cracker Creation line with a new graham-based cracker. We've also added spicy flavors, which are always very popular in the food category as we've launched our very first jalapeno sandwich cracker on our Captain Wafer base. And my personal new favorite is the Chocolate Nekot cookies, with both chocolate or peanut butter filling.

Next of all, Snyder's of Hanover. For 2013, our Snyder's innovation crosses grocery, mass, club and convenience channels. Our 2012 tube innovation for C stores and UDS has exceeded our expectations and, clearly, has room for a lot more growth and expansion. Our flavor doubles are meeting our sales expectations and we have many more exciting new products to come under our SOH line in the coming years. And most exciting, we are supporting our Snyder's of Hanover brand with a new TV advertising campaign starting this month.

Now turning to Cape Cod. We've had a lot of innovation in our Cape Cod products over the past year, with products like our waffle cut and also our new flavors. For 2013, we are putting an extra emphasis on our reduced fat lineup. And the original Cape Cod reduced fat has been a top seller for many years, and we're introducing a number of new flavors to continue to enhance that experience for our consumers.

Now turning to Page #9 and referring to our 100th year anniversary. Our Lance 100th anniversary campaign is in full swing and a number of different consumer events are scheduled to be executed across the balance of this year. One example is a 100 days to win sweepstakes, which will drive excitement and rewards our very loyal consumers. Another is we've launched a very aggressive digital and social media campaign, and getting great feedback on that so far.

For retailers, their in-store POS, [indiscernible] and mobile apps to help entice additional display execution and results at store level. We also have a very exciting tie-in and partnership with Six Flags theme parks. We also have, coming later this summer, a great movie tie-in, the movie is Cloudy with a Chance of Meatballs 2, which was a very strong success just a few years ago. We also have grass roots efforts, such as our snacks patrol and aggressive product sampling opportunities throughout the balance of the year.

And now Slide #10. Looking a little forward to the next couple of months. Starting in the second quarter, we've increased our investment in marketing and advertising to drive sales. Our advertising efforts will focus on core brands as we leverage TV advertising and online interactive media that reach new consumers. This is a very significant step as we're excited about our incremental spending on our advertising and marketing and primarily, against our SOH brand. Marketing efforts will help us reach broader consumer base and allows us to support our core brands, while we also do some additional support for allied brands. The majority of these activities will occur during the second and third quarter of 2013.

And finally, we are committed to our strategic plans as we drive execution across the entire company. All of our associates are actively engaged in this process and are driving it on a daily basis. Snyder's-Lance continues to be a great company and is growing and building a solid place in the snack food industry. We've accomplished a great deal over this past quarter and we have a lot left to accomplish over the balance of the year. And again, my thanks go to all of our team members for their dedication and hard work over the past few months, and also to our IBO's and especially to our retailers.

At this time, I'd like to turn it over to Rick for some further review on our financials.

Rick D. Puckett

Thank you, Carl, and good morning, everyone, and welcome to the call. I want to turn your attention to Page 12 in the deck that was posted earlier this morning. And I want to go into a little bit more detail on some of the financial results.

On Page 12, you'll see a breakout of revenue, net revenue across our branded, private brands, partner brands and other revenue sources. The branded revenue, as Carl mentioned, was up last year, 15% and core brands was actually up 23%, excluding the IBO impact. We gained market share in each of our core brands during the quarter. We also saw Pretzel Crisps and the performance there being very good performance and quite consistent with our expectations. The private brand trends are consistent with general retail customer trends in the mass and grocery channels.

Turning to Page 13, I want to highlight a few things in terms of the key financial metrics. Gross margin for the quarter was 34.6% versus 32.8% last year. Snack Factory contributed approximately 90 basis points in favorable mix. More effective trade spend drove an additional 90 basis points for the quarter. And then better manufacturing efficiencies that Carl mentioned a few minutes ago, as well as product mix with our core brands, offset any negative impact from the IBO conversion comparison.

