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Snyder's-Lance (NASDAQ:LNCE)

Q4 2013 Earnings Call

February 07, 2014 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

Jonathan P. Feeney - Janney Montgomery Scott LLC, Research Division

Sarah Miller - SunTrust Robinson Humphrey, Inc., Research Division

Lubi Kutua - KeyBanc Capital Markets Inc., Research Division

Brett M. Hundley - BB&T Capital Markets, Research Division

Thilo Wrede - Jefferies LLC, Research Division

Rohini Nair - Deutsche Bank AG, Research Division

Amit Sharma - BMO Capital Markets U.S.

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

Operator

Good morning. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Snyder's-Lance, Inc. Full Year 2013 Earnings Conference Call. [Operator Instructions] Thank you. Mr. Mark Carter, Vice President and Investor Relations Officer, you may begin your conference.

Mark Carter

Thank you, Lisa, and good morning, everyone. With me today are Carl Lee, President and Chief Executive Officer, as well as Rick Puckett, Executive Vice President and Chief Financial Officer of Snyder's-Lance, Inc.

During today's call, we will discuss our 2013 full year results, as well as estimates for 2014. As a reminder, we are webcasting this conference call, including the supporting slide presentation on our website at www.snyderslance.com.

Before we begin, I would like to point out that during today's presentation, management may make forward-looking statements about our company's performance. Please refer to the Safe Harbor language that's included in each of our presentation.

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

Carl E. Lee

Thank you, Mark. Good morning, everyone, and welcome to our fourth quarter call. We really appreciate you investing your valuable time to work with us today and listen to our results, talk a little bit about our future and where we're going. We want to make sure that we're very open and that have a chance to deal with all of your questions as we go forward.

As I begin my remarks, I want to just kind of focus on a couple of things. I think everyone who -- clearly talk about our recent past. We want to talk about our coming year and we also want to talk a little bit about our future and where we want to take our company as we continue to grow.

As we deal with today's conference call, we're going to do dig into Q4, and we want to make sure that you feel very comfortable and have a chance to deal with your questions and we clearly articulate what drove our results during the quarter.

We're also going to talk a little bit about how delighted we are about our potential in '14. And we're also going to clearly demonstrate our determination to continue to build our company and grow our business, because we've got a lot of great associates working day in and day out for us.

Now let's dig in just a little bit into Q4 before I get into the posted remarks in the presentation. Your big question is, what really happened in Q4? What drove the shortfall on our EPS? And we want to be very clear about that and make sure that we articulate it to your satisfaction.

I think the first and foremost thing that we need to talk about is throughout 2013, we had a tremendous amount of activity and projects going across all of our sites. All of our major manufacturing sites and regional DCs experienced some type of major project or system change or other things that really took their time and effort to deal with as they also ran our plants, and ran them efficiently day in and day out.

With those 12 major projects going on across our entire operation and supply chain, we did have 2 that came in behind schedule and 2 that experienced some additional difficulty late in Q4, and were unable to deliver the savings that we had built into our forecast. One of those was a major consolidation up in Canada where we brought 2 plants together. And most of you are familiar with all of the heavy lifting that's involved when you're bringing operations of that magnitude into one site, and then we also had some difficulty with a major bakery line that we were bringing up that came in behind schedule.

So having dealt with 12 projects, having 2 come behind -- come in behind schedule is not acceptable. It's disappointing. However, the good news is both of those have been corrected and we've got that behind us, so it will not be impacting us in Q1 or going into 2014.

In addition, the other difficulty we had was while we had fairly good growth compared to the categories and we had strong organic growth in general, we did not deliver our revenue forecast and that contributed to a small part of our overall miss for the quarter. A majority of our miss came in through our plant consolidations and then the balance can be explained through our revenue challenges.

Now Rick's going to get into a little bit more detail than this, but I wanted to just be very forthcoming and very upfront with why we had our miss in Q4 and make sure that through transparency, we're very clear about covering both our opportunities and our issues with you clearly.

Now I'm going to ask you to turn to the presentation that Mark had posted earlier and ask you to go to Page 4. We'll get into a little bit of overall core competencies, a little bit of some of our progress in '13 and also continue to give you an overview for 2014.

So if you take a look at Page 4 and "Reinventing Your Snack Experience" is our overall headline. As we get into really where our strengths are as a company, we're proud to be a leader in highly differentiated snacks.

If you take a look at SOH and you take a look at Lance sandwich crackers, really known for quality and variety. If you take a look at Cape Cod, it really stands for handcrafted, reduced-fat, high-quality kettle chips. And then our Pretzel Crisps, really, is a very versatile and multipurpose item that deals and provides itself as both a cracker and also a great out-of-the-bag snack. So we're very proud of our core brands and all of our brands, but we really are playing in some differentiated areas.

We're also market leaders in premium categories, and we're the leaders in categories that we see have lots of growth potential because of the uniqueness and they also address very changing consumer demands. We're also very proud of our national DSD system because it drove distribution gains across our core brands last year and really increases our retail presence day in and day out. We're also clearly a new product innovator in step with and leading some consumer trends and expectations. And then clearly, we're quality led and we're brand builders and work diligently at that each and every day.

