Snyder's-Lance's (LNCE) CEO Carl Lee on Q2 2014 Results - Earnings Call Transcript

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

Snyder's-Lance (NASDAQ:LNCE)

Q2 2014 Earnings Call

August 07, 2014 9:00 am ET

Executives

Mark Carter - Vice President and Investor Relations Officer

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

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

Analysts

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

Rohini Nair - Deutsche Bank AG, Research Division

Lubi Kutua - KeyBanc Capital Markets Inc., Research Division

Jonathan Patrick Feeney - Athlos Research LLC

Amit Sharma - BMO Capital Markets U.S.

Operator

Good day, ladies and gentlemen, and welcome to the Snyder's-Lance Inc. Second Quarter 2014 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I'd now like to introduce your host for today's conference, Mark Carter, our Investor Relations Officer. You may begin.

Mark Carter

Good morning, and thank you, Ashley. 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're going to discuss the Snyder's-Lance Inc. 2014 second quarter results, as well as estimates for the balance of 2014. As a reminder, we're webcasting this conference call, including the supporting slide presentation at our website, snyderslance.com.

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

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

Carl E. Lee

Well, good morning, everyone, and thanks for joining us. I have to admit, I've been looking forward to this call and looking forward to the chance to spend some time with you and to share what I consider some very exciting news. If now you'll turn to Page 3, we'll begin to walk through the deck that Mark provided earlier.

I want to point out a couple of things as we enter our discussion and enter our presentation. I think first and foremost, we're very excited about our Q2 results, and a lot has been achieved over the last 90 days as we execute day in and day out to build our overall business and improve our shareholder value. But even more important, we've been able to continue to execute our strategic plan and achieve a couple of milestones that we truly think are noteworthy and really reposition our company for expanded [ph] growth and a very bright future.

So if you take a look at Page 3, we're going to talk about being a much more nimble company, having the resources to really reflect and adjust as necessary to address the changing consumer dynamics that we all see and very many other food companies have been talking about over the past couple of weeks. In addition, we're going to talk about our success rate and all the recent accomplishments that we've achieved and ones we worked on since the beginning of our merger of these 2 great companies.

So as we talk about Q2, I'll share some information. Then I'll turn it over to Rick, and after that, we'll be excited to talk about the transformation and where we're going as a corporation [ph].

Now if you would, please turn to Page 4, and we'll dig a little deeper into the solid performance that we're able to share with you today for Q2. Taking a look just at the top line and bottom line. Excited about the ability to report sales growth of 4.8%, almost 5% growth in a very challenging environment, thanks to the hard work and the dedication of lots of great people that are part of the Snyder's-Lance team. And then even more impressive is the bottom line results, EPS increase of 21% while we continue to invest in our company and continue to build out our platforms and the strength in our ability to take great products to marketplace day in and day out. Beyond that, we're happy to announce that we sold our private label business. We worked through that throughout Q2 and have wrapped up very early in Q3. Sold it to Shearer's and very happy to do so, because it's a great place for our team to be working with and a great organization for them to be serving, but it allows us to be able to really focus on our branded portfolio and be much more nimble on what we're trying to achieve with our brands. It also increases our capacity for strategic aligned acquisitions as we've been successfully doing over the past few years.

In addition to that, we acquired Baptista. We acquired it in June. It allows us to expand our better-for-you platforms, allows us to focus more on organic products, all natural, gluten-free items, non-GMO items, that as all of you know, are in very high demand today. It also allows us just to continue to expand our already successful innovation pipeline and one that we're very proud of, the achievements in 2014 and even more enthusiastic about the opportunities that lie ahead for 2015.

Now I hope when we get to the Q&A session, we'll be able to talk a little bit more about Baptista, and I'll really welcome your questions because that was a very strategic move on our part, and it's not often that someone acquires their contract manufacturer. And we'll be happy to talk about your questions as we dig into deeper around the rationale of Baptista and what that really does for our company.

Now, if you would, please turn to Page 5, talking a little bit more about the accomplishments throughout the quarter. Thanks to some very diligent effort and some of our key finance leaders, we were able to refinance our debt at a lower rate and have been able to achieve much more flexible covenants that positions us in a very good place for us to continue to look for opportunities as we move forward. We mentioned to you at the very end of Q2, and we actively begin to implement very early in Q3, our margin improvement and restructuring plan that allows us to aggressively address the stranded cost that was left as we sold our Private Brands business.

Our salesforce was also very busy during the quarter. After years of expanding our distribution, we were able to post some very attractive ACV gains on all of our core brands. And even beyond that, we were able to record some nice improvements with display support for all of our core brands across the entire United States. As we continue to invest in our brands, we actually increased our advertising and marketing spend, as we've talked to you about before, and in fact, it's up over 26% year-to-date. And then beyond that, we're proud to announce and report that our core brands grew both revenue and volume by over 3% in a very challenging environment, as I might add. And as we get to Q&A, I'd welcome a chance to talk about our sandwich crackers because we are running into just a little bit of headwinds there. But it's all planned, it's all purposed by being able to reinvigorate and also renovate that very important core brand.

So at this time, I'd like to turn it over to Rick and allow Rick to be able to share more about

our Q2 results.

Rick D. Puckett

Well, thank you, Carl, and good morning, everyone. Before I begin going through Page 6, let me just make a few general comments on the financials. We're very excited about the accomplishments in the second quarter, as Carl mentioned, as we advanced our strategic plan forward very significantly with the sale of Private Brands and the acquisition of Baptista's. Both of these significant transactions were announced on the same day and closed within 2 weeks of each other. If you think about the work that went into that, it is significant, and it is a testament, quite honestly, to the skilled associates that we have, and the commitment that we all have to achieve our strategic plan.

The press release this morning that was issued included financial statements that also included the reclassification of Private Brands to discontinued operations. This is a requirement of GAAP given that the transaction closed early in the third quarter. Page 22 of this deck, however, provides a clearer breakout of the business for the first half of this year, excluding the reclassification of Private Brands to discontinued operations and will be consistent with my comments.