Operating margins, 8.1% versus 5% last year. This improvement was driven by a number of things including: the continued good growth in our core brands, including Snack Factory; our efforts to optimize our non-branded products, were also very beneficial; the full integration impact of the IBO's, the G&A functions, as well as supply chain functions; and the overall gross margin improvement through more effective trade spend, which is supported by our new systems and processes.

In addition, I don't talk about this too much, but tax rate is worth mentioning this quarter. You can see it's 37.7% versus last year at 35.8%. We actually expected the full year tax rate will be in the range of 36.5% to 37% this year. This will impact EPS by $0.025 to $0.03 for the full year, which was not originally planned. This is a result from changes in our expectation of certain full year tax items. The diluted earnings per share was $0.28 versus $0.17 last year excluding special items, which represents an increase of over 65% year-over-year.

Turning to Page 14 and looking at cash flow. Our free cash flow is approximately $9 million for the quarter compared to last year's $6.8 million. As Carl mentioned, our CapEx was higher, driven by the larger projects that have been underway. These projects are on schedule and we look forward to the additional capabilities and efficiencies that they will bring.

In addition, we have driven good improvements in our working capital across all areas. We continue to focus on optimizing inventories within -- sorry, with new business intelligent systems at all of our locations. This results in better forecasting and production planning. It also allows us to drive accountability at each location through incentive metrics and KPIs. We are driving these accountabilities to each inventory location, whether as a manufacturing plant or a warehouse.

We're also driving for improvements in our cash cycle with our receivables and payables. Our leverage ratio was 2.9 at the end of the quarter, significant improvement from the beginning of the year and a reduction of 0.3 since the acquisition of Snack Factory. We expect continued improvement in leverage through the rest of the year, providing additional flexibility to support our growth objectives.

Now looking at Page 15. You'll see our full year estimates and you'll note that they are unchanged from when we talked last. We believe that our advertising and trade strategies around driving the top line through the remaining part of the year will accomplish our guidance as presented on revenue. Our EPS assessments are also unchanged as we continue to drive our margins through cost management and manufacturing efficiencies, and growth on the core and branded areas. The unplanned increased tax rate is expected to impact our EPS by a negative $0.03-or-so per share this year, which we are working very hard to offset.

So that concludes my remarks on the financial section. And I'll now turn it over to Kyle for any questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Heather Jones from BB&T.

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

Just some detailish questions first. From last call, I recall that you were estimating about a 15% increase in advertising and more than $3 million in startup costs for the year. And was wondering if you could give us a sense of how much of those startup increases were in Q1 and how should we think about the cadence of that through the year?

Rick D. Puckett

Yes. I would say there's not a lot of startup costs in Q1 because the capital projects are still being completed and not going through the first runs at this point. I think you'll see that in Q2, you'll see it in -- mostly in Q2, probably a little bit more in Q3.

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

And what about the advertising?

Rick D. Puckett

Well, as we have mentioned, we are looking to expand and launch our TV advertising for the Snyder's of Hanover pretzels. And you should start to see that on TV this month as Carl mentioned. It's a nice ad, particularly around the pretzel pieces that we have. So you'll see that on TV and that starts up this month. So it's probably going to exceed last year's second quarter advertising spend by probably $0.04 or $0.05 a share.

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

Okay. So we're still looking, on a full year basis, we're still looking at more than $3 million in startup costs and we're still looking for a 15% full year increase in advertising spend?

Rick D. Puckett

Yes. I think it's valid to say the $3 million will still be there, the advertising spend will be pretty close to what we expected. I'm not sure whether it's exactly 15% or not, Heather, but it'll be north of what we spent last year, especially if our top line continues to grow and supports the spend.

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

Okay. And I don't know if you said it, I missed it, but what was impact from the IBO conversion on the sales line and how much did Snack Factory contribute in sales for the quarter?

Rick D. Puckett

Actually, I didn't say that and I actually don't have that now on top of my head. But on Page 12, you could probably do the math to get back to it for both -- we had 23% growth with -- actually, I guess, it was excluding Snack Factory, the growth overall was 6.5%.