Turning now to Page 5. Digging a little deeper into our 2013 achievements. We gained ACV distribution across all of our core brands. So we expanded both our distribution, our retail coverage and our consumer reach with our ACV coverage and expansions through our DSD operation and our direct sales force for our Snack Factory. We expanded our market share position in pretzels, kettle chips and Pretzel Crisps, continuing to expand our overall strong position in those categories and reaching new heights for 2013.

We had tremendous growth for our first full year of Snack Factory Pretzel Crisps. As you're aware, that brand had very high momentum, very high growth prior to our acquisition in the fall of 2012. And I'm very proud of the team because they kept that momentum and in many areas expanded it and grew our business significantly throughout the year.

Overall, we had 9% total company revenue growth and we delivered 22% EPS growth for the year. We also had organic growth across our core brands of well over 5%. And in our total branded business, our total company had over 4% organic growth when you take out the contribution of the new revenue that came in from Snack Factory. So overall, very strong growth throughout the year. 9% top line, 22% bottom line is something that I want to commend our associates for delivering.

Turning now to Page 6 and talking a little bit about how we're supporting our brands and growing our overall business. We increased our marketing and advertising investments throughout the year by over 21% to support and continue to accelerate both our brand building efforts and our appeal to reach the newer consumers and be able to deliver ourselves into more pantries across the U.S.

We added talent in our marketing organization and really beefed up our efforts there. We added talented people in our innovation process in our pipeline of development for new products. We opened up our new R&D center and we staffed it well with some really quality scientists and the people who are very enthusiastic to continue to work on developing great product news for the future.

We invested in our IBOs, our very important business partners, our independent business owners. We provided them better tools and support to help each of them build their independent businesses. And we've got a number of things on tap for 2014 as we continue to support this very, very important customer, and we're proud to be a partner of theirs.

We invested capital in product quality, capacity and capabilities. As I mentioned earlier, we undertook some significant major projects across all of our sites last year, from system changes when we upgraded to Oracle in a couple of sites, to new capacity, new lines and having each of our plants touched by some type of major project and having 2 come in late did impact our Q4, but tremendous progress was made as we build a stronger foundation from a supply chain basis for 2014.

Turning now to Page 7. Just looking into 2014, we're going to continue to invest heavily in our advertising, our new product news and our overall marketing efforts. We're excited about the results that we saw in 2013.

As you know, we had advertising for Snyder's for most of the year. We covered a large portion of the overall major markets in the U.S. and we saw both short-term and long-term sustainable benefits from our TV advertising. In fact, the commercial that most of you are familiar with was awarded some very special recognition as a very impactful ad for 2013. We're going to be running that again this year with some additional ads, all tied back in around our pretzel pieces in some of our product news.

We're also going to be tying in with ESPN and a very popular site with Mike & Mike where you can call in your own plays of the week. We're also supporting our Lance Bolds initiative with both digital and social programming with X Games. We're going to continue our digital advertising with Cape Cod.

We've got some additional marketing and social programs plan for Snack Factory. And even beyond that, we're going to be increasing our sales and our marketing team support for Snack Factory as we add some additional, very talented personnel to continue to take the great message of Snack Factory forward to more consumers.

Now turning to Page 8. If we look at consumer trends, we all know that they're changing and that we are very fastly progressing and developing and executing well against "Better-For-You" initiatives. Very proud of what we're seeing already with our Gluten-Free pretzel expansion, also excited about what we see with our Reduced Fat Cape Cod as it continues to grow,

whole-grain sandwich crackers are all areas of expertise that we've got and we continue to expand. And we're looking forward to the ability to continue to really lead this change and address consumers' expectations sometimes before they even realize they have them and making sure that we take care of our overall portfolio of great brands, but really cater to this "Better-For-You" opportunity that's developing quite nicely. And we're uniquely designed as a company that provides great new products and then make sure that we get them in the market very quickly with the advantage of our DSD system and execute them well at store level.

And Page 9 gives you just another overview of our new products for next year. Cape Cod, we're excited about what we're already seeing in the product news that it's in the marketplace there with the new Waffle Cut flavor and then our Limited Batch. We've got Sweet and Salty coming out. It's already showing very good progress so far with our Snyder's lineup. Our gluten-free continues to perform well.

We're proud of our Bolds, that launch is underway. It will be hitting stores in just a few more weeks. And then our Pretzel Crisps has some exciting new flavors as they continue to expand their overall coverage across the U.S. market retail landscape.

That gives you a little bit of coverage on our overall results for -- and progress for '13 and as we look forward to '14. And now I'd like to turn you to Page 10 and turn the floor over to Rick, who's going to get a little bit more deeper into our overall financial results for both the quarter and for the year.

Rick D. Puckett

Thank you very much, Carl, and good morning, everyone. I'm on Page 11, actually. As we look at the fourth quarter revenue summary, excluding acquired revenue, total revenue increased 6.7% and core brands were up 6.8%. And of that 6.8%, 1.8% was pricing in the quarter.

We had very good growth from the sides of Hanover Cape Cod and Snack Factory brands. Partner brands were up as we picked up additional partners during the quarter in the West, which will improve our service frequency and route count, supporting the driving of our core brand geographic expansion. If you recall, we're looking to move certain products, core brands out west, and this increases the ability to do so by creating that railroad, if we -- if you will, to help us get our core brands out further west.

Private brands revenue, while it was essentially flat, pricing was a negative 0.6% here. It was impacted primarily by our planned optimization of cutting lower-margin businesses. We also experienced some end of the year weather-related issues in shipping to customers, which would have resulted in a slight increase year-over-year in the private brands business.