I will be discussing with you this morning the financial results that are reflective of the actual events. Private Brand results are included in the first half of 2014 as it was our business until it closed in early July.

For the full year, only the first half of the year for Private Brands but are excluded for the back half of the year as it is no longer part of our financial results going forward. Baptista's, as Carl mentioned a few minutes ago closed at the end of June, is included in the estimates only for the back half of the year. Even though it is included in the results, I will not speak for the performance of Private Brands in the first half of the year other than showing the top line results consistent with how we have communicated with you in the past. So if you look at Page 6, you'll see that branded grew a total of 2%. As Carl mentioned, core brands were up 3% for the quarter, all of which was volume related, very little price associated with that increase. This was very consistent with how the business has been turning, and it's slightly better than what we showed in the first quarter.

Our partner brand revenue was up also as we have taken on additional partners earlier in the year. This allows us to be in the stores more frequently, which is certainly an objective of ours, and it drives efficiencies in our national DSD network. We also have strong growth in the other category, which is primarily contract manufacturing. This good margin business helps drive better utilization of our manufacturing facilities, also resulting in efficiencies that we can apply to our core brands.

On Page 7, you'll see the first 6 months revenue summary, similar picture. Core brands were actually up 2% for the year, again, almost entirely volume-related. The additional partner brand, as I mentioned earlier, driving solid growth across our DSD distribution system, and contract manufacturing has also expanded significantly with the additional pickup of some customers that use our excess baking capacity.

On Page 8, we start to see some of the key metrics for the second quarter. As Carl mentioned, we announced a margin improvement in the restructuring plan in late second quarter. On a previous call with you, we discussed that we expect to reduce cost by $22 million to $25 million as a result of those actions, which will streamline our business and, as Carl mentioned, offset stranded cost that were left as a result of the sale of the Private Brands business. We'll continue to invest, however, in the growth of our brands through advertising and marketing. We have initiated actions early in the third quarter to drive these savings. Over the next 12 months, we expect to achieve the targets that were set. These reductions more than offset the stranded cost left by the disposition of Private Brands and move us close to our stated targets for operating margins.

Gross margin was 34.7% versus 33.8% for the quarter, up 90 basis points, driven by lower commodity cost as well as favorable plant performance. The operating margins were up 180 basis points, 90 of which came from the gross margin line. The other 90 came from good cost control, specifically in the distribution and DSD environment as well as good G&A cost control and other controls across the business.

On Page 9, you will see the first half year financial results and key metrics. Similar story here, the gross margin was really driven by manufacturing efficiency gains, as well as lower commodities in the second quarter. The operating margins, while essentially flat year-over-year, reflect a significant spending increase in advertising and marketing, up 70 basis points. That's about $0.06 per share in earnings for the first 6 months. We did have lower spend in G&A, and we had lower distribution costs through the increased efficiencies brought about by the addition of the partner brand.

There's also, as we mentioned in the first quarter of the year, a lower tax rate, which still is reflecting a positive $0.02 a share as a result of that. Let's go to Page 10 in your deck. This is really a great story. If you look at the free cash flow from last year to this year, and this is a rolling 12-month number, we had significant improvements and increasing cash flow, 250% in that time frame. If you look at the proceeds -- or sorry, the positive cash flow that we had from operations was really a result of better working capital controls. We still have some work there on the inventory side, but we're marking progress on most of our working capital. And CapEx, as you can see, was down $21 million as we have gotten past the major investment projects that we had to do in the last 2 or 3 years. These projects were needed for capacity and capability.

The proceeds from the recent closing of the disposition of Private Brands netted out around $300 million after-tax. What that does, in effect, is reduces our leverage to 1.5x, which is where we are currently. This performance that show above, with the free cash flow increase of 250% plus the fact that we have some proceeds from the sale, even after netting out the acquisition of Baptista's at around $200 million, gives us a very strong balance sheet with significant M&A capacity.

Let's go to Page 11 and talk about full year estimates for a moment. We have changed our estimates for 2014 to reflect the recent transactions. On the last call, we estimated that we would see an annual net reduction initially of approximately $250 million in net revenue and a reduction in EPS of $0.17 to $0.22. That would be the net impact of the 2 transactions on an annualized basis. The impact on 2014, however, is a little bit different, because we haven't, obviously, achieved all the synergies yet in the transactions, and we have some work to do in consolidating the businesses.

The first 6 months -- I'm sorry, the last 6 months is estimated to be a reduction of net revenue of approximately $130 million to $140 million, which reflects some seasonality, and it also reflects a reduction in EPS of approximately $0.13 to $0.18. The higher impact in 2014 on EPS reflects our current view given that depreciation and amortization has not yet been finalized. The Baptista's transaction closed 2 weeks ahead of the end of the quarter, and the asset valuation process, while underway, will not be completed until the end of the third quarter.

We've also been working hard to achieve the cost reductions from the margin improvement and restructuring plan. All of this being said, we will update these estimates with our third quarter review as we finalize these activities and get more information as it relates to how each of these things that are in process today are materializing.

We also changed the capital expenditures, and all of that change is a reflection of the additional capital for the Baptista's operation that we acquired at the back half of the year.

On Page 12, it's just the highlights and the summary of some key financial metrics for the quarter and the year-to-date. Revenue was up 4.8% in quarter 2; earnings per share, up 21% in the second quarter; operating margins, up 180 basis points in the second quarter; cash flow, 250% increase from the last 12 months, all of this being done while increasing marketing and advertising by 26% this year over last year for the first 6 months. That's equivalent to $0.06 a share in EPS.

At this time, I'll turn it back to Carl for further comments.