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

But that was on your core brands, right?

Rick D. Puckett

No. It's 6.3% on core, it was 6.5% on the total company. So I'll let you kind of work back. But I think the acquisition was somewhere around, I want to say, 20, 27...

Carl E. Lee

Well, the key is, I mean, we exceeded our budget and we also exceeded our forecast. So Snack Factory and Pretzel Crisp continue to outperform even our kind of aggressive expectations. So it's adding to overall top line growth, but it is also being supported nicely by our overall core brands. And so we're seeing good growth ahead of category trends in order to gain market share on both our pretzels, our sandwich crackers, our kettle chips, as well as our Pretzel Crisps.

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

Okay. And so maybe I want to hear sales cadence for the year. So you're talking about, I think, 10% to 12% for the year. For the quarter, you were, I think about 6.5%. What's going to drive that acceleration, I guess, lower IBO effect? But I mean, do you expect the advertising to drive significant acceleration in your branded sales?

Carl E. Lee

We think it certainly will contribute. I think to your point, I mean, the IBO effect will basically begin to really drop off significantly from here on out through the balance of the year. The majority of it that we are going to see for the full '13 will be during the Q1. But we are expecting to continue to see very positive trends on all of our core brands, and we do expect to see even a faster growth rate, in particular on Snyder's Pretzels, as we aggressively invest there on advertising. We think our 100th anniversary will also continue to help us with our sandwich crackers as we drive our loyal consumers to buy a little bit more and reach out to some new consumers. And then we've got a pretty exciting summer plan for Cape Cod. And we expect continued positive trends on our Pretzel Crisps. So those 4 cores will continue to drive our overall growth through the balance of the year.

Operator

[Operator Instructions] Your next question comes from the line of Akshay Jagdale from KeyBanc.

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

And my first question is, again, going back to Heather's question. So what was branded organic sales growth? Meaning branded sales growth, excluding IBO and excluding Snack Factory? I mean, it seems like -- the reason we're asking about it is because it seems like it was weaker than we had expected and probably a little weak in general on an absolute basis.

Rick D. Puckett

Akshay, I think as you've been following the rest of the industry, organic growth is kind of hard to come by. But ours was about 1/3 volume and 2/3 price.

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

Okay. And 1/3 volume, 2/3 price. But what was the absolute number when you add those 2 up for the quarter, roughly?

Rick D. Puckett

Well, I'm talking in terms of the core brands, primarily. So excluding Snack Factory, that was 6.3% as we said.

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

Yes. I will follow-up. I think what we're asking is more branded, not just core brand but all brands. But I'll follow-up on that. The next topic was just gross margins were better than we had modeled. Can you help us understand, sort of commodity costs, if they were a benefit or a headwind and what your expectations there are for the year?

Rick D. Puckett

As we said on our last call, we had put pricing into effect early this year. And so therefore, our commodities -- the commodities did increase in the first quarter over the last fourth quarter, but we had pricing to protect that. So really the price commodity equation did not really drive the improvements in margin. It really came from the better mix of our core brands, particularly the Snack Factory, as well as the more effective trade spin as results of our new systems.

Carl E. Lee

And some on going improvements in the plan and our operating efficiencies. So the combination of all those has really kind of improved our overall margins.

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

Okay. And just so I understand your guidance. Your guidance on sales you articulated very well before implies an acceleration in sales growth, mainly driven by the absence of IO and perhaps maybe an acceleration in organic sales growth. But it also implies, and correct me if I'm wrong, an improvement in sort of absolute gross margin percentage, correct?

Rick D. Puckett

Year-over-year, that would be the case. So as Carl just mentioned, we do expect that the gains that we've made in manufacturing will continue throughout the rest of the year. So we do expect to get an uplift in our margins year-over-year because of that. In addition, we have, as you have seen in some of our announcements, we've consolidated some plant locations and we're continuing to do that. And we announced the Corsicana late last year. We also announced the timing [ph] consolidation in Canada. All of that will drive improved gross margins as we take out fixed cost on the manufacturing side.