On Page 12. This is the full year showing a 9% overall increase in our business. Excluding acquired revenue here, total revenue increased 4%, as Carl mentioned a few minutes ago, and core brands were actually up 5.4% for the year. We had very good growth overall in all of our core brands, and we expect that -- and we saw market share gains in almost all of them.

Partner brands were up as we picked up additional partners during the fourth quarter, as we just talked about. And then Private brands revenue, while up slightly, was impacted primarily by, again, our planned optimization of cutting some lower-margin business.

Looking at Page 13. These are the key statistics for the fourth quarter. Let's turn our attention to the gross margin because that's where Carl mentioned, a few minutes ago, the impact would show, as we talk about some of these issues that we had in the fourth quarter.

The gross margin for 2013 was 33.3% versus 34.7%. It was down 140 basis points year-over-year. The projects that Carl mentioned actually equal about 65 basis points when looking at the impact on the fourth quarter for those projects. The additional 35 basis points comes from the Canadian consolidation that Carl mentioned as well. So both of those items hit our Q4 and would hit our gross margin.

In addition to that, we did have a higher trade spend, especially on the cracker category, to support that growth, which was equal to about 30 basis points. Therefore, the operating margins at 8% versus 7.9% were chiefly impacted by the gross margin items, although they were offset significantly by cost performance in the operating expense category of 150 basis points.

Looking at the full year, on Page 14, we're showing an 8.8% increase year-over-year in our top line revenue, and we talked about the mix of that a few minutes ago. Again, on the gross margin, it was up 50 basis points year-over-year, and that was primarily the result of the influence of Snack Factory coming into our business. And that was offset again by the same things that hurt us in the fourth quarter, which totaled up to be about 55 basis points between the 2 on a yearly basis.

Operating margins at 7.5% were up 70 basis points, that was again influenced by really good cost performance of approximately 20 basis points in operating expenses, but was offset by some of these items on the gross margin line.

Let's talk about the tax rate for a moment. Tax rate was at 36.8%. We had discussed on our last call and even on our second quarter call that we have expected additional tax benefits due to some expiration of certain statute of limitations. They did not occur in the year. So this resulted in a higher effective tax rate than prior years, and it represents the difference of about $0.04 this year on EPS versus last year. So it's pretty significant impact on the overall EPS year-over-year.

Turning to Page 15, our cash flow items. We generated very good free cash flow during '13. And accordingly, we have reduced our leverage significantly, down to a 2.6 level. This is the result of better discipline around our working capital components, which was a significant focus for us in 2013. It also increases our capacity to participate in future M&A transactions, especially as we look forward into 2014 and the cash generation that we expect to get from operations during that period.

CapEx was $6 million less actually in 2013 than the previous year. But for the full year '14, we do expect to spend approximately $5 million to $10 million more than we did in 2013 and we'll talk about that in a few minutes.

First, turn to our full year estimates on Page 17. The revenue guidance here for 2014 is consistent with our long-term goals that have been discussed with you previously. Top line net revenue is expected to grow between 3% to 5% organically in 2014. We had an organic growth in 2013 of 4% in a very tough top line environment. We will have a 53rd week in 2014. We estimate that to be worth about 1% given the timing of that, that would contribute to growth year-over-year.

The EPS growth is expected to grow by 10% to 16% in 2013 (sic)

, again reflecting strong organic growth here as well. The productivity actions that were taken in late '13 will -- they'll certainly have an overlapping positive effect on the results for '14. In addition, we are initiating further cost reduction activities planned for '14, which will also add to our improved performance. The extra week in '14 is not expected to add significantly to the EPS line.

Even though we do not supply quarterly guidance, we feel it is prudent to let you know that we will be investing an additional $0.10 approximately in EPS in the first quarter. This $0.10 will be used to launch our new products, which are significant, and jump-start the growth in the first quarter through additional advertising, promotions and marketing costs. Therefore, we will see a lower first quarter earnings than last year as some of the benefits of the increased spend will occur after the first quarter.

We're estimating CapEx to be $70 million to $75 million in 2014. We are investing in additional capacity to meet our demand in core brands in some areas. And we expect to see our free cash flow to be strong again in 2014.

So with those remarks, I'll turn it back over to Carl.

Carl E. Lee

Thank you, Rick. Again, we appreciate you joining us for the call today. I think we want to continue to explain the Q4 for you and dig into that deeper with -- through your questions. But we also want to convey a very positive message about 2014 and the fact we've got a lot of confidence on what our team is going to be able to do. So we've got a lot of great brands and a lot of great current plans in place to make sure we leverage 2014 and make the chance to live up to our full benefits and our full potential.

So with that, I will turn it back over to your questions and be able to deal with each of those individually, and we'll ask Mark and the operator to please take it from here.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Jonathan Feeney from Janney.

Jonathan P. Feeney - Janney Montgomery Scott LLC, Research Division

I wanted to ask about the core brand performance. You -- looking into 2014, you got some significant distribution gain it seems from the Snack Factory. And absent those distribution gains, I mean, and distribution gains in general, can you give me a sense of what the sort of same-store sales would be typically for a core brand product of Snyder's-Lance right now?

Carl E. Lee

I think you're probably referring maybe -- John, this is Carl, and thanks for joining us. I think you're probably referring maybe more to just overall store-level velocity and what we see is...