Carl E. Lee

Thank you, Rick. I appreciate you walking us through our Q2 performance. I think this is a good chance for me to take a quick moment and just thank all of our team members for their exceptional effort and all of their hard work that delivered these great results throughout Q2. And beyond even the excitement and enthusiasm we have for our Q2 performance, we're equally excited about where we go from here. And as we mentioned earlier, our company really has gone through a transformation to be able to come out as a much more nimble, branded-focused, highly capable organization that's going to continue to achieve our strategic goals as aggressive and as important as they may be.

If you'll turn to Page 16 and then on to Page 17, I'll begin to walk you just through a little bit of the transformation that we've been through. And the transformation, while Q2 was very impactful and very significant, it has been going on for a number of years. I'd like to go ahead and go back to kind of the formation of our company and take a look at the reason we got together in a merger of equals.

We've been executing our strategic plans for some time and it began, really, with the formation of our new company. Back in 2010, when we got the opportunity to bring us together, it was really about distribution and the power of our brands. We had the opportunity to bring an organization that had high skills and capabilities in C store distributions, which is Lance, along with a company that had strong capabilities with national DSD support and supermarkets, which was Snyder's, and combined it to allow us to be able to take the Lance brands to the West Coast and the Snyder's brands deeper into the C stores distribution. So our strategy really began with the formation of our company and what we were trying to do both from a branded standpoint and from an expanded distribution standpoint. And I'm glad to report, thanks again to the capable team, those milestones were achieved, the synergies were delivered and integration was completed on time and actually in most cases, exceeded our results.

Again, it's no small undertaking to convert 1,700 routes to IBO status in less than 18 months, and I emphasize that only to continue to show the capability of the team that I have the privilege of serving day in and day out. From there, not being satisfied about the integration, we continue to strengthen our DSD network. And over the past year, we've continued to implement some important improvement processes to serve our very important partner, which we admire and appreciate every day, and that's our hardworking IBOs, truly our partners and truly the individuals that get our great products into stores day in and day out, and we'll continue to try to enhance the programs that we use to support their effort.

Beyond that, the acquisition of Pretzel Crisps was another very important move that was spelled out clearly in our strategic plan of being able to use our new scale, our new balance sheet, our new capabilities to go out and acquire some very important brands that would provide not only the brand and the consumers they represented but bring in additional capability that would allow us to be able to build our other brands and expand our company. We're always excited about Pretzel Crisps. We're really appreciate of the results the team has achieved, and the beauty of it is it allowed us to get into the deli and be able to expand our distribution.

Also from there, the acquisition of Baptista that we just announced during the past few weeks is something we're excited about, and it was a very strategic move to bring in some capability that enhances all of the ability we have internally already. It allows us to expand our R&D capability using their very unique skills and their great team, along with their manufacturing capabilities, which expands the great items that we already had here. And then the sale of Private Brands. You had encouraged it for long time, I might add, and it was rightly so. But we chose the right time, the right place and the right buyer to be able to sell our Private Brands and begin to exit it, and we're very proud of that accomplishment of our team who worked hard to do it. And even beyond that, being the aggressive team that's focused on execution, we quickly moved into addressing the stranded cost that would be left behind when you sell a very large business that's very efficient and has a nice margin to it. And as I mentioned earlier, in the first few weeks of Q3, we began to implement those changes, and those cost savings will begin to flow through our P&L from now throughout the next 12 months.

Now if you would, let's turn to Page 15. And on Page 15, we're just looking forward to an even brighter future. As we talked about earlier, we've accomplished a lot in 2014. We're aggressive, we set milestones, we set very aggressive targets and we achieve those, and all of that has been building to the transformation that we're talking about now for our company. Today, we are clearly a focused, branded snack company positioned at the center of consumer trends, which we welcome and we dig into deeper and deeper every day. We've enhanced our marketing skills with some great new additions to our marketing team. We've also enhanced our innovation capabilities to deliver on-trend products and by the way, we've had a very successful 2014 rollouts of some new products that have exceeded our expectations and all the while, making sure that we continue to drive our lower and lower cost structure so we can reinvest in our business.

So truly, we've got a new platform, a new platform built around our great brands, our ability to achieve great distribution through both our national DSD system and our direct distribution organization, along with a team that just simply gets things done every single day.

And as we turn to Page 16 and take a look at the opportunities of the changing consumer trends. This is something that's been in the pages of lots of headlines over the past few weeks, and obviously, it will continue for some time. There is no doubt in anyone's mind our consumers are changing their eating habits. They're changing their desires and their needs from snacking. And it's a great opportunity to be in this space as long as you're willing to be nimble and at the same time, have the capability to address those. One of the things that we've talked about a lot and you begin to see, innovation really is the path to growth these days. Over the years, everyone's tried to launch new products, but today it's much more important than ever because you've got to build that platforms. A good example is our Cape Cod Popcorn. We launched it just over about 9 months ago, and we're seeing some of the highest velocity across the entire popcorn category because of the quality and because of the positioning. We got aggressive with gluten-free pretzels this time last year, and we've been able to expand the category and reach a lot of new consumers for our retailers, all important ways to leverage innovation continue to drive growth for ourselves and our customers. The demand for distinctive flavors just continues to be out there with consumers bringing it up more and more. We've launched Sweet and Salty Pretzels, which has performed extremely well. We've combined both bacon and cheddar flavors for excitement and enhancement to deliver what our consumers are looking for and all of those have been successful in achieving the milestones we set for them. And clearly, our consumers want healthier options. Everyone's talking about it and everyone's beginning to change some of their eating habits. And once again, we start there from a position of strength. 25% of our overall revenue today comes from better-for-you items according to Nielsen and the way they define better-for-you as a category. Beyond that, eating increasingly on the go is what we're all doing as we live very busy lifestyles and the portability of our items, like our pretzel tubes or just the convenience of our sandwich crackers, makes it very convenient for people to do that. And while all consumers are changing, Millennials are having more and more impact on the overall business that we have today, and we welcome that, because as they have the desire for fresh, perishable items, we're able to address that and make sure that we're staying on top of the things you're looking for. And they're looking for a little spice, and they're looking for some adventure, and our bold sandwich crackers is just one example of being able to do that, and that's been a very successful launch.