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

Okay. And just 2 more questions. One is Snack Factory. What's the accretion guidance for the year? Is it unchanged? And how accretive was it to earnings this quarter?

Rick D. Puckett

Well, and we're probably not going to separate that going forward, but we're on track, based on our original estimates, Akshay, as it relates to the accretiveness of that. We're very pleased with the performance of Snack Factory for the quarter.

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

Okay. And lastly, just on the acquisition side, it's a 2-part question. One is, where do you expect leverage to be by the end of this year and has that expectation changed after your first quarter results? And secondly, just more generally, if you could maybe talk about the acquisition environment, if you're seeing more opportunities or less than a few months ago? And if you can comment on sort of if valuations have increased generally in this stage, what the expectations are there? Just want to get a sense of the environment from your perspective.

Rick D. Puckett

As to the first part of your question, we do expect improvement through the rest of the year on our leverage ratio, allowing us additional opportunities to support our growth objectives through M&A and positioning ourselves to take advantage of those opportunities when they come along. As it relates to an absolute number, I've not really provided that. However, we're at 2.9 today. There's no reason to believe that we couldn't be in the mid-2s by the end of the year with continued good free cash flow. Our CapEx for the quarter was $18 million. We're projecting $83 million -- or up to $83 million for the year. So you can see that some of the free cash flow will be impacted in the later quarters with the timing of some of those capital expenditures. As it relates to the second part of your questions, we don't comment on M&A activity. I will say we are certainly in the deal flow and we are seeing things. And whether it's -- it's probably picked up a little, certainly, since the beginning of last year, but I wouldn't say that it's overflowing at the moment. I think that it's a moderate flow.

Carl E. Lee

Just to add, Akshay, just for a second, just to add to some of Rick's comments. I think that your questions about M&A, they were to be expected, I think. But also, you should see clearly through our comments, in our remarks, that we've got a lot of built up plans for organic growth. We see a long runway ahead of us for our pretzels, our sandwich crackers and our kettle chips, as well as the new platform we've got with Snack Factory. So we've got lots of plans, and a good example is the advertising we talked about, that's heavied up for our Q2 and Q3 on Snyders, to really make sure we're generating a lot of organic growth. And along those lines, we're very pleased with the fact that, in Q1, we drove volume growth, we drove revenue growth and we gained share across all 4 of our categories. That's pretty substantial when you take a look at the broader economics that our consumers are dealing with day in and day out. So I would say we are off to a good start on both our volume and our EPS growth for the quarter.

Operator

Your next question comes from the line of Thilo Wrede from Jefferies.

Thilo Wrede - Jefferies & Company, Inc., Research Division

Carl, can you talk a little bit how much the results this quarter were driven by benefits from the IBO model versus marketing versus trade spending versus innovation? Kind of what's behind the branded growth?

Carl E. Lee

I think, to answer your question, I mean, it was very broad base. We saw -- we did see some improvements through the IBO conversion, but it wasn't a significant factor by any means, why it helped. We also saw some very significant contribution through our margins, through the manufacturing efficiency, that helped in a large part and the gross margin improvements you saw. And then we also saw just good solid growth on the top line with our core brands. So if you look across the board, it was very broad-based in the improvements. So it wasn't just one particular factor, it was just good execution by our teams across sales, supply chain, marketing and throughout our entire system.

Thilo Wrede - Jefferies & Company, Inc., Research Division

Okay. And then, Rick, you mentioned that you expect now higher tax rates than you had originally thought, but the EPS guidance is unchanged. So you're offsetting that with just operations by the top line?

Rick D. Puckett

Well, that's correct. And certainly, we have a range there and we're willing to work very hard to offset that $0.03 negative. And we have plans in place to be able to do that. So we're maintaining our guidance as a result of that, even though we have a $0.03 that we did not expect originally.