Jonathan P. Feeney - Janney Montgomery Scott LLC, Research Division

Yes, store-level velocity. Store-level velocity, as you see it and how confident you are on that going to 2014?

Carl E. Lee

I think that, that's your point. We've really expanded distribution now for 2 years in a row across all of our core brands. The one with the highest overall distribution gains has been Snack Factory. And we continue to see improved velocity, even with Snack Factory, as we expand our overall ACV and expand our display coverage at store level. We're continuing to see velocity climb. So the more visibility we drive at retail, especially with that brand, the more we're seeing it correlate back to consumer turns and pick up. So overall velocity, we're feeling pretty comfortable across our core brands.

Jonathan P. Feeney - Janney Montgomery Scott LLC, Research Division

And just one other one. If you could just detail the capital expenditure a little more. You said $7 million -- I guess, $75 million. It would seem that -- I know it's a growth business, but it seems like there's a lot of different moving parts there. If I would think, at some point, maybe you could -- if you could identify out how much of that is maintenance versus growth, Rick. And if you could give us a sense when, if ever, that might be stepping down or being leveraged in some way.

Rick D. Puckett

Yes. Thanks, Jonathan. I think if you look at our 2014 CapEx plan, about $40 million of that is maintenance and then rest is sort of building cost reduction kinds of activities as well as capacity. And we're building additional capacity. And as we did in 2013, we had, as Carl mentioned, several capital projects in the supply chain that increased quality, as well as capacity and capability to allow us to kind of grow. So I think for '14, you'll kind of see a $40 million or so maintenance number because we still have 12 facilities -- or I think it's 12, and those do need to be maintained. And we are upgrading things all of the time and modernizing, as well as increasing our efficiencies as we invest in some of this older equipment that we're continually working through. So there's probably -- about $20 million to $25 million then would be sort of capacity related and the rest would be efficiency and cost performance.

Operator

And our next question comes from Bill Chappell from SunTrust.

Sarah Miller - SunTrust Robinson Humphrey, Inc., Research Division

This is Sarah Miller on for Bill. One of my questions has to do with -- can you give us a little bit more color on some of your West Coast progress? I know that's a big driver of some of your growth going forward. And I guess, kind of touch on -- is there any way you can quantify what your ACV distribution looks like out there and kind of where you think you can go over the next year?

Carl E. Lee

Yes. I appreciate the question. I think that one of the things that we've been able to benefit from through our expanded DSD system is to be able to take some of our Lance sandwich crackers, for instance, out west, Cape Cod out west, some of our other brands, expand those as far [ph] -- as well. And overall, we're very pleased with the progress. We moved early with Lance sandwich crackers and have been able to continue the momentum of building our ACV there, and we've made some strides. We don't really kind of get into brand-level ACV numbers. I hope you're okay with that. But we have seen continuous ACV gains on Lance sandwich crackers. We're seeing some very significant pick-up on our Cape Cod. We'll be moving Cape Cod into some additional markets this year, out west, and are pleased with both the retailers' reaction and the response from IBOs so far. So one of the advantages of having a national DSD system is either with the current brands we have to move them out or brands that we may acquire to be able to take them into lots of new markets relatively quickly, very strong, dedicated center of store merchandising capabilities through our DSD system.

Sarah Miller - SunTrust Robinson Humphrey, Inc., Research Division

Okay. Then my other question is kind of on the M&A market. Can you talk about what you're seeing there and whether there's lots of competition, a lot of stuff for sale, that kind of thing?

Rick D. Puckett

Sarah, we really don't talk too much about that on a call, but we are in the -- we're certainly in the deal flow, if you will. So we're aware of things that are out there and we continually look at opportunities. So I don't see it slowing down. I think it's probably going as quickly as we saw in 2013.

Carl E. Lee

If I may add just a little bit to your comments, Rick, I think if we take a look at Snack Factory and take a look at the success that our team delivered on that, I mean, we acquired that just over 15 months ago. We're very pleased with the progress we made bringing it in quickly and smoothly as far as integration goes. And then we hit our acquisition model as far as making sure that we were able to deliver the top line and bottom line performance that we expected. So we're very comfortable with that investment. We're also very comfortable with the progress that we've made so far. So naturally, we would always be interested in other type of Snack Factory opportunity.

Operator

And our next question comes from Akshay Jagdale from KeyBanc Capital Markets.

Lubi Kutua - KeyBanc Capital Markets Inc., Research Division

This is actually Lubi on for Akshay. So I just wanted to dig a little bit into your organic sales growth expectations for 2014. I mean, I know you said in your guidance, you're guiding 3% to 5% for the total company. But I was wondering if you could provide some additional color for your main categories, so sandwich crackers, pretzels and chips?

Carl E. Lee

I think if we take a look at our 2013 performance, we had over 5% organic growth for our core brands. We had 4% overall total company growth. We had very, very strong performance again from our Snack Factory business. So we're seeing the overall environment to be a little bit more challenging. If you read the headlines that are out there, it indicates that we need to kind of be a little bit careful with our estimates and our forecast. But being able to talk about the growth that we had in '13 continuing into '14 is pretty positive in my book and we expect to continue to see our SOH do well. That's the reason why we're investing more in first quarter with advertising and expanding our coverage to ESPN. We're excited about our Bolds and our Lance sandwich crackers, and that's going to be supported in quarter 1 this year, and then also our other brands. So one thing that Rick talked about is we're pleased with the performances. In line with our past performance this year and then also our ability to kind of forward spend just a little bit to Q1 to make sure that we've got good coverage for our brands and that we get the product news out there and consumers are aware of it quickly.