In addition, snacks are replacing meals. We all realize that. And the portability, the flexibility, the quality and the taste of our snacks, along with our innovation, really allows us to cater to those consumers. And now if you'll turn to Page 17, we'll talk a little bit more about how we've uniquely positioned ourselves with our new platform to continue to grow our company and be excited about the many things that lie ahead. We clearly have a laser-focus on our brands and by being able to sell our private label business, we've been able to simplify our day-to-day activities and align our resources more clearly around what's important and that's about our core brands. We've been able to differentiate our innovation capabilities. In addition to our R&D center and the great team that works there day in and day out and our R&D team members that work across all of our plants, we've been able to add the Baptista team and the Baptista capabilities to our portfolio, and that's going to allow us to continue to invest more in non-GMO, organic, gluten-free items, dippable tortilla chips, pretzels and crackers, to expand our portfolio and expand our product listing.

In addition, we're truly positioned to be able to capitalize on these enduring trends. We welcome the consumer changes and see them truly as an opportunity for us to continue to build out our product offering in line with what they're expecting and what they're asking for. In addition to that, we're very proud of our DSD organization, extremely excited that not only have they been able to build a great network and build a nationwide operation, in Q2 once again, they expanded their display coverage and they expanded their ACV. So day in and day out, the execution is good, and it continues to get a little better every day. And finally, thanks to the transition we've gone through, we've got the capability to continue to accelerate our growth, first and foremost, organically, but also equally being able to look at additional acquisitions that strategically will match our plans and allow us to expand where we're going.

And then taking a look now at Page 18 as we begin to bring it home. As we look forward to our very bright future, we're excited about our organic growth opportunities, and we continue to target that 3% to 5% annual growth. We now have been able to focus even more of our time and our attention on our brands and make sure that we continue to build them out, invest in marketing, invest in tools that will help us there, and we're going to continue to stay on top of the consumer changes and really focus on a differentiation that allows us to position our brands for short-term and long-term success.

The other important area is category management, category leadership. I'm excited about success rate that we've seen with all of our new items this year. We've got over an 80% success rate with the new items we've launched. And year-to-date, we're exceeding our aggressive targets on the innovation that we've launched this year, and it's been an important part of our overall success not only in the quarter but on a year-to-date basis and throughout the remainder for the year.

Our manufacturing capabilities, our innovation capabilities will allow us to continue to launch some exciting new products in 2015, several of which will be coming from Baptista as we leverage that great relationship. Growth through acquisitions, we'll continue to be very selective, we'll continue to be very disciplined, but we'll be an active participant reviewing the opportunities that come up and choose only the ones that are right for us but make sure that we have a chance to look at all of them. And more importantly, as we talked about our margin improvement and restructuring plan that is already well underway, we'll continue to look for ways to expand our margins to make sure we execute day in and day out to improve our mix and improve our productivity so that our margin expansion that Rick shared earlier in Q2 will continue so that we can hit our long-term targets.

So hopefully you can feel the enthusiasm, the excitement and the energy that we have for our Q2 results. And even more importantly, we're excited about the chance to reposition our company and go through this important transformation. And I'm very grateful for each of our associates, and we are very blessed to work with a great team and great organization as we continue to build our company.

So with that, we want to talk about your questions and deal with those. So we'll turn the phone back over to Ashley as she begins to set up the queue for some Q&A, and we welcome your questions and really, again, thank you for your time.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Brett Hundley of BB&T Capital.

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

Just had a question, first of all, on the current sales environment. Your branded sales hit my estimate, which is good to see. I was a little bit worried about this heading into the reports just given public company commentary to date. And I was wondering if you can talk a little bit about what's driving sales in this environment for you and how that can continue. You guys have an immense amount of innovation out there. Is that giving you the lift that you had expected? Are you winning more on the ongoing cost leveraging of brands? If you can just talk a little bit about what's helping you in the current sales environment, I think that would be helpful. And maybe, Carl, if you'd want, as an aside, you can also tie in what's happening in the sandwich crackers space and expectations going forward there?