Operator

Your next question comes from the line of Rohini Nair from Deutsche Bank.

Rohini Nair - Deutsche Bank AG, Research Division

I actually, I just want to focus a bit on the guidance, which you're still keeping at a pretty wide range, even though profitability was so strong this quarter. Can you just give us a sense of why there is still uncertainty between the low and high end of it? Is it the commodity environment or does it deal with the investments you're making in advertising? I was just hoping to get a little more clarity around that.

Rick D. Puckett

Yes. I think if you look at the revenue, it's only a couple of points spread there, which I don't believe, at this point, is really unreasonable. To your point on earnings per share, there is a pretty wide spread with 10 points of gain. However, that's not that many cents per share, right? It's really only about $0.09 a share from the beginning to the end, $0.09 to $0.10. So the spread is there still at the end of the first quarter for the things that we've addressed, which is the offsetting of the tax negative impact. We have plans in place, but they're not fully executed yet. So that has to happen between now and the end of the year. I think as we reach the second quarter call and talk to you again, we'll look to probably narrow that gap, Rohini, and give you a better sense of where we expect to come out for the full year.

Rohini Nair - Deutsche Bank AG, Research Division

Okay. And I just wanted to confirm, are you still looking on the top line for around 4% to 6% organic growth, with about 2% of that from pricing?

Rick D. Puckett

That was true for the quarter. Yes.

Rohini Nair - Deutsche Bank AG, Research Division

I'm sorry, for the full year?

Rick D. Puckett

I'm sorry, the other way around. For the year, we don't expect to do any additional pricing for the rest of the year, so I haven't calculated that quite honestly. So I'm not sure if that's the case or not, but I can certainly comment on the first quarter. It's kind of the reverse of that actually.

Rohini Nair - Deutsche Bank AG, Research Division

Sorry. So could you clarify for the first quarter, that means that pricing -- you said more from pricing in the first quarter?

Rick D. Puckett

On our core brands, yes. It's about 4 points on core and 2 points volume, a little over 2 points volume.

Rohini Nair - Deutsche Bank AG, Research Division

Okay. And maybe if I could just take another stab at what Heather and Akshay are trying to get at. So I mean, I think what I calculate is that it comes out to maybe a low-single-digit growth on your branded products in the quarter, which would suggest that if your core is up maybe 6%, that you're allied brands are down about mid-single digits. Is that right? Is that kind of how we should think about it? So I know your analysts say, you talked about returning those allied brands to growth in 2013. So do you think you might have to start rethinking your strategy around those a bit?

Carl E. Lee

I wouldn't think so. I think that -- we commented that our non-branded growth was down about 1%. And if you take a look at, as we work on our product mix, as we look at our price points, if you look at the overall profitability at line. And as we told you last year, we were really working to try to enhance the margins of those lines, we've been busy doing that. And so I think that, overall, we're kind of achieving what we -- our first objective which is, again, the profitability of those items. And as we do that, we're probably going to see a little bit of bumpiness on the top line. But I'd much rather see progress fast and furious on the bottom line, which we're achieving, that I would on the top line. I think, however, over time, we're obviously going to return those to stability and then beyond that growth. But we're going to put most of our emphasis, and certainly our marketing dollars, our advertising dollars against our core. So it's just a little bit of a balancing act as we drive good top line growth, overall, but we fuel it with our core, and then we begin to maximize the overall performance from a P&L basis on our balance of the brands or in our allied and non-branded.

Rick D. Puckett

Just to add one more thing. Specifically, on the private brands side. As you'll remember last year, we talked to you about optimizing that portfolio of products and customers. And that kind of started in the first quarter of last year, so we're lapping a little bit of that, having already accomplished that. We have, in fact, replaced a lot of that business with more effective and beneficial business, but there is a good site of growth on our private brands business as well.

Operator

Your next question comes from the line of Ann Gurkin from Davenport.

Ann H. Gurkin - Davenport & Company, LLC, Research Division

You commented on supply chain savings in Q1. Are there additional opportunities that you can recognize as the year unfolds and can you quantify that number?