Lubi Kutua - KeyBanc Capital Markets Inc., Research Division

That's very helpful. And then just a follow-up. In terms of investments and -- sorry, investments that you're making on advertising, can you maybe quantify -- first of all, is advertising -- do you expect advertising to be up in 2014 or kind of at the same spending level as 2013? And can you comment maybe a little bit more on some of the success that you had with your advertising initiatives in recent quarters?

Rick D. Puckett

Yes, I'll take that. This is Rick. I would echo what Carl said a few minutes ago in terms of the success of the advertising that we saw in all sides of Hanover that, as he mentioned, won some awards actually -- as well as was productive for us on top line growth in that category. We did spend over 20% more in 2013 than we did in 2012 for marketing and advertising. We do plan to spend 15% to 20% more over 2013 in 2014 in marketing and advertising. So we continue to invest back some of the positive performance we are having on cost side into the business to drive the top line growth. And while most of this is being spent in core brands, absolutely, there are marketing efforts in their other allied brands and that will help grow those as well. So we're investing probably 15% to 20% more next year as well.

Carl E. Lee

And just to emphasize what you said, we're going to get to -- a lot of that will fall into Q1. So our incremental spending will be in Q1. I just want to make sure that the note that Rick had made on that earlier, which is, once again, I kind of noted because it's all around supporting our new products and the consumer activation for those.

Operator

And our next question comes from Brett Hundley from BB&T Capital Markets.

Brett M. Hundley - BB&T Capital Markets, Research Division

Rick, I just wanted to ask you -- so the top line guidance, 3% to 5%, just following on that last question, the 53 week adds the 100 bps or so, so maybe a net view of 2% to 4% next year. And Carl, you certainly mentioned that you just -- the need to be cautious just given the environment. Can you guys kind of compare and contrast between the competitive environment that you see versus just a continued tough consumer? And just your view on both and whether, one, plays more than the other; and two, just a cautious view from a top line standpoint.

Carl E. Lee

I think just in general, I mean, you've kind of described it. I think that there are 2 key components here. The one is kind of the consumers' mindset and what they're doing generally with their shopping patterns and shopping frequency and purchasing habits. And we do see a little more caution there on their part. I think that there's been a lot of articles out there recently about that. So there's a lot of press releases that cover that in pretty good detail. I would say, what other people have talked about we're seeing, so that's important. And then you still continue to have some shifts with your major retailers. And some will progress this year, some will see more of what they saw last year. So there's a little bit of a dynamic change, both with our consumers and with our customers. And we're kind of expecting to see more going forward of what we saw in the back half of '13 when people got a little more cautious throughout '14. And we're trying to play just a little bit safer with our estimates for you.

Rick D. Puckett

And I think it's worthwhile to not ignore what's happening with the consumer. I mean, the disposable income was only up about 0.7% in 2013, which was a lot less than it was in 2012, at least some of the literature that I'm reading suggests that 2014, won't be that much of a relief because the Obamacare is kind of like a tax, and that will impact some discretionary purchases, we believe.

Brett M. Hundley - BB&T Capital Markets, Research Division

Okay. I appreciate that. I mean, I guess, referring to that, your sales guidance does -- can you discuss -- does that include any pricing or is that mostly volume?

Rick D. Puckett

If anything, there will be a consistent emphasis on being competitive. So there's certainly no price increase built into that guidance.

Brett M. Hundley - BB&T Capital Markets, Research Division

Okay. And then just -- Rick, I appreciate your commentary on Q1 and the margin impact that you saw during 2013. I mean, gross margins were certainly volatile during the year. And I'm just wondering if you can talk to some of that seasonality and just maybe how we should think about margin improvements going forward in 2014.

Rick D. Puckett

It's a great question. And the seasonality is not necessarily a seasonality as much as it is how we look to run promotional activities throughout the year, which, I guess you could say, is seasonal. But our trade spend and our promotional activity is -- it varies a little bit from quarter-to-quarter. Certainly, with the back-to-school time being a little higher, we're talking about our first quarter of this year. It's certainly going to be higher as we launch significantly -- a significant number of new products. So that's not going to -- in 2014, our promotional spend will not follow the same pattern as it did in 2013. And so therefore, we're going to promote quite a bit more in Q1 than we ever have. We believe that's necessary and we believe it's prudent to do that to get the trial of these new products that we're putting on the shelf right now, which are so important to achieving our growth coming in 2014. The other impact in 2013 were exactly the projects that Carl mentioned a few minutes ago. We have over a dozen projects sitting in our supply chain across the year. These projects, when they're launching into production, always have a launch cost component that we include in cost of goods. So that impacts gross margin as well. In 2014, we really do not have those same types of projects coming on board. We have one project that's fairly significant in the capital, but it's not a difficult project from an implementation perspective. It's a pretty straightforward capacity increase. So the kinds of things that impacted us in 2013 and even in Q4 and to some degree, in Q3, were, in fact, one-time events that are behind us now. So moving into '14, you really can't use the gross margin experience that you had in 2013 to kind of project to '14, which is unfortunate and I understand that. It makes it hard to build the model, but I think it's -- taking what we said about the first quarter will be pretty much the most important thing in building that out.