Carl E. Lee

Brett, I appreciate the question, and I think that it's a good subject for us to start out with. I think as you take a look at our top line growth, number one, we're very pleased with the results. 4.8% growth so far this year is much higher than what has been reported so far from lots of other companies in the food industry, so we're excited about that. But to your question, what's driving it? I think, first of all, is our core brands. We've had an incredible year so far with Cape Cod as we have strong growth in all of its core markets, as we've had strong growth in some new channels and as also, as we begin to expand it out to the West Coast. So Cape Cod has done a tremendous job of growing for us, and we've seen a long-term ability to continue to expand that brand. And we're excited about tying it in popcorn. That's performing quite well. And not only do we have a great kettle chip, we've got a great platform for some additional growth long-term. Pretzel Crisps continues to do well. There's more and more traffic going into the deli, and we're right here to seize it with the direct sales force that's in place to continue to expand our visibility, our distribution and to leverage our new items. SOH has continued to do quite well. The innovation there, the Sweet and Salty, the Pretzels Spoonz and some of the other items have performed extremely well. So innovation has been a key part of our overall growth, and so we're seeing some strong core brand growth. And I'll come back to sandwich crackers, because that's an important piece. In addition on the growth is we've seen some good growth with our partner brands. And what's interesting is our partner brands typically are better-for-you items. And so we've been able to provide great growth for our IBOs while we continue to be able to provide a great service for our retailers as they ask us to carry more of those brands, and we get a chance to play with some important partners who are all positioning themselves against consumer trends. And then we've had some upside with our contract manufacturing as we just continue to leverage our assets to be able to make them sweat a little bit more and pull more pounds through our plants. But however, we do have an area that is under renovation, as I call it. And before I dig deep into that, I want to kind of draw a parallel here. I think some -- a lot of us have had renovations at our home or maybe we built a new home, and we're all excited about when we walk into that new kitchen and get a chance to enjoy it for the very first time. But leading up to that, there's a lot of heavy lifting, a lot of dust and a lot of mess, and that's exactly what we're going through with our sandwich crackers. But I'm excited about it because we did the same exact thing in the past 18 months with Cape Cod. I talked a lot about Cape Cod's success right now. Cape Cod went through a very similar renovation back in 2012 where we went in and upgraded our manufacturing facilities to improve our capacity and our utilization and our quality, went through some heavy lifting there. We went in there and really strategically dug into the brand and worked on our packaging, worked on our positioning, worked on our flavors, work on our limited batch [ph] and did a lot of things to really improve the overall franchise. And now because of that, we're enjoying some incredible growth. But we're going down a very similar parallel path with our sandwich crackers. We've upgraded our packaging. It takes a long of time, though, to be able to transition all the SKUs, because it's important that you move them all over as quickly as you can, but it's taking us about 15 months to do that because of all the lines that had to be converted. We've also repositioned just the image and the marketing reach with it. But by being able to do that, as I mentioned earlier, Bolds has been successful. We've been able to launch Bolds because of some of the renovation we're putting our sandwich crackers through. So the category is not performing as well as we'd liked. We're running into a little bit of headwinds. We're also running into some kind of self-inflicted changes that we need to go through as we renovate, but sandwich crackers will bounce back strongly and continue to do well. But in spite of some headwinds on sandwich crackers, we delivered a 3% revenue and a 3% volume growth, which is a little bit higher than our overall peer averages. So that was a long answer, Brett. I'm sorry for that, but I think we need to share what's going on with sandwich crackers, so we continue to be very transparent, as we always do, but we also need to share with you some of the success that we're seeing in our other core brands.

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

I very much appreciate it, and maybe just as a very quick follow-up, is it safe to assume that the renovation underway with sandwich crackers could take a similar time to play out as it did with Cape Cod?

Carl E. Lee

It very well could. I mean, our packaging conversion will be compete in October. It'll be on the shelf for all of our SKUs. It's been on the shelf for a few of our SKUs now for some time. So that's coming through, and then there's a couple of other things that are still underway as we review every aspect of the brand to position us for the future. I think I'm excited about sandwich crackers, because if you take a look at portability and the ability to deliver nutrition, the ability to deliver convenience, to deliver protein and all the things consumers are looking for, there's really no better format than sandwich crackers to be able to do that. But we had to take time to go back and reposition the brand, go through this renovation and prepare for the future. And sometimes you're going to create headwinds and you're going to run into headwinds as you do it. But at the end, we're all confident that it's going to be well worth it, and Cape Cod is a good example. It's paid out there, it should pay out handsomely with our sandwich crackers, but it's going to require all of us to be a little patient as we go through to changes.

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

And then Rick, I just have 2 questions for you. Number one, can you give further color on the cost savings program? Maybe just give us an idea of chunks, what comes quickly, what level of cost savings comes more quickly and when, and then what chunk maybe comes longer? If you can just sort of piece that out for us.

Rick D. Puckett

Sure. As we've talked, we're looking at a target of about $22 million to $25 million. About half of that is related to cost of associates, actually, and most of that is already done. So we'll see that moving forward in our results. The other half is really, better utilization of our outside professionals, consolidation of some of the services that we are receiving, reductions in overall costs and improved efficiencies in manufacturing. There's about a $6 million requirement of capital to achieve some of the savings that we have on the manufacturing side, but those pay back very, very quickly. So the time frame will be over the next 12 months. We should be in a position, sort of in the Q3 of next year to really kind of have that in our run rate on a full-time basis.

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

Okay, perfect. And then just lastly, speaking of capital, can you please just give your plans for, a, cash that will be left over on the balance sheet. You'll certainly have a fair amount of it. And maybe within that, you could rank your desires for capital outflows, period.

Rick D. Puckett

Yes, we will have and do have today, some excess cash. We'll see a fairly significant balance on the balance sheet going forward as we pay down our debt. And we mentioned also that we recently refinanced. We put in a 5-year term loan at attractive rates and covenants, as well as a 10-year term loan -- or sorry, a 7-year term loan with attractive rates. So both of those are in place, we'll maintain those out there. The effective rate of those right now are about just around 2%, so not a bad rate. We will look at the cash, first and foremost, to continue to fund the operations, but as we're generating cash in the operations, we'll look to establish the bank, if you will, to acquire additional brands. And that is very much a part of our strategy, and that will be the first place that we would like to invest it.

Operator

Our next question comes from Rohini Nair of Deutsche Bank.

Rohini Nair - Deutsche Bank AG, Research Division

Carl and Rick, I think you guys did a great job in helping us understand how you're positioning the company for growth going forward, the focus on the better-for-you portfolio and differentiated innovation. You reiterated your target that you've talked about in the past about 3% of 5% and your growth on your core brand. I was just wondering if you can give us an update around how you're thinking about that double-digit margin target that you've alluded to in the past. I mean, it seems like you might have better visibility at this point as to when we might see that come through, especially with the restructuring initiatives. So if you could just give us some more color around that, that would be great.

Rick D. Puckett

Yes, and thanks, Rohini. It is an important target for us and as we talked about our stated targets, it is the double-digit operating margins. With the sale of Private Brands, we have a couple of obstacles over time. One is where we are today, which is around an 8% kind of a run rate and getting to double-digits, and then having to deal with stranded costs at the same time. So the margin improvement and restructuring plan that was initiated in -- at the end of the second quarter, and a lot of actions were taken, actually, in the early third quarter, it is designed to do that. It is designed to get very close to that stated target. It certainly is designed to offset, more than offset the stranded costs that were left by the sale of Private Brands. So we believe, as we've always stated, that in 2015 on a run rate basis, we will be very close to that stated target.