Rick D. Puckett

Yes. I mean, the areas that I mentioned were really fixed cost consolidation and we do not see anything beyond the ones we've already announced there. I think there is, certainly, still improvements to be made. And our head of supply chain, Pat McInerney is working very diligently to drive continued performance improvements along the efficiencies that are in the plants, plus the investments that we're making on capital will help drive some additional efficiencies in the supply chain because mostly the investments that we're making in large capital projects, or essentially all of it, is in the supply chain area. So those projects will start to return and drive even more efficiencies.

Ann H. Gurkin - Davenport & Company, LLC, Research Division

Okay. And then, can we have an update on the rollout of Lance products on the Snyder system?

Carl E. Lee

We're achieving the objectives that we laid out as a company and we've moved our Lance sandwich crackers, basically, throughout the West Coast and they're performing quite well there. So we've gained distribution, really, over the past 2 years since the merger. So our overall track of business continues to perform quite well and the good news is it's very robust, a growing category and we're fueling a lot of that growth. So we've been able to expand our sandwich crackers quite rapidly across the West and, again, pleased with the performance so far.

Ann H. Gurkin - Davenport & Company, LLC, Research Division

Okay. Great. And then just in terms of thinking about margin progression in Q2 and Q3 with the expected increase in brands support, can we expect margin improvement year-over-year in Q2 and Q3? Is that a fair assumption?

Rick D. Puckett

Yes. I think there will be a natural progression from the pre-synergy quarters and when you get to Q3 and Q4, you're pretty fully synergized on a run-rate basis from last year. So you may not see a significant of an increase year-over-year as you saw into Q1. We also talked about investing heavily in Q2 and 3 on advertising, so that will have an impact on operating margins for those quarters.

Operator

Your next question comes from the line of Amit Sharma from BMO Capital Markets.

Amit Sharma - BMO Capital Markets U.S.

Rick, I just wanted to confirm with you, if I heard you correctly, you said Snack Factory contributed $27 million to quarterly sales?

Rick D. Puckett

That's about right, Amit.

Amit Sharma - BMO Capital Markets U.S.

Okay. Great. And then just a clarification. When you talked about your branded sales, which were about $258 million during the quarter, how much of that is core brand sales?

Rick D. Puckett

We don't split that out, Amit...

Amit Sharma - BMO Capital Markets U.S.

Should I say about 80%, is that a fair number?

Rick D. Puckett

Again, we don't talk to that split.

Amit Sharma - BMO Capital Markets U.S.

Okay. Got it. And then, Carl, you mentioned high visibility for Snack Factory products and that's really true. We've seen a lot more distribution for that. What's driving behind that? Are you able -- are you having to spend a lot on slotting to get those distribution points? And going forward, should we continue to see that rate of distribution gains or is it going to slow down?

Carl E. Lee

I think. You're clearly seeing the expanded distribution as you've noted. And you're seeing it in not only in supermarkets where you would expect it or mass market to the other channels, but you're beginning to see it show up more and more in airports, C stores and other channels where you would expect to see our snacks. So we're gaining our distribution just basically because of the strength the brand, because of the uniqueness of the platform and because it really performs as a cracker. And so it does quite well and so the retailers are inviting us in, as well as we're making plenty of sales calls to expand distribution. So it's not driven through discounts or selling allowance or anything like that, it's really driven by the performance the brand. And so we expect to continue to fill out any distribution voids that exist. There are fewer and fewer as we continue to march forward with distribution. But good progress there with some more room for improvement.

Amit Sharma - BMO Capital Markets U.S.

And if you could quantify in terms of either ACV or whichever other measure you might want to look at in terms of distribution for Snack Factory. Where are we and where could we be in the next 12 months?

Carl E. Lee

I mean, clearly, our first barometer is ACV coverage, and we don't usually share those numbers or break those out. But if you look in Nielsen, you'll see a pretty nice short rise during the quarter on overall ACV growth. And that's kind of broad-based across all channels.