Brett M. Hundley - BB&T Capital Markets, Research Division

Rick, do you think that you guys have the ability to drive much further SG&A leverage in years ahead?

Rick D. Puckett

I think there's certainly some room as we continue to -- we have one other major implementation of systems to do and that's in our distribution system. So there could be some additional benefits from that, but that's kind of early 2015, so it's not even in '14.

Brett M. Hundley - BB&T Capital Markets, Research Division

Okay. And then just my -- I actually had 2 more other quick. I got removed from the call earlier in the call and -- did you guys detail the revenue challenges that you saw in Q4, where they were?

Carl E. Lee

Yes, Brett, to a certain degree I think we continue to see really good performance on Pretzel Crisps. Very pleased overall with our first year and even more pleased with the Q4 performance on Pretzel Crisps. And I also saw some good progress on our Snyder's and then also our Cape Cod. We had a little softness in the overall category on sandwich crackers and we experienced that, so it was -- that was a little bit challenging. But overall, good organic growth in Q4, but not quite the forecasted level that we had shared with you.

Brett M. Hundley - BB&T Capital Markets, Research Division

Okay, that's helpful. And then just my last one is, can you remind me if you guys pay slotting fees on your Pretzel Crisps business? And can you just talk about how pricing has been for that product recently? I appreciate it.

Carl E. Lee

I think that slotting is -- the term is used primarily for warehouse goods that -- you got an important question there. But slotting is more for warehouses where you got to pay for going through the warehouse and the space in the warehouse and then ultimately, your space on the shelf and sometimes stay for the resets. So with DSD environment, you really don't per se have slotting. There are some fees and some expenses that go along with getting new items in the stores, but it's not the same for both our Snack Factory as well as for our DSD items. So there are expenses with launching items because the key for us is making sure we've got consumer interest levels up and then the trial comes and then we build a good base business. So there are monies tied to launching an item, but it's not quite the same way as it would be with a traditional warehouse center-of-store item.

Operator

Your next question comes from Thilo Wrede from Jefferies.

Thilo Wrede - Jefferies LLC, Research Division

You just mentioned your ongoing emphasis on being price competitive. If you have input cost deflation in 2014, would you even consider lowering prices to stay competitive?

Carl E. Lee

I think that -- we've got to be a little careful there. I think that promotional activity and things like that may change as you go forward through the year. I mean, we've seen some improvements in overall cost input, but not significant enough to make it really take it as a point of true price reduction. I think what we are doing is being a little bit -- taking the high road, so to speak, and focusing more on putting out really exciting, differentiated new products out there. So through the excitement the consumer see and -- a reason to buy our brands more often. Our Sweet and Salty pretzel from SOH has really been received very well. And that's the new exciting kind of extension of the brand and one that needs to be supported early to drive trial, and then our Spoonz is getting off to a good start and Korn Krunchers is getting good recognition, and we've got similar news on our other core brands. So as Rick mentioned earlier, we're putting a lot more into marketing, a lot more into new product development because the category is driven off of impulse and it is driven off of variety and innovation. And we're going to focus on that primarily, and then we'll kind of keep a close eye on just overall pricing to make sure that our premium status is maintained, but that we continue to attract people as well. So I hope that helps, Thilo. We're trying to -- that's an important question and there's multiple ways to approach it and we do want to kind of take the high road and support the long term with innovation and excitement through the category.

Thilo Wrede - Jefferies LLC, Research Division

That certainly helps out and I appreciate the color there. But it raises another question for me. If your products are truly differentiated and consumers are excited about them, why doesn't that give you the ability to actually take price on them?

Carl E. Lee

I mean, if you take a look at -- historically, when the input costs went up in 2011 and they went back up heading into 2013, we did have -- we were forced to take some pricing and then we've been able to work through that over the course of this past year. So I don't see us in a position to take any pricing anytime soon. It's more around protecting what we've got and then reinvesting in our brands as quickly as we can to continue to reach more consumers. The good news is we continue to see household penetration and measures like that go up. But with our brands, we still have lots of upside from household penetration, consumer awareness and attracting new consumers and launching important things like our Bolds sandwich crackers, which will really kind of cater the younger clientele. That's what we're going to continue to kind of expand our brand and that's where we need to put our support behind.

Thilo Wrede - Jefferies LLC, Research Division

Okay, that's helpful. The other question I had, did the quarter -- or the outlook for '14, did that change anything about your 10% margin target by 2014 or 2015?

Rick D. Puckett

I think our target's been stated kind of towards the end of 2015, which is -- we're still in that same place.

Thilo Wrede - Jefferies LLC, Research Division

Okay, so there's no changing. Can you remind me what the drivers for the target are? Is it scale, is it pricing, is it cost cutting, mix shift, just a refresher there?

Rick D. Puckett

The most important thing is the mix shift to a higher branded mix, Thilo. And with that is the continued cost reductions that we have going on. Those are the 2 primary drivers of getting there.

Thilo Wrede - Jefferies LLC, Research Division

So scale and M&A is not a major component of it?

Rick D. Puckett

We have not included M&A as the driver at this point. We always kind of separate that as a benefit.

Operator

Our next question comes from Rohini Nair from Deutsche Bank.