Rohini Nair - Deutsche Bank AG, Research Division

Okay, great. And if I could follow up on your advertising. So you mentioned that it was up around 26% year-to-date. I guess I'm curious to see how you're judging the returns you're getting on that spend and maybe how you're expecting that to trend over the course of the year. I know you've always kind of targeted the weighting to be towards the beginning of the year, but do you get the sense that you'll need to up your investment in order to keep your sales momentum up?

Carl E. Lee

Thanks for the questions, Rohini. I think that most of that spend, we really aggressively increased our overall budget and our spend for Q1. Traditionally, we were basically spending in Q2 and Q3 with some in Q4, but we repositioned our P&L to add more to upfront this year. It's all about supporting our innovation, which has worked out extremely well. We'll have those funds now in place for Q1 of 2015, but they're a very aggressive new slate of SKUs to be able to go forward. But you bring up an important question. I mean, spending more on advertising is easy. Making sure you're spending it efficiently, that's what's really important. And we've got some great new leaders in our marketing organization and they're putting in place some great new tools. You may be familiar with market mix and some of the other tools that are out there. And we're using that as a new tool to go in and evaluate the efficiency of our spend and the effectiveness of our spend. So while we'll continue to increase our spending, because it's important to drive household penetration and awareness, we're going to adapt it to a point where we get the best overall return. And we've got the toolbox to be able to do that, but we didn't necessarily have it in the past. So the advertising, from what we can tell, is working. We'll get more efficient in where we're spending it, maybe more on digital, maybe less on TV, maybe more on TV and maybe less on print. So we'll kind of move through the different medias that are out there but continue to make sure that we're very effective in the news out with our better-for-you portfolio and with our overall innovation. So we'll continue to spend, but to your point, spend very efficiently.

Rick D. Puckett

And just add to that, Rohini -- just quickly to add to that, these tools are allowing us to pull apart our branded portfolio and see what brands react to what kinds of advertising and/or media in a more optimized way. So it's allowing us to reallocate some of those dollars going forward to a more effective spend. So we're feeling pretty good about the amount of information we're getting and the knowledge that we're gaining from it.

Carl E. Lee

It's a good point, Rick. And just to add, I mean, Rohini, we were clearly focused on our overall margin. That's something that's very important. We've shared with you our expectations, and we're making good progress there. Obviously, and probably goes without saying it, we could get there a lot quicker if we weren't trying to build our company for the long term. Investing in marketing, investing in our IBOs, investing in our innovation, in our capability, and adding an R&D center, and other things. Those are what are important to make sure we balance the need for our margin improvement but also the long-term ability to grow a successful company. So the good news is we're getting to the margin expectations, we're getting there on the timeline that we expected, but equally as important in my book is we're doing it the right way, and kind of brick by brick, we're building our company, and we're investing as we go.

Operator

We'll move on to Akshay Jagdale of KeyBanc Capital.

Lubi Kutua - KeyBanc Capital Markets Inc., Research Division

This is actually Lubi on for Akshay. I just wanted -- I was just wondering if you could talk a little bit about the competitive environment that you're seeing in the snacking house. Can you just address whether or not you're seeing any sort of increased competition or greater promotional activity and maybe which categories, if any, you're seeing the biggest changes?

Carl E. Lee

Lubi, thanks for joining us. I think that you're right, there is a step up in competitive activity. I think what we're doing is trying to play to our strengths, and leaning into innovation has really helped us. In fact, we were the first to launch the waffle cut at Cape Cod, lots of imitators that followed us into that. We were the first to launch the Sweet and Salty platform with our pretzel pieces. Lots have followed in with sweet and salty additions. So we're seeing innovation as our key driver of growth and as also our way to kind of stay ahead of the competition and make sure we're kind of focused on bringing consumers what they're looking for versus getting into the trenches and just fighting out on price. We are seeing some price pressures on our mainstream, kind of our day-to-day items, but when you balance that out and promote or spend enough to make sure you kind of protect volume, but you're not going to chase the competition but instead, put more emphasis and more execution around innovation, it allows us to kind of deal with those challenges of the pricing issues, but do it in our way. And that's focused on good solid top line growth and protect our margins, while at the same time that we do protect our share across our core brands. So for us, it's much of a balancing act as we do see more competition, we're leaning into kind of long-term growth versus just dealing with those kind of day-to-day pricing issues. Hope that helps.

Lubi Kutua - KeyBanc Capital Markets Inc., Research Division

Yes, it does. And then just on your new product launches, you guys just have talked about how you're seeing some pretty good results with your new product launches. I think you called out Cape Cod Popcorn in particular as showing particular strength. Are there any other specific product categories within your new launches that you're really happy with the progress with?

Carl E. Lee

I think just to run down all of our core brands because each one -- Cape Cod's Popcorn has worked tremendous along with some flavors and other items there. Some new sizes have worked real well for us on Cape Cod. But the Sweet and Salty, I mentioned earlier, for our pretzel pieces, has just been a homerun. It's been addressing a pent-up consumer demand on the brand that is known for quality, that's known for its overall ability to deliver when the consumers open the bag. And so Sweet and Salty has done real well for us. Our new Pretzel Spoonz has done really well. It's really truly the first edible spoon that allows you to tie in with lots of dips and other items that people want to be able to eat right out of the jar, for instance. And then we've seen good success with Pretzel Crisps and the new mini [ph] launch and some new flavors there. And then one I'm personally excited about is our sandwich crackers and our Bolds. And as I alluded to earlier, the new packaging, the new equipment and manufacturing capabilities we've added there has allowed us to come out with a different number of crackers in the box and be able to do a closed carton, that really positions an item like Bolds right front and center for millennials and people who are looking for more of a spicy cracker. So kind of across-the-board, all of our brands have gotten some important innovation and is helping all of our brands achieve our targets.