Amit Sharma - BMO Capital Markets U.S.

And should we assume a similar level of penetration in non-measured channels as well or are you lower in those channels?

Carl E. Lee

I think it's still a gradual build out when you launch any new brand. And we are seeing build out in those channels and we'll continue to see it. I think that it is a premium kind of premier item that really kind of caters to certain consumer occasions and eating occasions. And so we're really focused on making sure we get distribution in those channels as quickly as we can.

Amit Sharma - BMO Capital Markets U.S.

Got it. And one more for me. I think, this is the first, I believe, I noticed you mentioned specifically premium with your product portfolio and the press release. Does that signal any change in either how you view the portfolio within the next 12 months or the strategic actions that you are willing to take in terms of either your allied brands or the non-branded portfolio to really sharpen the focus on the premium segment of the snack?

Carl E. Lee

I think, we're highlighting effective, we clearly see. If you take a look at the Snyder's pretzels, what's built that great brand, it's certainly is the premium quality, the premium image and the overall franchise that we built for the consumers there. You take a look at our Lance sandwich crackers. Again, a very strong talented brand inside the sandwich cracker category. And every time we enhance it, we add more premium to it. You take a look at Pretzel Crisps, clearly, a premium item. And you look at Cape Cod and you ask yourself, what's Cape Cod first known for? It's reduced fat. So all of those really kin of catered to a premium image around those brands that are very important, and we're just going to continue to nurture it. So I think, in some ways, we're signaling the obvious.

Amit Sharma - BMO Capital Markets U.S.

And Carl, have you sharpened the focus on this side of the aisle? Should we assume a margin lift from it or should we assume that you will outperform this overall category even more? I mean, what sort of repercussion are you focusing more on the premium side?

Carl E. Lee

I think, we again, we're just kind of calling out the way we see the brands and their positioning. And we're going to continue to work to enhance that. But if you go back and look at the Q1 performance, I mean, the fact that we gained shares is very important, so that premium image is working. And as we enhance it and take a chance to communicate it, as we're going to be doing with our marketing campaign and TV company on Snyders this coming quarter, or this quarter too, it just again reinforces with the consumers that these are very high-valued premium items that are providing a lot of value.

Operator

[Operator Instructions] Your next question comes from the line of Michael Gallo from CL King.

Michael W. Gallo - CL King & Associates, Inc., Research Division

My question is around, you had Snack Factory now for about 6 months. Obviously, the margins there are a lot higher than your existing portfolio, even though you are not actually manufacturing the products. I was wondering, as you look at your product portfolio and your ability to optimize manufacturing further, I was wondering whether you think you're getting close to optimum, whether you might see opportunities to co-pack or outsource additional products? Or just how you think about optimizing the margin profile of your overall portfolio?

Carl E. Lee

I think a lot of that just deals with the way we're running our overall operation today and the way we're running our plants. Rick talked about earlier about Pat, Greg and Greg, and the great job they're doing from a manufacturing standpoint. So I mean, we saw some significant gains in our cost of goods going down over the past quarter, and we're going to continue to do that. As we've shared our strategic plan with everyone. One strategic plan in there is called Fund the Future, that's all about us across all of our associate base just working to be more and more efficient day in and day out. And through some of our Vision Stream ideas and other ways to look for efficiencies, we're driving down scrap rates, we're driving down ingredient costs, we're driving up utilization of our lines in our plants. So we've got a good operating base there that's going to allow us to continue to improve our margins. And then you would throw, on top of that, again, what Rick mentioned with our capital projects, where we've got some automation going in to enhance both our packaging, as well as our efficiency. We're going to see some gains there. So we're busy expanding our manufacturing capabilities, busy investing in our plants and we've got a really super team that's leading it day in and day out, so that's going to allow us just to continue to be more productive.