Rohini Nair - Deutsche Bank AG, Research Division

A lot of my questions have been answered. But maybe just building on Thilo's question, Carl, can you give us a sense as to kind of the level of promotion you're seeing in your categories? We're seeing volumes still broadly pretty weak across the industry. So just wondering whether retailers may be advocating for more price investment and whether you're feeling any pressure around that?

Carl E. Lee

I think that we saw a little bit more requests and excitement around promotions maybe the back half of '13. Haven't seen any more changes for that in '14. I think that as we remain very competitive -- our retail customers try to remain very competitive and one of the first places they try to go is to work on pricing. So to answer the question, we really haven't seen any recent changes in expectations on our part or our retailers. But it's an area just for us to continue to stay on top of and watch very closely. Again, part of our solution is leaning more into category excitement than just everyday lower prices.

Rohini Nair - Deutsche Bank AG, Research Division

Okay. And just maybe a sense of your new product lineup for this year, do you feel that it may be higher quality than what you saw in 2013? Are you launching more products? Is that why -- is that part of the reason why the advertising is going up?

Carl E. Lee

I really appreciate that question. And you prompt me to share a couple important things. I think that as far as -- we're proud of all of the items we've launched here over the last 10 years, but 2014 clearly is by far the best as far as the quality and the consumer potential, as far as the new items we've got. Each of the items we've got really kind of caters to a new consumer reach underneath our core brands, whether it's foods, which is a very versatile product. It kind of creates a little bit of fun with pretzels as you're dipping dips or spreads or anything else. Perfect party item, it's a new way to use pretzels. Our Sweet and Salty really brings the contrast of both sweet and salty, hot and cold, those type of things together, which consumers are asking for and is very much a way for us to lead a trend that's already out there. So the reach of our new products and the quality of our new products is much better than it ever has been before. And it's a chance for us to reward long-term consumers but also attract a lot of new ones. And the good news is Snack Factory's got some exciting news. Our sandwich crackers do, our Cape Cod has good response on what we've seen so far there and also our pretzels, as I mentioned. So we've actually got 61 new items we're launching this year. It might not seem a lot when you have a few for C stores and a few for supermarkets and then you've get the number of core brands we've got. It's not really that [ph] many. And that compares to about 33 last year. So the quality, first and foremost, has gone up dramatically. And then we've got borrowed reach with each one of those. And based on the consumer studies that we did before we ever allowed these to pass through our stage gate process, and then the response we got from the retailers was just more encouragement that the advertising that Rick talked about, the upfront expenditure we're going to have in Q1 this year, significantly above our Q1 levels last year, is money well placed and bets that are going to be well rewarded with response. And a few of our items have already been out. We kind of launched some of this stuff in stages so our DSD can execute better. And the ones that rolled out in early January, we're very pleased with. The ones that have rolled out just recently, we're also excited about. And we still got a little bit news coming later in the Q1 timeframe. So I think you can tell, I'm pretty enthusiastic about our new items, and we'll share with you the progress as we get into future earnings calls on those.

Rick D. Puckett

And just to add a little bit to that, the investments that we've made up to this point in marketing and advertising have provided us with some insights that we didn't have before relative to where we should be innovating. And to Carl's point, this is the best lineup that we've had ever. And it is in response to those data points that we're getting, as well as consumer studies that we're doing. And we are looking at new consumers. We're looking at -- on the Lance sandwich cracker lines, for example, the Bolds are really kind of positioned for a younger consumer. And that was something that we may have not hit 100% with the rest of the line. So it's all very positive stuff and we're pretty excited about it.

Operator

And our next question comes from Amit Sharma from BMO Capital Markets.

Amit Sharma - BMO Capital Markets U.S.

Carl, you mentioned sandwich, Lance Snyder -- sorry, Lance-branded sandwich cookie crackers, and why there is some category weakness, and that's one thing that we've seen in IRI data as well, pretty sharp decline in your sales for that. What's happening there?

Carl E. Lee

I think that -- maybe take took a look at the -- just the overall category, and it's really -- start having more in the second half of last year. The category had quite a bit of a product news and also product advertising across the entire category, when you take a look at both the kind of the mainstream and also the premium. And so first half of '13 and then going back into '12 and earlier, there was just a lot of kind of reasons for consumers to draw their attention towards that category. That faltered a little bit in the back half of '13. And we -- I think it just really flowed through to the overall kind of category growth that the category was seeing, so it was much lower than it had been traditionally.

Amit Sharma - BMO Capital Markets U.S.

And is Bolds starting to make a little bit difference in those trends yet or not yet?

Carl E. Lee

Bolds are just beginning to roll out. We've just begun to getting that into the retail, where we've had just a couple of weeks of early reads. We're very pleased. The turns are there. The advertising is now going to begin to kick in. And what we're seeing so far from Bolds is very good progress. So to kind of get back, I mean, there will be good quality product news in the category again with us featuring Bolds. There will be the digital and online advertising, social media that we've got to sponsor Bolds. We'll be reaching out to a whole new audience with the X Games, for instance, with Bolds. And so we think that the category's going to look much better because number one, it's got the product news it needs; number two, someone is advertising again inside the category. And then even with that, that the 6-count carton versus our traditional 8-count, that's going to allow us to get to a little bit better price point while we still protect our margins.

Amit Sharma - BMO Capital Markets U.S.

Got it. And then within this category, certainly, you're doing some work on gluten-free in the Snyder's. Is Lance also a candidate for a gluten-free product down the line?