Operator

Our next question comes from Jonathan Feeney of Athlos Research.

Jonathan Patrick Feeney - Athlos Research LLC

I wanted to first ask about maybe a detailed question for Rick about how to think about the loss of contribution from the Private Brands business. I know you've given us some guidance, but just as it relates to the first couple of quarters, like I mean, is just taking out the nickels from discontinued operations maybe a way to think about what the base would be of the business as it is today without Private Brands. Just kind of looking forward to 2015, I know there is a couple, at least, of factors on top of that, that would grow that number, but I want to know how much of a hole you're actually working out of. If you can give us any kind of sense, I'd appreciate it.

Rick D. Puckett

Yes. Actually, there's also the stranded cost it leaves behind, right? So there's more of an impact, quite honestly, on a contribution margin and what you see on discontinued ops. So that stranded cost is somewhere between $0.10 and $0.15 a share on an annualized basis. And that, we're going to overcome with our margin enhancement and restructuring plan that we have in place. So the hole -- just for Private Brands, we really haven't shared too much with you, and I'd rather not do it. But it is a -- it represented a large portion of our EPS in terms of the contribution from that business. It was a $300 million business, right, and it was performing quite well because we had optimized that business for really, the 2 years prior to the sale, to the point where it was running on all cylinders, and it still is. So it was a hole that is a significant hole for us to fill. We believe we can do that on the bottom line. It may be a little tougher to do it on the top line without acquisitions, and that's what we would look to do.

Jonathan Patrick Feeney - Athlos Research LLC

Great. That's really helpful. And just 2 questions for Carl. First, on the Private Brands business, you hear a lot about -- in Europe, Private Brands go hand-in-hand with brands in terms of retailer relation, but then on the flip side, here you hear a lot of food manufacturers talk about how actually -- they would never get into the Private Brands business because it hurts them with retailers. How have retailers reacted to your exit of the Private Brands business would be my first question. And second question would be it seems to me you have a great opportunity with any up-and-coming niche snack company, and there's [indiscernible] of them when you go to these tradeshows, as really, the only game in town if they want to partner as opposed to sell. Could you talk about maybe the pipeline of potential distribution partnerships, particularly in some of these niche-y sort of -- in a lot of cases, better-for-you snacks?

Carl E. Lee

Thanks for the questions, and I think that you bring up an interesting point about Private Brands and the dynamic and situation in Europe. I lived and worked in Europe for a number of years and was excited about the opportunity to deal with the European trade and European retailers and the European consumers. But I find that to be a very different model than we have here. Their overall penetration and revenue that's produced by Private Brands is much higher than what we have in the U.S., but it -- I don't foresee that coming to that same point in the U.S. It will continue to grow, but it's going to be a different situation, U.S. versus Europe, in my opinion, on the way Private Brands continue to develop. They have upside, but it probably won't achieve what we've seen in Europe. But the retailers have been very positive about the exit from Private Brands. What I find is that I think again, complementing our team, and the great leaders we have, did a very good job of trying to put one foot day in and day out in Private Brands and the other foot into brands and trying to balance the needs to be able to support and grow both. But it's difficult, and very few companies are successful, in my opinion, of being able to manage both Private Brands and branded. So I think that the retailers understand that, and they've been supportive and we've been able to exit that very gracefully and be able to find a great partner in Shearer's to acquire it. And Shearer's is going to take that business to the next level, because Private Brands is what they do in day in and day out, and that's very important for them. So I think the exit has gone smoothly. The transition to make sure we deal with the stranded cost is in place. And if you'll be patient with us over the next 4 quarters as we deal with discontinued operations and the impact on the P&L, we'll be able to make this transition very smooth for you as well as we transition through the numbers and the time frame. But overall, the exit has gone well for us and for our associates that are part of the Private Brands business. And the other thing I think helped us was we did Private Brands was different segments. We sold the sandwich cream cookies and chocolate chip cookies. We did not sell sandwich crackers, and we did not sell pretzels and Pretzel Crisps and potato chips. So it was a different category that we participated on Private Brands.

Jonathan Patrick Feeney - Athlos Research LLC

And just on the Partner Brands, Carl, it seems like there's a great opportunity there for a lot of niche snack players around to gain national or super regional distribution. And really, you're, by far, the leader in being able to provide that. Could you talk about that as an opportunity and where you stand?

Carl E. Lee

You bring up an important point because our Partner Brands strategy is a win, win, win. It's a win for us because we're able to provide some great brands for IBOs to carry and great ways to leverage our distribution infrastructure. It's a win for the retailer because we kind of consolidate the deliveries for them and bring in great execution and take care of the delivery and merchandising for them. But to your point, it's a real win for the partners because they have access to national distribution through a very capable and growing and expanding DSD system, which really doesn't exist. There's other national distributors out there, but no one is going to be in the store 4 or 5 days a week, providing that personal touch to their packages and making sure they get on the shelves and have display support and the placements and everything else they're looking for. But there's a good opportunity there, and we know our partners well. We interact with them. We help them with some of their planning. We help them with some of their strategies and execution. But it does, to your point, give us kind of the first chance to get to know them, the first chance to begin to understand what their brands are capable of, and it gives us the chance to build relationships that either can be around distribution long-term, around an interest in their company, around potentially acquiring them. So Partner Brands is an important part of our strategy, but the point you're making is equally important. It helps us leverage our DSD system, but it really helps us be able to view [ph] some partners that we can expand our relationship with over time. And we do that quite often, and it gives us a chance to bring other better-for-you items into the store, and then keep an eye out for acquisitions that we may be interested in long term.

Operator

[Operator Instructions] Our next question comes from Amit Sharma of BMO Capital Markets.

Amit Sharma - BMO Capital Markets U.S.