Michael W. Gallo - CL King & Associates, Inc., Research Division

Okay. Great. And then just second question, obviously, Pretzel Crisps has done -- doing very well under the Snack Factory umbrella. I was wondering when we might start to see you come out with some additional items under the Snack Factory umbrella that might be different or related that you can kind of launch as new products within the category?

Carl E. Lee

We showed you one new item that was rolled out kind of on a limited test last year, which is our chocolate Pretzel Crisp. We've expanded the distribution into a couple of new accounts this year, it's actually exceeding what we had originally forecasted for the revenue. So we've got some innovation that's already in the pipeline, both our season items that we had for Christmas last year, which will expand, again, this year, our chocolate covered. So we've got some kind of closed [ph] innovation that's working really well, and then you combine that with just overall distribution gains. We've got a lot of excitement with that brand. But over time, we are building a pretty robust pipeline behind it, with some additional new items. And it's just a little too early to begin to talk about those.

Operator

Your next question comes from the line of Heather Jones from BB&T.

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

Just when we think about acquisitions or organic growth for you guys. The Snack Factory is in the deli, and I know that consumers are focusing more and more on the perimeter and their shopping, which is attractive. However, deli doesn't leverage your DSD network either. So when we are thinking about where your focus is going to be for organic or acquisitions, do you have a preference like, where you want to drive growth? I mean -- or are you ambivalent between driving center of the store or deli?

Carl E. Lee

Heather, I appreciate the question, but I think, clearly, we're committed to both. We've worked very diligently as you've seen over the past 8 years or so, building out a very capable and very talented national DSD system. And the beauty of that system, it handles high velocity, fast earning, almost perishable or relatively fresh items in the center of the store. So it gives us the benefit of having that merchandising, carrying our products in and then serving our products day in and day out. So we really like that model for expanding the center of the store execution. But to your point, the delis are not that friendly when it comes to DSD. It's not the most efficient place for the use of DSD system. So we are going direct in that area and have leveraged that successfully. So we've got the benefits of having the direct model with that item, with Pretzel Crisps, and then we have a great DSD system, we're going to continue to grow and expand for center of the store. So bottom line is, we're really committed to leveraging both and expanding both.

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

And can you give us an updated sense -- I know you probably won't provide exact numbers, but could you give us an updated sense of what proportion of your routes are -- I don't want to use the word underutilized, but heavily rely on partner brands to get up to full utilization, where there's an opportunity to more greatly penetrate with your brands?

Carl E. Lee

I think you're hitting on the fact that we're more than happy to carry partner brands and we see that as a real strategic advantage for our sales and our brands, but also for our partners. And then we just provide a tremendous service for our retailers because we are able to carry in more than just our items. So it's a win-win, it's a win for our brands, it's a win for the partner, it's certainly a win for the retailer. But our partner brand strategy, overall, allows us to get to more stores and allows us to get there more frequently. So we really win on multiple fronts, and it varies by area. Some areas may have a slightly higher percentage of partner brands versus branded. But over time, it all continued to grow and we continue to kind of leverage that route, so it drives up the equity for the IBO, drives up the service for the retailer. So again, we're kind of pleased with being a distributor and being a branded company.

Operator

There are no further questions at this time. I'll now turn the call back over to Carl Lee, President and CEO for closing remarks.

Carl E. Lee

We want take this opportunity to really thank everyone for participating in the call today and we're also very grateful for your questions. And we're certainly very blessed that we shared with you a very good Q1 performance. We're very proud of all of our associates and team members who've worked so hard to deliver these results, and we're very proud of each of them. And we'll continue to work equally as hard to make sure we drive good growth for Q2 and the balance of the year.

So we just want to recognize the fact that, again, we're investing more heavily in advertising during Q2 and Q3, as part of our overall strategic plan. And we talked to you about our commitment to drive our overall brands, and we see some long runways ahead of us to reach those. We also want to recognize our private brand team who did a very good job in delivering a very good Q1. And so we're just excited about our strategic plan and we're also very excited about our future. So again, thanks for your time and interest today.

Operator

This concludes today's conference call. You may now disconnect.

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