Carl E. Lee

We're looking at -- important question. We're looking at a number of ways to kind of deliver against consumer expectations there, and we're looking at -- we've got -- our Reduced Fat line's doing well in there. We've got our whole grains line that's already in there. So we've got #1s that we want to play up that are already established. Amit, you're absolutely right. We've got to go in and look for some additional ones that we can add. And we've got a number of projects in our R&D pipeline right now for additional ways to enhance sandwich crackers along that "Better-For-You" theme.

Amit Sharma - BMO Capital Markets U.S.

Got it. And then one more on your overall portfolio. Clearly, you well articulated what the estimates are or expectations are from this portfolio in the next year. But holistically, when you look at it, are you happy with what you have today in the pipeline or the core brands? Or you feel like there is room for more within that to sort of fill up the portfolio?

Carl E. Lee

I think as I said earlier, we're very pleased with the progress and success our team has delivered on Snack Factory, so absolutely. Based on our track record of being able to bring 2 great companies together, add some of the exciting new products to our lineup, in other words, expand our portfolio, we would be very interested in ways to continue to expand our portfolio. And we're going to continue to kind of focus on our core brands. And while we may have a broader line of products we carry to enhance our DSD capabilities and store-level frequency and store-level service, we will have some kind of priority brands or core brands that we focus on. And we are very open to ways to expand our core brand coverage.

Amit Sharma - BMO Capital Markets U.S.

And that's really what the key behind the question in -- is that, look, you have a DSD system and there is room for better leverage of the DSD system. So is your core portfolio well positioned to benefit from it, or do you need some help in terms of more leverage on that system?

Carl E. Lee

I think that if you take a look at our overall DSD operations, I mean, we have added some partner brands. We have expanded our core brands. So I think our DSD system, every year, continues to get leveraged more and more. But because of our model, adding routes and expanding it even beyond what we've got is something that's very easily done. And so we've got retailers from time to time to come and ask us to carry additional items and we're able to do that. And that leverages our system, to your point. But we're also very interested in company brands that we can continue to do that as well. And we've got some ideas that we'll develop over the coming months and years on how to do that.

Amit Sharma - BMO Capital Markets U.S.

Got it. And then just one quick one for Rick. Rick, can you give us some idea what commodity, inflation or deflation you're building into the model at this point?

Rick D. Puckett

Well, certainly, our major commodities are wheat and soybean oil and -- but we have a lot of other commodities like sugar and some other things. So while some may be going down, others are going up. And off the top of my head, I'm not sure exactly what the dollar number is in 2014, but it's not significantly up or down based on the gives and takes of the various commodities. So we don't see it as a significant driver of cost one way or the other.

Amit Sharma - BMO Capital Markets U.S.

Got it. And then just the tax rate for 2014, is it still 37 percentage or is that lower than that?

Rick D. Puckett

No. I think you should use 35.2% or so, 35.256% or something like that.

Operator

And our next question comes from Michael Gallo from CL King.

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

I just had a question just broadly about the sales guidance in light of -- I think you talked about double the number of new products you had in 2013. You've got significantly greater trade spending. You seem very excited about the pipeline and the early reads on the products. Yet if I take out the 53rd week, the sales guidance is only 2% to 4% growth. So I want to just help reconcile, is it just the environment that keeps you cautious? Is it some conservatism built in around what you expect out of those new products? Or help us reconcile why the sales growth wouldn't be better, given a number of new products, your excitement around the new products and the trade spend behind it.

Rick D. Puckett

Michael, this is Rick. I mean, you have to remember that 35% to 40% of our business is not branded, and we do not expect large growth numbers out of that piece of the business, as a matter of fact, kind of similar to what we saw in 2013. So that's the pull down or the dilution effect, if you will, for the total company. So we do expect exciting things on the branded side, which is what we want to do to help drive our better mix and our better margins. But we're not planning large increases in our Partner brands as an example. We're not planning large increases in our Private brands business. So those would be dilutive in the total.

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

So it's to be just relatively flat year-over-year like they were this year?

Rick D. Puckett

Yes.

Carl E. Lee

I think we're just -- in general, we're trying to be a little bit more careful as we look into '14 and it's early in the year.

Operator

We have no further questions in queue.

Carl E. Lee

We really appreciate everyone's time today, and we value greatly our partnership with you and our chance to share with you our Q4 results. I think that -- I think we tried to explain very clearly and very transparently what happened last quarter. Clearly, I'm responsible for it and we take that responsibility greatly, and are always open to additional questions and comments from you.

In addition to that, as we look into 2014, I'm proud of our team. I'm very proud of all the associates and IBOs that make up our great organization. And we've got a lot of exciting product news that we're rolling out there. We want to be an innovator. We want to be someone who really -- the retailers look at, who's not only going to drive our business, but more importantly, drives their categories.

And so I think that we're going to be seeing some good success with our new items. We're seeing some good turns already as we're just getting them on the shelf. And we want to be a little bit more careful as we try to predict the future and give you some ideas of where we're going to go. But we're very enthusiastic and very comfortable as we own our results and are accountable to our shareholders day in and day out and do our very best to drive both top line and bottom line and overall shareholder value.

So have a great Friday. Thanks for sharing your very, very valuable time. It's greatly appreciated.

Operator

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

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Source: Snyder's-Lance Management Discusses Q4 2013 Results - Earnings Call Transcript

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