Carl, I just wanted get a better understanding of what Baptista brings to the table. I mean, clearly, the back half guidance seems -- or the loss of EPS seems like you're not assuming a whole lot from that business in the back half, and that's probably understandable with all the stranded cost that you are trying to offset. But looking forward, if you can talk about what kind of revenue contribution we should expect from that business, what sort of margin improvement we should expect from that business is as you bring some core [ph] packing in house?

Carl E. Lee

First of all, I just want to thank you for the question, because in our desire to be very transparent, I'm glad to be able to talk about this subject. And there's lots of different ways to approach it. I think that a natural question that I would have, maybe looking from the outside in is why would you buy your contract manufacturer? Why would you invest your hard-earned capital there? For us, it was an absolute strategic move because Pretzel Crisps is an important part of our overall future. And with Baptista's capabilities, we've launched a number of new items here already. We've got a number of new items coming, so it gives us a chance to continue to expand that brand and improve our overall margins. But what I'm really excited about, even above that, which is important, is that we've got a lot of new items for 2015 that Baptista's is making for our Distribution business. So you'll see some new items that roll out with SOH and Cape Cod that are made at the Baptista factory and will allow us to be able to continue with our successful innovation by tapping into both their skill set, but in addition, some of the unique equipment that they have that makes very on-trend, consumer-driven, new items, so that's important. So I think the first big opportunity and win with Baptista is the innovation pipeline that we're expanding on the success we already have, using their capabilities. I think the second, it does give us some critical mass and scale, increases our purchasing scale, increases our chance to tie in with them and drive some synergies through logistics, purchasing, overhead, other areas. We will continue to improve our margins over time across both our brands and the other items that we produce for others. So there's multiple ways that this was a very strategic move for us. And you will see, in 2015, some additional enhancements in margin, and you should expect them as we go forward.

Amit Sharma - BMO Capital Markets U.S.

Maybe provide a little bit more specifics around what kind of revenue contribution. If we think about the core [ph] packing business that Baptista is doing currently and that will accrue to you, is it in the neighborhood of $100 million on run rate basis or less than that?

Carl E. Lee

We haven't -- we chose not to break that out and we're going to continue to do that. I appreciate the question and respect it, but I just don't want to provide numbers. It does -- back to Jon's question on Partner Brands earlier. We've got some very high value, very consumer trend, better-for-you type of items that we produce there for some other partners. But similar to the fact that for over 20 years, we've distributed Partner Brands and been proud to do it, and we're very proud to make some brands for some of our partners at Baptista. So there's some real advantages to both that revenue stream, but also to the ability to stay on top of creating high value items for our partners and for ourselves. So there is some incremental revenue, there is some incremental income there, along with the skill set enhancement I talked about earlier.

Amit Sharma - BMO Capital Markets U.S.

Let me ask this in a different way then. So the 3% to 5% annual growth guidance, that is for the overall portfolio, right? That's not just branded portfolio, right, Rick?

Rick D. Puckett

That's correct, Amit. That is correct.

Amit Sharma - BMO Capital Markets U.S.

So if that is the case, we did 2% branded growth in this quarter, and we've -- we're increasing [indiscernible] spending by 25%-plus. What gets us from that 2% growth to perhaps 5%, because your Partner Brands probably, on organic basis, are not going to grow as quick as your branded portfolio now?

Rick D. Puckett

One of the things that's obviously coming out is the Private Brands business that was not growing, right? So the overall growth will go up as we improve the growth or improve the mix of high-growth, higher growing segment. So that's the big piece of it. Certainly, the 3% to 5% that we've talked about is not really inclusive of acquisitions. So whatever Baptista's adds in the long term is really on top of that 3% to 5%. So we expect to get to the 3% to 5% without Baptista's.

Amit Sharma - BMO Capital Markets U.S.

And you think the portfolio is set out [ph] with the innovation pipeline that you see coming on, you're well positioned to accelerate the trends that you see in the branded portfolio for the last few quarters?

Rick D. Puckett

We do. I mean, even if you -- I'll just do the math real quick, but even if you were to take Private Brands out of the first 6 months, you're going to get a number that is north of 5%. It's 6% or so.

Carl E. Lee

I think just adding a little more to your question, I think the first suggestion I would have is just compare the current trends and the current growth rates that we've got to the overall industry and to lots of other food companies who have released. Ours are very attractive in comparison to all of the others. And to Rick's point, I think we had a little bit of challenges with Private Brands that changes it a little bit. And then I talked about earlier, we're intentionally going through some [ph] innovation process with sandwich crackers, similar to what we did with Cape Cod. And that is a little bit of a headwinds right now that we expect to come out of. So our growth has been very positive, and we expect it to continue.

Operator

I'm not showing any further questions in queue. I'd like to turn the call back over to Carl Lee, President and Chief Executive Officer, for any final comments.

Carl E. Lee

Ashley, thanks for your help today. We appreciate you coordinating the call. And I really appreciate everyone who's joined the call. And as I said earlier, we've been looking forward to this chance to share with you the very positive Q2 results that we're all very proud of. And again, I want to thank all of my teammates for all of their hard work to make it possible. I also want to call out what Rick said earlier, to be able to announce 2 major transactions on the same day is a feat that you very seldom see, and it's an accomplishment and something incredible that our team was able to pull off. But I think beyond even Q2 and the ability to announce and then execute the transactions, the transformation is real, it's permanent, it's been building for a long time and it really positions us to be very uniquely different versus our competition. We focus on premium items, we focus on differentiated items and we've got an important pipeline that's already working for us and another pipeline that's coming online in '15 of new items that we're excited about. So I, again, appreciate the time, but I'll leave you with 3 words. This organization, first and foremost, is focused; this organization, second, is very nimble; and third, based on our track record, this organization is very capable.

So continue to count on us to work very hard for our shareholders and do hard work day in and day out to build our shareholder value. Thanks for your time. We wish everybody a very good day.

Operator

Ladies and gentlemen, thanks for participating in today's conference. This concludes today's program. You may now disconnect. Everyone, have a great day.

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